Foreign Aid

Between 1975 and 1990, total foreign aid to Laos, including grants and loans, was approximately US$2.3 billion. Of this sum, only 65 percent had been spent as of 1989, of which grants and loans made up approximately equal quantities. Fifty-five percent of spent aid derived from the nonconvertible currency area, 17.8 percent from convertible currency area countries, and 27.2 percent from international organizations and financial institutions.

According to the World Bank and the IMF, long-term loans increased nearly threefold, from about US$38.8 million in 1982 to about US$111.4 million in 1988. Drawings on loans received from the nonconvertible currency area had averaged 73 percent of the total annually through 1988; in 1989, however, drawings from the area dropped to 23 percent of the total, and by 1991 they were nonexistent. In January 1991, the Soviet Union suspended all its aid and credits to Laos although loan repayments were postponed until the end of the decade. Drawings from the convertible currency area during this period increased, but not enough to support spending at the level of the mid-1980s; by 1991 drawings on all loans received had dropped nearly 50 percent from 1988. In response, grants from the convertible currency area, which had decreased from approximately US$45.4 million in 1985 to just US$14.7 million in 1989, spiraled to US$63.9 million in 1991.

Aid from the nonconvertible currency area was primarily from the Soviet Union and Vietnam. Until 1991 Soviet aid constituted over half of all aid to Laos, including the stationing of over 1,000 Soviet technical personnel in Laos, and donations of construction equipment, vehicles, and aircraft. The second largest donor was Vietnam, which sent roughly 5,000 advisers and technicians to the country and participated in the joint exploitation of mineral and forest resources.

The cutback in aid from the nonconvertible currency area caused Laos to seek improved ties with Western nations. Australia, Japan, and Sweden accounted for virtually all foreign aid from the convertible currency area until 1988; but by 1990, their combined share had dropped to about 78 percent, because other developed nations began to increase their aid programs to Laos. Japan and France have become more important aid donors in the early 1990s. The United States does not have an "aid program" in the traditional sense because Laos is a communist country and is prohibited from receiving aid under the Foreign Assistance Act of 1961 (as amended). The crop substitution program, begun in October 1989 following reassessment of the country's involvement in the world opium trade, is possible because of separate legislative authority. In December 1990, following an improvement in Chinese-Laotian relations, China pledged a US$9.3 million credit for a five-year economic and technical cooperation program in Laos.

Other aid is provided by international organizations such as the UNDP, the Asian Development Bank, the International Development Association, and the IMF. Multilateral organizations provide large loans in support of government reforms--in 1990 and 1991, the IMF and the Asian Development Bank made loans worth US$37 million for this purpose.

Aid to Laos covers a wide range of activities, including technical and capital assistance for such projects as hydroelectric power stations (Sweden), a livestock vaccination program (the UNDP), and scholarships for agricultural study (Thailand). The IMF approved a US$50 million loan in 1993 in support of economic development, inflation reduction, and compensation for depleted reserves. Other loans have been granted for such infrastructure development as road construction, hydropower projects, and telecommunications systems. Aid has also been extended for irrigation projects and forestry and fisheries programs.

Other types of aid include loan forgiveness: in 1991 Japan and Germany forgave loan liabilities worth US$32.3 million. Despite the country's continued striving to reach food self-sufficiency, it relies on food aid for its domestic needs during years of poor harvest. In 1988 and 1989, for example, 140,000 tons of food aid were donated or sold to Laos to make up for shortfalls caused by drought. Food aid in cash or in kind was donated to Laos in 1991 by the Food and Agriculture Organization and the UNDP, and by the United States, Australia, Thailand, and the Netherlands.

Although foreign grants and loans remain sufficient to finance Laos's trade deficit and development expenditure, at least for the medium term, poor absorptive capacity, the result (in part) of a poorly educated and trained labor force, reduce its ability to make efficient use of the available funds. The balance of payments actually went into surplus in 1989 and 1990. However, there remains the question of whether flows from the convertible currency area will continue to increase enough to make up for the losses from the nonconvertible currency area. Because the country's fiscal and trade position is not likely to improve dramatically in the early 1990s, this is an important concern.