The Lao economy is facing increased challenges from a sharp currency depreciation and high inflation, amid a deteriorating global economic environment and slow domestic reforms. There were signs of an economic recovery in early 2022, but the domestic and external environment has deteriorated significantly since then. High inflation is eroding the purchasing power of households, many of whom experienced income losses from COVID-19 and are still recovering. While labor market indicators improved by mid-2022 and poorer households have benefitted from a recovery in nominal wage earnings and remittances, their purchasing power and living standards have been negatively affected by rapidly rising domestic prices. Despite an improvement in the fiscal balance in the first half of 2022, fiscal space to support the economy remains limited. Debt sustainability hinges on a successful conclusion of ongoing debt negotiations with major bilateral creditors. In the medium term, the outlook assumes a gradual recovery in international tourism and exports, but it is contingent on a successful conclusion of ongoing debt negotiations. Given accumulated macroeconomic imbalances and a highly uncertain outlook, strong political commitment to ambitious reforms is essential to restore economic stability and sustain growth. The five vital reforms are: (i) cutting costly tax exemptions to raise public revenues and protect social spending
(ii) improving the governance of public and public-private investment, as well as SOEs
(iii) restructuring public debt through ongoing negotiations
(iv) strengthening financial sector stability through the implementation of legal and regulatory tools
and (v) improving the business environment and promoting exports through effective regulatory reforms.