Laos has experienced a frightening debt crisis in recent years, which has sparked concerns about the tiny country’s debt to China, its largest creditor.

In late 2013, China emerged as the biggest foreign investor in Laos, and ever since, its sway over the country has only grown.

Laos owes Beijing a large portion of its public debt, which the IMF projects to be 122% of GDP this year, as a result of infrastructure agreements made under China’s Belt and Road Initiative, or BRI.

In order to finance roadways, trains, and hydroelectric dams, Laos borrowed billions from the government of President Xi Jinping, depleting its foreign reserves in the process.

The Laotian kip has dropped to historic lows versus the US dollar due to a currency crisis, rising food and gasoline costs worldwide, and other factors, leading to a growing inflation. 

If the current economic crisis gets out of hand, there is widespread fear that the nation could be on the verge of economic collapse.

In response, the government has enacted a number of stability measures, such as raising interest rates, issuing bonds, and developing debt management strategies in collaboration with the Asian Development Bank. Additionally, it has resulted in lower spending on necessities like healthcare and education.

But experts caution that Laos’ financial problems are unlikely to get better in the absence of a definitive debt reduction agreement with China.

“Laos should negotiate an upfront debt treatment with China, such as debt reduction in net present value terms, to enable Laos to meet debt services obligations sustainably,” said Toshiro Nishizawa, a professor at The University of Tokyo who focuses on economic policy.

He went on to say that other options included longer payback terms and lower interest rates, as well as a climate-focused strategy like debt-for-climate swaps, in which Laos would agree to environmental regulations in exchange for a haircut.

From 2020 to 2022, China provided Laos with significant near-term debt relief, which the World Bank described as “temporary relief.” Over those three years, postponed repayments are estimated to have accounted for around 8% of Laos’ GDP in 2022. However, the generosity of the second-biggest economy in the world is limited.

“Given the approach China has taken previously, it may offer short-term relief, but only that,” said Mariza Cooray, a research fellow and senior economist in the Lowy Institute’s Indo-Pacific Development Centre, in a report published earlier this year.

There were no comments on the issue from the Chinese foreign ministry.

“As with Sri Lanka and Zambia, China has also so far been unwilling to take a haircut on its debt, despite obvious signs that this will ultimately be necessary and to everyone’s benefit,” she wrote, adding that “China needs to do more for Laos, and do it quickly.”

Beijing should work to keep Laos from going into default.

As Washington increases clout in the Indo-Pacific, Beijing’s standing in Southeast Asia is bolstered by strong ties with Laos. Another factor is that Laos and China have socialist relations.

Moreover, “Chinese banks do not want to become creditors burdened with non-performing assets, nor does China want to look like an unreliable lender to developing nations,” said Nishizawa. “China is unwilling and unable to let Laos default.”

According to certain media sources, should Laos default or be unable to make payments on time, Beijing would confiscate its significant infrastructure assets, creating a situation known as the “debt trap.”

After the state-owned energy firm Électricité du Laos, which is responsible for over 37% of the country’s external debt, inked a 25-year concession deal with China Southern Power Grid in 2021, worries increased. The agreement granted the Chinese state-owned enterprises (SOEs) the ability to export Laos’s electricity abroad and a majority interest.

However, several academics have dispelled concerns about China’s debt-trap diplomacy in the BRI countries.

Researchers Meg Rithmire of Harvard Business School and Deborah Brautigam of Johns Hopkins’ China Africa Research Initiative (CARI) have noted that, for example, Sri Lanka owes more to Japan, the World Bank, and the Asian Development Bank than to China.

“When debt distress strikes, we do not see Chinese banks attempting ‘asset seizure,’ and so far, no cases in Africa of international arbitration or involvement of courts, either,” CARI noted in a 2020 research paper.

“Instead, Chinese officials are trying to develop tailor-made solutions to address debt (and development) sustainability, case by case,” they said.

Laos has to diversify its foreign investment portfolio eventually, but given its current economic unrest, this will be challenging to do without a debt restructuring agreement.

“The ongoing debt renegotiations must come to a successful conclusion,” stated Pedro Martins, senior economist at the World Bank’s Laos office.

Vientiane still has a lot of choices available to it in the interim.

“This could involve tax reforms, including the reduction of excessive tax exemptions and improved tax collection on the revenue side,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence.

“On the expenditure side, financial management reforms, including strict controls on repayment from SOEs and lending/guarantees to SOEs, would be key,” she said.

Other alternatives, according to Martins, include increasing the banking sector’s strength, enhancing the business climate, and encouraging exports while increasing spending efficiency.

(Adapted from TBSNews.net)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy