In August and September 2025, Laos continued to experience a decline in inflation, signalling a gradual stabilisation of its economy. The national Consumer Price Index (CPI) rose slightly from the previous month, signalling a gradual increase in overall prices.
However, there is a growing likelihood of a default on the government’s massive debt. Over-investment in the energy sector, coupled with an ambitious infrastructure plan funded by Chinese loans, has turned Laos into one of Asia’s biggest borrowers. Notably, China lent 70% of the $6 billion needed for the high-speed rail link between Vientiane and Kunming.
In 2024, public debt stood at 97% of GDP. As per the International Monetary Fund (IMF), the ratio will rise to 127% by 2029, leaving Laos in “external and overall debt distress.” While taking note of the government carrying out course-correction measures like currency stabilisation, raising money through domestic borrowing and asset sales, and charging higher taxes, Sydney-based think tank Lowy Institute suggests that Laos go for debt relief, either by China (which it says is unlikely), or with multilateral IMF-led restructuring.
The debt trap
While most economists are discussing the Lao government’s challenge of reducing the risk of a debt default risk, three members of the Lowy Institute, Keith Barney, Roland Rajah, and Mariza Cooray, in their study titled “Trapped in debt: China’s role in Laos’ economic crisis,” have put a sharp focus on China’s role in propelling the Southeast Asian country’s economic doldrums.
The analysis showed that Laos cannot escape the crisis without substantial debt relief. While growing out of the crisis is unrealistic, even with the benefit of the Laos-China Railway or realistic reforms to boost growth and government revenue, the nation also has little to no room to absorb any future shocks without suffering an even deeper crisis. Whether under a China-led bilateral deal or a multilateral IMF-led restructuring, Laos’ need for debt relief is clear.
The Lao Kip (the national currency) has lost half its value against the US dollar since the start of 2022, causing domestic prices to skyrocket and devastating household incomes. It has resulted in food insecurity and transnational labour migration. Total public and publicly guaranteed (PPG) debt is estimated to exceed 100% of GDP. Laos has not formally defaulted on its international debt obligations, but only due to repeated ad hoc debt deferrals from China, which holds nearly half of Laos’ sovereign external debt.
Laos’ sovereign debt crisis dates back to the early 2000s, when public debt exceeded 140% of GDP. Laos chose not to participate in the World Bank–IMF Heavily Indebted Poor Countries Initiative. Instead, Russia, Laos’ largest creditor at the time, wrote down 70% of the face value of their bilateral debt and restructured the rest on highly concessional terms.
Laos made a strong recovery, with annual economic growth accelerating to around 7%. The economy was liberalised, facilitating investment inflows, and the country benefited from rising global mineral prices. Throughout the 2000s, Laos steadily integrated into the Western-led international financial and development architecture, and it secured substantial Japanese aid, apart from being able to borrow on highly concessional terms from Multilateral Development Banks (MDBs).
However, things changed after 2010, as Laos changed course and became one of the heaviest borrowers (relative to GDP) under China’s Belt and Road Initiative (BRI), formally launched in 2013. While from Beijing’s part, it was a pure geopolitical move, the Southeast Asian country fell for it. In 2016, Laos became host to a signature BRI project, the Laos-China Railway, an immense $6 billion engineering initiative to connect the Lao capital Vientiane to China’s Yunnan province.
The project’s enormous cost, in relation to the small Lao economy, garnered significant international attention. Additionally, billions were invested in hydropower and transmission projects, which were loosely aligned with the government’s slogan of becoming the “Battery of Southeast Asia.” However, this initiative was experiencing declining state revenues and an increase in borrowing from international capital markets.
Alongside its borrowing, the government ran increasingly profligate fiscal policies. Although Laos has persistently run large budget deficits, things widened substantially to reach 5% of GDP by the mid-2010s.
Also, government revenue sharply declined, falling from 20% of GDP in 2013 to 15.4% by 2019, reflecting investment incentives, tax exemptions, and weak compliance. This saw the government increasingly borrow from international bondholders and commercial banks, adding a further $2.1 billion of debt by the end of 2019.
