Foreign currency outflow to repay debt owed to China… Due to the fall in currency value, inflation is expected to rise by 25% this year.
‘Belt and Road Debt’ Laos suffers extreme hardship due to skyrocketing prices
Foreign currency outflow to repay debt owed to China… Due to the fall in currency value, inflation is expected to rise by 25% this year.
(Hanoi = Yonhap News) Correspondent Park Jin-hyung = AFP reported on the 17th (local time) that the hardship of living in Laos is becoming severe as prices are soaring more than 20% per year. The diagnosis is that this is due to China’s participation in the One Belt, One Road (land and maritime Silk Road connecting China, Central Asia, and Europe) resulting in a huge debt.
According to the Asian Development Bank (ADB), Laos’ consumer price inflation rate soared from 23% in 2022 to 31% last year, and is expected to soar to 25% this year as well.
Prices in Laos began to soar after the COVID-19 pandemic and were loosened due to the outbreak of the war in Ukraine in 2022.
In particular, the prices of daily necessities such as rice, sugar, oil, and chicken nearly doubled last year, causing a major blow to the livelihood of ordinary households.
“Before, people came to buy necklaces, rings and earrings for special occasions, but now only people come to sell their jewelry to raise cash,” said a jewelry dealer in Vientiane, the capital of Laos.
This merchant, who has been in business for 15 years, said, “Before, the store was busy, but now no one buys gold,” and said that the future of business is difficult.
As living conditions worsen, nearly one in three children under the age of five in Laos have stunted growth due to malnutrition, ADB reported. This rate of malnutrition is the highest in the world.
The reason why the Laos economy has become so difficult is the large amount of debt incurred due to participation in China’s Belt and Road Initiative.
The Laos government introduced billions of dollars in loans from China for the China-Laos railway and hydroelectric dam construction project worth about 6 billion dollars (approximately 8.4 trillion won).
As a result, Laos’ national debt exceeded $13 billion (about 18 trillion won), soaring to 108% of gross domestic product (GDP). In response, the World Bank warned in a report last week that this level of national debt is “unsustainable.”
As a large amount of foreign currency flows out to repay the national debt, the value of the Laos kip falls, and this causes Laos to fall into a vicious cycle of worsening inflation.
The total amount of debt interest paid by the Laos government amounts to $1.7 billion (approximately 2.4 trillion won) this year and an annual average of $1.3 billion (approximately 1.8 trillion won) over the next three years.
The value of the kip against the US dollar has fallen by about half over the past three years.
“Laos is heavily dependent on imports, so the decline in the value of the kip has led to a rise in domestic consumer prices and deepened inflation, which has reduced domestic demand and slowed economic recovery,” said Po Linh Ng, economist at the ASEAN+3 Macroeconomic Research Organization (AMRO), an international organization. He explained.
Laos authorities are recently raising base interest rates and implementing fiscal austerity measures to control soaring prices.
In response, the World Bank pointed out that the Laos government had stabilized its finances to some extent, but mainly through delaying debt repayments and limiting spending on health, education, and welfare.
He went on to say that austerity measures will have long-term detrimental consequences for the Laos economy, and instead advised Laos to reduce tax breaks to raise tax revenue and try to restructure debt.
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Jinhyung Park
