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Laos stresses the need o borrow a West raises debt alarm

2018-06-16 12:20

As the only landlocked country in Southeast Asia and one of the least developed ones in the region, Laos seems to have different priorities on growth that are driving it pile on even more debt.

Prime Minister Thongloun Sisoulith believes adding debt beyond a warning level is necessary for the country to grow and compete internationally as an economy, despite growing wariness among Western donor nations and multinational financial institutions.

“As an LDC (least developed country), [Laos] certainly needs funding to support its development,” Thongloun told the Nikkei Asian Review in an interview on the sidelines of the Future of Asia 2018 conference on Tuesday.

According to the International Monetary Fund, Laos' ratio of public and public guaranteed debt to gross domestic product in 2017 crept beyond 60% and is projected to reach 65.9% in 2019. The IMF's latest debt sustainability analysis in January 2017 warned that the country's external debt distress had risen from “moderate” to “high,” as the ratio has continued to climb since breaching the threshold of 40% set by the fund.

The main reason for this rise, which comes even as the economy has grown at an annual pace of around 7% in recent years, lies in investments in hydropower development on the Mekong River and the Chinese-led high-speed railway construction that kicked off in 2016 as part of Beijing's Belt and Road initiative. IMF Managing Director Christine Lagarde said these projects can "lead to a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payments challenges," when she was in Beijing in April.

However, Thongloun stressed that Laos “needs to borrow," even as he raised doubts about figures on debt compiled by multilateral organizations, telling Nikkei: “I think they may have a different approach to calculations.”

On the Chinese-led high-speed rail project that will connect Kunming in southern China to Singapore through Laos, which will cost a reported $5.8 billion, the prime minister told the conference that "I am not concerned much about the burden of debt or the construction."

The railway construction “has seen considerable progress” and is now 34% complete. The prime minister assured that the 417km segment of the railway in his country is set to be completed by the end of 2021 and “operation will be on schedule.”

The Laotian leader’s view is supported by the Chinese. “To me, it’s not a question of excessive borrowings, it’s a question of what kind of project on what kind of terms,” Jia Qingguo, dean of the School of International Studies at Peking University, told Nikkei in an interview on Monday.

"If you can have good projects on good terms, why not?" he added. "If your country develops, you become less dependent on others, and you get more prosperous.”

Jia, a respected scholar at the top Chinese university who doubles as a standing committee member of the Chinese People's Political Consultative Conference, a national advisory body, also said that the whole debate on debt “originates in the U.S. [on] suspicion of the Belt and Road initiative."

As for the timing of Laos' graduation from LDC status, which must be assessed by the United Nations, Thongloun virtually admitted that the country has missed its self-imposed 2020 target set at the turn of the century. It will likely to be postponed to 2024, and the prime minister vowed to make use of the next five years to prepare for that step, as exiting the LDC group entails a reduction of official development assistance and the loss of preferential tariff treatment by developed nations. “We still have more than five years to prepare,” he said.

Along with maintaining the momentum of economic growth, Thongloun stressed making the most of Laos' natural resources and comparative advantages, namely by further expanding the hydropower sector. This will allow Laos to capitalize on being “in the middle of big countries" with higher power demands to sell them excess electricity.

The development of dams on the Mekong, though, has created problems for downstream residents, whose livelihoods are based on fishing and irrigation-heavy farming. Thongloun stressed that projects will go ahead only with the consent of the governments of Thailand, Cambodia and Vietnam, and other donors involved.

Besides hydropower, the prime minister named agricultural processing, mining and mineral processing, and tourism. He believes that building infrastructure like railways, motorways, industrial parks and smart cities would help attract investment from abroad.

Thongloun repeated during the interview that Laos wants to “stand on our own feet” after graduating from LDC status. Whether its rising debt level helps or burdens the country in the future remains to be seen.