Lao PDR: Economic Recovery Challenged by Debt and Rising Prices – Modern Diplomacy

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While sectors of the Lao economy are beginning to recover from the slowdown caused by COVID-19, the country faces stiff challenges associated with long-standing macroeconomic imbalances, according to the World Bank’s latest economic update for the Lao People’s Democratic Republic.
Increasing public debt levels and rising global prices are endangering macroeconomic stability and threatening living standards, according to the Lao PDR Economic Monitor — Restoring Macroeconomic Stability to Support Recovery.
Laos’ economy is forecast to grow by 3.8 percent in 2022, up from an estimated 2.5 percent in 2021, provided that ongoing debt renegotiations are successful and that strict COVID-19 containment measures do not return. The country currently enjoys a trade surplus and continues to attract foreign investment. The energy and mining sectors have been buoyant, while agricultural and manufacturing exports are supported by strong external demand and higher commodity prices. A gradual recovery is also expected in domestic services.
However, inflation reached 9.9 percent in the year to April 2022, up from under 2 percent last year, while long-term job losses and business closures caused by the spread of COVID-19 continue to put pressure on household incomes. With prices rising faster than earnings, many low-income families are at risk of falling into poverty, especially in towns and cities.
“Problems caused by two years of lockdowns and restrictions for COVID-19 are now being compounded by rising prices, especially for fuel and food, partly because of the war in Ukraine and the rapid depreciation of the kip,” said World Bank Country Manager for Lao PDR Alex Kremer. “For Laos, because of government debt and poor revenue collection, the situation is particularly challenging. The top policy priority is therefore to increase public revenue by reviewing tax exemptions.”
Public debt levels have increased considerably since 2019, increasing to 88 percent of GDP in 2021, with the energy sector accounting for over 30 percent of the debt stock. Foreign currency reserves remain low.
The report recommends restoring macroeconomic stability, chiefly by increasing both revenue collection and spending efficiency. The country also needs to strengthen debt management and transparency, to improve the stability of the financial sector through legal and regulatory tools, and to scale up targeted cash transfers to the poor.
The latest Lao Economic Monitor also looks at Laos’ gradual transformation from a land-locked to a land-linked country through infrastructure development, and suggests several reforms that could reduce the risks and maximize the benefits of the large investments being made in roads, rail, and logistics parks. These reforms include building connecting roads to ensure that farmers and businesses can access new infrastructure, making border crossings more efficient, and improving the business environment to attract investment and generate jobs. Laos should also promote sectors where it has a comparative advantage, for example, in high-value added manufacturing goods, agricultural products, and nature-based tourism.
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Kicking off a three-day meeting on Friday on the fallout from Russia’s invasion of Ukraine and its wider impact on food and energy prices, the head of the UN agriculture agency outlined key ways for governments to help safeguard global food security.
Under the theme Securing Global Food Security in Times of Crisis, QU Dongyu, Food and Agriculture Organization (FAO) Director-General, told agriculture ministers from G7 wealthy nations gathered in Stuttgart, Germany, that the most significant threats stem from conflict, and the associated humanitarian impact, together with multiple overlapping crises.
“Crisis represents a challenge for food security for many countries, and especially for low‑income food import dependent countries and vulnerable population groups,” he said.
Based on the Global Food Crises Report released on 4 May, last year around 193 million people in 53 countries/territories were officially in the Crisis phase, or worse (IPC/CH Phase 3 or above).
Other 2021 data revealed that 570,000 people in four countries were in the category of Catastrophe phase (IPC/CH Phase 5).
Just over 39 million in 36 countries faced Emergency conditions (IPC/CH Phase 4); while just above 133 million in 41 countries were in IPC/CH Phase 3. A total of 236.2 million people in 41 countries were living in Phase 2 conditions.
“Price increases always have food security implications, particularly for the poorest,” Mr. Qu reminded.
On top of already “high prices driven by robust demand and high input costs” resulting from COVID-19 recovery, the FAO chief noted Ukraine and Russia as important players in global commodity markets, explaining that uncertainty surrounding the war has prompted further price increases.
Wheat, maize, and oilseed prices have surged in particular.
At 160 points, the FAO Food Price Index reached its highest level ever in March, averaged 158.2 points in April and remains today at a historical high.
Mr. Qu said FAO’s proposed Food Import Financing Facility would be an important tool for easing the burden of rising food import and input costs, potentially benefitting 1.8 billion people, across 61 of the most vulnerable countries.
Since the start of the conflict in February, export forecasts for Ukraine and Russia have been revised down as other market players, notably India and the European Union, have increased exports.
“This partly compensated for the exports ‘lost’ from the Black Sea region, leaving a relatively modest gap of about three million tonnes,” said the FAO chief.
