Laos Teetering on the Edge of Financial Crisis

Hit from many sides . . . 

Laos may be the next casualty of the forces that recently sent Sri Lanka’s economy into a free fall – and its political leaders into exile. Like Sri Lanka, Laos has suffered from the loss of tourism revenue due to pandemic-related travel restrictions. It is also starting to buckle under the weight of foreign debt obligations – estimated at around C$18.7 billion, or roughly 88 per cent of its GDP – and limited cash reserves for servicing that debt. Last month, international credit rating agencies began to sound the alarm that the country may be getting perilously close to defaulting on those debts. Meanwhile, the population is grappling with steep price hikes, shortages of fuel and other essential goods, a currency that has plummeted against the U.S. dollar, and inflation that has hit a 22-year high of nearly 24 per cent.

Crisis years in the making . . .

A little less than half of Laos’s debt is held by Chinese creditors. Some of this debt is from costly infrastructure projects with questionable long-term payoffs. One example is the new US$6-billion rail link between the capital city of Vientiane and the city of Kunming in southwestern China. While the benefits of the rail link are clear for China, such as increasing Chinese access and export potential to ASEAN, experts have questionedthe commercial benefits for Laos, with a population of just 7.3 million. Observers are speculating that China, to help Laos avoid a catastrophe, may have to depart from its usual aversion to debt restructuring, especially given Laos’s location along China’s southern border.

Frustration boils over . . .

One of the surprising side effects of Laos’s evolving difficulties is the rare public outburst on social media against the government for mishandling the economy. Some of this frustration was also directed at China. However, the situation in Laos will likely deviate from the course of events in Sri Lanka as Laos has been under the grip of the country’s authoritarian communist party since the mid-1970s. The government has fired and re-shuffled some high-level officials, perhaps a sign that it recognizes the urgency of the situation. But any substantial change in government is extremely unlikely.

READ MORE