(KPL) Economic growth in the Lao PDR is estimated to have been below 2019 levels in 2023 and is forecast to remain below that pace in 2024, weighed down by economic instability, low worker skills, out-migration of labour, and a challenging business environment, the World Bank said in a report released on Tuesday.

The Lao GDP is estimated to have grown 3.7% in 2023, with positive contributions from tourism, transport, logistics, and mining, according to the Lao Economic Monitor for April 2024, Accelerating Reforms for Growth. Foreign investment increased substantially, mainly in electricity and mining, while improved revenue collection has offset increased public spending. In 2019, growth stood at 5.5%.

Continued high inflation, caused by the falling value of the kip, means that consumption remains constrained. In 2023, the annual average official kip/U.S. dollar exchange rate weakened by 31%. Given Laos’ high import dependence, depreciation brings changes in domestic prices. Headline inflation averaged 31% over 2023 and remains high, with food, transport, hotel, and restaurant price increases the main contributors. 

“While average household incomes improved in 2023, about a third of Lao households, especially low-income families, have seen their purchasing power fall behind inflation,” said Alex Kremer, World Bank Country Manager for the Lao PDR. “Our monitoring surveys show over 30% of families have reduced their spending on health and education, while in urban areas where fewer people grow their own food, food security is becoming an increasing problem.”

In 2024, GDP is projected to grow by 4%. Economic activity is expected to benefit from further growth in services, plus investment in the power sector and some special economic zones. However, kip depreciation and high inflation are likely to persist due to a lack of foreign exchange and the need to repay high external debts.

Between 2020 and 2023, about US$2 billion (around 15% of GDP at the 2023 rate) of principal and interest payments on debts owed to China was deferred. Nevertheless, debt payments will still require large amounts of foreign currency, and access to international capital markets has deteriorated with loss of access to the Thai bond market. Recent regulations requiring the repatriation and conversion of export proceeds from mining, power, agriculture, and services may bring more foreign currency into the economy in the short-run but could be counter-productive if they deter future investment.

The report recommends restoring macroeconomic stability through a strong commitment to five critical reform areas: debt management, revenue mobilization, public investment management, financial sector stability, and business environment reforms. Recent revenue reforms will help balance finances, but the overall pace of reform needs to accelerate.

This edition of the Monitor includes a thematic section on education, which finds that public education funding has fallen, with the 2023 budget allocation for education 38% down from the 2013 figure in real terms. While strong human capital and education are fundamental to putting Laos on a sustainable high-growth trajectory, primary education is no longer universal across the country: an increasing number of children are dropping out and those who stay are not learning.

This has follow-on effects for subsequent education levels. Most Lao secondary students score below expected levels, especially in mathematics and science. If learning outcomes are to improve, the education sector needs urgent re-prioritization and increased budget allocation.

KPL