He observed that wheat export prices surged in March, continued to edge upwards in April, and will likely “remain elevated in the coming months”.
He also called on governments to “refrain from imposing export restrictions, which can exacerbate food price increases and undermine trust in global markets”.
Turkey, Egypt, Eritrea, Somalia, Madagascar, Tanzania, Congo, Namibia and other countries dependent upon Ukraine and Russia for wheat have been greatly impacted.
Mr. Qu said that these States need to identify new suppliers, “which could pose a significant challenge, at least in the next six months”.
At the same time – with levels ranging from 20 to more than 70 per cent – Brazil, Argentina, Bangladesh, and other nations, are reliant on Russian fertilizer for their crops.
While Africa overall accounts for only three to four per cent of global fertilizer consumption, Cameroon, Ghana and Ivory Coast are amongst the most vulnerable countries, relying heavily on Russian supplies.
“We need to assure that key food exporting countries have access to the needed fertilizers to assure sufficient food availability for the next year,” said the top FAO official, encouraging all countries to improve fertilizer efficiency, including through soil maps and improved application.
To support farmers’ access to crop and livestock in the immediate and medium‑term, FAO has developed a Rapid Response Plan for Ukraine, which outlines three key actions.
The first is to maintain food production through cash and inputs for cereal crops in October, vegetable and potato production in the spring, and harvest support in July and August, for the upcoming winter crop.
Secondly, the plan advocates for bolstering agrifood supply chains, value chains and markets through public-private partnerships that provide technical support to household level and smallholder producers.
And finally, it stresses the importance of ensuring accurate analyses of food security conditions and needs as they evolve.
“Coordinated action for Ukraine within this group is indispensable to facilitate the smooth functioning of global food markets and thus to secure food supply for all,” said the Director-General
“FAO stresses the need to support the continuity of farming operations within Ukraine; while supporting agrifood value chains”.
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In the last thirty years, Poland was one of the fastest-growing economies in the world. To continue to catch up with the advanced economies of Western Europe, the country should support firm productivity improvements through relevant public instruments, including those targeted at small and medium-sized enterprises, according to a new World Bank report. The report was developed in partnership with Statistics Poland, which prepared the data and collaborated with the World Bank team on econometric calculations and analyses (conclusions and recommendations related to the public policy expressed in the report belong to the World Bank).
Over the last three decades, Poland’s GDP tripled in size, and in 2009 the country achieved high-income status, according to World Bank methodology. Still, with a per capita income at two-thirds of the per capita figure in the ‘old European Union’ member states, Poland has yet to catch up with the countries of western Europe.
The gap is visible at the individual firm level, too. For instance, an average industrial firm in Poland needs three times more staff than its German counterpart to produce the same product. In addition, the World Bank report reveals that the total factor productivity (TFP) growth in the manufacturing sector in Poland has stagnated since 2012, and the expansion of the manufacturing industry has come predominantly from increasing capital intensity.
“Despite the turbulence in the world economy caused by the 2008-2009 financial crisis and the COVID-19 pandemic, Poland’s dynamic yet steady development serves as a model of economic success,” says Marcus Heinz, Resident Representative of the World Bank in Poland and the Baltic States. “The country still faces significant challenges, such as addressing low investment levels and the challenge of an aging society. This report highlights that one way to keep the development dynamics is to invest in firm productivity and it presents recommendations in this regard”.
To begin with, strengthening managerial skills and workforce skills, providing business advisory services, and facilitating entrepreneurial networks and clusters could help improve Poland’s performance on key innovation and digital economy indicators. Currently, Poland is ranked 23rd in the European Union’s Digital Economy and Society Index and 24th on the Innovation Scoreboard. World Bank research shows that about fifty percent of firms in Poland are yet to start using the most basic management tools.
Secondly, given that small and medium-sized enterprises are the engines of productivity growth in Poland, they should be supported with public policies that eliminate barriers, including regulatory and financial barriers to market entry and competition. Moreover, policy interventions need to address potential barriers to SMEs adopting digital technology. According to World Bank research findings, nearly half of the firms in Poland declare they do not need to invest in digitization.
Thirdly, country economic policy should focus on supporting exports and linking Polish companies to global supply chains. This can be facilitated with such measures as foreign trade promotion and investments in reducing the cost of the export activity (e.g., streamlined certification policy), as well as awareness building in the business community.
The World Bank has supported Polish institutions in their efforts to improve economic competitiveness and productivity, including at the local level. For example, World Bank’s expertise and recommendations were instrumental in the establishment of Podkarpackie Innovation Center in Rzeszów, with the mission to help bridge the gap between science and business communities in research, development, and innovation.
