SINGAPORE, December 10, 2024 – The Lao PDR economy is projected to have expanded by 4.5 percent in 2024, up from 4.2 percent in 2023. The economy is projected to sustain moderate growth of 4.6 percent in 2025. However, significant challenges, including kip depreciation and persistent high inflation, are hampering its growth prospects. Concerns over elevated public debt service have led to increased uncertainty, while weighing on sentiments. Maintaining a tight monetary policy stance and improving public debt sustainability are critical to restore price and exchange rate stability.

These conclusions are highlighted in the 2024 Annual Consultation Report on Lao PDR published today by the ASEAN+3 Macroeconomic Research Office (AMRO). The report was based on AMRO’s Annual Consultation Visit to Lao PDR from June 17 to 28, 2024, and data and information available up to August 30, 2024.

Economic development and outlook

Lao PDR’s economic growth is projected to have picked up to 4.5 percent in 2024 from 4.2 percent in 2023. El Niño weather conditions in 2023 dampened electricity and agricultural production, which were partially offset by a robust expansion in the services sector, including tourism-related and logistics industries. A recovery in the electricity sector and continued growth in the services sector are expected to boost economic activity.

Lao PDR continues to grapple with strong headwinds. Amid high debt service obligations, the kip remains significantly weaker than its level two years ago, though it has shown signs of stabilization since mid- 2024. Inflation remained elevated at about 25 percent in 2024 but is expected to decline to 15 percent in 2025.

Although the balance of payments swung to a surplus in 2023, Lao PDR’s external position remains vulnerable. Foreign exchange reserve buffers are still low. The Bank of the Lao PDR (BOL) has further tightened monetary policy to absorb kip liquidity by raising interest rates and issuing short-term bills. In an effort to stabilize the exchange rate and to increase the supply of foreign exchange in the market, the BOL has implemented a new regulation mandating repatriation and conversion of a minimum share of export proceeds into the local currency.

The country’s budget recorded a fiscal surplus in 2023 as growth in revenues outpaced expenditure. The fiscal balance is projected to have reverted to a small deficit in 2024 as increased expenditure and higher external interest payments exceed the higher revenues from the restoration of VAT rate from 7 percent to 10 percent. While public debt is expected to moderate over the medium term, gross financing needs remain high amid a high level of debt servicing in the coming years.

Risks, vulnerabilities, and challenges

A renewed kip depreciation would heighten inflationary expectations and fuel a further increase in consumer price inflation. External debt burdens would also rise, exacerbating the already strained government finances. A sharp weakening of the kip would pose significant challenges to the economy, particularly to state-owned enterprises (SOEs) with high foreign currency debts and revenues in kip, and complicate the effectiveness of monetary policy.

Natural disasters and extreme weather conditions could affect major economic sectors, especially the hydropower and agriculture sectors, and may intensify inflationary pressures.

Risks to public debt sustainability persist, as the debt service payments on its foreign currency debt remains elevated over the next several years. The authorities face significant challenges in issuing offshore bonds, which has been exacerbated by the downgrade of its sovereign credit rating in the Thai market. Refinancing risks and costs have also increased in recent years.

Policy recommendations

The BOL should maintain a tight monetary policy to restore price and exchange rate stability. The issuance of short-term instruments to absorb excess liquidity is essential given the urgent need to reduce inflationary expectations and stabilize the exchange rate. The BOL should avoid purchasing any new triangulation bonds that are issued by the government to redeem arrears as it would inject liquidity into the system.

A timelier adjustment of the reference rate should be considered in order to stabilize the foreign exchange market. Repatriation and conversion requirements should be implemented in close consultation with exporters. These measures must be time-bound and periodically assessed, with policy details effectively communicated to the relevant stakeholders.

Banking sector soundness should be strengthened. This calls for decisive policy measures to raise the capital buffer in a systemically important bank and to enhance the supervisory and regulatory framework.

While fiscal policy has remained appropriately tight, public financial management systems must be improved to prevent new arrears, while revenue mobilization efforts to expand tax base and increase share of income-based taxes should continue. The authorities should leverage the electronic tax systems to broaden the tax base and reduce tax compliance costs, and monitor VAT collection from digital services vendors.

The government should consider a more comprehensive restructuring of its external debt with major creditors. This could help to lower Lao PDR’s annual debt service payments to a level that is consistent with its medium-term balance of payments projections. SOE reforms in the electricity sector should be accelerated to prevent the materialization of government contingent liabilities, with a plan to increase the average electricity tariffs to the cost recovery level.

Promoting inclusive and sustainable growth calls for ambitious structural reforms across a wide range of sectors. These include strengthening transport and connectivity infrastructure, creating a more business-friendly environment, and accelerating progress to address the adverse effects of climate change. Such measures would help attract stronger inflows of foreign direct investment, boosting competitiveness and growth prospects.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute toward securing macroeconomic and financial resilience and stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support regional financial arrangements, and provide technical assistance to the members. In addition, AMRO also serves as a regional knowledge hub and provides support to ASEAN+3 financial cooperation.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing, and reporting to its members on their macroeconomic status and financial soundness. AMRO also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.