The government took on large debts for resource and infrastructure projects with long and uncertain lead times, simultaneously allowing revenues to fall and the fiscal position to weaken. Heavy borrowing from China and commercial sources delivered a remarkable reversal in the structure of Laos’ public debt.
In 2004, three-quarters of Laos’ debt was on highly concessional terms, with only one-quarter non-concessional. By 2019, things got complicated further due to higher interest rates, shorter repayment periods, with the expiry of grace periods on large Chinese loans producing a dramatic rise in debt servicing costs. Including amounts ultimately deferred by China, scheduled debt service payments increased threefold, from less than $375 million in 2016 to $1.2 billion in 2020 and $1.7 billion by 2023.
Currency collapse
While the Kip faced sharp depreciation due to pre-existing vulnerabilities and global economic shocks like the COVID-19 pandemic and the Ukraine war, China’s role was equally important. Beijing provided substantial financial assistance through the deferral of impending debt service payments (thus far $2.5 billion in total) along with the extension since 2020 of a RMB 6 billion ($900 million) currency swap line from the People’s Bank of China (PBoC).
“Without these supports, Laos’ economic crisis would have been far deeper. Laos chose not to participate in the G20 Debt Service Suspension Initiative that provided temporary debt service relief to the world’s poorest countries during 2020 and 2021. The duration of China’s debt deferrals to Laos has been considerably longer than the G20’s initiative, thus far extending into 2024. However, a lack of transparency — around the continuation and terms of debt deferrals, whether the PBoC swap line can be used for balance of payments purposes (i.e. to defend the kip), and when it will be concluded — has fed uncertainty, exacerbating Laos’ crisis,” remarked Barney, Rajah and Cooray.
Laos entered the ongoing decade with substantial and mounting macroeconomic vulnerabilities. Even in the absence of global shocks, Laos would likely have faced significant difficulties in meeting its impending debt service requirements, most of which were owed to China.
Based on pre-COVID economic projections by the IMF, debt service payments would still have reached more than a third of government revenue — around 2.5 times the IMF warning threshold of 14%. Foreign exchange reserves held at the Bank of the Lao PDR were also inadequate. At the end of 2019, reserves stood at just under $1 billion, equivalent to 1.4 months of imports — half the three-month international benchmark level and low compared to other developing countries that have subsequently experienced severe debt problems.
Mounting debt servicing pressures, combined with global economic shocks, saw Laos experience sharp net financial outflows. While all developing countries faced financial pressures due to capital outflows, sharp increases in US interest rates, and an appreciating dollar, Laos faced the worst of it. In 2020, it was downgraded by global credit rating agencies, followed by a similar move from the Thai credit rating agency in 2023.
The last move resulted in Laos losing a major part of its access to the Thai bond market, leaving it unable to access fresh foreign currency financing to service its debts. Ballooning debt service payments and persistent unrecorded capital outflows combined to see around $700 million annually in net financial outflows, leaving the Lao Kip further vulnerable. With net exports and foreign investment inflows also drying up in 2022 due to the Ukraine war, the currency duly collapsed.
Is Laos a victim of debt traps?
There is an accusation that China purposely over-lends to developing countries to create a debt crisis to leverage political and economic concessions. In Laos’ case, heavy Chinese lending into the Lao energy sector resulted in massive overcapacity, financial losses, and finally the takeover of its energy grid by a Chinese state firm.
The Southeast Asian country’s domestic elite also appears to be an equal participant in the poor decisions that ultimately led to the mishap. They approved the infrastructural projects undertaken with Chinese loans, and they made matters substantially worse by overseeing a sharp decline in government revenue collection, relying on fickle international sovereign bond investors to plug the gap.
During most of the time covered by China’s lending spree, Laos lacked an international credit rating. Lao agencies negotiated energy deals from a stance of sovereign agency and considerable ambition, but also a relatively subordinate position characterised by institutional weakness.
China’s policy banks should have recognised that their planned lending scale would create significant risks of debt distress, especially as the grace periods on their loans expired and scheduled debt service payments increased. However, the Lao government exacerbated the situation by allowing revenues to decline sharply, leading to increased short-term external borrowing and a diminished capacity to service its debts. The consistently low foreign exchange reserves should have served as a clear warning that the ability to safely take on additional foreign currency debt was limited, not expansive.