The report, which was published today titled “Paths of Productivity Growth in Poland: A Firm Level Perspective”, was carried out with funding by the European Union via the Structural Reform Support Programme and with the support and the partnership of the European Commission’s DG REFORM.
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Officially recorded remittance flows to low- and middle-income countries (LMICs) are expected to increase by 4.2 percent this year to reach $630 billion. This follows an almost record recovery of 8.6 percent in 2021, according to the World Bank’s latest Migration and Development Brief released today.
Remittances to Ukraine, which is the largest recipient in Europe and Central Asia, are expected to rise by over 20 percent in 2022. However, remittance flows to many Central Asian countries, for which the main source is Russia, will likely fall dramatically. Thesedeclines, combined with rising food, fertilizer, and oil prices, are likely to increase risks to food security and exacerbate poverty in many of these countries.
“The Russian invasion of Ukraine has triggered large-scale humanitarian, migration and refugee crises and risks for a global economy that is still dealing with the impact of the COVID pandemic,” said Michal Rutkowski, Global Director of the Social Protection and Jobs Global Practice at the World Bank. “Boosting social protection programs to protect the most vulnerable, including Ukrainians and families in Central Asia, as well as those affected by the war’s economic impact, is a key priority to protect people from the threats of food insecurity and rising poverty.”
During 2021, remittance inflows saw strong gains in Latin America and the Caribbean (25.3 percent), Sub-Saharan Africa (14.1 percent), Europe and Central Asia (7.8 percent), the Middle East and North Africa (7.6 percent), and South Asia (6.9 percent). Remittances to East Asia and the Pacific fell by 3.3 percent; although excluding China, remittances grew 2.5 percent. Excluding China, remittance flows have been the largest source of external finance for LMICs since 2015.
The top five recipient countries for remittances in 2021 were India, Mexico (replacing China), China, the Philippines, and Egypt. Among economies where remittance inflows stand at very high shares of GDP are Lebanon (54 percent), Tonga (44 percent), Tajikistan (34 percent), Kyrgyz Republic (33 percent), and Samoa (32 percent).
“On the one hand, the Ukraine crisis has shifted global policy attention away from other developing regions and from economic migration. On the other hand, it has strengthened the case for supporting destination communities that are experiencing a large influx of migrants,” said Dilip Ratha, lead author of the report on migration and remittances and head of KNOMAD. “As the global community prepares to gather at the International Migration Review Forum, the creation of a Concessional Financing Facility for Migration to support destination communities should be seriously considered. This facility could also provide financial support to origin communities experiencing return migration during the COVID-19 crisis.”
Globally, the average cost of sending $200 was 6 percent in the fourth quarter of 2021, double the SDG target of 3 percent, according to the Bank’s Remittances Prices Worldwide Database. It is cheapest to send money to South Asia (4.3 percent) and most expensive to send to Sub-Saharan Africa (7.8 percent).
The costs of sending money to Ukraine are high (7.1 percent from Czech Republic, 6.5 percent from Germany, 5.9 percent from Poland, and 5.2 percent from USA). The global goodwill towards refugees and migrants from Ukraine opens an opportunity to develop and pilot programs to facilitate their access to jobs and social services in host countries, apply simplified anti-money laundering and counter-terrorist financing procedures for small remittance transactions to help reduce remittance costs and mobilize diaspora bond financing.
The war in Ukraine has also affected the international payment systems with implications for cross-border remittance flows. The exclusion of Russia from SWIFT has added a national security dimension to participation in international payments systems.
“Lowering remittance fees by 2 percentage points would potentially translate to $12 billion of annual savings for international migrants from LMICs, and $400 million for migrants and refugees from Ukraine,” added Ratha. “The cross-border payment systems, however, are likely to become multipolar and less interoperable, slowing progress on reducing remittance fees.”
World Bank Launches International Working Group to Improve Data on Remittances
The COVID-19 pandemic and the war in Ukraine have further highlighted the need for frequent and timely data. In April, the World Bank, under the auspices of KNOMAD and in collaboration with countries where remittances provide a financial lifeline, launched an International Working Group to Improve Data on Remittance Flows. Having improved data on remittances can directly support the Sustainable Development Goal indicators on reducing remittance costs and help increase the volume of remittances. This will also support the first Objective of the Global Compact on Migration, to improve data.
Regional Remittance Trends
Remittance flows to the East Asia and Pacific region fell 3.3 percent following a 7.3 percent drop in 2020. Flows reached $133 billion in 2021, close to 2017 levels. Excluding China, remittances to the region grew by 2.5 percent in 2021. Remittances to the Phillipines benefitted from job creation and wage gains in the United States where a large number of Filipino migrants live. Among economies where remittance inflows constitute a high percentage of their GDP are Tonga, Samoa, the Marshall Islands, the Philippines, and Fiji. Excluding China, remittance inflows are projected to grow by 3.8 percent in 2022. The average cost of sending $200 to the region fell to 5.9 percent in the fourth quarter of 2021 compared to 6.9 percent a year earlier.
