(KPL) Logistics and tourism services will continue to be the main driver of growth in the Lao People's Democratic Republic (Lao PDR).

Gross domestic product (GDP) is forecast to grow moderately by 3.9% in 2025 and 4.0% in 2026, amid macroeconomic challenges, according to the latest Asian Development Bank (ADB) report released in Vientiane on April 9, 2025.

"It is most crucial to strengthen the macroeconomic fundamentals that anchor the economy and ensure long-term resilience, given the current global uncertainties. The focus on improved fiscal management, human resource development, and renewable energy will help enhance the country's capacity to withstand external shocks, ensure sustainable economic growth, and improve social inclusivity," said ADB Country Director for the Lao PDR Shanny Campbell.

Tightened monetary policy is expected to stabilize the exchange rate and dampen inflation.

The central bank's tightened monetary stance helped stabilize the Lao kip and inflation in the fourth quarter of 2024. The kip saw an overall depreciation of 5.4% against the US dollar and a 1.2% appreciation against the Thai baht.

Inflation averaged 23.3% but food, alcohol, restaurant, and hotel prices remained high, driving up consumer prices.

Inflation is forecast to moderate to 13.5% in 2025 and 10.4% in 2026. However, foreign currency-denominated debt will continue to strain the exchange rate and drive inflationary pressures.

The increase in electricity tariffs, effective March 2025, will also push up prices in the short to medium term.

Renewable energy and mining investments are projected to help industry grow over the next two years.

Export values for electricity, minerals, and agricultural products are forecast to increase and import levels will likely recover with the stabilized kip.

However, agriculture faces climate change challenges and growth is projected to remain moderate. Labour shortages and lower prices of agricultural commodities will dampen investments.

Fiscal policy will remain tight due to the debt burden. The 2025 budget targets a 1.0% GDP deficit, with revenue rising by 36% to 68.1 trillion kip and expenditure by 19.1% to 71.8 trillion kip.

Tax reforms and improved tax administration will drive revenue growth. However, high public debt will continue to challenge fiscal sustainability and constrain government spending.

The principal external risk to the Lao PDR's growth outlook arises from elevated tariff rate increases by the United States, which are expected to have a direct impact on the Lao economy, as well as a pronounced effect on neighbouring economies that serve as its key trading partners.

The full impact remains subject to significant uncertainty and the extent and transmission of these effects are not readily quantifiable, as it will depend on the duration of the tariffs and the negotiation capacity of affected countries.

Tightened monetary and fiscal policies have had trade-offs on health and education, impacting human capital and overall productivity. As debt servicing requirements increased, critical expenditures on health and education have decreased significantly. The report emphasizes the need for comprehensive public financial management reforms to tackle challenges in education and health.

ADB is a leading multilateral development bank supporting sustainable, inclusive, and resilient growth across Asia and the Pacific.

Working with its members and partners to solve complex challenges together, ADB harnesses innovative financial tools and strategic partnerships to transform lives, build quality infrastructure, and safeguard our planet.

Founded in 1966, ADB is owned by 69 members with 49 from the region.

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