A weakening currency, inflation, labor shortages, and unfavorable weather have constrained economic growth in the Lao PDR this year, according to the World Bank's semi-annual economic update.

Over 2023, the Lao economy continued its gradual recovery from the COVID-19-induced slowdown of 2020, with GDP growth expected to rise to 3.7%, up from 2.7% in 2022, but less than previously forecast, says the report, Fiscal Policy for Stability. The improvement is largely due to stronger performance in tourism, transport and logistics services, and greater foreign investment. Inflation has increased consumption and business costs, reducing household spending on food, education, and health, and depleted savings, putting many families at risk of falling into poverty.

Although the global prices of some imported goods have eased, inflation remains high, reaching 26% in the year to October 2023. Food price inflation stood at 29%, severely affecting poor urban households, due to the weakening national currency. On average, a 1% fall in the value of the kip increases consumer prices by 0.5%. Inflation will therefore remain high until exchange rates stabilize.

The kip depreciated over 2023, falling in value by 29% against the Thai baht and by 21% against the U.S. dollar up to October, principally due to a lack of foreign currency caused by the need to repay large external debts. With banks rationing access to foreign currency, the difference between official and parallel market exchange rates has risen to about 15% for the dollar and 8% for the baht.

“Public debt is undermining Laos' economic stability and development prospects,” said Alex Kremer, World Bank Country Manager for the Lao PDR. “To restore economic stability, it is crucial that ongoing debt renegotiations are successfully concluded and that more revenue is raised to protect spending on health and education.”

The government has taken measures to improve its finances by controlling expenditure and increasing domestic revenues in the first half of 2023. However, while the government earned more than it spent in the first half of 2023, high debt repayments mean fiscal space is still limited. Combined public spending on education and health has declined from 4.9% of GDP in 2013 to an estimated 2.3% in 2023.

To improve revenue collection, the report recommends restoring VAT to its previous rate of 10%, revising the investment promotion law to curb incentives and broaden the tax base, reforming excise tax structures and rates, and strengthening the administration of large taxpayers.

Economic growth is projected to accelerate to 4.1% in 2024, led by services and exports and assisted by growing international demand, coupled with Laos’ improving connectivity and logistics services. However, with the kip likely to remain under pressure because of high imports and large debt repayments, inflation is anticipated to remain in double digits in 2024. This means household incomes will continue to be affected and progress in poverty reduction will likely remain slow.