Remittance inflows to Europe and Central Asia increased by 7.8 percent in 2021, reaching historic highs of $74 billion. The growth was due in large part to stronger economic activity in the European Union and rebounding energy prices. In 2021, Ukraine received inflows of $18.2 billion, driven by receipts from Poland, the largest destination country for Ukrainian migrant workers. Personal transfers constitute a vital source of finance and growth for the economies of Central Asia, for which Russia is the prime source. As a share of GDP, remittance receipts in Tajikistan and the Kyrgyz Republic were 34 percent and 33 percent respectively in 2021. Near-term projections for remittances to the region, which are expected to fall by 1.6 percent in 2022, are highly uncertain, dependent on the scale of the war in Ukraine and the sanctions on outbound payments from Russia. By contrast, remittance flows to Ukraine are expected to increase by over 20 percent in 2022. The average cost of sending $200 to the region fell to 6.1 percent in the fourth quarter of 2021 from 6.4 percent a year earlier.
Remittance flows to Latin America and the Caribbean surged to $131 billion in 2021, up 25.3 percent from 2020 due to the strong job recovery for foreign-born workers in the United States. Countries registering double-digit growth rates included Guatemala (35 percent), Ecuador (31 percent) Honduras (29 percent), Mexico (25 percent), El Salvador (26 percent), Dominican Republic (26 percent), Colombia (24 percent), Haiti (21 percent), and Nicaragua (16 percent). Recorded flows to Mexico include funds received by transit migrants from Honduras, El Salvador, Guatemala, Haiti, Venezuela, Cuba, and others. Remittances are important as a source of hard currency for several countries for which these flows represent at least 20 percent of GDP, including El Salvador, Honduras, Jamaica, and Haiti. In 2022, remittances are estimated to grow by 9.1 percent, though downside risks remain. The average cost of sending $200 to the region was mostly unchanged at 5.6 percent in the fourth quarter of 2021 compared to a year earlier.
Remittances to the developing countries of the Middle East and North Africa region grew by 7.6 percent in 2021 to $61 billion, driven by robust gains into Morocco (40 percent) and Egypt (6.4 percent). Factors supporting the flows were economic growth in host countries in the European Union as well as transit migration which further boosted inflows to temporary host countries such as Egypt, Morocco, and Tunisia. In 2022, remittance flows will likely ease to a 6 percent gain. Remittances have long made up the largest source of external resource flows for developing MENA—among ODA, FDI, and portfolio equity and debt flows—accounting for 61 percent of total inflows in 2021. The cost of sending $200 to MENA fell to 6.4 percent in the fourth quarter of 2021 from 6.6 percent a year ago.
Remittances to South Asia grew 6.9 percent to $157 billion in 2021. Though large numbers of South Asian migrants returned to home countries as the pandemic broke out in early 2020, the availability of vaccines and opening of Gulf Cooperation Council economies enabled a gradual return to host countries in 2021, supporting larger remittance flows. Better economic performance in the United States was also a major contributor to the growth in 2021. Remittance flows to India and Pakistan grew by 8 percent and 20 percent, respectively. In 2022, growth in remittance inflows is expected to slow to 4.4 percent. Remittances are the dominant source of foreign exchange for the region, with receipts more than three times the level of FDI in 2021. South Asia has the lowest average remittance cost of any world region at 4.3 percent, though this is still higher than the SDG target of 3 percent.
Remittance inflows to Sub-Saharan Africa soared 14.1 percent to $49 billion in 2021 following an 8.1 percent decline in the prior year. Growth in remittances was supported by strong economic activity in Europe and the United States. Recorded inflows to Nigeria, the largest recipient country in the region, gained 11.2 percent, in part due to policies intended to channel inflows through the banking system. Countries registering double-digit growth rates include Cabo Verde (23.3 percent), Gambia (31 percent), and Kenya (20.1 percent). Countries where the value of remittance inflows as a share of GDP is significant include the Gambia (27 percent), Lesotho (23 percent), Comoros (19 percent), and Cabo Verde (16 percent). In 2022, remittance inflows are projected to grow by 7.1 percent driven by continued shift to the use of official channels in Nigeria and higher food prices – migrants will likely send more money to home countries that are now suffering extraordinary increases in prices of staples. The cost of sending $200 to the region averaged 7.8 percent in the fourth quarter of 2021, a small decline from 8.2 percent a year ago.
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