Lao Economy Grows Amid Inflation and Labor Challenges, Says World Bank Report

The Lao People's Democratic Republic (Lao PDR) has posted steady economic growth, driven largely by a resurgence in exports and tourism, as well as resilience in key sectors like agriculture, electricity, mining, and manufacturing, according to the May 2025 edition of the World Bank’s Lao Economic Monitor. Titled Weathering Risks, the report highlights both the momentum and fragility in Laos’ economic trajectory as the country contends with high inflation, persistent labor shortages, and a vulnerable financial sector.

The economy expanded by 4.1% in 2024, thanks to a 21% increase in foreign tourist arrivals, growing demand for cash crops like rubber and cassava, and strengthened infrastructure that boosted trade and service exports. Despite these gains, challenges loom on the horizon, with economic growth expected to moderate to 3.5% in 2025.

Inflation Threatens Purchasing Power and Private Sector Recovery

One of the most pressing concerns in the Lao economy is stubbornly high inflation, which continues to erode the purchasing power of households, weaken consumer spending, and drive up business costs—particularly for small enterprises already struggling with limited access to finance.

Inflation, although decelerating slightly, is expected to remain in double digits throughout 2025, raising concerns over macroeconomic stability and long-term investor confidence. According to Alex Kremer, World Bank Country Manager for Lao PDR:

“The actions of the Bank of the Lao PDR and the government have helped decelerate inflation. However, inflation remains high and further reforms would help promote economic stability.”

The inflation easing has been supported by a more stable exchange rate, continued monetary tightening, and improved fiscal revenue collection—aided in part by the reinstatement of fuel excise taxes and tighter tax administration.

Labor Shortages Constrain Industrial Output

The industry sector grew at a moderate pace in 2024, but the shortage of skilled and semi-skilled labor remains a major bottleneck. This constraint threatens both the competitiveness of Laos' manufacturing exports and the ability of firms to scale operations to meet rising demand.

While agriculture demonstrated resilience, benefiting from export momentum in livestock and cash crops, the sector also faces potential headwinds from climate variability, rural labor migration, and limited value-chain integration. These factors highlight the importance of diversification, mechanization, and improved market access for farmers.

Fiscal Pressure from Unsustainable Debt Levels

While Laos has made strides in public financial management, including the establishment of a Treasury Single Account to streamline government liquidity, public debt levels remain unsustainable. Debt repayments are projected to peak in 2025, significantly limiting the fiscal space for essential public investments in infrastructure, health, and education.

Moreover, the government's increasing reliance on domestic borrowing could lead to crowding out of private credit, especially for micro, small, and medium enterprises (MSMEs), which are already underfinanced.

Spotlight on MSMEs: The Engine That Needs Fuel

A special section of the report zeroes in on the challenges facing Laos' micro, small and medium enterprises, which form the backbone of the economy but suffer from systemic constraints. These include:

• Limited access to formal credit due to weak collateral, informal operations, and low financial literacy.

• A fragile financial sector that lacks adequate products tailored to the needs of MSMEs.

• Macroeconomic volatility that discourages lending and investment.

To support this vital sector, the World Bank recommends:

• Strengthening microfinance institutions (MFIs) to broaden financial inclusion.

• Establishing an independent credit facility dedicated to lending to MSMEs.

• Enhancing business development services and capacity-building programs focused on digital skills, financial management, and regulatory compliance.

These reforms could unleash new entrepreneurial energy and stimulate inclusive growth, especially in rural and peri-urban areas where small businesses are critical to employment.

Outlook: Balancing Growth and Reform

Despite the headwinds, the medium-term outlook for Laos remains cautiously optimistic, anchored by growth in energy exports, agriculture, and tourism. However, the report stresses that sustaining this momentum requires coordinated reforms to address inflation, improve workforce participation, and enhance the financial resilience of small businesses.

The government's efforts to mobilize domestic revenue, modernize fiscal institutions, and manage liquidity are positive signals. Yet, bold reforms in public debt management, labor policies, and SME financing will be crucial to ensure that the benefits of growth are broadly shared and resilient to future shocks.