The International Monetary Fund (IMF) has delivered a candid evaluation of Laos’ economic situation, highlighting the country’s financial difficulties as it grapples with 25 percent inflation and a depreciating currency. The nation’s public debt levels are calling for financial assistance from China and the risk of unsuccessful asset sales.
According to a recent IMF report, the exchange rate continues to depreciate, inflation remains stubbornly high, and the country is facing labor and foreign exchange shortages. The report also states that public debt is currently unsustainable despite tight fiscal policies, and foreign exchange reserves are critically low.
In 2022, public debt hit an all-time high of 131 percent of GDP, dropping to 116 percent in 2023. This decline was primarily due to an inflation-driven surge in nominal GDP. However, the IMF predicts that this figure will drop to 108 percent of GDP this year, only to climb back to 118 percent in 2025.
Between January 2021 and September 2024, the exchange rate dropped by 140 percent, fuelling inflation and increasing the value of public debt in local currency. Inflation reached its peak at 41 percent year-on-year in February 2023 before plateauing at the current rate.
The IMF report, a 112-page document based on studies and discussions with Laotian officials, was released during the “2024 Article IV consultation” in Washington. Predictably, it is filled with IMF jargon.
Economic growth in 2023 was reported at 3.7 percent and is forecasted to increase to 4.1 percent this year. This surge is primarily driven by the industrial and service sectors. Despite performing well, the tourism and natural resource sectors have been hit by drought, affecting agriculture and electricity generation.
Although these growth rates would be celebrated in the West, they are considered low for a developing nation. The IMF’s message was unequivocal: The Laotian economy remains stagnant and dependent on Chinese financial assistance, with no clear exit strategy.
The IMF also noted that Laos’ current financial strategy heavily relies on continued debt relief from China and, to a lesser extent, the proceeds from asset sales to Thai renewable energy company, Energy Absolute Public Company Limited (EA). This deal is supposed to provide the Laotian government with $300 million this year and an additional $600-$700 million in 2025.
However, the IMF has expressed concerns as the Thai Securities Exchange has accused EA’s CEO and deputy CEO of fraud and suspended trading in the company. This has led the IMF to doubt the success of the share sale, which could result in a GDP shortfall of 2 percent.
The report also highlights significant uncertainties in the economic outlook, including labor emigration, a potential decrease in investment if exchange rate pressures worsen, increased banking sector pressure due to deteriorating asset quality, and ongoing currency mismatch.
The IMF projects an acceleration in growth to 4.1 percent in 2024, driven by a recovery in tourism. However, it warns that the considerable financing needs resulting from high public debt levels pose challenges to the medium-term economic outlook. It estimates that over 80 percent of the country’s debt is external and denominated in foreign currency.
The IMF calls for improved governance, greater transparency, consistent regulation implementation, and a crackdown on corruption as crucial to the country’s long-term economic health. This report should serve as a wake-up call for Laos, given its history of reluctance to publicly address its financial issues and its uncontrolled spending on large-scale Chinese-funded infrastructure projects.
