Lao People’s Democratic Republic (PDR)’s rapid economic growth over the past twenty years has been driven by the exploitation of the country’s natural resources, with significant investments in the development of hydropower dams, mines and transport sector infrastructure. Much of this investment was undertaken with external parties in public-private partnerships, and involved significant debt commitments on the part of the government. 

As these commitments accumulated, government expenditure was increasingly dedicated to debt servicing, leaving the country in a fragile fiscal position with little margin to cope with unanticipated shocks. The combination of the Covid-19 pandemic and the war in Ukraine has disrupted economies across the globe, causing sharp declines in revenue as well as driving inflation in essential commodities, such as fuel. In Lao PDR, the timing of these shocks was particularly unfortunate, as they took place in the run-up to a period of sharply increased debt servicing when public finances were already under strain.

This document highlights possible avenues for capital-light public sector investment, which could result in alternative pathways to securing foreign exchange revenue over the short to medium term. Given current fiscal constraints faced by the government, now may be the right time for Lao PDR to shift away from its focus on capital-intensive hydropower development.