Why Laos’ reliance on Chinese money could bankrupt the country

Photo: Christian Haugen/CC BY 2.0
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Laos is pushing hard to meet United Nations (UN) development targets. The government risks bankrupting the nation in the process.

By John Pennington

Laos remains on the United Nation’s (UN) list of least developed nations. The government wants the country to graduate from this list. To try to achieve this, it has borrowed money from abroad to fund infrastructure projects.

The government’s policy is risking short-term prosperity for long-term gain. The risks outweigh the rewards and Laos is now heading for bankruptcy. Is the government to blame? What can it do to ease the situation?

Desperate to meet UN targets, the government overborrowed

Laos is one of three ASEAN nations on the UN’s list of least developed countries.  Cambodia and Myanmar are the others. To climb out of this lowest tier, Laos must raise its gross national income per capita to US$1,230 or more. It must also meet other economic and social thresholds.

The government wants this to happen by 2020. Aiming to boost revenue, it committed to infrastructure projects. These included a new bridge over the Mekong River. Laos also wants involvement in the high-speed rail link between China and Thailand.

In the long-term, these projects should boost trade, investment, and tourism. In the short-term, it puts the country’s finances at significant risk. Laos is still repaying the money it borrowed to construct hydropower dams on the Mekong. Its debts are mounting.

Laos’ borrowing from China continues to increase

World Bank economists assessed that China accounted for 35% of Laos’ public debt in 2012. They claimed this figure rose to around 44% by 2015. Public debt is now at an estimated 68% of gross domestic product (GDP). Around half of the borrowed money is from China. This level of exposure to one creditor is a severe risk. It leaves Laos subject to major losses if China’s economy slows. It leaves the country heavily reliant on Beijing. China could use the situation to wield greater influence over Laos.

Sources: Aljazeera, Global Finance

In return for considerable investment, China demands swift and smooth progress. It will put Laos under financial pressure. Laos’ government offered Chinese companies land when it fell behind on loan payments. If it were to do so again, it would further alienate its subjects.

The government faced a dilemma. To push Laos’ development forward, it had to spend. With limited capital, it had to borrow the money. It now hopes that the projects will generate enough funds to pay back the loans.

The government is not the only culprit for Laos’ growing debts

Blaming only the government for Laos’ losses is unfair. The economic slowdown in China and Thailand is exacerbating Laos’ problems. These are Laos’ biggest trading partners. As economic growth stalls, Laos’ risk of debt distress rises.

Global commodity prices dropped. Laos’ economy, dependent on resources such as gold and silver, took a hit. Farmers struggled to overcome poor weather and harvests declined.

Economists analysed that Laos lost millions of dollars due to corruption. Transparency International ranked Laos 123rd out of 176 nations for corruption perception. Companies are reluctant to invest and do business in Laos. The government had limited options so it borrowed from the only sources available.

The government is working to service the debt but must do more

World Bank economists in May 2016 advised, “It would be important to put in place policies that will lead to stabilisation of the public debt burden and its gradual reduction consistent with fiscal sustainability level.” The government is doing what it can to address the losses. It recently issued bonds of US$419 million.

Endemic and widespread corruption remains a massive problem. The government faces an enormous struggle. “The opaque business environment and the presence of politically connected vested interests will make entry into some sectors difficult in the years ahead,” warned Alice Mummery, an Economist Intelligence Unit analyst.

Laos must diversify and reduce its reliance on China. The government must explore business, investment, and trade opportunities with other partners. Those partners include Malaysia and Singapore. Laos’ Prime Minister Dr. Thoungloun Sisoulith visited both countries last year. He held encouraging talks with his counterparts.

Laos will see no quick return on its government’s investments

Following the recent economic slowdown, Laos is in a precarious position. Without an upturn in conditions, the country will continue on the road to bankruptcy. It is now too late for the government to change its strategy.

Laos sought huge investments and loans from China. Borrowing during favourable conditions when the economy was growing had some merit. The outlook has changed.

Laos’ government gambled on the finished projects generating enough money to boost development. If the country graduates from the UN’s list of least developed nations, more challenges await. Laos would lose concessions such as favourable debt repayment rates.

Hitting development targets while maintaining economic growth and servicing mounting debts is impossible. Something had to give. Laos will be paying China back for decades to come.