The growth of the past two decades in Laos was predominantly driven by large-scale investments in capital intensive sectors, particularly in mining and hydropower. However, these investments have failed to support job creation, and some have entailed considerable environmental costs.

Moreover, public investment in the power sector has been mostly financed by external debt — often on commercial terms. In 2021, the new Prime Minister announced seven priorities, vowing to tackle public debt and revenue leakages, boost exports, counter corruption and create more job opportunities. The Government has also pledged to foster quality growth and reduce reliance on the natural resource sector, to increase access to basic public services, especially health and education, and to place more emphasis on human resource development. Meeting these challenges will require a sizable increase in all resources, but the outlook for financing remains uncertain.

Growth in public finances is needed to provide public services and infrastructure to the most marginalized rural communities. However, there are constraints to revenue collection, and increased non-concessional borrowing has meant that the Government is facing higher budgetary interest payments, which are constraining its fiscal space. Foreign direct investment (FDI), which has been central to past increases in private finance, is set to decline significantly as hydropower projects are finalized and due to a moratorium on new mining concessions. Poor infrastructure and the lack of a skilled workforce have negative impacts on manufacturing growth, and laws restricting foreign participation in the tourism industry create barriers to increasing FDI in other areas.

While portfolio equity and domestic private finance resources have increased following the introduction of a securities exchange market, the number of companies listed has stagnated as have levels of investment. Domestic private finance has been constrained by high interest rates on commercial borrowing and by lack of access to financing, particularly for small and medium-sized enterprises (SMEs). Laos remains highly dependent on international public resources compared with other ASEAN countries, particularly in certain social (e.g., health, education, and social welfare) and economic sectors (e.g., agriculture). The GoL faces potential challenges in maintaining levels of investment, as certain development partners are re-prioritizing investments to other geographic areas (e.g., Gavi and the Global Fund), and graduating from LDC status may see the modality of official development assistance (ODA) shift away from grants.


In FY (Financial Year) 2015/2016 there was a fall in revenue both in real terms and as a percentage of GDP (to 16.2%), due to falling global mineral prices and lower than expected non-resources revenue (especially value-added tax (VAT) and excise duty), at local and national government levels. This had a significant impact on the fiscal deficit and necessitated a revision of the budget to curtail government expenditure. Despite this setback, the GoL sees significant potential to expand domestic public resources, and this is a key driver of its financing policy in national development plans.


Key policies and governance approach

The country’s Vision 2030 and its 8th Five-Year National Socio-Economic Development Plan (2016–2020) (NSEDP) provide a clear overarching direction and a guiding policy framework up to 2020, which has broad buy-in across government as well as with development partners. The Government has recently drafted a Public Finance Strategy to 2025, which is linked to the NSEDP, although it operates on an annual budgeting cycle rather than a medium-term one, which means that there is a lack of coordination between this strategy and development planning. There are also several sectoral and thematic development plans that detail activities alongside financing needs and expected sources, although their coverage and quality vary.

The Vientiane Declaration on Partnership for Effective Development Cooperation (2016–2025) (VDPEDC), the 8th NSEDP and the sector work plans, as part of the country’s Round Table Process (RTP), have provided a framework for successfully aligning support from development partners. The lack of a clearly defined private sector strategy, however, has hampered the focus on shaping private sector development that would finance the desired outcomes of the NSEDP and prepare the country for sustainable LDC graduation.

Overseas public development assistance has played a major role in financing development in Laos, and it continues to do so. Since 2000, levels of international public resources have remained relatively stable in real terms, with the result that this form of financing now provides a smaller proportion of development financing overall. However, in 2015 it was significantly higher than the proportion for the ASEAN or CLMV country groupings, at 23%. The Law on Investment Promotion (amended 2016) emphasizes the promotion of co-investment between public and private sectors (PPP) in large projects which need large investment, technology, and innovation to reduce the financial burden and investment risk, increase effectiveness, efficiency, transparency, and sustainability in project management in infrastructure projects.



More financial resources are needed to attain the SDG targets by 2030, especially in the field of infrastructure. This can be helped by better investment promotion, but it depends on market development and the country’s appeal to investors. Creating new market is a strategic endeavour, which needs to be developed through policy making. SDG financing in Lao PDR is still dependent on external sources. Despite the current limited capacity of the domestic banking system, diversifying these sources to include more domestic financing could be a good start. Increasing capitalisation and the number of listed companies on the capital markets could provide for one of these diversification channels provided both the market and the financial architecture are ready for it.


Initiatives and Development Plans

In July 2017, the Government approved Vision 2030 and the Public Finance Strategy to 2025, followed by Ministerial approval of an implementation strategy in early 2018. The Public Finance Strategy 2025 was developed in response to a comprehensive review of Lao PDR public financial management (PFM) reform efforts during 2000–2015 where significant progress was made in the areas of budget reforms, new and revised legislation, customs reform, treasury modernization and intergovernmental fiscal relations. Reforms during this period still lacked an overarching framework to guide, prioritize and build on progress. In addition, towards the end of the period, the PFM reform agenda slowed down considerably, which led to the appointment of a new government in 2016 with a specific mandate to restart PFM reforms.

The Public Finance Development Strategy to 2025 provides a detailed and prioritized framework to guide reforms and links policy, planning and budgeting. It also places greater emphasis on a multiyear perspective on expenditure policy and budgeting to strengthen the overall allocative efficiency across key sectors.


Goals and Ambitions

In the 9th NSEDP, the GoL set a target to seek a financial source of 205,599 billion LAK within 5 years for development, equivalent to 19.4% of GDP. There is domestic finance of 22,950 billion LAK, equal to 11% of total investment fund. The fund from ODA is 37,344 billion LAK, equal to 18% of total investment fund. The target for private fund from domestic and foreign sources is 100,000 billion LAK, equal to 49% of total investment fund. “Other” investment fund amount to 44,305 billion LAK, equal to 22% of the total investment funds.

The proportion devoted to sustainable or “green” finance is not known. In the last year available, public expenditure on the environment was estimated at just under US$0.6 million in 2005. From 2013-2014, US$223 million in ODA flows supported climate change projects in the country, with around half going towards activities to support climate change adaptation. The OECD Investment Policy Review in 2017 noted that “lack of sustainable financing for environmental initiatives is an ongoing challenge for green growth in Lao PDR”.

  • Laos will need to improve labour skills, weaning investment inflows away from reliance on unskilled labour and intensive use of natural resources.
  • Mapping Research and Innovation in Lao People’s Democratic Republic demonstrates the need to develop a range of operational policy instruments to encourage R&D and innovation, including human resource development. Measures could include incentives for students to complete a PhD programme for green investment.