BTI 2022 Laos Country Report

While Laos largely avoided the health impacts of COVID-19, the pandemic’s economic consequences exposed existing vulnerabilities, and left the country at the precipice of fiscal and debt crises. At the 11th national congress of the Lao People’s Revolutionary Party (LPRP), held in January 2021, the LPRP reinforced key elements of the regime’s high-stakes economic strategy but also hinted that the pandemic had encouraged a shift in economic emphasis.

Even before the pandemic hit, Laos’s economic transformation had started to slow in 2019. While GDP growth had eased from 8.0% in 2013 to 6.3% in 2018, it dropped to 4.7% in 2019, as a result of natural and human-caused disasters that slowed growth in agriculture and power generation. In addition, inflation had started to climb due to rising food prices, while the fiscal deficit, public debt, current account deficit and falling international reserves suggested long-standing structural vulnerabilities in the economy had not been alleviated.

The Lao government acted decisively to prevent the spread of COVID-19. It closed international and provincial borders to human traffic (though not goods) on March 30, 2020, and implemented a shutdown with limited exemptions for essential activities and services. With the spread of the virus quickly contained, restrictions were eased from May and most were lifted by July – with the exception of international arrivals and departures. By January 2021, the National Taskforce Committee for COVID-19 Prevention and Control had reported only 42 cases of COVID-19 in the country, resulting in zero deaths. Notwithstanding the government’s low testing rate, these figures represented one of the world’s lowest rates of COVID-19 infection and a clear endorsement of the government’s public health strategy. Besides the containment of the virus, the government earned plaudits for uncharacteristically open communication through televised daily press briefings, and the circulation of official announcements and decrees on social media. Despite isolated reports of unwarranted arrests for breaching social distancing measures – or in one case broadcasting such a breach on social media – the government’s response was reasonable, proportional and supported by the public.

The economic impact of the pandemic was another matter, as the country slumped into recession for the first time in over 20 years. Although power generation and agriculture continued to grow, the pandemic virtually stopped travel and tourism, disrupted supply chains and manufacturing, and meant that migrant worker remittances and overflight fees paid to the government dried up. Although government spending actually fell, revenue fell faster due in part to income tax relief. Unfortunately for the government, the widening fiscal deficit coincided with rising debt-service payments together with a growing current account deficit and dwindling foreign reserves. In August and September, Moody’s and then Fitch downgraded Laos’s credit rating to their lowest levels, warning of a potential debt default. Although the pandemic brought Laos’s debt problems to the fore, the underlying cause – as the government conceded – was over-borrowing for as-yet unproductive hydropower assets. Laos chose not to sign up to the World Bank’s Debt Service Suspension Initiative (DSSI), apparently preferring direct debt restructuring arrangements with China, its largest creditor. In one apparent example, Electricité du Laos (EdL), the state power enterprise that holds a large proportion of public debt, joined with a Chinese state enterprise to form EdL-Transmission to develop the Lao transmission network and generate increased exports.

At the LPRP’s 11th national congress at the end of the review period, Prime Minister Thongloun Sisoulith succeeded Bounnhang Vorachit as party general secretary, while Vice President Phankham Viphavanh leapfrogged two rivals to become the second most powerful person in the party hierarchy. Lower down the central committee, there was a major cleanout of mid- and senior-level cadres. It is possible that these changes will lead to greater focus on party and state governance, including anti-corruption activities. The congress’s most significant indicator of change may prove to be the party’s adoption of a reduced growth target of 4% p.a. for 2021–25, down from 7.5% five years earlier, together with an increased emphasis on the stability, quality and sustainability of economic growth. Nevertheless, the LPRP remains committed to its resource-based strategy for development, particularly hydropower, and acknowledges the country’s economic dependence on China, and other lenders and investors that this strategy implies. Moreover, while the LPRP continued to advocate the development of a legal framework, this continued to be conceived in statist terms of strengthening party and state governance, and control over development and society, rather than in terms of political liberalization or human rights.

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