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Laos Economic Crisis Intensifies Amid Chinese Debt

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The escalating debt crisis in Laos is pushing the country toward a meltdown and even experts believed that Vientiane is on the brink of loan default.

Laos' low foreign exchange reserves make experts worried that the southeast Asian nation might be embarrassingly close to a loan default, Financial Post reported.

Anushka Shah, vice president, and senior credit officer at Moody's Investors Service said, "It (Laos) is on the brink of default," according to Financial Post citing a DW report in August.

Laos owes about half of its foreign debt to China, which opened the gate for infrastructural projects.

China lent the money for the projects such as hydropower plants, publicly guaranteed debt and railway lines. Mostly, the loans for infrastructural projects came from the China Development Bank (CDB) and the Export-Import (Exim) Bank of China.

Even before the onslaught of COVID-19, the World Bank and IMF through the Low-Income Country Debt Sustainability Framework had identified Laos as potentially suffering from a high risk of debt distress.

The accumulation of sovereign debt in itself is not necessarily a problem, but Laos' position as a small, emerging economy placed the country at heightened risk of distress. Funding for resource projects had produced a mismatch between the longer-term mobilization of state revenue and the short-term maturity of debt obligations, according to Financial Post.

The Covid situation also played an important role in affecting the Laos economy. Due to the COVID situation, the country saw a massive decline in tourism revenue, a breakdown of supply chains, and a loss of up to USD 100 million in remittances from workers forced to return from Thailand have added to the financial cost of the pandemic.

In discussions over Laos' debt distress, attention often focuses on the Laos-China Railway project, financed through China's Exim Bank under the umbrella of the Belt and Roads Initiative. The construction cost of USD 5.9 billion (one-third of Lao GDP in 2017) is shared between Lao PDR and China at a ratio of 30/70, but the high costs nevertheless present risks.

Forty per cent of construction is funded through equity, with one-third provided by the Lao Government (partially funded through loans from the Export-Import Bank of China) and the remaining two-thirds funded by China. The remaining 60 per cent of costs will be funded through loans taken on by the Lao-China Railway Company, a State-owned Enterprise with 30 per cent Laos and 70 per cent Chinese ownership.

While the Government of Laos is optimistic for this railway to serve as an export and trans-shipment gateway between the Mekong region and China, there is also a high probability that the railway will be unprofitable in the coming years, according to Financial Post citing 2020 Asian Development Bank Institute (ADBI) working paper contributed by J A Lane.

Laos owes about half of its foreign debt to Chinese enterprises, and the government seems to negotiate with Beijing directly on restructuring some of its debts. However this process pans out in the short term, and the country's economic challenges appear far from over, reported Financial Post. (ANI)

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