The World Bank In Lao PDR

The Lao PDR’s economic situation remains difficult, marked by persistently high inflation, currency depreciation, and slow growth. Tourism, transport and logistics, and investment in the energy sector have shown signs of recovery in 2024, but economic growth remains below pre-COVID-19 levels, primarily due to protracted macroeconomic instability and external factors.

Between July 2023 and June 2024 the kip depreciated by 14% against the US dollar in the official market and by 29% in the parallel market, leading to inflation. The year-on-year inflation rate reached 24% in May 2022 and has remained in double digits since, recorded at 24% again in August 2024. This prolonged period of high inflation has changed the labor market, with external migration increasing, mainly to Thailand and workers quitting wage employment for farming and the informal sector. Inflation has also eroded household living standards and undermined human capital development. Poorer people have been the worst hit and progress on poverty reduction is estimated to have stalled.

Large public debt and weak public revenues are driving inflation, exacerbating long-standing structural vulnerabilities. Before 2013, Laos’ rapid growth came mainly from large-scale investments in mining and hydropower, which failed to support job creation and in some cases have imposed considerable environmental costs. Public investment in the power sector has been financed mostly by external debt, often on commercial terms, gradually jeopardizing macroeconomic stability.

The gradual economic slowdown seen since 2012 has become more pronounced. Structural challenges, macroeconomic instability, and a deteriorating external environment have curtailed recovery from the COVID-19 era, with growth recorded at 2.7% for 2022 and estimated at 3.7% for 2023. The improved performance was largely due to recovery in the services sector. Economic growth is forecast to pick up to 4% in 2024, though the outlook remains subject to high economic uncertainty. Tighter monetary and fiscal policies and renewed efforts to enforce foreign exchange restrictions have had little impact in restoring macroeconomic stability. Limited foreign exchange liquidity, and hence a weaker kip, put pressure on external public debt servicing, which constrains fiscal space.

Economic instability and challenges in social services mean that Laos is in danger of losing gains previously made in poverty eradication, education, nutritional status, and other human development indicators. Structural reforms are needed to stabilize the economic situation and support more inclusive growth. A child born in Laos today will only be half as productive as she could be if she enjoyed full health and education. Malnutrition continues to be a critical issue affecting people’s physical and cognitive development, with stunting affecting over 30% of children under five. The maternal mortality rate is also high, recorded at 185 per 100,000 births in 2017. Malnutrition is likely to have increased during the pandemic while there has been a significant fall in school attendance since 2022, possibly because of the pressure from inflation upon household living standards.

Last Updated: Oct 04, 2024

The World Bank Group works with the Lao government to reduce extreme poverty and boost shared prosperity, supporting the Ninth National Socio-Economic Development Plan 2021-25 and the 2021 National Agenda to Address Economic and Financial Difficulties. 

A Country Partnership Framework 2023-26 was launched in early 2023 following consultations with government, the private sector, civil society and other development partners. The immediate priority is to protect the most vulnerable in Lao society from the effects of economic shocks, while advising the government on reforms that could stabilize the situation in the longer term. The World Bank has an ongoing portfolio of 24 projects in Laos, with a funding value of over $840 million. Most of the financing comes from the International Development Association, the World Bank’s fund for countries most in need.

The current framework therefore includes an intensive program of technical advice on macroeconomic and debt-related policies, World Bank funding for health, education, and social protection, and support from the International Finance Corporation (IFC), the private-sector arm of the World Bank Group, for private sector employment. It also looks to support better management of natural resources, which are essential to the livelihoods of over 80% of Lao people. The framework follows an updated Systematic Country Diagnostic and a Country Economic Memorandum, which outline developments in Laos over the previous few years, updating knowledge and filling data gaps. The documents identify the most pressing development challenges and explore how the country can take advantage of its strategic location and natural resources to seize emerging opportunities and rebalance the economy for more inclusive and sustained growth.

IFC is also active in Laos. Since 2000, it has invested and mobilized more than $98 million in the country, mainly in the power, banking, manufacturing, and services sectors. IFC is currently implementing five advisory projects valued at $12.2 million to improve the business environment, expand access to finance for small and medium enterprises, boost sustainable economic growth, and create more jobs.

To support implementation of Laos’ National Agenda on Addressing Economic-Financial Difficulties, the World Bank is advocating urgent reforms in five crucial policy areas:

1: Raise public revenues to protect spending on education, health, and social protection

Current challenge: Tax exemptions deprive the government budget of much revenue, leaving less money for schools, health care, and debt repayment. Tax exemptions for foreign investments also reduce foreign exchange inflows.

Key reforms: Curb tax incentives and exemptions; having returned value added tax to 10%, and collect 1% of GDP through taxes on alcohol and tobacco; strengthen tax administration; reprioritize spending toward education, health care, and social protection.

2: Improve expenditure efficiency

Current challenge: Inefficient public investment is costly, and state-owned enterprises and public-private partnerships often create government liabilities.

Key reforms: Make investors and contractors compete for concessions and contracts; improve state enterprise management; control public investment more tightly.

3: Restructure public debt

Current challenge: High public debt undermines macroeconomic stability by constraining fiscal space, and exerting pressure on the exchange rate, which drives inflation.

Key reforms: Bring ongoing bilateral debt negotiations to a successful conclusion; strengthen controls over public sector borrowing; limit non-concessional borrowing.

