One of the greatest economic crises in decades has hit Laos, with inflation reaching record highs and the possibility of a default on the country's debt looming large.
Due to a financial problem that has been worsening, Laos is dangerously near to defaulting on its debts and the economy has been on the verge of collapse.

Meanwhile, Laos' total external and internal debt has risen to above $14.5 billion (€14.2 billion), as reported by the World Bank. Anushka Shah, vice president and senior rating officer at Moody's Investors Service, said categorically in mid-June, "It is on the edge of default." Experts agree that Laos has little chance of meeting its debt commitments on its own, given the country's tiny size and its lack of access to the ocean. Chinese loans for infrastructure projects like hydropower plants and railway lines account for over half of Laos' total foreign debt.

Now that Vientiane is having financial difficulties, all eyes are on Beijing to see whether it would provide a bailout or cancel part of the country's debt. The frightening rate of inflation in Laos is the latest indicator of the ongoing financial storm that has been ravaging the country's debt-ridden economy. Though GDP growth averaged 6-7% in the decade before the coronavirus epidemic, the nation was severely impacted by the pandemic.

"Small size of the Laotian economy makes it more susceptible to outside influences. The widespread spread of COVID-19 has severely hampered development "Washington-based research tank CSIS fellow Erin Murphy told DW her organization's perspective. The little nation of 7 million people relies greatly on its trade partners in Asia due to its landlocked location. The epidemic has contributed to inflationary pressures by disturbing supply networks and leading to an increase in food and gasoline costs.

"Some Lao people are going hungry as they attempt to deal with a situation beyond their control, which has been exacerbated by a number of reasons, including the crisis in Ukraine. Unfortunately, many people still need assistance as they struggle to get their lives back to normal "This is what Alex Kremer, World Bank Country Manager for Laos, said in a recent news release. The government of Laos's poor decision making in taking on massive amounts of debt to finance massive infrastructure projects has only served to deepen the current problem.

Whether it's via rail links or the electricity that Laos can provide, "I believe Laos is at the mercy of being part of China's economic objectives," Murphy said. Laos has been a hub for commercial, economic, and infrastructural development in the Mekong region in recent years. Water from its dams powers its more populated neighbors, and a developing road and rail network may one day link the region's burgeoning industries. China is one of the top foreign investors in Laos, having undertaken projects with a total value of more than $16 billion. Beijing's massive, multibillion-dollar Belt and Road Initiative includes the newest megaproject, the $5.9 billion China-Laos railway connecting Vientiane to the Chinese border.

Some critics of Beijing's worldwide expansion and infrastructure-led foreign policy worry that developing countries like Laos may fall into China's "debt traps," which they fear would give Chinese investors control of strategic national assets if the borrowing countries default on their loan payments.

Beijing has remained rather quiet about Laos' debt problems thus far. We reached out to the Chinese embassy in Vientiane for comment, but did not get a reply. I don't believe China will allow Laos to fail despite the fact that the country is facing enormous and worrisome financial and economic troubles. He noted that while the sheer magnitude of the debts suggests default is likely, geo-economic considerations would render such a forecast improbable.

Laos has been a crucial ally in China's Belt and Road Initiative to strengthen economic linkages throughout Southeast Asia, which has received over $800 billion in funding from China since 2013. With this context in mind, a Lao loan default might hurt China's image as a reliable partner in the developing world.

"There is too much at risk for China, both diplomatically and economically. Given that Laos's debt is substantial but not unprecedented compared to that of other nations, I believe it will be prepared to intervene "That was what Murphy stressed. A default on Laos's debt could hurt China's image as a reliable partner in the developing world, particularly in this part of the world.

China has much too much diplomatic and economic capital at risk. I believe it will be prepared to intervene since Laos's debt is substantial but not unprecedented compared to that of other nations. A tighter grip from Beijing and rising prices put Laos in a precarious position. Laos has several other major trade partners than China. The country has a long history of successfully negotiating between the needs of its various diplomatic allies. For quite some time, Japan has been Laos' greatest bilateral assistance provider, while Vietnam is still seen as one of its most significant security partners, among other examples. Vientiane has avoided talking to its international lenders about renegotiating its debt despite its economic woes. While other countries turned to international lenders during the COVID outbreak, this one turned instead to Beijing for emergency funding.

In a perfect world, Laos "can get the best of all worlds while addressing their debt issue. This economic crisis in Laos has the potential to become a geopolitical concern if other diplomatic allies believe their position in Laos is being eroded by China's influence.