(especially fuel) and additional exchange rate depreciation pressures, which would LAO PDR Key conditions and increase inflation. Moreover, a slower- than-expected economic recovery in key challenges trading and investment partners may cur- tail external demand. However, high min- Table 1 2021 Unaddressed debt challenges can hamper eral prices and the opening of the Lao- Population, million 7.4 medium-term economic growth. High China railway (in December 2021) will GDP, current US$ billion 18.7 public debt levels and rising debt service likely support merchandise exports and GDP per capita, current US$ 2539.0 obligations pose liquidity and solvency the domestic services sector – especially a 18.3 National Official Poverty Rate problems that compound other macroeco- transport and logistics services. a 10.0 nomic vulnerabilities – such as low rev- Domestic and external uncertainty affects International poverty rate ($1.9) a 37.4 enue collection and limited foreign re- economic prospects. COVID-19 vaccina- Lower middle-income poverty rate ($3.2) Gini index a 38.8 serves. A positive conclusion of ongoing tion rates have improved, with 58 percent School enrollment, primary (% gross) b 98.8 debt renegotiations will be vital for of the population fully vaccinated, but a b 67.9 restoring macroeconomic stability. Grow- large Omicron outbreak could still under- Life expectancy at birth, years ing debt service requirements, in a con- mine economic activity. Tightening global Total GHG Emissions (mtCO2e) 42.3 text of declining revenues and expendi- macroeconomic conditions and geopoliti- Source: WDI, Macro Poverty Outlook, and official data. ture consolidation, have narrowed the fis- cal tensions could impact Lao PDR a/ National Statistics Office. Most recent value (2018). b/ WDI for School enrollment (2020); Life expectancy cal space for investments in human and through higher commodity prices (espe- (2019). physical capital that are essential for cially fuel) and additional exchange rate long-term growth. While the financial sec- depreciation pressures, which would in- tor provided some support to mitigate the crease inflation. Moreover, a slower-than- The economic recovery is expected to con- impacts of COVID-19, vulnerabilities are expected economic recovery in key trading tinue in 2022, mainly supported by in- high and forbearance measures impede a and investment partners may curtail exter- clear assessment of bank balance sheets. nal demand. However, high mineral prices dustry and services, with growth project- Improved connectivity and trade integra- and the opening of the Lao-China railway ed to accelerate to 3.8 percent. However, tion present an opportunity for greater (in December 2021) will likely support growing macroeconomic vulnerabilities – economic dynamism, but need to be ac- merchandise exports and the domestic ser- mainly stemming from a high debt bur- companied by structural reforms to en- vices sector – especially transport and lo- hance export competitiveness. gistics services. den – and external shocks may affect the Domestic and external uncertainty affects outlook. Labor market conditions remain economic prospects. COVID-19 vaccina- subdued, while rising fuel and food prices tion rates have improved, with 58 percent are threatening poverty and food security. of the population fully vaccinated, but a Recent developments Addressing macroeconomic imbalances large Omicron outbreak could still under- mine economic activity. Tightening global GDP growth is estimated to have rebound- will be critical to laying the foundation ed to 2.5 percent in 2021, driven by indus- macroeconomic conditions and the Russ- for sustained economic growth and sup- ian invasion of Ukraine could impact Lao try (particularly mining, energy and some port poverty reduction. PDR through higher commodity prices manufacturing subsectors) and agriculture FIGURE 1 Lao PDR / Real GDP growth and contributions to FIGURE 2 Lao PDR / Actual and projected poverty rates and real GDP growth real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (millions constant LCU) 8 100 25 90 6 80 20 70 4 60 15 50 2 40 10 0 30 20 5 -2 10 2015 2016 2017 2018 2019 2020 2021 2022 0 0 Agriculture Industry 2007 2009 2011 2013 2015 2017 2019 2021 2023 Services Net Taxes on Production International poverty rate Lower middle-income pov. rate Real GDP growth Upper middle-income pov. rate Real GDP pc Sources: Lao Statistics Bureau and World Bank staff estimates. Source: World Bank. Notes: see Table 2. MPO 1 Apr 22 – both of which were supported by solid burden on households. The share of and exports will provide an important external demand. However, the services adults employed fell from 76 percent in stimulus to the economy, although higher sector continued to struggle. Inflation in- Q2 2021 to 69 percent in Q4 2021, follow- imports will partly offset these trends. Ex- creased from less than 2 percent in Febru- ing an outbreak of COVID-19. Disrup- isting macroeconomic vulnerabilities and a ary 2021 to 7.3 percent in February 2022 tions to economic activities led to a de- less conducive external environment – due (year-on-year), mainly driven by fuel cline in household income, with 63 per- to tighter macroeconomic conditions and prices and a sharp depreciation against the cent of households experiencing a fall in the war in Ukraine – will avert a faster US dollar. Nevertheless, the annual aver- household income between Q2 and Q4 economic recovery. In a downside scenario age inflation rate declined from 5.1 percent 2021, of which 21 percent saw their in- where domestic and external risks materi- in 2020 to 3.8 percent in 2021. come reduced by more than half. In- alize, economic growth could slow to 3.3 The fiscal deficit declined significantly in come losses combined with rising food percent in 2022. 