Laos’ Tourism-Driven Economic Recovery Hinges on China

Source: Nikkei Asia

Laos’ economy is recovering from a pandemic slump as the opening of a passenger railway link with China helps bring back tourists, but the country risks becoming more reliant on its northern neighbor as a result.

In April, the Asian Development Bank (ADB) revised the 2023 real GDP growth rate forecast for Laos to 4%, an upgrade of 0.5 percentage point and 1.7 points higher than in 2022. The growth rate had reached 4.7% in 2019, before the pandemic. The economy shrank in 2020 before expanding in the 2% range in 2021 and 2022.

The biggest growth factor is the revival of the tourism industry, which accounts for about 10% of gross domestic product. Foreign tourists in the January to April 2023 period reached 1.11 million, surpassing the number from January to June of the previous year, according to the government.

The ADB expects 2.6 million visitors for the full year, doubling from 2022. Although the figure pales in comparison to the 4.8 million visitors recorded in 2019, the tourism industry’s contribution to the economy is significant.

In April, passenger service began on the 1,000-kilometer cross-border railroad linking Kunming, in China’s Yunnan province, with the Laotian capital of Vientiane. About 60% of the $6 billion construction cost was covered with interest-bearing debt from the Export-Import Bank of China.

Trains run once a day in each direction between the two countries, stopping in the ancient capital of Luang Prabang, a United Nations World Heritage Site, and the town of Boten on the Chinese border.

There has been a sharp uptick in tourists, said a Luang Prabang resident who opened a cafe when railway service started, adding they hoped more trains would come through.

In May, the Laotian government took the unusual step of announcing a three-year plan to attract tourists from one specific country: China. The country ranks third in foreign visitors to Laos after Thailand and Vietnam. Chinese tourists, who tend to spend more, can have a large economic effect.

The number of Chinese tourists this year was expected to increase 20% year-on-year to about 370,000, but the number has already passed 200,000 as of April. The government’s plan includes training Chinese-speaking guides, increasing flights from Chinese cities, and promoting electronic payments. Private companies are encouraged to contribute to the efforts.

The Chinese government is also encouraging its citizens to travel to Laos, including the country on a list of 20 approved destinations with the lifting of a ban on overseas group travel in February.

The degree to which Laos’ economic recovery depends on China carries risks concerning influence. The use of the yuan is widespread in some of the cities served by the railroad. A highway built on the outskirts of Vientiane in 2020 also had investment from China.

Soaring prices for natural resources added to Laos’ economic slump during the pandemic, and as of the end of 2021, public debt had risen to nearly 90% of GDP. China accounts for almost half the external debt.

“If Laos’ dependence on China increases, it could lead to interference in domestic affairs,” said Kenichiro Yamada, a representative at the Japan External Trade Organization office in Vientiane.

There is also concern that the economic recovery will fall short due to worsening public finances. At the end of May, the Laotian kip was down 32% against the dollar from a year earlier due to factors like soaring debt and decreased confidence in the currency. An increase in the price of imported fuel, which the country relies on, could cause consumer spending to stall.