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Laos finds itself in China’s debt trap amid signs of economic collapse MPNRC

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The scenery of Sri Lanka is still refreshing. An economic crisis that led to violent protests and eventually the resignation of Prime Minister Mahinda Rajapaksa caught the attention of the world. Kovid-19, the war in Ukraine and the growing debt burden all proved to be the last straw for the South Asian country.

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Sri Lanka seems to have been the first of many to face the imminent threat of outright economic reluctance. Laos, for one, is saddled with threats to its economy – which is on the verge of default.

Laos is a communist state, and public discontent is unwelcome.

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Nevertheless, the people of this Southeast Asian country are becoming angry and frustrated with the situation. Oil shortages have begun in Laos, and long queues at petroleum stations are now a common sight.

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In addition to its debt crisis, Laos’ currency – the kip – has started to take a nosedive. Inflation is on the rise. Inevitably, an economic storm promises to turn Laos upside down.

Last year, this time Lao Kip was trading at around $9,430 per US dollar. Now, a US dollar purchase requires about 15,000 kip – a depreciation of more than 40 percent. This depreciation is exacerbated by the United States raising its interest rates. Inflation figures for Laos paint a frightening picture for the country.

Inflation in January was recorded at 6.25% year-on-year. The figure rose to 7.3% in February and rose to 8.5% the following month. In April, inflation rose to 9.9%, and the latest estimate stood at 13%.

The biggest concern for Laos is its rising public debt. Last year, the public debt reached $14.5 billion, about half of which was owed to China alone. According to the World Bank, this figure accounts for 88% of the gross domestic product (GDP) of Laos. According to Nikkei Asia, China’s debt to Laos also accounts for 11% of bilateral debt. The World Bank says Laos’ foreign debt is projected to hit $1.3 billion annually by 2025.

Earlier this month, Moody’s Investors Service warned that Laos was “on the verge of default” while downgrading the country’s credit rating to Caa3.

Laos has chosen to stay away from global trade. Trade with the West is negligible, and Laos’ only meaningful trade partners are China, Thailand, and Vietnam. China has put Laos in debt by pretending to be its friend. For example, in 2020, Laos handed over most of the control of its electric grid to a Chinese company. Total Chinese investment in Laos’ electricity, transportation, a border economic zone and other projects already exceeds $16 billion.

The regime in Laos is perhaps for the first time facing some serious questions about how the country has gotten into this situation and what is being done to fix it. The Lao People’s Revolutionary Party (LPRP) has somehow reorganized its government’s cabinet to save its reputation. Two new Deputy Prime Ministers have been added, while the heads of the National Bank and the Ministry of Industry and Commerce have been replaced.

Prime Minister Funkham Vipawan quite late in the game shifted the entire focus of his government towards somehow saving Laos from the economic crisis. At this time, although Laos’ problems seem insurmountable, the people are ready for the impact.

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