The deepening debt crisis which is hurting the country’s finances and putting Laos dangerously on the brink of default has brought the country’s economy to the brink of collapse. The Southeast Asian country’s Bureau of Statistics said in June that inflation had hit a 22-year high of 23.6%, making basic goods harder to obtain and diminishing purchasing power people.
Laos’ domestic and international debt has reached more than 14.5 billion dollars (14.2 billion euros), according to the World Bank. Anushka Shah, vice president and head of ratings at Moody’s Investors Service, said flatly in mid-June that she “is on the brink of failure.”
According to analysts, Foreign exchange reserves of Laos are so weak that there is no way out for this small landlocked country without outside intervention to help it pay its debts. China, which has provided money to Laos to build infrastructure projects including hydropower plants and railway lines, is responsible for almost half of the country’s external debt.
Now that Vientiane is in trouble, attention is turning to Beijing’s response to the question and whether it would support any form of bailout or debt cancellation. Alarming inflation rates in Laos are the latest indication that the country’s debt-ridden economy is still in the grip of a financial storm.
The country has been badly affected by the pandemic, even though the economy was booming with annual GDP growth of 6-7% for much of the decade before the coronavirus outbreak. “The modest size of Laos’ economy makes it much more susceptible to shocks.” “Any attempt at expansion has been seriously hampered by the COVID-19 outbreak.” Member of the Center for Strategic and International Studies (CSIS), a research group headquartered in Washington.
The landlocked nation of 7 million people mainly depends on imports and exports to trading partners in Asia due to its small size. The outbreak has increased inflationary pressure on the country by disrupting supply networks and driving up food and gasoline prices.
“The war in Ukraine and other reasons are exacerbating this problem at the moment, and some Laotians are skipping meals to deal with circumstances beyond their control.” While trying to get back to normal, people have challenges and may need help. In a recent press release, Alex Kremer, Laos Country Director for the World Bank, said
The Chinese debt trap
Another aspect that has contributed to the escalation of the crisis is Laos’ choice to take on significant debt to finance major infrastructure projects. Whether it’s rail links or the hydroelectricity that Laos is capable of generating, Murphy said, “I think Laos is at the mercy of being part of China’s economic goals.”
In recent years, Laos has emerged as the hub for expanding trade, economic and infrastructure integration in the Mekong sub-region. Its dams provide electricity to its more populous neighbors, and its expanding road and rail network could connect the region’s expanding businesses. China is now one of the top foreign investors in Laos, with projects totaling more than $16 billion, according to China’s official media, Xinhua.
The newest major undertaking, the $5.9 billion China-Laos Railway linking Vientiane to the Chinese border, is an important pillar of the massive multi-billion dollar Belt and Road Initiative. of Beijing to create infrastructure. However, poorer countries like Laos run the risk of falling into China’s “debt traps” which critics of Beijing’s global expansion and infrastructure-focused foreign policy say allow investors China to take control of important national assets when the debtor countries cannot repay the loans.
The overall amount of Laos’ public debt to China is estimated at around $12.2 billion by AidData Lab, a research center of William & Mary’s Global Research Institute, which is significantly higher than the Bank’s estimate. world.
Toshiro Noshizawa, a professor at the University of Tokyo’s Graduate School of Public Policy, said: “Laos is undoubtedly facing huge and alarmingly serious economic and financial problems, but I don’t think the China will allow Laos to default.” Although the number of debt commitments alone seems to indicate that default is inevitable, he warned that such simple forecasts would be impossible due to geoeconomic variables.
To bolster economic ties across Southeast Asia, China has committed more than $800 billion since 2013 to its Belt and Road Initiative, with Laos a vital ally. In light of this, a default by Laos could harm China’s position as a reliable partner in the developing world, especially in this area.
The stakes are too high for China, both politically and economically. Overall, Laos has a lot of debt, but it’s not as much as other nations, so I think it will be ready to step in.
Laos’ balance between the powers
Laos is caught in a severe power struggle as Beijing’s grip on the country tightens and the rate of inflation rises. Besides China, there are many more important trading partners for Laos. The nation has a long history of juggling the interests of rival diplomatic allies. Unlike Vietnam, which is currently considered Laos’ most important security partner, Japan has long been the country’s largest provider of bilateral assistance.
Despite its financial difficulties, Vientiane has so far refrained from approaching its foreign lenders to renegotiate its debt. The nation has opted to borrow new money from Beijing during the COVID outbreak rather than seek loans from multilateral lenders.
Why China won’t let Laos default
There is probably no way out of Laos’ worsening economic and financial difficulties without some sort of Chinese bailout or debt cancellation. The tiny Southeast Asian nation is covered in warning signs that are all flashing red. Compared to the same time last year, the value of the national currency, the kip, has fallen by about a third. In June, inflation reached 23%, its highest level in decades. The landlocked nation is currently experiencing gasoline shortages in several areas.
A new trade minister and central bank governor were appointed by the communist-led administration in late June after much breathing space. A few emergency measures have prevented certain economic problems from worsening. The country’s external debts have increased to nearly $14 billion, or 88% of its GDP.
Besides the Lao state’s one-third stake in the $5.9 billion China-Laos Railway, a mega project that opened in December despite doubts about the line’s financial feasibility, about half of this sum is due to China.
Last year, Vientiane more or less succeeded in honoring its annual debts. The World Bank estimates that the Lao state had exactly this amount in foreign exchange reserves at the beginning of this year and now has to pay this amount in debt service each year until 2025. Moreover, this is equivalent to to almost half of all the national money collected each year. .
To restructure the debt it does not owe to China, Laos could turn to the International Monetary Fund (IMF), which would have no impact on its financial obligations to Beijing. However, Laos, however, “would almost certainly be under pressure to cut public spending, reduce corruption and increase domestic revenue to receive an IMF bailout.”
But so far it has refrained from approaching its foreign lenders to renegotiate its debt. He chose to accept new loans from Beijing during the COVID-19 outbreak rather than seek help from multilateral lenders.
Alternatively, the Lao state could give Chinese investors greater interest or influence in infrastructure projects instead of partial reimbursement. Additionally, Laos is also notorious for ceding state-owned land to Chinese companies in the past in exchange for debt forgiveness. Renegotiating the repayment plan on Chinese terms would be an additional choice. This would likely result in longer payback times, but higher interest rates.
Edited by Prakriti Arora