Lao PDR's Economic Growth to Contract in 2020, First Time Since Late 1980s
VIENTIANE, LAO PEOPLE’S DEMOCRATIC REPUBLIC (15 September 2020) — Economic growth of the Lao People’s Democratic Republic (Lao PDR) will contract this year for the first time in decades, but will rebound next year as the country will start to recover from economic contraction caused by the coronavirus disease (COVID-19) outbreak, says a new Asian Development Bank (ADB) report released today.
The Asian Development Outlook (ADO) 2020 Update forecasts gross domestic product (GDP) to contract by 2.5% for Lao PDR this year—marking its first negative economic growth since 1986 and 1987, compared to -0.5% for the projection in ADO 2020 Supplement in June. However, growth is expected to rebound to 4.5% in 2021, suggesting a slow recovery, as the pandemic outbreak is expected to subside slowly.
“The COVID-19 outbreak has not only severed the economic growth in 2020 but hampered the government’s prospect to collect revenues. This situation will exacerbate fiscal deficit and increase public debt services pressure. Going forward, the government needs to improve macro-fiscal framework and accelerate public finance reform to create more fiscal space to buffer shocks”, said ADB Country Director for the Lao PDR Yasushi Negishi.
Agriculture is expected to grow at 1.9% in 2020, somewhat slower than the 2.5% projected in April for lower rainfalls, while industry growth is projected at 1.4% for the whole year. Service sector is projected to contract by 5.5% as tourist arrivals falling by 60% in the first half of this year and expected to cease altogether, and contraction in wholesale and retail trade, transportation, and hospitality. Disrupted inflows of foreign direct investment will shrink all investments in the country by 17.5%.
The inflation forecast for the Lao PDR this year is 5.5%, due to higher food prices and Lao Kip depreciation. For the first half of the year, Kip exchange rate depreciated by 1.6% against the US dollar in regulated commercial banks rate and by 5.7% on the parallel market rate. The large gap between the two markets reflects shortage of foreign currencies. Inflation for 2021 is projected to ease to 4.5%, as food prices are expected to decline due to a better harvest.
The current account deficit is expected to narrow this year more than earlier projected on the back of lower oil prices and lower demand for imports, as well as higher electricity exports, but will widen again in 2021.
Risks to the outlook are mainly on the downside of external vulnerability from meager international reserves and rising public debt, continuing pandemic-related losses, and ever-present exposure to natural hazards.
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.