Reform essential to restore economic stability in Laos

Laos faces increased challenges from currency depreciation and high inflation despite signs of economic recovery in early 2022, according to the World Bank’s latest economic update for the country.
The “Lao Economic Monitor for October 2022: Tackling Macroeconomic Vulnerabilities”, released on Monday, identifies ambitious reforms that can help the country restore economic stability and sustain growth.

The report noted that the kip lost 68 percent of its value against the US dollar over the year to October, undermining recovery and fuelling inflation, which in turn squeezed private consumption and investment.
Public and publicly guaranteed debt is projected to surpass 100 percent of GDP by the end of year. The World Bank has lowered its 2022 economic growth forecast for Laos to 2.5 percent, down from an earlier projection of 3.8 percent.
“Although employment had risen by mid-2022, Lao people’s earnings have not kept pace with inflation. Year-on-year consumer price inflation had risen to 37 percent by October 2022, with food price inflation at almost 39 percent. This particularly affects the urban poor, with some families forced to reduce their consumption of food and fuel,” the World Bank said.
In a World Bank survey, two-thirds of households reported spending less on health and education, which can undermine long-term human development.
“The World Bank and other development partners are discussing with the government a roadmap of reforms that can help stabilise the situation, protect essential spending on education, health, and welfare, and create a solid environment for long-term recovery,” said the World Bank country manager for Laos, Mr Alex Kremer.
According to the World Bank, five vital reforms are proposed – cutting costly tax exemptions to raise public revenue and protect social spending, improving the governance of public and public-private investment, and of state-owned enterprises, restructuring public debt through ongoing negotiations, strengthening financial sector stability through legal and regulatory tools, and lastly, improving the business environment and promoting exports through effective regulatory reform.
The report gives a medium-term outlook that assumes gradual recovery, driven by tourism and exports, though this is dependent on successful debt negotiations with bilateral creditors.
In addition, the economic outlook is subject to significant external risks, including tighter global macroeconomic policies and the protracted impacts of the Russian-Ukraine conflict.
This economic update features a thematic section on “Exports for Jobs”, which shows that the labour market remains characterised by high informality, reliance on public sector jobs, and a large number of agricultural workers who face seasonal demand.
The lack of high-quality formal jobs means that Laos’s previous economic growth did not reduce poverty as much as expected, while inequality rose. The section provides recommendations on how to boost exports in manufacturing, commercial agriculture and services in order to raise revenue, increase productivity, and create jobs.