LAOS Vientiane faces Chinese debt trap

Considered the “battery of Southeast Asia”, with its dams it produces electricity for the entire region, but it has a debt equal to its annual GDP, half with China. The country is of great strategic importance, but it cannot borrow abroad.

Vientiane () – Laos continues to experience a paradoxical situation: considered the “battery of Southeast Asia” due to the large number of dams that produce electricity for neighboring manufacturing countries, it is struggling in the “debt trap”. This is an enormous deficit for its possibilities: 17,000 million dollars in 2021, equivalent to the annual GDP, half contracted with the People’s Republic of China.

Added to the dependence on Chinese investments and loans -incentivized in every way by Beijing in order to have a strategic cushion in the south- is Chinese control over its main infrastructures. Especially after the loans granted to Vientiane to build – with Chinese resources, technologies and workers – the immense system of dykes for the production of hydroelectric energy in the course of the Nam Ou, in the north of the country. The 25-year concession to Chinese companies of the state electricity network, which represents 37% of the national foreign debt, effectively deprives the country of one of the main sources of income, leaving little room for maneuver for an economic recovery or a greater autonomy.

Laos is of strategic importance to China: it is fully included in the infrastructure project of the Belt and Road Initiative, especially after the construction of the main railway financed by Beijing with 1.8 billion dollars. It is rich in water, mineral and forest resources and is in the hands of a repressive regime, without any critical element regarding Chinese foreign control, because it is considered “fraternal”.

So far, China has wavered on its debt restructuring request, and at the same time the restrictions imposed by Beijing have also made it difficult to seek help from abroad, for example from the International Monetary Fund. A financial aid that would be necessary but difficult to grant due to the dismal economic performance of the country, starting with inflation.

According to the World Bank, the need for money in circulation is four times greater than what the country could obtain from abroad as new credit, while the strict controls on capital that were introduced last year have not prevented distorting effects, such as the rate “parallel” change. .

Laos could be an economy with great potential, but the country has few financial resources at its disposal, and those it does have today have been misdirected. This made it necessary to resort to help from Beijing, but highlighted the consequences of intervening in cases of structural weakness and heavy indebtedness.

The postponement of the payment in 2022 of an installment of 8% of the total debt of Laos was an encouraging sign, but much will depend on the ongoing negotiations, to which there is no alternative at the moment: the post-pandemic economic situation is stagnant , the depreciation of the local currency (the kip) last year was 70% against the dollar and tourism shows no signs of recovery.