Lao PDR’s economic growth is projected to be unchanged at 4.5% in 2026, driven by strong electricity exports, tourism revenue, and continued inflows of foreign direct investment, according to the International Monetary Fund ( IMF ).

But in a statement released in Washington on December 19, the IMF warns that “significant economic vulnerabilities remain” given the country’s negative net international investment position and low gross international reserves.

Public debt remains high at around 82% of GDP, with constrained access to international markets resulting in continued reliance on domestic bond issuance at below-market rates to contain borrowing costs.

The report, which follows two weeks of annual consultations by a visiting IMF team in November, also notes sizeable contingent liabilities from state-owned enterprises and the banking sector.

‘Dollarization pervasive’

Although the local currency has stabilized since plunging from 11,000 kip to the dollar in 2021 to almost 22,000 at the end of last year, “dollarization remains pervasive”, it says. 

“And despite some improvement, the still-concentrated commodity-oriented export base leaves the economy exposed to external shocks.”

At the same time, “low profitability and capital buffers in important segments of the banking system leave it vulnerable to adverse shocks. Governance challenges persist.”

Notwithstanding these vulnerabilities, “the near-term outlook is robust”, with a significant increase in minimum wages and relaxation of fiscal policy expected to boost domestic demand by raising disposable incomes in 2026.

Externally, the balance of payments has improved with favourable terms of trade this year, underpinned by higher metal prices and lower fuel costs along with Chinese debt service deferrals and stronger-than-expected growth in China, Thailand ,and Vietnam.

Meanwhile, inflation, as measured by average consumer prices, is forecast at around 7% for 2026, slightly lower than the estimated 8% this year and down sharply from more than 30% in 2023 when the kip was near its all-time low.

“But the medium-term outlook is subdued,” the report says, projecting growth to fall to 4.0% in 2027, 3.5% in 2028, and 3.0% in 2029.

“Growth is expected to moderate due to continued labour shortages and low productivity growth. Despite broadly stable exports, external balances are expected to weaken due to rising net income outflow.

“Moreover, assuming an unchanged monetary policy rate, a decline in real interest rates would induce capital outflows in time.”

Public debt ‘unsustainable’

Most debt burden indicators are expected to remain well above thresholds. “Therefore, public debt continues to be assessed as unsustainable,” the report warns. “Near-term risks to the outlook are on the downside.”

“Global risks stem from geopolitical tensions; escalating trade measures and prolonged policy uncertainty; commodity price volatility; and tighter global financial conditions.

“Domestic risks include unexpected private-sector outflows, potential policy reversals, and natural disasters. Banking sector stress could arise in the event downside risks were to materialize."

Over the medium term, however, the IMF notes possible benefits from efforts to deepen regional integration. “If well implemented, initiatives underway to upgrade connectivity, logistics and facilitate digital transactions, especially within… Asean, could substantially bolster growth and external balances,” it says.

Regarding the country’s aspiration to graduate from lower to upper middle-income status by 2030, the IMF warns that “premature easing of fiscal and monetary policies would be counterproductive” given the country’s multiple economic challenges.

“Instead, a strengthened monetary policy framework focused on maintaining price stability, an improved composition of fiscal policy – combined with accelerating fiscal, structural, financial sector and [state-owned enterprise] reforms – would not only boost macroeconomic stability, resilience and debt sustainability, but also help [Laos] move toward upper-middle income status in a sustainable manner,” it says.