Part A: Recent Economic Developments and Outlook

The Lao economy is facing increased challenges from a sharp currency depreciation and high inflation, amid a deteriorating global economic environment and slow domestic reforms.

High inflation is eroding the purchasing power of households, many of whom experienced income losses from COVID-19 and are still recovering. While labor market indicators improved by mid-2022 and poorer households have benefitted from a recovery in nominal wage earnings and remittances, their purchasing power and living standards have been negatively affected by rapidly rising domestic prices. Consumer price inflation rose to 37 percent in the year to October 2022, while food price inflation reached 39 percent. The welfare cost of high inflation is considerable, particularly for the urban poor because more of their income share is spent on food and fuel. Social assistance to households is constrained by limited fiscal space, forcing some households to reduce their consumption of food and fuel. Two-thirds of households have cut spending on health and education, which will likely undermine long-term human capital development.

Despite an improvement in the fiscal balance in the first half of 2022, fiscal space to support the economy remains limited.

Debt sustainability hinges on a successful conclusion of ongoing debt negotiations with major bilateral creditors.

In the medium term, the outlook assumes a gradual recovery in international tourism and exports, but it is contingent on a successful conclusion of ongoing debt negotiations.

Given accumulated macroeconomic imbalances and a highly uncertain outlook, strong political commitment to ambitious reforms is essential to restore economic stability and sustain growth.