This Analysis examines the drivers of the Lao debt crisis and what will be required to get out of it, with a focus on China’s role. Laos’ debt crisis has received little international attention and scrutiny, reflecting the country’s opacity and the minor exposure of international bond investors. Yet China’s outsized role makes the Lao crisis a crucial case study in an era when China has become the world’s largest bilateral creditor to developing countries.
What is clear is that China lent on a huge scale to a country with weak institutions and limited ability to productively absorb the investment. This has resulted in massive overcapacity in the Lao energy sector, unsustainable financial losses, and finally the takeover of its energy grid by a Chinese state firm. Regardless of China’s motives, domestic Lao elites appear equally to blame for the poor decisions that ultimately led to the economic crisis. China and Laos have thus settled into a hierarchical creditor-debtor relationship, underpinned through a logic of power, influence, and economic insecurity.
Our analysis shows that, even under the most optimistic scenarios, Laos cannot escape the crisis in the absence of substantial debt relief. We assess that 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 country 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 cut.
Laos is suffering an acute debt crisis with no apparent way out. The Lao kip has lost half its value against the US dollar since the start of 2022, causing domestic prices to skyrocket and devastating household incomes. Hundreds of thousands of Lao citizens are experiencing new food insecurity or are being pushed into 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.
More than half of domestic government revenues went to meeting debt servicing obligations in 2023 (even after large repayment deferrals granted by China), leaving little fiscal space for vital education and health spending.
On its current trajectory, the Lao debt crisis is likely to deliver a lost decade of sub-par growth and stalled poverty reduction — a dramatic reversal of the economic optimism of previous decades.
This is not the first time Laos has been engulfed by a sovereign debt crisis. In the early 2000s, public debt stood at more than 140% of GDP. Laos opted 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. Through the 2000s, Laos further integrated into the Western-led international financial and development architecture, secured substantial Japanese aid, and was able to borrow on highly concessional terms from Multilateral Development Banks (MDBs).
Through the 2010s, Laos changed course, becoming one of the heaviest borrowers (relative to GDP) under China’s Belt and Road Initiative (BRI), formally launched in 2013.
The shift marked China’s geopolitical quest for influence in Laos. 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 enormous cost of the project relative to the small Lao economy attracted much international attention.
However, far larger has been the billions funnelled into hydropower and transmission projects loosely framed under the government’s slogan of becoming the “Battery of Southeast Asia”. Falling state revenues also saw the government increasingly borrow from international capital markets.
The result of this sea change in Lao public finances was a stunning re-expansion in sovereign debt. Lack of transparency and reporting inconsistencies cloud the overall picture.
Official figures nonetheless indicate external government debt more than doubled from less than $4 billion in 2010 to about $10 billion by 2019 and $10.5 billion by 2023 (Figure 1). China accounts for about half, at $5.1 billion. However, these figures substantially understate Laos’ total debt liabilities. A more comprehensive measure of public and publicly guaranteed debt suggests a total figure of around $17 billion in 2023 or 112% of GDP (Figure 2).
The key lenders to Laos through the 2010s were China’s policy banks — the Export-Import Bank of China (China Ex-Im Bank), and to a lesser degree China Development Bank (CDB). Much of this was on-lent to Lao state-owned enterprises (SOEs), largely the national power utility, Électricité du Laos (EDL).
In 2023, EdL’s total debt load was US$5.4 billion, including US$1.8 billion in government guaranteed debt. A further US$1 billion in non-guaranteed debt was held principally by EdL-Gen (a majority owned subsidiary of EdL).
At over US$6 billion, the energy sector accounts for the lion’s share of government debt exposure.
