BANGKOK —
Laos is straining under soaring inflation rates made worse by the stress of massive loans owed mostly to China for a series of megaprojects that have yet to pay off.
The tiny landlocked nation of nearly 8 million has already deferred some payments. But economists and analysts say Beijing may start asking for a stake in Laotian land, resources and infrastructure as compensation, which could expand China’s influence in the neighboring country.
Laos’ inflation rate jumped from the low single digits to 23% in 2022 and another 31% last year, the highest in all of Asia, according to the Asian Development Bank, or ADB. The regional development bank expects inflation to stay above 20% through 2025.
Food prices have climbed even higher, nearly hitting 40% in 2023. The ADB says the prolonged climb has slammed most families in Laos, forcing many to eat less or even forage to make up for what they can no longer afford to buy in a country that already had the highest rates of hunger in mainland Southeast Asia.
“The price of everything [is] just increasing, increasing, increasing, more and more,” said a resident of Luang Prabang, Laos’ ancient royal capital, who spoke to VOA on condition of anonymity for fear of reprisal from the communist country’s authoritarian government.
He said the price of beef has more than doubled in the past year and that an average meal or a grilled fish from a street stall now costs up to four times what it used to.
“People are suffering,” he said. “Some people buy less than before because of things [being] more expensive. That is why many people now, we try to grow things by ourselves.”
The Luang Prabang resident who works as a language instructor says he started a fruit and vegetable garden a year ago to help feed his own family and earn a little extra at the local market.
Analysts and economists ascribe the rampant inflation to several factors, including a rise in global oil prices and a sharp drop in the value of the local currency, the kip, as central banks in other countries have raised their interest rates, driving their own currencies up.
Souknilanh Keola, a senior economist at Indonesia’s Economic Research Institute for ASEAN and East Asia, mostly blames Laos’ failure to build up a healthy supply of foreign currency reserves over the years. He says that has forced the government to now spend big on foreign currencies to pay its bills with other countries, driving the kip down and the price of imports up.
But he and others agree that the burden of servicing Laos’ mammoth public debt has made the problem worse.
At $13.8 billion, or 108% of the country’s gross domestic product, the World Bank recently called Laos’ debt “unsustainable.” Of the $10.5 billion Laos owes to other countries, half is due to China.
Much of that debt has gone to financing Laos’ share of the bill for a few megaprojects, some backed by China, including hydropower dams on the Mekong River and a $6 billion high-speed rail line connecting China and Thailand through Laos.
“Because of the Chinese debt, yes, that put pressure on the foreign exchange,” Keola said. “They had to do everything to try to buy foreign currencies in the market, and that put pressure for [the] Lao kip to be weaker, thus making inflation going up.”
The kip lost half its value against the U.S. dollar in 2022 and another fifth during the first three quarters of this year, according to the World Bank.
Wen Chong Cheah, a research analyst for the Economist Intelligence Unit, says having to pay back so much debt has also been driving the kip down by making it less attractive for investors to buy, trade or hold.
“This plays into investor sentiment. If you expect a country to … default, if you expect the kip to worsen, you would less likely want to hold kip. This makes the allure of holding kip less,” he said.
Laos watchers see little to no chance of China standing by to let the country default.
Cheah says Laos has been a useful advocate of China’s interests this year as chair of the Association of Southeast Asian Nations, or ASEAN, playing down talk of a code of conduct for the South China Sea.
ASEAN has been in talks with Beijing for years over a binding code for the sea, where China has overlapping claims with several members. Landlocked Laos does not have any claims in the South China Sea.
Analysts say China is widely seen to be dragging its feet, preferring instead to deal with the competing countries one on one to make the most of its overwhelming size.