Laos’ untamed debt has raised the country’s default risk, ADB expert says

Laos’ depreciating currency has increased the risk that the country will default on its rising national debt, which has outgrown its gross domestic product, an Asian Development Bank financial expert told Radio Free Asia.

The steadily declining value of the kip has made servicing the debt increasingly more expensive for the government, which typically has to exchange the kip for U.S. dollars, Thai baht or Chinese yuan before making payments, according to the financial expert, who like other sources in this report requested anonymity for security reasons.

“The Lao government is bearing the brunt,” he said. “In fact, the rising debt has been affecting the whole economic system.” 

The government is trying to acquire as much foreign currency as possible to make debt payments through the collection of tariffs and taxes from large businesses, the financial expert said.

Service payments on Laos debt – the regular payments required by loan issuers that include interest and principal – could rise to 39 percent of GDP, according to the World Bank.

The government is working to improve tax collection from businesses with the aim of taming the debt payments, Minister of Finance Santiphab Phomvihanh told National Assembly lawmakers on Monday.

“We’re requesting the big businesses to pay their taxes regularly and on time,” he said. “Mega projects like dam construction, mining operations, expressway construction, transport and digital trades – including online marketing – must pay their dues.” 

The government will need at least US$10 billion this year to cover all debt-related expenses, but Laos’ central bank – the Bank of Lao P.D.R. – has so far only brought in US$3 billion, according to Santiphab, who is the son of former president Kaysone Phomvihan.

‘Under my watch’

Prime Minister Sonexay Siphandone also spoke with lawmakers about the debt issue on Monday, saying that the government recently sold bonds worth 8 trillion kip (US$368 million).

“Under my watch, I will never allow our country to default on debt,” he said.

Laos’ economy continues to face challenges brought on by the COVID-19 pandemic. The number of visits by international tourists remains low, for example.

A shortage of foreign currencies needed to pay down debt and fund development projects has been a main driver of the kip’s depreciation, the World Bank said last December.

According to a 2023 report published by the Ministry of Finance, Laos’ total debt was US$14 billion. About 51% of the debt is owed to China, according to the ministry. 

China helped Laos build the US$6 billion Lao-China High Speed Railway, which was completed in 2021 as part of its Belt and Road Initiative. Other major Chinese investments in roads and hydropower dams have also contributed to the debt.

About 6% of Laos’ debt is held by Thailand, 7% by the World Bank and 8% by the Asian Development Bank, also known as the ADB, according to the ministry.

In December, an ADB official told RFA that the government was negotiating to restructure its debt to China.

Translated by Max Avary. Edited by Matt Reed and Malcolm Foster.