Laos on the brink of sovereign bankruptcy – The Diplomat

A decade of massive debt accumulation and economic mismanagement by the communist authorities in Laos has finally brought the country into bankruptcy, with its foreign exchange reserves unable to meet its credit obligations without outside help.

Long queues for fuel, soaring food prices and the inability of households to pay their monthly bills have also led to rare public criticism from across the landlocked country, where authorities frown on anyone who openly disagrees with government policies.

It would be too easy to blame China, which accounts for about 47 percent of Laos’ debt accumulated through major infrastructure projects, and its “debt traps” that have left their mark on countries such as Pakistan, Sri Lanka and Fiji.

Neither the war in Ukraine nor the devastating impact of the COVID-19 pandemic is an excuse. The main reason for the economic collapse of Laos is the eternal thorn in the side of many Asian countries: corruption.

Prime Minister Fanham Viphavan acknowledged this when he told the National Assembly this week that embezzlement by managers and staff, combined with poor management, are the main causes of chronic losses suffered by 178 state-owned enterprises.

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“The administration of these enterprises, as a rule, did not follow a well-thought-out business plan. In addition, the recruitment of managers and staff was largely based on nepotism, and these factors were the main cause of deep-seated managerial failures.” state media said politely.

Warnings at least from this postLaos’ festering debt problems go back 10 years.

But the damage has already been done and the immediate concern is the livelihoods of the 7.3 million Laotians, who are among the planet’s poorest and have witnessed a massive widening of the wealth gap, sparking new warnings from Asian Development Bank.

Today, annual external debt service has risen to $1.4 billion from $1.2 billion in 2018 and just $160 million in 2010, when external debt service could be covered by domestic income.

By the end of last year, according to the World Bank, Laos’ public debt stood at 88 percent of gross domestic product, with an external debt of $14.5 billion. Vientiane needs $1.3 billion a year to pay off its bonds by 2025, but only has about $1.2 billion in foreign exchange reserves.

In a desperate attempt to support the economy government offers about $340 million in bonds with a staggering six-month interest rate of 20 percent. Sources told Radio Free Asia that the bond issue is intended “for everyone except commercial banks and financial institutions.”

However, few believed that the government could provide such a generous level, designed to fight inflation at 12.8%, which many call “too good to be true.”

Fankham has been prime minister since March last year. He has been Vice President for the previous five years and has served as Executive Secretary of the Communist Party’s Executive Committee since 2011.

For more than a decade, the prime minister has been an important player who has also ignored the warning signs in formulating deals and economic policies that have pushed Laos to the brink of sovereign default. Now his choice is harsh.

Because of Laos’ strategic position on China’s southern flank, Beijing may abandon past practices and agree to a debt restructuring. The alternative is to turn to the International Monetary Fund (IMF), like Pakistan and Sri Lanka, for help.

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IMF intervention will come with conditions, and there will be many. Lean spending policies will be applied, and to some extent, the economic sovereignty of Laos will be undermined.

But the great irony in saving the Laotians from an incompetent government that rules by force is the use of what is essentially a US-Western financial institution to pay off Chinese debts that have arisen despite warnings made loud and clear.