After enduring one of the most severe macroeconomic shocks in Southeast Asia, Laos is showing early signs of economic stabilisation. However, a deep-rooted structural issue remains unresolved — the country’s heavy external debt.
The Crisis in Retrospect
The Laotian kip, long held steady against the US dollar, began a sharp depreciation in late 2021. This currency slide, driven by capital flight and weak foreign reserves, caused import prices to surge. Inflation skyrocketed to 31% in 2023 and stood at 23% in 2024.
The crisis was not an isolated event. It was the culmination of a decade-long borrowing spree. Between 2010 and 2022, central government debt increased from 49% to 130% of GDP. Much of this debt financed major infrastructure and energy projects, such as the $6 billion Vientiane–China railway and a wave of hydropower investments.
Foreign Investment: A Double-Edged Sword
China and Thailand have been the primary sources of this capital. While these investments spurred job creation and trade — with Laos’ electricity exports hitting $1.7 billion and China becoming its top export destination in 2023 — the returns did not always match the expectations.
In particular, overcapacity in the power sector, where demand projections failed to materialise, has strained the country’s ability to service its debt. As a result, net payments to foreign creditors ballooned. Net primary income outflows increased from $150 million in 2014 to $1.4 billion in 2022.
What Has Changed in 2025?
After losing over half of its value, the kip has now stabilised. Inflation is declining. The current account has moved into surplus territory, with consecutive positive quarters since late 2024.
In response, the central bank has strengthened its reserves, increasing foreign exchange holdings from $1.8 billion in early 2022 to $2.8 billion by September 2025. This has provided a modest buffer against external shocks and currency volatility.
Currency depreciation also made Laos’ exports more competitive, helping correct trade imbalances. But these gains alone are not enough to ensure long-term economic health.
The Elephant in the Room: Debt Sustainability
Despite these improvements, Laos’ external liabilities remain an existential threat to growth. The government has yet to negotiate meaningful debt restructuring. No formal relief efforts have been announced, even as debt-servicing pressures mount.
China, as Laos’ largest creditor, holds the key to any comprehensive solution. Instead of offering debt forgiveness or restructuring, both countries have chosen to double down on investment. While this may boost GDP figures in the short term, it risks repeating past mistakes if debt is not matched by tangible economic output.
Looking Ahead
To secure a sustainable recovery, Laos must achieve a better balance between foreign borrowing and long-term returns. This includes:
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Improving public revenue collection
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Restructuring underperforming energy assets
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Negotiating debt relief or rescheduling
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Attracting investment into export-driven sectors beyond energy
Without tackling these fundamentals, any macroeconomic stability may prove temporary. The recovery is fragile, and future risks — from interest rate hikes to commodity price shocks — remain potent.
Laos may be exiting the most acute phase of its economic crisis. But it’s not out of the woods. Unless the issue of external debt is addressed — either through renegotiation or genuine growth — the country will continue to walk an economic tightrope.