4: Strengthen financial sector stability

Current challenge: Vulnerabilities in the banking sector remain high, despite the restructuring of two state-owned banks. The sector faces liquidity constraints in foreign exchange, rapid currency depreciation and record inflation levels. Recent increases in the sector’s financing of government deficits increase risk and threaten to crowd out private sector financing. The eight largest banks have significantly lower capital levels than do smaller banks.

Key reforms: Enhance bank monitoring; operationalize existing legal and regulatory tools to manage vulnerability, and develop plans to remove special banking measures brought in during COVID-19.

5: Improve the business environment and promote exports

Current challenge: Burdensome processes and regulations raise business costs and undermine productivity.

Key reforms: Simplify business registration processes and regulations; make licensing transparent.

Building on the success of the first Reducing Rural Poverty and Malnutrition Project, a second phase of the project began in early 2024, bringing additional resources to improve nutrition and reduce poverty in 25 of the country’s poorest districts. This forms part of the National Nutrition Convergence program, which coordinates five World Bank-financed projects aimed at accelerating the reduction of stunting in Laos. Phase I of the project brought nutrition-improvement efforts to over 48,000 people including through the Helping Hand conditional cash transfer program. These initiatives are now being scaled up, as is the social registry of poor and vulnerable people, which has registered over 1.2 million households and is being used by the government and UN agencies to better target aid assistance. Initial results show the first phase effectively mitigated COVID-19's impact on child nutrition, improved diet diversity, and boosted growth monitoring services. Without the program, stunting and wasting among children under two would have been 7.7 and 3.4 percentage points higher in project villages. In target areas, consumption of diverse foods needed for adequate nutrition has increased by 12.7% among children aged 6–12 months. Household nutrition has also improved, with the availability of nutritious food up by 7.8% and the food diversity score increasing by 6.6%.

Since 2018, the Lao PDR-World Bank Competitiveness and Trade Project has been helping simplify business regulations, facilitate trade, and improve the competitiveness of private firms. Under its Business Assistance Facility, by mid-2023 over 364 firms, 65% of them led by women, had received grants to upgrade productivity. This support directly helped 192 of these companies weather the impact of COVID-19. Many have also benefited from free business advisory services. The project has worked with the government on a series of business regulatory reforms, reducing the steps needed to register a business from nine to three, and simplifying the business licensing regime. It is now also easier for troubled firms to restructure, making it easier for capital stuck in insolvent businesses to flow to more productive uses. Support to the Lao National Chamber of Commerce in its reform dialogue with the government led to breakthroughs at the March 2023 and April 2024 Lao Business Forums, with agreements and progress on new dialogue mechanism for addressing major business issues.

The recently completed Scaling-Up Participatory Sustainable Forest Management Project supported over 100,000 people, largely from ethnic minorities, in over 650 forest villages. Livelihood support and casual employment in forest restoration have reduced the deforestation rate and saved an estimated 1.8 million metric tons of carbon dioxide-equivalent emissions. The Second Lao Environment and Social Project has strengthened environmental management policy and capacity, updating the country’s Environmental and Social Impact Assessment Decree and the Environment Protection Law. Laos is now publicly disclosing air pollution data and environmental compliance monitoring reports, and has issued a state of the environment report. The project also strengthens forest management systems, promoting conservation-friendly livelihoods in 191 villages and increasing the capacity to curb the illegal wildlife trade. With support from the Resilient Green Growth Program, the government has also finalized a National Plastic Action Plan, setting out goals, strategy, and activities for improving plastic management and reducing pollution.

The Bank provides support to the Lao transport sector to improve trade, road connectivity, and sector management. Improvements to National Roads 13 North and South have upgraded the safety and climate resilience of 98 km of these major national arteries. Under the Southeast Asia Regional Economic Corridor and Connectivity Project, the Bank is supporting the improvement of 136 km of National Road 2, which facilitates connectivity and trade with Vietnam and Thailand, plus 300 km of local roads in the northern provinces to improve domestic access to the regional corridor. This project is also developing border facilities, dry-ports, and consolidation yards to promote agricultural exports. So far, the improvement and maintenance of roads is estimated to help 2.63 million people through better access to farms, markets, health services, schools, and jobs, while also boosting trade.

The Lao PDR Enhancing Systematic Land Registration Project has so far provided almost 70,000 land titles to around 135,000 beneficiaries in 32 districts. Over 70% of the titles issued are in the name of a woman or jointly name a woman, enhancing women’s control over their economic resources. The project has also contributed to recent legal clarifications that will allow land titles to be issued for existing residential and agricultural lands inside state forestlands. This will improve security of tenure for almost a quarter of the country’s population.

By the time Tropical Storm Yagi hit Laos in September 2024, the Southeast Asia Disaster Risk Management Project for Lao PDR had completed approximately 8.3 km of a planned 13 km of riverbank protection works in Oudomxay, Luang Prabang, and Borikhamxay. This has protected an estimated 23,000 people and over 3.1 square kilometers from floods. Assessments are ongoing as to how much damage the ongoing works received and how effectively they performed during the recent storm-induced flooding, with early diagnosis suggesting the protection systems provided important riverbank defenses. Following storm Yagi, the government made an insurance claim and received its second insurance payout from the Southeast Asia Disaster Risk Insurance Facility. The project has also installed over 60 hydrometeorological stations in strategic locations across the country to strengthen the monitoring and observation network and improve rainfall and flood forecasting.