Economic growth in Laos has seen a slight improvement in 2024, but the country's public debt remains unsustainable, contributing to ongoing macroeconomic instability. This assessment comes from the latest Lao PDR Economic Monitor: Reforms for Stability and Growth report published by the World Bank.
Despite some positive signs across various economic sectors, Laos faces significant challenges. The depreciation of its currency, the kip, coupled with high inflation rates, is diminishing purchasing power and increasing business costs. Labor supply issues are exacerbated as more workers opt for self-employment or move abroad. Additionally, interest payments on national debts have increased due to currency depreciation and rising interest rates.
From January to September 2024, the kip weakened by 19% against the US dollar at official exchange rates and by 28% on parallel markets. This led to an average consumer price inflation rate of 25% over this period. A decline in private consumption is linked directly to these changes in currency value.
“Laos has managed to stabilize government finances this year,” said Alex Kremer, World Bank Country Manager for the Lao PDR. “However, this has been possible mainly because of debt deferrals and limits on public spending, notably on health, education, and social protection. Continued underinvestment in human capital will damage the country’s long-term productivity and its future ability to compete in regional markets.”
The report suggests that enhancing state revenue capacity through restructuring excise duties and removing tax incentives from current investment agreements could be beneficial. A credible debt restructuring plan alongside improved debt management practices is recommended for restoring financial sustainability.
The GDP growth rate for 2024 is projected at 4.1%, driven by tourism, transport logistics performance, and investments within the power sector. However, labor shortages and rising costs may undermine their contribution beyond 2024. Persistently high inflation is expected to continue affecting real household incomes negatively.
This edition of the Lao Economic Monitor also discusses health tax reforms advocating higher excise taxes on tobacco products as well as alcohols including sugar-sweetened drinks which not only promote better public health but also contribute additional revenues into state coffers.
Although excise taxes were raised at the beginning of 2024 these adjustments appear unlikely affect smoking prevalence significantly nor increase real revenues substantially since tobacco sales remain shielded under a longstanding agreement due renewal later this year; thus prompting recommendations from World Bank urging against renewing such arrangements instead suggesting modest reforms around cigarette/alcohol taxation potentially generating upwards two-point-seven-five trillion kips within first fiscal cycle equivalent approximately zero-point-eight percent Gross Domestic Product figure according institution's estimates moving forward given current conditions present challenges going further without corrective measures implemented accordingly soon enough before consequences become irreversible eventually down line ultimately altogether avoiding pitfalls associated herein addressed now proactively addressing matter head-on whenever feasible practical manner possible given 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