Laos

Key development challenges

Laos is a lower middle-income country with a GDP of $15.5 billion in 2022, representing 0.4% of Southeast Asia’s regional GDP. With a population of 7.5 million, Laos’ per capita GDP is the third-lowest in Southeast Asia at $2,054.

The Lao government’s development agenda is focused on poverty reduction and the expansion of education services to rural populations. The country’s industrial development policy is centred on transforming the country into a transport hub for the Mekong region and a major hydropower energy exporter to Southeast Asia.

Between 2000 and 2012, Laos was one of the fastest-growing economies globally, largely underpinned by investment in capital-intensive sectors that nonetheless struggled to support long-term job creation. In addition, much of Laos’ energy and transport investment was financed by commercial-rate external borrowing. This has increasingly had an impact on Laos’ macroeconomic stability. Combined with the Covid-19 pandemic and other global shocks, Laos has since found itself in an acute debt crisis marked by sustained high inflation, and is currently in need of substantial debt relief.

Development finance has played a substantial role in Laos, both in financing investment and contributing to its debt problems. Over the 2015–22 period, more than 10,000 projects were implemented by 71 development partners in Laos, amounting to $14.9 billion in official development finance (ODF).

Overview of development finance trends

From 2015 to 2022, ODF disbursements to Laos — including grants, loans, and other forms of assistance — averaged $1.9 billion annually (in constant 2022 US$). However, ODF declined by 39% over this period, largely due to a significant decrease in non-concessional loans from China.

In 2015, Chinese loans to Laos totalled $1.3 billion and represented 84% of total ODF inflows. By 2022, ODF from China fell to $291 million, representing 30% of Laos’ development finance for that year. China’s declining role in Laos was partially offset by increased ODF from the Asian Development Bank (ADB) and the World Bank, particularly in response to the Covid-19 pandemic.

Over the 2015–22 period, the total volume of ODF going to Laos was among the smallest in Southeast Asia, accounting for just 5.8% of regional ODF. However, in per capita terms, Laos is the region’s highest ODF recipient.

Between 2015 and 2022, the role and significance of ODF relative to Laos’ economy declined sharply, from 11.2% of GDP in 2015 to 6.3% of GDP in 2022. Much of the decline occurred between 2018 and 2022.

Spikes in financing commitments to Laos in 2016 and 2018 were partially caused by the announcements of large Chinese projects: the $2.1 billion Laos Coal Electricity Integration Project; the $1 billion Nam Ou Hydropower Project Phase II; and the $2.1 billion Pak Lay Hydropower Dam.

China’s ODF disbursements to Laos equalled about 70% of its commitments, similar to that of the ADB (79%) and significantly more than the country’s next-largest sources of ODF commitments — the World Bank (62%) and South Korea (58%). During 2015–22, Japan disbursed more in ODF than it made in new commitments, reflecting the implementation of projects to which Tokyo had committed prior to 2015. Overall, 74% of projects committed during the 2015–22 period resulted in disbursements, well above the regional average of 67%.

Main development partners

China was by far the dominant ODF provider to Laos over the 2015–21 period, but its profile declined significantly in 2022. China’s share of ODF to Laos dropped from 66% in 2018 to 30% in 2022. Laos’ second tier of donors, comprising the ADB, Japan, and the World Bank, individually averaged between $76 million and $111 million per year in ODF disbursements between 2015 and 2022.

China’s disbursements in Laos exclusively focused on infrastructure, with energy and transport projects accounting for about 94% of disbursements. Chinese hydropower projects alone represented 60% of its total ODF spending in Laos between 2015 and 2022. The most significant of these were the Nam Ou Hydropower Project, the Nam Ngum Hydropower Project, and the Laos–China Railway Project. The vast majority of China’s ODF to Laos came in the form of loans, with concessional and non-concessional loans accounting for 84% of its ODF to Laos over the period; this fell to 47% in 2022.

Laos’ next-largest ODF partner was the ADB, whose principal focus was smallholder agricultural projects, alongside flood and drought risk management and mitigation, as well as Covid-related projects.

Laos’ third-largest ODF partner, Japan, funded major infrastructure projects including the $94 million Vientiane International Airport Terminal Expansion Project. More than two-thirds of Japan’s ODF to Laos was through grants, with the remainder in the form of concessional loans.

Laos’ other major development partners — namely the World Bank, South Korea, and the United States — mostly directed their financing towards government and civil society, and human development.

Sectors

The sectoral distribution of ODF spending in Laos was distinct from regional averages. In the early 2000s, the Lao government set out a development plan focused on making the country the “battery of Southeast Asia”. Energy projects, specifically hydropower projects, were responsible for more than half of the country’s ODF; more than double the share seen regionally. The country’s largest 15 projects by spending, worth a cumulative $7.9 billion in disbursements, were all infrastructure projects.

Climate

As a share of total ODF received, combined “principal” and “significant” climate-related ODF in Laos represented 59% of the total incoming flows. This was the highest proportion in Southeast Asia by a large margin, with the next-largest shares in Thailand (48%) and the Philippines (34%). This is in large part a result of the focus on hydropower projects. Laos also received limited climate-related ODF, with most of this being for energy-grid upgrade projects, alongside a handful of forest sustainability programs funded by Climate Investment Funds.

Gender

Gender equality finance has constituted a growing proportion of ODF to Laos since 2015, but this reflects a drop in overall ODF more than an increase in gender equality finance, which has stayed consistent, averaging $250 million annually. The ADB, European Union, and Germany were the primary supporters of gender equality in Laos, which was delivered via grants. The dominant sector for gender equality finance in Laos is education, followed by health. The biggest project in this category was the Basic Education Support Programme funded by the EU with ongoing disbursements since 2018 totalling $60.8 million.

Laos as an ODF provider

As one of the lowest-income Southeast Asian countries, Laos played a small role as an intra-regional ODF provider. Its main ODF contribution was to the ASEAN Coordinating Centre for Humanitarian Assistance on Disaster Management, with annual contributions of around $60,000. Laos also contributed $100,000 in recovery funds to Indonesia following the 2018 Sulawesi earthquake and tsunami disaster.