Laos Falters Under Opaque Chinese Debt

According to the International Monetary Fund, Laos’s gross government debt has reached 123 per cent of its GDP. Half of that debt is owed to China, which has funded a handful of large-scale infrastructure projects across the country. Now, despite China’s debt deferment and aid, Laos is struggling to repay its loans, prompting one expert to state that, outside of debt forgiveness, she does not see “a way out for Laos.”

Chinese investments: Backing or trapping?

China has often been accused of ‘debt-trap diplomacy,’ or lending to and then leveraging political influence on already debt-laden countries through its international infrastructure builds (i.e. the ‘Belt and Road Initiative,’ or BRI). In the case of Laos, some experts say that such a narrative is at odds with the strong bilateral ties and extensive investments between the two socialist countries. Nishizawa Toshiro, for example, a former adviser to the Laotian government, has argued that China would never let Laos default on external debt obligations. China, meanwhile, has labelled debt-trap accusations as "irresponsible" and "unreasonable.”

But observers, including Mariza Cooray, senior economist at Australia’s Lowy Institute, remain concerned about the lack of reliable information surrounding the terms of some of China’s loans. Cooray told Nikkei that Laos’s “debt crisis is a lot bigger than the world realizes, partly because of the incredible level of opacity and the poor quality of the statistics.”

Landlocked to land-linked

Large-scale infrastructure projects in landlocked Laos, with a population of 7.4 million, include the C$8-billion Boten–Vientiane railway, which has turned over majority control to the Chinese government. Since its launch in 2021, the line has carried 20 million passengers and more than 20 million tonnes of cargo.

Hydropower dams built across the country on Chinese loans have also come under scrutiny for their environmental impacts. Some of the funds used for constructing these dams were put towards environmental protection measures, according to China’s foreign ministry. But one World Bank estimate suggests that construction on BRI projects in Laos could increase CO2 emissions in the country by 7.7 per cent from 2014 to 2030.

Despite these potential drawbacks, on September 17, Laos signed onto another development project with China General Nuclear, a state-owned energy corporation, to construct a renewable energy base in the north of the country as part of Laos’s effort to become Southeast Asia’s “battery.”