However, China also knows that Laos warrants debt relief. In 2019, China’s Ministry of Finance released its own BRI debt sustainability framework (BRI-DSF), designed to guide its approach. The BRI-DSF closely follows that of the IMF, utilising the same key thresholds to signal when debt is problematic.
The Lao government has imposed foreign exchange controls and tightened monetary policy to stabilise its currency. Unable to raise fresh foreign capital to help meet impending debt service payments, the government has resorted to borrowing domestically, selling state assets, increasing tax revenues, and imposing harsh budget cuts.
In the medium term, the hope is that Laos will grow out of debt, especially given the recent completion of the Laos-China Railway. However, the most important measure, by far, keeping Laos afloat is the continued ad hoc deferral of near-term debt service payments to China.
Still, as per the IMF, apart from debt problems, Laos will see continued Kip depreciation, double-digit inflation eroding household incomes, rising outmigration to Thailand resulting in domestic labour shortages, and greatly reduced public and private investment, with the latter crowded out by heavy domestic borrowing by the government to meet its financing needs.
For Barney, Rajah and Cooray, even under the most optimistic economic assumptions, it would not be possible for Laos to restore public debt sustainability. For instance, a return to 7% annual economic growth would be in line with Laos’ pre-COVID historical growth and consistent with studies by the World Bank conducted in 2018 extolling the large potential benefits of the Laos-China Railway, assuming these are complemented by trade reforms and improvements in other forms of transport connectivity.
The Southeast Asian country might also optimistically lift revenue back to 20% of GDP by 2029, compared to its current 16%, with the additional revenue split equally between achieving a larger budget surplus and restoring core spending. Experts assume annual currency depreciation and inflation will slow to 5% from the current double-digit rates, while the government can borrow externally and domestically on similar terms to the past.
Yet even the above-mentioned assumptions would not be enough to put Laos on a path to exiting the crisis. Without additional and sustained Chinese debt deferrals, impending debt service payments would remain at highly problematic levels under any scenario, and above the IMF warning threshold until the early 2030s. The overall stock of debt would also remain at unsustainable levels at 60-80% of GDP. In present value terms — which adjust for the fact that much of Laos’ debt is concessional — debt would be above the IMF warning threshold into the 2030s.
To help Laos exit its debt crisis, the IMF may require a debt restructuring currently involving its financial support. According to the latest IMF guidance, such restructurings should aim to restore sustainability within five years such that key debt indicators are below their respective IMF warning thresholds.
“A full debt restructuring scenario is beyond the scope of this paper. However, we construct an illustrative scenario to give a sense of the scale of debt relief required. We suppose that a comprehensive debt restructuring programme, including complementary economic reforms, allows annual growth to remain at 4% per year, with currency depreciation and inflation stabilising at 5%, and revenue rising to 18% of GDP by 2029. Revenue gains are assumed to be split evenly between higher government spending and a larger fiscal surplus, which rises to 4% of GDP. As before, we focus on two key debt indicators, the ratio of external debt service to state revenue and the present value of external public debt relative to GDP,” Barney, Rajah and Cooray commented.
Based on the above prediction, restoring debt sustainability in Laos would require a sharp reduction in external debt service payments, equivalent to over 60% of average payments over the rest of this decade. Also, at least a one-third reduction in the present value of external public debt is required, excluding debt owed to MDBs, as this is typically only included as part of multilateral debt relief initiatives. This should be considered a minimum degree of debt relief, since it assumes no buffer to absorb further shocks.
“In Laos’ case, restoring sustainability would require a comprehensive approach. Relying solely on rescheduling would require China to extend the maturity on its Ex-Im Bank loans by 40–50 years and more than 100 years for CDB loans. This is unlikely. Alternatively, a combination of sharply reduced interest charges to 1% (Ex-Im) and 1.5% (CDB), 15-year extensions of maturity, and new five-year grace periods for both Ex-Im and CDB loans would be within the upper bounds of what China has provided in other cases and achieve the required degree of debt relief,” Barney, Rajah and Cooray concluded.