Inflation in Laos reaches 22-year high as economic crisis deepens – The Diplomat

Inflation continues to spiral out of control in Laos, as the country’s statistics office announced this week that year-on-year inflation in the country rose to a 22-year high of 23.6 percent in June. According to a report in the state newspaper, the Vientiane Times, the consumer price index last month jumped sharply above the 12 percent ceiling rate set by the government, which was already breached last month, when year-on-year inflation touched 12.8 percent.

The alarming inflation numbers are the latest indication of the economic storm that continues to batter the country’s heavily indebted economy. In recent months, Laos has been hit by the double shocks of high oil prices and a rapid devaluation of the currency, which has led to wild increases in energy and consumer goods prices. The local currency, the kip, has collapsed in value. As recently as September, one US dollar traded for just over 9,300 kip, a rate that has since fallen to around 15,000.

As a result, the Vientiane Times reported that gasoline, gas and gold prices rose 107.1 percent, 69.4 percent and 68.7 percent, respectively, in the year to June. It also reported that “the cost of imported foodstuffs, spices, non-alcoholic beverages, clothing, shoes, medicines, construction equipment, vehicles, spare parts and other goods rose significantly.” In the words of usually sober newspapers, these upward pressures “continue to deepen hardship and create new pains for Common Lao”.

The fuel price crisis was perhaps the most visible indicator of the economic crisis, with motorists forced to queue for hours in the capital, Vientiane, in May due to fuel shortages caused by the government’s lack of available foreign currency. With diesel prices rising by margins similar to fuel, the fuel crisis also threatens to halt agricultural production, as farmers struggle to keep needed machinery running.

Looming issue of debt. Laos currently owes $13.3 billion in sovereign debt, much of which has financed the construction of large-scale infrastructure projects, many of them backed by China, including the impressive and undeniably high-speed railway that connects Vientiane to the Chinese border. After COVID-19 hit the country in 2020, draining its foreign reserves and leaving it at great risk of default.

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As David Hutt of The Diplomat recently pointed out, the economic crisis is now beginning to take on a political dimension. Last month, Prime Minister Phankham Vivavanh was forced into a cabinet reshuffle in a bid to control the economic situation. On June 6, Vankham formed a belated special task force to address the country’s economic problems, in particular, to solve the fuel shortage problem.

The nation has since seen a temporary reprieve from the fuel crisis after the government issued a line of credit to state fuel importers, allowing them to import enough fuel to keep the country running through the end of August. The government has also raised the national minimum wage to help those most affected by the rising cost of living.

But these are best seen as piecemeal measures that will do little to solve the structural challenges facing the economy. This includes endemic corruption and tax evasion, which has admittedly starved the state of revenue, and an infrastructure-based development strategy that has left the country vulnerable to external shocks and saddled with debt to a single creditor (China).

There is no doubt that the government of Laos will introduce more measures to stave off the worst effects of the crisis on ordinary people, but a more lasting solution to the country’s economic problems seems far off.

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