Developing Asia’s laggard Laos faces economic headwinds
Xay, an auto mechanic from Laos, has been working in Thailand for three years. A combination of rising prices and falling purchasing power back home mean that he is one of 286,000 documented workers who have left Laos for better opportunities over the border.
“Here I receive 550 baht (US$17) per day, compared to a bit over 100 baht (US$3) in Laos which barely made ends meet. I can learn new technology with better equipment here,” said Xay, who asked to use a pseudonym so he could speak freely.
Double-digit inflation is having a major impact on Laos’ labor market, according to the World Bank. While consumer price rises have eased to 11.2%, compared with 26.2% in mid 2024, many people are still struggling to make ends meet.
The bank says high inflation is persuading people to leave manufacturing and service sector jobs and take up farming or head abroad in search of higher incomes. As a result, private businesses face major staff shortages.
“The transformation of the labor market in Laos is astonishingly quick. Three years of high inflation and currency depreciation have reshaped work choices, eroded household living standards, accelerated migration, and undermined human capital development,” said World Bank Country Manager Alex Kremer, adding that families are using up their savings “and may eventually run out of coping mechanisms.”
Rising prices and a skilled labor shortage are not the only factors weighing on an economy predicted to grow 3.9% this year, underperforming Developing Asia, which the Asian Development Bank says will grow 4.9% in 2025.
Persistent weakness in the Lao kip is eroding purchasing power and raising the cost of servicing the country’s massive debt burden.
The government has taken steps to stop the currency slide. In March 2024, the central bank ordered exporters to repatriate a portion of foreign currency earnings and convert part of that into kip. The bank also told commercial lenders to sell it at least 30% of the funds they received from exporters. But that is only a temporary fix, according to the Asean+3 Macroeconomic Research Office.
“To achieve lasting macroeconomic stability, Lao PDR must continue to strengthen its balance of payments, attract new investments, and diversify its sources of foreign currency income,” it said, referring to the Southeast Asian nation by its official name, the Lao People’s Democratic Republic.
If Laos is hoping to export its way out of its economic problems, it has a potential new hurdle in its way – the threat of 48% tariffs on shipments to the U.S., its fourth biggest foreign market. Laos has until July 1 to persuade the Trump administration it is taking steps to cut a trade surplus which stood at US$763 million in 2024, a 194% increase on the previous year, although tiny in proportion to neighboring Vietnam’s record US$123 billion surplus.
If higher tariffs are introduced Laos will need to rely more heavily on its main export destinations, Thailand, China and Vietnam and seek new trading partners.
Probably the biggest threat to Laos’ economy is the growing likelihood of a default on the government’s massive debt. Over-investment in the energy sector coupled with an ambitious infrastructure plan fed by Chinese loans for projects such as a high-speed rail link from Vientiane to China’s Kunming – for which China lent 70% of the US$6 billion construction costs – have turned Laos into one of Asia’s biggest borrowers.
Public debt stood at 97% of GDP last year and the International Monetary Fund forecasts it to rise to 127% by 2029, leaving Laos in “external and overall debt distress.”
The government has been trying to manage the problem by stabilizing the currency, raising money through domestic borrowing and asset sales, and charging higher taxes. However, in the long term, the only way out, according to the Lowy Institute, is debt relief, either by China, which it says is unlikely, or with multilateral IMF-led restructuring.
“The current approach will only draw out Laos’ crisis,” the think-tank wrote in a recent article. “We recommend that Laos and China engage with the IMF, of which China is a leading shareholder. This would offer numerous advantages, such as independent technical analysis of the required debt restructuring, policy conditionalities to rectify key governance gaps, and complementary economic reforms that would improve the chances of success.”
Unless the government does more to ease the risk of debt default, protect the value of the kip and bring inflation down into single figures, economists say Laos will continue to underperform its regional peers.
For workers like Xay, who would like to set up his own business in Laos one day, that means the likelihood of returning home is unlikely in the near future.
“I wish the Lao government was able to improve the economy,” he said. “But I don’t see any chance of that right now.”
Developing Asia’s laggard Laos faces economic headwinds – Radio Free Asia
