Laos Under The Weight of Chinese Debt
Economic disruptions due to the war in Ukraine and inflation are hitting this Asian country that is heavily indebted to China.
The Laotian population faces a severe economic crisis. The kip currency depreciation is raising the cost of living, with the nationwide oil shortage affecting the agricultural sector.
With an external debt of some 10 billion dollars – estimated by the World Bank in April at 66% of gross domestic product (GDP), with nearly half owed to China – and foreign exchange reserves equivalent to a few months' worth of imports, Laos is one of the countries whose warning lights are flashing red. On paper, these imbalances are similar to those that capsized Sri Lanka, four times larger and more populous. The cause is a combination of factors, notably Covid-19 and its prolonged after-effects on trade with China, whose border is closed, and the inflationary impact of the war in Ukraine. These global disruptions are particularly cruel for this small country of 7.5 million inhabitants, which had begun an economic metamorphosis thanks to massive investments in logistics and hydroelectricity.
In May, things almost got out of control. With the kip (the Laotian currency) plummeting against the dollar, oil companies stopped supplying gasoline. Long queues appeared in the provinces, then in the capital, Vientiane. The tug of war with the government only ended when it agreed to grant them new means of payment to ensure two months' supply of fuel via Thailand, while keeping the kip stable, thanks to exchange controls, at two-thirds of its value against the US currency of a year ago.
Despite a post-Covid economic recovery driven by rising exports of raw materials and agricultural products, macroeconomic pressures have aggravated a "worrying state of debt" and "pushing the country towards a debt crisis.
Laos' opening up to China has been expensive: nearly half of the country's debt is in the hands of Chinese development banks or state-owned enterprises. In infrastructure, the new train linking Vientiane to the Chinese border then to Kunming, in the province of Yunnan, cost 6 billion dollars, financed 70% by a consortium of Chinese companies and 30% by the government of Laos – mainly through Chinese loans. China is the top local investor, with a cumulative total of $16.4 billion in 833 projects, the planning minister of Laos confirmed on July 15 at a forum with Chinese investors in Vientiane.
In the capital, which was beginning to modernize, several Chinese projects are on hold – such as the “specific economic zone of That Luang marshes”, an ambitious real estate project designed around a huge perfectly round basin, east of the capital city. A network of circular roads has been paved, but the vegetation has completely invaded the accesses of the ten towers already built and still empty.
Chinese investments have also been massive in hydroelectricity – Laos having undertaken to become the “pile of Southeast Asia”, by multiplying the dams to export electricity to Thailand, and even Singapore. However, nearly half of the national installed capacity is due to a dozen Chinese electricity producers. Electricity for export is in the hands of other foreign operators – such as EDF and a Thai electrician at the Nam Theun 2 dam on the Mekong. The accumulated debts of the Laotian electricity company, Electricité du Laos (EDL), are estimated at at least 30% of the total public debt, of 14.5 billion dollars. Caught at fault by global disturbances, Vientiane nevertheless knows how to play on the rivalries between its three big neighbours: Vietnam, the ideological big brother, Thailand, its first economic partner, and China. The Lao Prime Minister visited Hanoi and Bangkok in January and early July respectively. With China, relations are cordial – unlike Sri Lanka, whose concession of the port of Hambantota to a Chinese creditor group in 2018 for ninety-nine years caused a scandal.
And no one sees Beijing scuttle the first stamped railway And no one sees Beijing scuttle the first "new silk roads" (Belt and Road Initiative, BRI) stamped railway ever built by it on its border: the symbol is worth gold. The Middle Kingdom would then jeopardize all of its rail projects in Southeast Asia, including those in Burma. “The Chinese are not going to let Laos default, it won't cost them anything and in exchange they can get very valuable assets. Except that this will be done in a way that is probably not very transparent, ”said the foreign consultant. In 2021, the China Southern Power Company won the twenty-five-year concession for the country's high-voltage line network, through a new joint venture with EDL. And at least one swap agreement (a currency exchange) between kips and renminbi has already allowed Laos to supplement its anemic foreign exchange reserves – while increasing debt.
“Peasants must dip into their savings. The result is that we reduce production, it costs us too much. If it continues, it can create a food crisis” – Khamoun Xaymany, president of the Lao Farmer Network
Ordinary Laotians are struggling. About 65% of the population lives in rural areas and depends on agriculture. Small producers, those who do not export, lament an ination that reached 23% over one year in June. The price of gasoline has doubled, that of gas has increased by 70%. No question of demonstrating, nor of begging for aid in the country of the single party: the Lao Farmer Network, a network which brings together 100 groups of peasants across Laos, is sounding the alarm on… Facebook, by uploading videos of peasants who recount their diculties. This virtual syndicate is trying to organize itself in the face of distributors who have lowered the purchase prices specified in the contracts, on the pretext that their costs had increased – doubly penalizing the farmers, who must already collect the increase in the price of gasoline or fertilizers, most often imported. “The future is bleak. Farmers must dip into their savings. The result is that we reduce production, it costs us too much. If it continues, it could create a food crisis”, explains the president of the Lao Farmer Network, Khamoun Xaymany, in the suburbs of Vientiane, where representatives from all over the country met in June.
The big farmers – who grow cassava, rubber, bananas, corn – benefit from the Chinese market and the rise in prices. Except for livestock, whose exports have been stopped dead for fear of the virus. For several years, the Laotian authorities have stopped awarding concessions to impose a model of land rental on peasants by Chinese investors, who pay labor by the day and inputs in technology or capital. Not without some deviations. Cassava, prized in flour as a thickener or for making straw, very quickly impoverishes the soil if it is not left to regenerate for long enough. The Chinese banana boom, grown in plastic bags, in plantations copiously sprayed with pesticide, has led to waste problems and poisoning of local residents or workers – to the point that regions in the north of the country have set n.