Laos had the feeling of a nation moving ever closer to an economic reckoning in 2023, even though the outcome is likely to be ambiguous and protracted. While according to official statistics, Laos narrowly avoided an outright recession during the depths of the global COVID-19 pandemic, the sparkle of the resource-driven boom years in Laos dimmed further in 2023.
The key problem is debt — both sovereign and state-owned enterprise debt — and lots of it. Total public and publicly guaranteed debt, including government arrears and swap lines, reached approximately US$15.9 billion in 2023, equivalent to 125 per cent of GDP. The interrelated ills of high inflation and further currency weakening made external repayments ever more difficult. As approximately half of all external debt is owned to China, once again it was only thanks to debt rescheduling by Chinese banks (US$2 billion worth since 2020) that the Lao government avoided a full default.
A series of temporal and spatial mismatches in the energy and infrastructure sectors lie at the heart of Laos’ debt crisis. There are mismatches between the timing of debt repayments and the forecasted onset of hydropower and infrastructure revenue streams. The seasonality of hydropower, combined with an unfinished high voltage domestic transmission grid, means that Laos runs an energy production surplus during the wet season but a dry season deficit. This necessitates expensive seasonal re-imports of electricity from Thailand.
There are different spatial mismatches, including between the location of major new dam projects targeting the domestic energy market and incomplete transmission grid infrastructure to offload power to a load centre.
These mismatches mirror underlying coordination disconnects between and within Lao government institutions. Ultimately such governance challenges are a function of Laos’ statist socialist drive towards big infrastructure and energy projects, combined with elite capture and cronyism. While members of the National Assembly have raised pointed questions on the debt crisis, in 2023 the party-state leadership tended towards boilerplate responses.
The former jewel of the Lao state-owned electricity sector, Électricité du Laos (EDL), is now about US$5.7 billion in the red — 45 per cent of GDP. It is not clear what the plan is to regain financial sustainability for this critical state enterprise.
Following another sovereign credit rating downgrade, by September 2023 the Lao Ministry of Finance, and by extension EDL and its subsidiary EDL-Generation Company, were effectively shut out of Thai commercial debt markets. Debt repayment obligations will need to be achieved through a combination of initiatives. This may include new investments, GDP growth, domestic tax reform, onshoring investment funds and the issuance of new domestic bonds priced in Lao kip. More Belt and Road Initiative (BRI) debt extensions and currency swap pledges from China are likely.
The problem is that any further non-concessional borrowing now just adds to the downside risk of a counterparty debt default. There is also significant uncertainty on when repayment on the existing debt extensions provided by Chinese banks would be restarted. Poor levels of financial transparency — neither EDL nor domestic state-owned banks issue audited financial statements — have contributed to an overall sense of paralysis and policy drift.
On the surface, everyday life continues. But inflation pressures are steadily gnawing at family budgets. Civil servant salaries, set at 1.8–2 million Lao kip (US$87–97) per month, barely cover the petrol costs to drive to work. Many Lao government staff are reportedly ‘working from home’ for much of the week — taking on second or third jobs — and petty corruption by officials is said to be increasing. Enrolments at the National University of Laos are down significantly as young people must secure a wage to support themselves and their families.
While the Lao People’s Revolutionary Party retains firm single-party political control, the Lao political economy is at a critical juncture. The present value of public and publicly guaranteed debt must be reduced. With over US$1 trillion in BRI lending, China has so far showed little inclination to extend face value debt reductions to recipient countries.
Laos has three options. First, securing more debt repayment extensions from Chinese banks through to 2027 or beyond, which would be non-transparent, while trying to grow out of the debt burden. Second, coordinated debt restructuring, stabilisation and economic reforms arranged in consultation with the IMF and backed by a support package of highly concessional lending through the development banks, which would involve greater transparency. Third, privatising more state assets inside state-owned enterprises to reduce debt loads and hopefully raise some new capital.
The second option would likely present a challenge to core political and party interests. While to have any major impact the third option would in effect require further privatisation of EDL-Generation — anathema to the leadership. The first option, which is largely a deferral approach, could be viewed by the leadership as (ostensibly) the best path. Yet this option could also lead to a ‘lost generation’, with tightly compressed expenditures on human capital and high levels of youth emigration for many years. Laos’ political economy would have some further space to run, but the country would remain excluded from global private credit markets and struggle to attract reputable private investors.
The deferral approach could leave Laos trailing far behind in the 21st century knowledge economy as disinvestment in education and health undermines human capital. In its broader socio-economic implications, the first option could be the worst of the three, as it just temporarily dilutes the debt burden, and would suggest an unwillingness to address the underlying problems.
Laos retains some economic resilience. Tourism is rebounding, the Lao–China Railway is operational and Lao hydropower represents a long-term and relatively low-carbon energy source. Laos will be the rotating ASEAN Chair in 2024, which could present either an opportunity to garner further external support or, more likely, render government institutions overcommitted and distracted, with the leadership reliant on the magnanimity of Chinese lenders.
In the first weeks of 2024, Lao President and party Secretary-General Thongloun Sisoulith provided signals that more substantive economic reforms are now on the table. For Laos in 2024, without some clear moves toward a structural resolution of the country’s economic woes, we should expect the appearance of further morbid symptoms.
Keith Barney is Associate Professor at the Crawford School of Public Policy, The Australian National University.
This article is part of an EAF special feature series on 2023 in review and the year ahead.