PRC infrastructure scheme drowns Laos in heavy debt, high inflation – Indo-Pacific Defense FORUM

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Laos is straining under soaring inflation made worse by the stress of massive loans owed mostly to the People’s Republic of China (PRC) for a series of mega-projects that have yet to pay off.

The landlocked nation of nearly 8 million people has already deferred some payments. But economists and analysts say Beijing may start demanding a stake in Laotian land, resources and infrastructure as compensation, which could expand its influence in the neighboring country.

Laos’ inflation rate jumped from the low single digits to 23% in 2022 and an additional 31% in 2023, the highest in Asia, according to the Asian Development Bank (ADB), which expects inflation to stay above 20% through 2025.

Food prices climbed even higher, nearly hitting 40% in 2023. The ADB said the prolonged increase slammed most families in Laos, forcing many to eat less or forage to make up for what they can no longer afford. Laos already had the highest rate of hunger in mainland Southeast Asia.

One resident said the price of beef more than doubled in the past year and that an average meal or a grilled fish from a street vendor now costs up to four times more than before. To compensate, many people try to grow their own fruits and vegetables, he said.

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Analysts and economists ascribe the rampant inflation to 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 raised their interest rates, driving up their own currencies.

Souknilanh Keola, a senior economist at Indonesia’s Economic Research Institute for ASEAN and East Asia, primarily blamed Laos’ failure to build up its foreign currency reserves over the years. That has forced the government to spend heavily on foreign currencies to pay its bills with other countries, driving the kip down and import prices up, he said.

The burden of servicing Laos’ mammoth public debt makes the problem worse, experts contend.

At $13.8 billion, or 108% of the country’s gross domestic product, Laos’ debt is “unsustainable,” the World Bank said recently. Of the $10.5 billion Laos owes to other countries, half is due to the PRC.

Much of that debt has gone to financing a few mega-projects, some backed by the PRC, including hydropower dams on the Mekong River and a $6 billion high-speed rail line connecting the PRC 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 [go] up.”

The kip lost half its value against the United States dollar in 2022 and an additional fifth during the first three quarters of 2024, according to the World Bank.

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Analysts don’t expect Beijing to let Laos default.

Laos has been an advocate of the PRC’s interests as chair of the Association of Southeast Asian Nations (ASEAN) in 2024, playing down talk of a code of conduct for the South China Sea, said Wen Chong Cheah, a research analyst for the Economist Intelligence Unit.

The 10-member ASEAN has been negotiating with Beijing for years over a binding code for the resource-rich sea, which the PRC claims almost in its entirety despite a 2016 international tribunal ruling dismissing Beijing’s arbitrary assertion. Laos does not have claims in the South China Sea.

The PRC is widely seen to be dragging its feet, preferring to deal with competing countries bilaterally to leverage its overwhelming size.

“Laos provides China a voice in Southeast Asia,” Cheah said. “It is in China’s best interests to not let Laos default because if Laos defaults it is likely to seek aid from Western countries or multilateral organizations, and this would diminish China’s influence.”

The PRC could keep deferring some of the debt or pursue debt-for-equity swaps in which Beijing trades part of the debt for a stake in land, mineral rights or other equity.

In 2021, Laos gave the PRC a majority stake in a joint venture between a Chinese state-owned power company and the heavily leveraged Electricite du Laos. The deal effectively handed Beijing control over the country’s power grid, including electricity exports to neighbors.

Although the terms of Beijing’s loans to Laos are opaque, they include land and natural resources as collateral, according to AidData, a research unit at the U.S.-based university William & Mary.