2021, owing to a recovery in revenue and prices present a threat to poverty and Domestic labor market conditions are ex- expenditure cuts. Revenue collection re- food insecurity. Constrained by limited pected to improve gradually following bounded mainly due to non-tax revenue fiscal space, government assistance pro- the growth rebound, although permanent and consumption taxes. Expenditure curbs grams were limited and mainly targeted job losses and business closures induced continued with the postponement of new formal workers. The poverty headcount by COVID-19 will continue to put pres- capital projects – which led to a 24 percent rate (measured at the lower-middle-in- sure on household income. Rising food decline in capital spending. With limited come poverty line or $3.2 (2011 PPP) a and fuel prices undermine households’ access to international capital markets, fi- day) is estimated to have marginally de- purchasing power and, without adequate nancing needs were met through strong clined from 36.9 percent in 2020 to 36.8 relief measures, put them at risk of falling short-term domestic bank borrowing at the percent in 2021. into poverty. end of 2021. Addressing internal and external imbal- The current account deficit improved, ances will be key to accelerate economic partly due to a large merchandise trade growth and improve welfare. The deterio- surplus. Merchandise exports grew by 22 Outlook rating public debt situation is a main con- percent – owing to electricity, minerals, cern, with external debt repayments aver- and several agricultural and manufac- Economic activity is expected to recover aging around $1.3 billion a year over tured products – supported by strong gradually to 3.8 percent in 2022, supported 2022-2025 – about half of the average do- external demand and commodity prices. by merchandise exports and the services mestic revenue. Upside risks to the outlook Merchandise imports also increased, dri- sector – especially transport and logistics include a positive outcome from the ongo- ven by fuel, vehicles, and machinery. services (linked to the new railway) as well ing debt renegotiations – providing much- Nonetheless, trade in services remained as wholesale and retail activities. In con- needed fiscal space for growth-enhancing subdued and external debt service pay- trast, tourism will likely take longer to re- expenditures – and a fast and effective im- ments are elevated. High demand for for- bound. Infrastructure construction (in- plementation of planned revenue-enhanc- eign currency (especially to service exter- cluding power projects and highway ex- ing measures. A strengthened legal frame- nal debts) coupled with limited reserve tensions) is also expected to contribute to work for foreign currency management buffers contributed to a strong deprecia- the recovery. From the demand side, pri- may enhance foreign reserve buffers, while tion against the US dollar – 22 percent as vate consumption will increase, although business environment reforms would help of February 2022 (year-on-year). public consumption and public investment boost growth and job creation. The labor market remains subdued, and will remain constrained – owing to the dif- rising food prices place an additional ficult fiscal situation. Private investment TABLE 2 Lao PDR / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 5.5 0.5 2.5 3.8 4.0 4.2 Real GDP growth, at constant factor prices 5.5 0.5 2.5 3.8 4.0 4.2 Agriculture 1.2 3.2 2.3 2.2 2.5 2.6 Industry 5.6 4.0 7.6 5.2 4.0 3.4 Services 7.0 -3.5 -2.2 2.9 4.4 5.7 Inflation (Consumer Price Index) 3.3 5.1 3.8 6.0 5.5 5.0 Current Account Balance (% of GDP) -8.1 -1.5 1.3 -2.7 -4.6 -5.4 Fiscal Balance (% of GDP) -3.3 -5.2 -1.4 -2.9 -2.6 -2.3 Debt (% of GDP) 59.0 62.3 77.9 79.0 79.3 79.2 Primary Balance (% of GDP) -1.6 -3.7 -0.1 -0.1 0.1 0.5 a,b International poverty rate ($1.9 in 2011 PPP) 9.7 9.8 9.7 9.5 9.3 9.1 a,b Lower middle-income poverty rate ($3.2 in 2011 PPP) 36.8 36.9 36.7 36.4 35.9 35.5 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 69.8 70.0 69.8 69.4 69.0 68.5 GHG emissions growth (mtCO2e) 1.9 3.2 4.1 4.4 5.0 4.7 Energy related GHG emissions (% of total) 48.0 48.5 49.5 50.6 51.9 53.0 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on EAPPOV harmonization, using 2012-LECS and 2018-LECS.Actual data: 2018. Nowcast: 2019-2021. Forecasts are from 2022 to 2024. b/ Projection using annualized elasticity (2012-2018) with pass-through = 0.7 based on GDP per capita in constant LCU. MPO 2 Apr 22