A Touch of Populism and Austerity from Laos’ New PM

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A Touch of Populism and Austerity from Laos’ New PM

A month after his appointment, Sonexay Siphandone has given some indication of how he plans to tackle the country’s severe economic challenges.

A Touch of Populism and Austerity from Laos’ New PM
Credit: Depositphotos

Sonexay Siphandone is less than a month into his premiership, and we’re now getting an idea of his government’s agenda. After a recent two-day cabinet meeting this month, the media was briefed that, as one newspaper paraphrased it, “a greater focus will also be placed on repaying money owed by the government to private companies that carried out state-funded development projects.” Quoting a government spokesperson, it added: “the government will not launch any nonessential state-funded projects, but will instead concentrate on poverty reduction programs.”

That’s all for the birds. The same briefings have been made for years: the government says it wants to cut spending, reform state-owned businesses, and eventually run a budget surplus. Austerity is always pledged. Many of its briefings read like a precis of a World Bank recommendation. But do the numbers back this up? Last weekend, the finance ministry announced that government expenditure will grow from 34.5 trillion kip to 43.4 trillion kip (around $2.5 billion) this year. And it reckons state revenue will grow by 21.7 percent to 38.4 trillion kip, a rather ambitious target since revenue collection rose rather considerably last year and, as the World Bank pointed out, that was “partly reflecting high inflation.” It added in its November update that “revenue collection remains below pre-pandemic levels. Generous tax exemptions continue to undermine revenue mobilization.”

The finance ministry’s numbers suggest state expenditure will be 26 percent higher this year (and about four percentage points higher than expected revenue). Based on the ministry’s numbers, that deficit will be around 5.05 trillion kip (nearly $300 million), or 2.16 percent of GDP, but this all depends on meeting revenue targets. As such, the first plans of Sonexay’s premiership are not miles away from those of his predecessors.

The more important question is whether he has the acumen to manage affairs if things don’t go to plan. Laos is unlikely to receive as many debt deferrals as it has in previous years, and Sonexay will be under pressure to offer concessions to all sides; China, the main creditor, wants those generous tax exemptions for its companies. Development banks, like the ADB, want fewer regulations on business. As managing that debt becomes harder, and requires more state money to be siphoned away from social projects and infrastructure spending, Sonexay will have to find a better way than his predecessor to explain this to the people. That’s an uphill task for a politician who many Lao reckon only made it to the top because of nepotism; Sonexay is the son of the communist party grandee Khamtay Siphandone, himself a former prime minister and party chief.

It’s difficult to see last month’s leadership change as anything but a convenient power grab by a certain section of the communist party, which the rest of the party went along with because Phankham Viphavanh, the former prime minister, had become such an embarrassment. He was up to his neck in gossip; the Vientiane grapevine has been buzzing for months about his alleged connection to a Lao-Chinese businesswoman whose corpse was found floating down the Mekong in a suitcase last year. There were also question marks about the number of construction permits his government had handed out. Those issues would have ordinarily been cleaned (and hushed) up in one-party Laos, but obviously there was no quorum of apparatchiks lining up to cleanse Phankham’s image. It was the economy that did it for him, though. Gossip, vice, and corruption – that’s par for the course for a senior official. But the economy is on its knees, with inflation around 39 percent, a collapsing currency, the perennial risk of debt default — none of which could be handled alongside the scurrilous talk.

Whichever way one looks at it, though, Sonexay deserves as much of the blame for the economic nightmare as Phankham. He was made head of the government’s special economic taskforce in the middle of last year and had a say in the government’s responses. He’s been a deputy prime minister since 2016. Now prime minister, perhaps Sonexay has the chops to turn things around. Fortune may be on his side; he took over as external concerns were improving. China, the most important economic power, ended its “zero-COVID” restrictions in December, which should spur Laos’ tourism and manufacturing sectors. Perhaps the shock of the Russia-Ukraine war won’t be as pronounced this year as it was last year. Recovery in Vietnam and Thailand will help, too. The Vientiane government reckons the economy will grow by 4.5 percent this year, compared to just (probably) 2.5 percent in 2022.

Zachary Abuza, a respected analyst, argued recently that Sonexay “has the political connections to maybe run a more efficient government or make some hard choices, but Laos’ problems are systemic and far greater than what one man can solve.” For sure, many of Laos’ problems aren’t its prime ministers’ doings. No one in Vientiane can dictate the policy of the U.S. Federal Reserve. And perhaps Sonexay will do better than Phankham (if he avoids scandal, that’s a good start).

Where Vientiane does have agency is over its debt, which brings us back to this year’s budget. The finance minister has noted that debt repayments will be bigger this year because of “debt deferrals granted in the [previous year] and the depreciation of the Lao kip.” The national debt almost certainly crossed the 100 percent of GDP mark last year, and not just because of currency depreciation. Some reckon it was way beyond that threshold years ago. Between now and 2026, it needs to find around $1.3 billion per year just to service that debt.

Earlier this month, the finance ministry said that it will raise 41.15 trillion kip this year to address the projected fiscal deficit and repay domestic and overseas loans. Of that, 36.1 trillion kip will be used to repay domestic and overseas loans, and 5.05 trillion kip will go towards the fiscal deficit. Most will come from bonds; the ministry wants to issue 23.5 trillion kip worth of bonds in foreign countries, and 10.95 trillion kip from domestic bonds. In simplistic terms, there’s not much to suggest Sonexay’s cabinet is engaged in radical thinking. Years ago the government decided that bonds were the way to go. There’s talks of restructuring the money-hemorrhaging state-owned enterprises rather than privatizing them.

What’s important, though, is restraint. But Sonexay also (probably) knows he needs to win loyalty within the party, and earn the party back some trust from the public. It appears he has made some concessions to National Assembly delegates, who voted him into office last month, and to the communist party’s base, the state employed. A few days after Sonexay became the new prime minister in late December, his office announced that there will be an increased monthly living allowance of 150,000 kip to civil servants and retired senior employees. It softened this additional expense by also stating that it will recruit only 800 new civil servants this year, down from around 1,300 civil servants recruited in 2022, 1,600 in 2021, and 2,000 in 2020. Nonetheless, some 13.3 trillion kip has been allocated for the payment of state-sector salaries and 2 trillion kip on their allowances, according to the Vientiane Times, another newspaper. That’s more than a third of the total budget.

All this could be expected of a new leader, especially one who takes office halfway between Party congresses. Managing the national debt is the sine qua non of a prime minister. But where Phankham, his predecessor, really failed was on the social front: he didn’t do enough to tackle official corruption; he didn’t invest enough on poverty relief programs (he was widely blamed for not offering enough funds to the poor during the pandemic); and his stiffness and formalities made the communist party appear even more removed than it usually is from ordinary people. A touch of populism, such as with civil servants’ salaries, maybe what Sonexay needs to revitalize the party’s fortunes (so long as it doesn’t impede debt consolidation). After taking office, he pledged to “raise the spirit of the revolution to the highest level.”  After years of disappointment and hardship, that spirit within the communist party is probably at its lowest ebb. Maybe just having a Siphandone in charge will give some apparatchiks a nostalgic lift.