Lao Economic Growth Requires Reforms for Stability - World Bank

Economic growth in the Lao PDR has improved slightly in 2024, but public debt remains unsustainable and macroeconomic instability continues to constrict growth, according to the Lao PDR Economic Monitor: Reforms for Stability and Growth, published by the World Bank today.

While most economic sectors show some signs of growth, multiple challenges reduce the country's prospects. The weakness of the Lao currency, the kip, and high inflation are eroding purchasing power and pushing up costs for businesses, while the labor supply is shrinking as workers shift toward self-employment and migrate abroad. Meanwhile, interest payments that Laos must make on its debts have grown because of currency depreciation and higher interest rates.

Between January and September 2024, the kip weakened by 19% against the US dollar at official rates, and by 28% on the parallel market. This pushed up consumer price inflation to an average of 25% over the same period. At the same time, for every 1% fall in the value of the kip on parallel markets, private consumption drops by an estimated 0.6%, in turn eroding domestic welfare and demand.

"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 recommends rather increasing the state's revenue capacity, primarily by restructuring excise duties and eliminating the tax incentives granted under many current investment agreements. At the same time, a credible debt restructuring plan and improved debt management are needed to restore debt sustainability.

GDP will grow by an estimated 4.1% in 2024, buoyed by performance in tourism, transport, and logistics, and by investment in the power sector. These sectors should sustain growth beyond 2024, but their contribution will be undermined by labor shortages and higher costs. High inflation will continue to weigh on real household incomes, depleting family savings, reducing consumption, and cutting spending on human capital.

This edition of the Lao Economic Monitor includes a section on health tax reforms, arguing for higher excise taxes on tobacco, alcohol, and sugar-sweetened drinks. Such taxes improve the health of the population by reducing demand, and simultaneously generate revenues for the state budget.

While the government raised excise taxes from the beginning of 2024, these increases are projected to have almost no impact on smoking prevalence or on real revenues, with tobacco sales currently protected from extra taxes by a 25-year-old agreement that is due to for renewal this year. The World Bank urges the government not to renew this agreement and recommends a modest reform of taxes on cigarettes and alcohol that would bring in additional revenue of over 2.75 trillion kip within the first year, equivalent to almost 0.8% of GDP.