Laos is struggling to repay billions owed to China. What now?

Laos is in serious economic trouble.

The developing South-East Asian country borrowed big — mainly from China through the Belt and Road Initiative — to fund an ambitious infrastructure program.

With the goal of becoming the region’s “battery”, it built about 80 hydropower dams on the Mekong River and its tributaries.

But the revenue from the infrastructure is yet to flow through and the debt repayments are mounting up.

Laos’ total government-guaranteed domestic and international debt reached $US13.8 billion, or 108 per cent of the country’s gross domestic product, last year.

About half the $US10.5 billion owed to other countries is owed to China — though the details of the loans have remained opaque.

It begs the question, could Laos soon go broke?

What led to the debt crisis?

The former French protectorate has been a one-party socialist republic since the Lao People’s Revolutionary Party came to power at the end of the Vietnam War in 1975.

It’s got a population of about 8 million people, with most employed in agriculture, largely subsistence rice farming.

The economy was continuing to experience solid growth through the 2010s, with borrowed money flowing in to fund the infrastructure program.

But things went south during the pandemic, with Laos’ currency, known as the kip, depreciating heavily, which in turn fuelled rampant inflation.

Laos’ headline inflation averaged 31 per cent over 2023, according to the World Bank.

“The main factor in the kip’s falling value has been the lack of foreign currency available in country, a result of the need to repay large external debts, despite some deferrals, and limited capital inflows,” the World Bank said in a report last year.

Kearrin Sims, an adjunct senior lecturer in development studies at James Cook University, said Laos had been borrowing “fairly heavily and arguably unsustainably”.

While the new infrastructure included transport projects such as highways and a joint-venture railway line with China, he said the hydropower projects were the biggest contributor to the sovereign debt issue.

He added that the problem was amplified by the slowing of economic growth during the pandemic, but that was true for many countries.

He said trying to achieve rapid economic growth, and in turn development, through large-scale infrastructure projects was a flawed approach.

“Large-scale infrastructures can make important contributions to development, and often require borrowing to finance,” he said. 

“It is not that all infrastructure financing in Laos should stop, but that a more balanced approach to development is needed — one that prioritises poverty alleviation, human development, and sustainable resource management over economic growth and resource extractivism.” 

How are people in Laos being affected?

Dr Sims said the money going to repay the debt was money not going into things like education, healthcare, social services and other kinds of public goods.

“In the context of Laos, a lower-middle income economy, that has real effects for poverty alleviation efforts, for the ability of Laos to achieve sustainable development goals,” he said.

The director of the Lowy Institute’s Indo-Pacific Development Centre, Roland Rajah, said the depreciation of the kip and inflation had devastated Lao households.

“Measured consumer prices have roughly doubled, including for essentials like food and medicine,” he said.

Keith Barney, an associate professor at ANU’s Crawford School of Public Policy, said the rural population could rely to some extent on locally grown or foraged food supplies.

“However, especially for the urban poor and lower middle classes, their spending power has been significantly reduced,” he said.

“This affects their ability to purchase adequate quantities of healthy and nutritious food as well as things like spending on education and health.

“The economic crisis has been a disaster for Lao youth who are dropping out of schooling at record rates, with thousands heading across the border into Thailand or further afield, to find any work in a foreign currency.”

Why have the debts become such a problem?

Dr Barney said after all the spending on dams and transmission lines the state electricity company Électricité du Laos (EdL) owed about 40 per cent of Laos’ public and publicly-guaranteed debt.

He said the reasons for the big debt were “multi-causal and cascading” including:

• “over-lending” and poor due diligence by Chinese banks;
• “over-borrowing” by Laos with the sheer number of project loans appearing to overwhelm the utilities’ capacity effectively manage so many large and complex energy projects;
• over-estimated domestic energy demand projections which justified these investments;
• a seasonal mismatch between hydropower energy supply and demand forcing Laos to re-import expensive electricity from Thailand in the dry season; and
• poor planning between the large number of hydropower dams targeting the domestic energy market and the extent of high voltage transmission infrastructure needed to deliver that output to load centres; and
• EdL sale prices of electricity falling below cost recovery.

The result was a large surplus in domestic energy production capacity, and stranded and idled hydropower projects. 

Meanwhile, the deep depreciation of the kip meant that the value of the revenue EdL was receiving in local currency was shrinking relative to the debt repayments and operational expenses priced in US dollars.

Mr Rajah said problems were “almost inevitable”.

Has China snared Laos in a ‘debt trap’?

Some have accused China of carrying out “debt-trap diplomacy” by intentionally luring Laos into taking on huge loans so that Beijing can seize its assets or increase its geopolitical influence.

It’s a charge Beijing denies.

China had been carrying out “mutually beneficial cooperation” with developing countries including Laos that involved strong support for economic and social development, China’s Ministry of Foreign Affairs recently told Bloomberg.

The ministry said the “debt-trap” allegations were part of US attempts to disrupt Beijing’s cooperation with developing countries.

Dr Sims said there was an open debate about the use of the term “debt-trap diplomacy” and whether China was using it more than other countries.

He pointed out that other development partners like the Asian Development Bank had been calling for Laos to invest in infrastructure such as hydropower.

“China’s just been the one to pop in the money,” he said.

However, he said that it was clear loaning money to another country brought political leverage as well.

“I think we can say with confidence if we have a very high debt, like in the case of Laos, to another country then that country bears influence politically and economically,” he said.

How is Laos digging itself out of the hole?

Mr Rajah said the Lao government was now “essentially scrounging around trying to raise money, especially in foreign currency, any way it can”.

“That includes borrowing domestically and selling state assets,” he said.

“But each year Laos has had to negotiate with China to secure this, which is not a sustainable solution.

“And in any case Laos still needs to find more money because it still has to make other debt payments and meet its import needs.”