Year 2022 has been an annus horribilis for communist party-run Laos. Analysts are divided on whether 2023 will bring any relief. Even the more optimistic-minded aren’t too optimistic.
“The economy will not be back on track, but the worst will be over unless unanticipated adversities emerge,” says Toshiro Nishizawa, a University of Tokyo professor and a former adviser to the Laotian government.
Laos had known economic growth rates in excess of 6% or 8% during the 2010s, but this year the economy is likely to grow at just 2.5%, about the same as last year, says the World Bank.
Inflation has skyrocketed throughout the year, reaching 38.4% year on year in November, one of the highest in all of Asia, while the cost of many essential goods surged by more (food and non-alcoholic drinks are up nearly 43%). The local currency, the kip, crashed in value by as much as 68% against the US dollar, as of October. Poverty rates have increased.
The World Bank expects the economy to grow by around 3.8% next year, Asia Times understands, while the Asian Development Bank (ADB) says 3.5%. But these forecasts rest on the assumption that Laos continues to receive debt-repayment deferrals from China.
That’s a big if, although most analysts reckon Beijing has no interest in seeing a loyal partner suffer the indignity of defaulting, along with the associated geopolitical implications for China. Laos’ debt-service obligations will average US$1.3 billion per year from next year until 2026, roughly the same amount the state had in official foreign reserves in June.
In some good news, the ADB’s latest Asian Development Outlook, released on December 14, asserted that inflation across the whole of 2022 probably averaged around 23%, but will fall to nearly 10% next year. A depreciated kip may spur Laos’ sleepy export sector in 2023. Tourism, an important sector, is expected to do better next year too.
Laos may be nearing the pre-pandemic normalcy that some of its neighbors have already arrived at.
“Overall and surprisingly, the Lao economy appears resilient for the short term,” says Nishizawa. “However, the government and LPRP [Lao People’s Revolutionary Party] need to restore and re-establish policy coherence to avoid significant discrepancies between political motives and economic rationale.”
Asia Times expects three main trends for Laos next year. First will be macroeconomic reforms.
“With much faster price rises in Laos than elsewhere in the region, the causes must be sought in domestic rather than global factors,” says Alex Kremer, the World Bank’s country manager for Laos.
The World Bank has recommended key measures to restore stability to the country’s finances, some of which are already under way. These included increasing public revenues through a review of tax exemptions and the reversal of the recent cut in value-added tax (VAT).
Speaking at a National Assembly session this month, Deputy Prime Minister Sonexay Siphandone said revenue collection is projected to be above the target of 15% of GDP.
The World Bank also advises more effective public expenditures, successful negotiations on debt-repayment deferrals, better bank supervision, and reforms to the ease of doing business.
“Although Laos can look forward to growing farm exports and tourism … medium-term prospects for growth and poverty reduction will depend largely upon these structural reforms,” Kremer says.
Exports
A depreciated currency, which is likely to stay weak throughout 2023, could encourage progress on another trend: a refocusing on the country’s dawdling export sector.
“Laos must boost its labor-intensive tradable export sector, beyond just natural resources,” says Keith Barney, associate professor at the Australian National University.
Unlike its neighbors, Laos has a relatively small manufacturing sector. While apparel goods make up the bulk of Cambodian and Vietnamese exports, they constitute a small fraction for Laos. Industrial exports from all special economic zones were worth a little over $287 million this year, according to recent statements by Sonexay.
Instead, the landlocked state has focused on shipping minerals and energy from its slew of hydropower dams. But mineral mining is peaking and the hydropower sector employs few locals.
With the kip now depreciated, that should make the country’s exports more competitive. At the same time, exporters will soon have access to key ports in Vietnam and Thailand thanks to new railways, which will also reduce transport costs.
Plans are under way for railway connection ports in Bangkok and Vietnam. The Laotian government has partnered with a local conglomerate to develop the Vung Ang port directly in northern Vietnam, a multilayered project that should be completed by the end of the decade.
Meanwhile, direct access from Vientiane to southern China thanks to a $6 billion high-speed railway that opened last year could boost exports to the US, Japan and European countries.
In 2019, China, Thailand and Vietnam purchased around four-fifths of Laos’ exports, according to United Nations data. The US imported only $218 million of Laos’ total exports of around $7 billion last year.
“This combination of the railway and a lower kip offers a potential pathway out of Laos’ debt problem,” Barney says. “But Laos needs to prioritize what sort of goods the country can manufacture and export to regional buyers, that meets competitive price point and quality specifications. That will be a tall challenge.”
Social issues
The third trend will be more investment on welfare. Laos is scheduled to graduate from its least developed country (LDC) category in 2026, says the United Nations. But the Covid-19 pandemic and macroeconomic instability this year have weakened social progress.
Two-thirds of households have significantly reduced spending on health and education this year, according to a recent World Bank report. Kremer, of the World Bank, notes that spending on education and health fell from 4.3% to 3.1% of GDP over the 2016-2021 period. “Laos will need to renew its commitment to building human capital,” he told Asia Times.
In August, the government raised the minimum wage by 100,000 kip to 1.2 million kip (around US$79). But delegates at a recent National Assembly session called for a major hike in pay for state-employed workers, a large share of the national workforce. The government is hesitant lest it causes inflation to spike further.
An unusual degree of social unrest was felt in 2022. Angry scenes were witnessed at fuel stations this year when fuel was rationed. Public anger stirs on social media, despite the customary speed of the authorities to crack down on any criticism.
“The government and LPRP may face the challenge of minimizing risks of public criticism from the urban poor coming up to the surface,” Nishizawa says. “For this reason, they will emphasize, actually and rhetorically, social protection measures for the most vulnerable segments of the population, particularly in urban areas.”
Instability fears
But all of these trends depend on political stability. The LPRP, the ruling communist party, is safe. No other political party is allowed and there is no inkling of a pro-democracy movement, let alone coordination among the disparate anti-government voices.
But it could face intra-party tensions next year. After Phankham Viphavanh was elected prime minister in early 2021, he asserted that he should be judged halfway through his five-year term, which would be in late 2023. Whether he opens himself for rebuke by National Assembly delegates and party grandees is unclear.
Some analysts reckon that a major reshuffle of the country’s top leaders is unlikely, since that would be an admission of failure.
Moreover, deciding who occupies the country’s top government and party posts is a complex process of balancing factions, family network and interest groups, and it usually takes months of negotiation leading up to the LPRP’s quinquennial congresses, the next of which is due for 2026. An early reshuffle could jeopardize the factional balance.
But Phankham’s future isn’t secure. Influential Chinese businesspeople and advisers in Laos are believed to be lukewarm, since he is considered to be close to the pro-Vietnam lobby within the country’s communist party.
Some believe Phankham acted too slowly in early 2022 to curb the problems (he only established a special economic task force on June 6). He was also pressured into cabinet reshuffles throughout this year that gave more power to his potential rivals, although they too now share collective responsibility for the economic woes.
At the time of publication of this article, Asia Times was told that a decision has already been made to replace Phankham with Sonexay Siphandone, a deputy prime minister and scion of the Siphandone dynasty, one of the two main political families. This cannot be confirmed.
Meanwhile, the Internet rumor mill is churning on allegations that Phankham may have some association to the mystery of the bullet-ridden body of a businesswoman that was discovered floating down the Mekong stuffed in a suitcase in November. Dissidents living abroad have alleged that she was Phankham’s mistress.
The ruling communist party needs to avoid such scandals in 2023. Apparatchiks will be hoping for a quiet year.
Follow David Hutt on Twitter at @davidhuttjourno.