Laos (Lao People's Democratic Republic)

Growth based on FDI and the exports generated by it

Growth is expected to slow slightly in 2026, but remain moderate and still trend below pre-COVID levels (7-8%). Economic momentum is largely driven by foreign direct investment (5% of GDP in 2024), mainly from China, Thailand and Vietnam. These countries are primarily targeting hydroelectricity, renewables, the electricity grid, mining and infrastructure. For example, China's construction and financing of the Laos-China railway line, inaugurated in 2021, has revolutionised transport. However, doubts about the country's ability to cope with its debt load, the lack of skilled labour, and the obligation to repatriate a larger share of export earnings could weigh on foreign investor confidence. At the same time, public investment (in roads, bridges, dams and the electricity grid) plays a key role in attracting FDI. However, fiscal consolidation is restricting public spending. Last, limited access to credit for local businesses is hampering domestic investment, even though kip stabilisation is reducing the cost of imports of intermediate goods and equipment.

Services account for more than 40% of GDP and are dominated by foreign tourism (more than 3% of GDP each year), transport and logistics. Tourism, mainly from neighbouring countries, has benefited from the Visit Laos Year 2024 campaign and improved connectivity with the outside world. Tourist arrivals are expected to return to pre-Covid levels by 2026. The contribution of foreign trade will remain positive. Exports of natural resources are helping boost the economy. Chinese investment has led to a sharp increase in electricity exports (15% of total exports in 2024).

One of the major challenges remains the fight against inflation. After reaching an exceptionally high level (31% in 2023), it fell below 10% in 2025 and is expected to continue to decline in 2026. Imported inflation has fallen due to lower global food and energy prices, amplified by the sharp decline in the depreciation of the kip. In addition, China, seeking alternative markets, has increased its sales in Southeast Asia while reducing its prices. The central bank lowered its interest rate to 9% in August 2025, down from 10.5% a year earlier. However, due to the dollarisation of the economy, it favours the use of reserve requirements and open market operations to regulate the amount of money available. Disinflation has led to a slight upturn in household consumption, which remains sluggish due to restrictive economic policy.

Overwhelming debt hinders public spending

The primary budget surplus (i.e., excluding interest) generated since 2022, thanks to restrictive policy, has reduced the debt burden. Nevertheless, this remains considerable. The debt is mainly external (more than 50% owed to China) and mainly denominated in US dollars. Laos' excessive debt is linked to 35 Chinese projects identified since 2010. China regularly grants repayment deferrals to avoid default. In the event of non-compliance with debt obligations, the Chinese creditor may be awarded the concession to operate the infrastructure concerned. As a result, the state-owned company Electricité du Laos (EDL), which accounts for nearly 45% of total public debt, was forced to enter into a 25-year concession agreement with China Southern Power Grid, creating the joint venture Electricité du Laos Transmission Company Limited. This agreement transfers the management and control of EDL to the Chinese company. This was necessary in a context of electricity underpricing on the domestic market. Debt servicing restricts other public spending, particularly in education and health. Expenditure in these sectors accounted for only 11.3% of GDP in 2024. Furthermore, the budget allocated to road infrastructure maintenance is only one-third of what is needed, while cross-border road traffic is increasing. In addition to debt relief granted by China, the government mainly finances itself by issuing securities in foreign currency or kip to local banks.

Laos' dependence on China may explain why it is one of the countries most affected by US tariffs (40%). However, exports to the US account for only 1.6% of the total. The impact would therefore be indirect via exposure to its trading partners. The trade balance will remain significantly in surplus. In 2024, electricity accounted for the largest share of exports (21.3% of the total). Laos’ goal is to become the “battery of Southeast Asia”. By 2030, Vietnam plans to import around 5,000 MW of electricity from Laos, which would represent a quarter of Laos' planned exports. This is followed by minerals, electronics (a booming industry) and clothing. The trade surplus adds to that of services provided by tourism. With expatriate remittances from Thailand even if stagnant, and FDI, these surpluses should more than offset the interest and dividends paid to foreign investors, as well as the debt repayment deadlines eased by the deferrals granted by China. This contributes to the increase in foreign exchange reserves, which remain limited and covered 3.2 months of imports at the end of June 2025.

Between internal political stability and external dependence

Laos has been ruled by a single party since the fall of the monarchy in 1975: the Lao People's Revolutionary Party (LPRP). The party's general secretary and president of the republic, Thongloun Sisoulith, wields the lion’s share of power, while the National Assembly mainly serves to rubber-stamp the LPRP's decisions. The February 2026 legislative elections will have no impact. The lack of freedom of expression and of the press is preventing the emergence of an organised opposition. The government has been criticised by the international community for its repression of political opponents, particularly members of the Hmong minority. However, since 2022 and the rise in inflation, MPs have become increasingly vocal, but criticism remains rare. Political stability is promoted by the regime as an asset to attract foreign investment. Nevertheless, low wages, corruption, regional inequalities, forced displacement associated with major infrastructure projects and aggressive mining and agricultural practices by foreign investors remain sources of discontent.

Externally and given its status as a landlocked country, Laos maintains close relations with Vietnam, Thailand and China, its most powerful neighbours on which it depends. It is a member of regional (ASEAN since 1997) and international (WTO since 2013) organisations, which allows it to assert its non-alignment and willingness to cooperate. Its arable land, labour force and the electricity from dams are within reach of its neighbours, particularly China, which plays a predominant role through massive investments, its position as the largest creditor and its control of the upper Mekong River. This skewed relationship between China and Laos reduces Laos' financial and political headroom and raises questions over sovereignty. Furthermore, Laos also depends on international aid, which is tending to decline due to repressive domestic policies.

Last updated: 10 September 2025