Laos

Key development challenges

Laos is classified as a lower middle-income country. In 2021, Laos’ GDP was $18.8 billion, representing 0.6% of Southeast Asia’s regional GDP. With a population of 7.4 million, Laos’ per capita GDP is the fourth lowest in Southeast Asia.

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.

In 2021, close to a fifth of Laos’ population were living below the national poverty line, while 7% of Laotians’ incomes fell below the World Bank extreme poverty benchmark of $2.15 per day. Laos is ranked 140th out of 191 countries in the United Nations’ Human Development Index. Corruption and governance issues remain considerable impediments to Laos’ development, with the country ranking 128th out of 180 in Transparency International’s Corruption Perceptions Index.

Between 2000 and 2012, Laos maintained an average annual GDP growth rate of 16%, making it one of the fastest-growing economies globally. This growth was 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, including through official development finance (ODF) from China. 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 and is currently in need of substantial debt relief.

Development finance has played a substantial role in Laos, in both financing investment and contributing significantly to its current debt problems. In 2021, ODF accounted for 7.4% of Laos’ GDP, the second-highest ratio in Southeast Asia. Over the 2015–21 period, more than 8,698 projects were implemented by 66 development partners in Laos, collectively amounting to $11.2 billion in ODF or about $1.6 billion a year on average.

Overview of development finance trends

During 2015–21, ODF disbursements to Laos — including grants, loans, and other forms of assistance — averaged $1.6 billion annually (in constant 2021 US$). ODF flows to Laos, however, declined by 32% over this period. This decline was largely driven by a significant decrease in non-concessional loans from China.

In 2015, Chinese loans to Laos totalled $1.5 billion and represented 70% of total ODF inflows. By 2021, however, ODF from China halved to $571 million, representing little less than 50% of Laos’ development finance. 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 2015–21 period, the total volume of ODF going to Laos was among the smallest in Southeast Asia, accounting for just 5.6% of regional ODF. However, in per capita terms, Laos is the region’s highest ODF recipient. Over the seven-year period, Laos received $216 in ODF per person, marginally ahead of Timor-Leste ($200) and significantly higher than the regional average of $83.

Between 2015 and 2021, the role and significance of ODF relative to Laos’ economy declined sharply, from 12.8% of GDP in 2015 to 7.4% of GDP in 2021. Much of the decline occurred between 2015 and 2017, with the ratio stabilising from 2019 onwards as Laos’ economic growth slowed markedly, a shift that partially masked the 32% decline in its development support over the period.

Commitment spikes in Laos in 2016 and 2018 were partially caused by the announcements of China’s three largest projects in the country. In 2016, China announced the Laos Coal Electricity Integration Project Lao021 and the Nam Ou Hydropower Project Phase II Lao025, costing $2.1 billion and $1 billion respectively. In 2018, the Export–Import Bank of China committed to the Pak Lay Hydropower Dam Lao001 for $2.1 billion. The commitment-spending gap in Laos is typical of small nations receiving financing for major infrastructure projects, which often include large upfront, single-year commitments with slower disbursment over the following years.

China’s ODF disbursements to Laos equalled about 80% of its commitments, similar to that of the ADB (79%) and significantly more than the country’s next largest sources of ODF commitments, from the World Bank (62%) and Korea (58%). During 2015–21, 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, spent-commitment ratio in Laos was 83% during 2015–21, well above the regional average of 64%.

Main development partners

China was the dominant ODF provider to Laos over the 2015–21 period. Its share of Laos’ total ODF received declined steadily over the seven-year period, dropping from 71% in 2015 to below 50% in 2020, before rebounding modestly in 2021. Laos’ second tier of major donors, comprising the ADB, Japan, and the World Bank, individually averaged around $77 million per year in ODF disbursements between 2015 and 2021, roughly 25% of China’s average annual spending.

China’s disbursements in Laos exclusively focused on infrastructure, with energy and transport projects accounting for almost 90% of China’s total disbursements. Chinese hydropower projects alone represented over a third (37%) of total ODF spending in Laos between 2015 and 2021. The most significant of these were the Nam Ou Hydropower Project (Lao005, Lao025), the Nam Ngum Hydropower Project Lao002, and the Laos–China Railway Project Lao010-1. The vast majority of China’s ODF to Laos came in the form of loans, with concessional and non-concessional loans accounting for 93% of its ODF to the country.

Laos’ next largest ODF partner was Japan, whose major projects included the $86.6 million Vientiane International Airport Terminal Expansion Project 2014003001 - JICALS-P8 and a substantial $82 million water and sanitation project. Almost 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 ADB, the World Bank, and Korea — directed their financing outside the infrastructure category. The ADB’s principal focus was on smallholder agricultural projects, alongside Flood and Drought Risk Management and Mitigation projects XM-DAC-46004-40190-023-LN2936. Conversely, the World Bank spent most of its development financing on governance projects and environmental protection 2019037715 - P166839.IDA64200.crs1.

Laos’ top implementation partners reflect the major role China plays as the provider of more than half (59%) of the country’s ODF and the focus of these development flows on hydropower and energy projects. After China, the largest implementation partner in Laos is the Export–Import Bank of Korea, which has overseen $157 million in projects, mostly focused on energy, agriculture, and governance.

Sectors

The sectoral distribution of ODF spending in Laos was distinct from regional averages. In the early 2000s, the Laos government set out a development plan focused on making the country the “battery of Southeast Asia”. The development pathway was centred around the hydropower potential of the Mekong River and its major tributaries, which flow along Laos’ western border. As of March 2023, Laos had 78 dams in operation, with an additional 246 memorandums of understanding for additional hydropower projects. Tied to this ambition was the goal of transitioning Laos’ land-locked disadvantage into a “land-linked” advantage — principally through the development of major road and rail connectivity for the Mekong region.

Reflecting this development priority, energy projects, specifically hydropower projects, were responsible for close to half of the country’s ODF, more than double the share seen regionally. Infrastructure projects more broadly accounted for the country’s 15 largest ODF projects, with the exception of an $82 million Covid-19 vaccination program funded by China Lao055.

Laos saw a convergence of infrastructure and human development (health and education) ODF over the 2015–21 period. This was primarily driven by the decline in Chinese ODF spending on energy projects and a mild increase in education- and health-focused investment by the United States and China. When accounting for the one-off bump in the health sector caused by China’s Covid-19 vaccination program, human development spending in Laos remained largely consistent over the seven-year period.

Climate

The Southeast Asia Aid Map uses an adapted version of the Organisation for Economic Co-operation and Development’s (OECD’s) climate marking system to sort projects into three distinct categories: principal, where climate change mitigation or adaptation is explicitly stated as fundamental to the project; significant, where climate change mitigation or adaptation is explicitly stated but not fundamental; and not climate-related, where climate change is not targeted in any significant way.

As a share of total ODF received, combined “principal” and “significant” climate-related ODF in Laos represented 62% of the total incoming flows. This was the highest portion in Southeast Asia by a significant margin, with the next largest shares in the Philippines (37%), Timor-Leste (37%), and Thailand (34%). The significance of this ratio is in large part a result of the focus on hydropower projects. Outside of hydropower projects, Laos received limited climate-related ODF, with most of this being energy-grid upgrade projects, alongside a handful of forest sustainability programs funded by Climate Investment Funds (2020000033 - XFIPLA004A, 2020000091 - XFIPLA006A).

Laos as an ODF provider

As one of the lowest-income Southeast Asian countries, Laos played a limited role as an intraregional ODF provider. Its main ODF contribution within the region was to the ASEAN Coordinating Centre for Humanitarian Assistance on Disaster, 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.