Two years into the COVID-19 pandemic, Laos’ economic future looks precarious, bogged down by massive public debt and an economic strategy overly reliant on power generation.
The World Bank reported in August 2021 that Laos’ public debt has climbed to U.S. $13.3 billion, or 72 percent of its gross domestic product. Most of the debt was incurred by the energy sector, with the state-owned Electricité du Laos (EDL), accounting for 36 percent.
Laos has built dozens of hydropower dams on the Mekong and its tributaries and is building about 50 more under a plan to become the “Battery of Southeast Asia” and export the electricity they generate to other countries in the region, mainly Thailand.
Additionally, Laos and China in December completed a $6 billion high-speed railway project linking the Lao capital Vientiane with China’s Yunnan province. Though Laos only has a 30 percent stake in the project, it still needed to borrow heavily from China to fund what it pledged to the project.
The World Bank said Laos owes a total of $1.3 billion in debt service each year through 2025 and estimated that servicing the annual bill would reach 52.5 percent of public sector revenue in 2021, considered high for low-income countries. It noted that Laos’s obligations far exceed its reserves, recommending a shift in focus to “managing debt in a more sustainable and transparent manner.”
Two international credit rating agencies in 2020, Moody’s and Fitch Ratings, downgraded Laos’ sovereign rating, meaning they believe the country has a high likelihood of defaulting.
Fitch said in an August 2021 report that almost half of Laos’ external debt over the next few years must be paid to China. The two sides have worked together on the debt issue previously, with Laos asking for a debt suspension agreement, and the People’s Bank of China swapping yuan with the Bank of the Lao PDR in 2020 to help boost reserves of foreign currency, Fitch noted.
At an October meeting of the Lao National Assembly, the minister of finance warned that interest payments will sharply increase over the next five years on public debt that stood at $13 billion in 2020.
“The government will have to pay $414 million a year in interest alone, so we must tighten our belts,” Finance Minister Bounchom Oubonpaseuth said.
Negotiating with China will be key to getting Laos out of its debt problems, and there are four possible options, a foreign journalist and analyst who has covered Laos extensively, told RFA’s Lao Service on condition of anonymity.
“You can suspend … and give a longer time to pay the debt. They can cancel the debt. … They can ask Laos to settle for a foreign currency swap between the Bank of Laos and the People’s Bank of China. Or, China can loan money to Laos to pay the debt.”
EDL heavily indebted
Chanthaboun Soukaloun, managing director of Electricité du Laos, told the annual general meeting on February 11 that EDL has been losing money for years and has accumulated $5 billion in debt. The loss is affecting EDL’s ability to repay its loans, the Lao government news agency, KPL reported.
“The government has been aware of the debt. Everybody and every department of the government must help repay our debt, but we at the EDL don’t have money,” an EDL official, who requested for anonymity for safety reasons, told RFA Feb. 17.
“The government knows that EDL owes a lot of money to EGAT (Electricity Generating Authority of Thailand), and that the EDL doesn’t have money to pay them back,” he said.
The debt rose sharply over the past decade as EDL borrowed significant sums from foreign countries, especially Thailand and China, to build dams, install power lines and invest in other power related businesses.
But some of the dams have not been productive due to a lack of water, while other dams with sufficient resources produce power that nobody is buying.
The EDL has an obligation to purchase the electricity generated by the dams at high prices but must sell it at lower prices to companies in Thailand and China.
Additionally, EDL owns only 10 of Laos’ 88 currently operational dams, while the rest belong to foreign investors, who sell the power they generate to EDL at high prices.
Despite the excess electricity, power prices remain too high for many domestic customers to pay, which is why the company is losing money, the official said.
The power business favors foreign investors, an official from the Ministry of Energy and Mines told RFA.
“Of course, they pay all taxes and royalties to the government, but the government has huge expenses, such as paying out compensation” to people displaced by hydropower projects, the energy official said.
Compensation for households, or even entire villages displaced by dams and infrastructure projects has been a source of friction for years. Many rural villagers have told RFA that the offered compensation is far below the value of the property they are giving up, and they trade fertile farm land for remote parcels of land with poor soil.
For those that accept, the government sometimes struggles to pay out compensation in a timely manner, with relocated families waiting years for payment in some cases.
In this March 2020 file photo, employees of the Électricité du Laos (EDL) work on a power line in Vientiane, Laos. Credit: Citizen Journalist
Another problem for EDL is that it anticipated higher electricity prices when it signed agreements to buy electricity from the dam investors, with the eye of selling it for higher to its buyers.
EDL is obligated to buy the electricity from most of the dam projects for $0.06 per kilowatt hour but currently can only sell it for $0.04 to companies in China’s Yunnan province or $0.05 to companies in Thailand.
Many Lao citizens blame EDL’s problems on corruption, which has plagued the inner workings of Laos’ national and local governments for decades.
Berlin-based Transparency International’s 2020 Corruption Perceptions Index ranked Laos 134 of 180 countries it evaluated in fighting corruption.
Prime Minister Phankham Viphavanh pledged to stamp out corruption, bribery, fraud and other malfeasance by state officials in a speech to the Lao National Assembly in August, and in December, Laos stepped up the campaign against corruption by expelling corrupt officials from the Lao People’s Revolutionary Party, the country’s sole political party.
Corruption is so pervasive in Laos that many of its citizens suspect it is the reason EDL is losing so much money.
“EDL must inspect and closely monitor its employees at all levels, making sure that they don’t abuse power and seek personal financial gain,” a Lao businessman told RFA. “Widespread corruption leads to financial leaks and massive debts.”
EDL must be reorganized, a resident of the southern province of Champassak, told RFA.
“EDL’s employees and management team are running the company for their own benefit, not for the company or the state. First and foremost, actions for personal benefit must be stopped,” the Champassak resident said.
A resident of the capital Vientiane slammed EDL’s lack of transparency.
“There are no financial reports published. There must be a lot of corruption going on. That’s why the company is in such a big debt,” he said.
An EDL affiliate in a letter last year asked several Thai companies for a longer grace period in repaying debt, due to the COVID-19 pandemic and rapid inflation.
Prime Minister Phankham Viphavanh told the Lao National Meeting in November that the government was in the process of reforming several large state enterprises, including EDL, because of massive debt problems.