Is the economic crisis in Laos coming to an end?

Written By:  James Guild
Publisher, Date:  The Diplomat, December 4, 2025

The kip has stabilized and inflation is dropping, but the issue of the government’s heavy external debt remains unresolved.

In 2022, Laos experienced an acute economic crisis. The kip, which had maintained a relatively stable exchange rate against the dollar for many years, entered a period of steep depreciation at the end of 2021. The weakened currency made imports of essential goods such as food and fuel more expensive. Inflation soared as a result, with the central bank reporting annual inflation of 31 percent in 2023 and 23 percent in 2024.

The roots of the crisis are pretty clear. In the mid-2010s, foreign investment began to pour into Laos. This includes the $6 billion railway connecting Vientiane to southern China, along with a big wave of investment in hydropower, primarily from China but from other countries as well, such as Thailand. Beyond infrastructure, there are major industrial projects in the works, including large Chinese investments in fertilizer production.

Such capital inflows undoubtedly create jobs and stimulate economic activity. For instance, exports of electricity have increased dramatically in recent years, reaching $1.7 billion in 2023. The railway (as expected) has boosted trade with China, which passed Thailand to become Laos’ largest export market in 2023, absorbing $3.6 billion worth of goods and services.

But foreign investment also creates liabilities, as investors and creditors expect to be repaid over time. Due to the influx of investment over the last ten years, Laos has accumulated substantial liabilities to foreign creditors on its balance of payments.

In and of itself, using debt to finance power or railway projects is not bad policy. It all depends on whether the benefits from such projects exceed the cost of the debt. With Laos, at least in the short term, the amount of debt incurred did not produce sufficient economic returns to justify the costs. As highlighted in a recent report from the Lowy Institute, the main culprit here was not the Chinese-backed railway that often grabs headlines, but rather over-investment in power plants for which the expected level of demand never materialized.

At the same time that Laos was over-investing in the energy sector, the government was collecting less revenue as a percentage of GDP, forcing it to borrow increasingly large sums to cover fiscal deficits. According to the IMF, in 2010, central government debt was equal to 49 percent of GDP, about the same or below debt levels of many regional peers. By 2022, it had ballooned to 130 percent of GDP.

The current account tells a pretty clear story here. The deficit in net primary income, which measures how much money is flowing out of the country to foreign creditors, surged from $150 million in 2014 to $1.4 billion in 2022. This means Laos was in a precarious situation in 2022 as the economy struggled to bounce back from the pandemic. It had accumulated large debts to foreign creditors, which were used to finance under-performing projects. And the costs of servicing this debt were beginning to add up, just as global events conspired to make it least affordable.

If you recall, around this time, the Federal Reserve started raising interest rates to cool inflation in the United States. This would have placed pressure on the currency in any case, but became especially burdensome given the heavy external debt load and the central bank’s thin foreign exchange reserves, which stood at just $1.8 billion at the beginning of 2022. With high external debt and insufficient reserves to backstop the currency, the result was capital flight, depreciation, and soaring inflation.

Following several years of painful adjustment, there may be light at the end of the tunnel. After losing more than 50 percent of its value against the dollar, the kip has stabilized and inflation is dropping. Currency depreciation has made Laos’ exports more competitive and the current account is looking stronger, having recorded consecutive quarterly surpluses since the end of 2024. The central bank enacted several measures to help rebuild its foreign exchange position, reported at $2.8 billion in September 2025.

These are positive and necessary steps to get Laos back on a path toward macroeconomic stability. The critical issue of its external liabilities, however, remains unresolved. As long as the cost of foreign investment exceeds the net economic benefit, it will be challenging to get back on a sustainable growth trajectory. Some sort of relief is probably needed.

As Laos’ largest foreign creditor, China will be a key player here. So far, there has been no publicly announced debt restructuring plan. Interestingly, rather than debt relief, we have seen renewed effort from both countries to sustain and expand Chinese investment in Laos. One way or another, it seems Laos’ path to recovery from the 2022 crisis, either through debt relief or stronger growth, will inevitably have to run through China.