Executive Summary Extract
Macroeconomic conditions improved noticeably in 2025, supported by a more stable exchange rate, easing inflation, and gradual economic recovery. Growth is projected at 4.2 percent in 2025, driven by tourism, transport, steady expansion in energy, mining, and manufacturing, and stronger non-rice crop production. Improved external demand has supported exports, offsetting impacts from fiscal tightening. Inflation has eased considerably, with headline consumer price inflation averaging 8.5 percent over the first ten months of 2025, down from 24.5 percent a year earlier. This improvement reflects stable exchange rates, tighter macroeconomic policies, softer global commodity prices, and better domestic food supply. In turn, lower inflation has reduced pressure on private consumption, while investment remains stable.
The external position strengthened in 2025, supported by a sizable current account surplus, itself driven by strong merchandise exports, and growth in tourism and transport services. These inflows helped offset continued net financial outflows from debt repayments. A combination of stable foreign direct investment and the current account surplus have resulted in an overall balance of payments surplus and enabled a gradual rebuilding of foreign exchange reserves, which rose to $2.8 billion by September (equivalent to three months of imports). Despite these gains, reserve buffers remain low relative to external financing needs, and the kip remains vulnerable to shifts in external conditions.
The fiscal accounts show a surplus in 2025 as domestic revenues strengthened while expenditure growth remained moderate. The fiscal and primary balances are estimated at 1.6 and 4.7 percent of GDP in 2025, supported by strong revenue performance. However, gross financing needs remain high due to substantial external debt repayments, prompting continued reliance on debt-service deferrals and diverse financing sources. Renewed access to international bond markets in November has reduced pressure on financing from the domestic banking sector and helped improve the medium-term repayment profile. Though public debt has declined from its 2022 peak, it remains elevated, largely external, with concentrated exposure to bilateral creditors, and significant contingent liabilities from State-Owned-Enterprises. This leaves the fiscal outlook vulnerable despite recently improved macroeconomic conditions. High interest payments continue to crowd out social sector spending.
Monetary conditions remain tight in 2025, with reserve money expanding more slowly and real interest rates rising. Reserve money growth eased to 4.7 percent year-on-year in September 2025—similar to last year and far below the 26 percent expansion of 2023—as rising net foreign assets were offset by Bank of the Lao PDR (BOL) bond issuance and tighter treasury management. Although the BOL reduced the policy rate, the decline in inflation pushed real interest rates into positive territory in May, raising the real cost of borrowing and keeping credit conditions tight. Broad money growth moderated to 15 percent by September, supported by rising deposits amid weakening credit demand and positive real interest rates. While the banking system remainsadequately capitalized, underlying vulnerabilities persist. These are reflected in uneven capital buffer and non-performing loans , and declining profitability, underscoring the need for continued supervisory vigilance. While key elements of the financial safety net and supervisory framework are in place, further strengthening is needed to enhance resilience.
Looking ahead, growth is expected to remain stable in 2026, with services and resource-based sectors continuing to drive activity. However, the medium-term outlook remains constrained by low productivity, skill shortages, and infrastructure gaps. Inflation is projected to edge up slightly in 2026 due to higher consumption following fiscal easing. The current account is expected to post a smaller surplus, supported by exports, tourism, and steady foreign direct investment (FDI) inflows, though reserve buffers will remain thin relative to external financing needs. The fiscal surplus is expected to narrow in 2026 as stronger revenue collection is offset by increased wages. While higher wages should support consumption, they will constrain fiscal space for non-wage recurrent spending amid sizable interest payments. Overall, the outlook remains subject to domestic policy implementation and external risks, especially slower growth among major trading partners. However, sustained reforms and deeper regional integration could help ensure a positive outlook.
Consolidating the recent reform momentum for stability and growth will require further actions in the following critical reform areas: (i) raising revenues (through reducing tax exemptions, reinstating fuel excise taxes, and reforming health excise taxes on tobacco and alcohol), while boosting spending on social services and infrastructure maintenance; (ii) establishing a strong institutional and legal framework for public–private partnerships; (iii) expediting ongoing debt renegotiations and strengthening public debt and contingent liability management; (iv) enhancing bank supervision; and (v) improving the business environment to promote investment and export diversification by digitizing business registration and licenses and streamlining non-tariff measures.