In Laos, Prime Minister Phankham Viphavanh Is In Trouble

Phankham Viphavanh hasn’t had the best of times since becoming prime minister of Laos in March 2021. When he took over, Laos had officially recorded only around 50 cases of COVID-19. By the end of the year, it was up to more than 110,000. Vaccination is plodding. The Nikkei COVID-19 Recovery Index ranked Laos as the worst performer among more than 120 countries.

For Laos, 2022 was supposed to be the year of economic recovery. Instead, inflation was up to 12.8 percent in May, an 18-year high and one of the highest rates in Asia. The local currency, the kip, has collapsed in value. This time last year, around 9,400 kip would buy you one U.S. dollar. Today, it trades for almost 15,000. Much of the country has faced petrol shortages for months. Wages are stagnating. There hasn’t been a minimum wage hike since 2018. Growth will likely be around 3.8 percent this year, the World Bank reckons, although that depends greatly on how the government deals with the most serious issue: debt. Moody’s Investors Service has warned that Laos is on the “brink of default,” as the agency downgraded Laos’ credit rating yet again on June 14th to Caa3.

Ordinary Laotians are angry. The communist government, which offered relatively little financial assistance to people during the pandemic, has blustered. Phankham’s cabinet is perceived as having acted too slowly; it only created a special economic task force on June 6, for instance. It’s also accused of badly communicating the crisis to the public. Don’t expect the crumbling of the Lao People’s Revolutionary Party (LPRP), the communist party, or Laos’ one-party system anytime soon, but internal politics are heating up.

Speaking to Bloomberg recently, Harrison Cheng, an associate director at Control Risks, speculated that “if the LPRP were to try and appease the public to buy time until the economic crisis wanes,” it might “sacrifice some top-level officials, ministers, or even Prime Minister Phankham Viphavanh.” As expected, the cabinet was reshuffled in late June. Sonexay Sitphaxay was removed as governor of the Bank of the Lao PDR, the central bank, and Khampheng Xaysompheng departed the Ministry of Industry and Commerce. They were sent packing to the relatively trivial positions of ministers in the Prime Minister’s Office.

Taking their place were some rising technocrats. Malaithong Kommasith, formerly president of the State Audit Organization, will become the new minister of Industry and Commerce. Foreign-educated, Malaithong was head of the Economic Advisory Team and secretary to the prime minister under Thongloun Sisoulith. He seems a trusted pair of hands within the government apparatus, although is rarely on the political frontlines; he had less than a year of experience as deputy governor of Champasak Province between 2020 and 2021. Coming in as the new central bank governor is Bounleua Sinxayvoravong, the former deputy minister of finance.

Days earlier, Phankham also announced the formation of a special task force to tackle the country’s main economic problems. It is chaired by Sonexay Siphandone, a deputy prime minister and son of LPRP power-broker Khamtay Siphandone. Before the party’s National Congress last year, some expected Sonexay to become the next prime minister.

All this could cut two ways for Phankham. On the one hand, he’s given far greater power to potential rivals in the party. On the other hand, it is expanding collective responsibility, making possible rivals also culpable for the economic crisis. Phankham’s position appears safe for now, but he dug himself into a rather gaping hole last year. Prime ministers are almost never replaced between the quinquennial party congresses. As such, Phankham should survive until 2026. Since the LPRP works on five-year plans, a prime minister’s national agenda is usually reviewed by the party and National Assembly at the end of their spell in office. “Any cabinet minister can wait until the end of the term to reveal if the major targets were achieved and leave without having to deal with the consequences,” the researcher Souknilanh Keola put it recently. Unlike his predecessors, however, Phankham vowed in his first speech to the National Assembly in early 2021 that he would review his national agenda by the end of 2023, so near the mid-point of his five-year term. If he sticks to his word, the party could at that point decide to replace him.

To be fair to him, Phankham inherited an unsteady ship – although he was a senior party apparatchik when that proverbial ship was tilting. The economy had been sketchy since the latter half of the 2010s. After reaching a peak of 8.5 percent growth in 2010, rates began to slump, down to 6.3 percent in 2018 and 5.5 percent in 2019. Phankham also inherited chronic debt; experts have been warning about it for the past decade, yet all Laotian politics seem to do is take on ever more risky loans from China and promise piddling policies to increase tax revenue and stop officials from driving state-provided cars.

Some of the current challenges are beyond Vientiane’s control. Inflation is soaring everywhere because of the economic impact of the Ukraine war and a post-pandemic spending splurge. China’s economic woes don’t help Laos. Washington’s ever-rising interest rates are causing many currencies to devalue against the dollar. As such, there’s not much Laos’ government can do to remedy these issues. But a new pair of hands at the central bank and Commerce Ministry should give some oomph to the reforms Phankham has laid out.

This begs a question, though. Can a Laotian politician actually have that much of an impact? Thongloun, the previous prime minister, burst onto the scene in 2016 with grand promises to tackle corruption and party discipline, and to balance the books. For some time, he appeared to be doing a good job. And he seemed like a new sort of leader for Laos; open, humble, and sometimes even humorous. But all that petered away. Laos actually fell 14 places in the Corruption Perceptions Index between 2016 and 2020. The national debt surged. After Thongloun was elevated to party chief last year, his predecessor, Bounnhang Vorachit, warned that reform was needed if the party wanted to remain relevant.

Take corruption. It’s almost certain that Phankham’s government will now double down on promises to tackle graft, just as every other administration has done. It’s a potential crowd-pleaser, if done well. But successes have been far and few between in recent years. Whereas neighboring Vietnam’s “burning furnace” anti-corruption campaign has taken down billionaires and ministers since 2016, the Lao government spends much of its time talking about stopping officials from using state-funded cars. The fact that Thongloun promised this when he entered office in 2016 and it was dusted off by Phankham last year shows that not much happened over those five years.

A meaningful anti-corruption campaign in Vietnam, which has been promised by every party chief since the 1980s, is very much due to one man: current general-secretary Nguyen Phu Trong. Counterfactually, it’s near impossible to imagine such an impactful anti-graft campaign if Trong wasn’t head of the Vietnamese Communist Party (VCP). If Thongloun, as LPRP chief, and Phankham really worked together, could they replicate a “burning furnace” in Laos? Probably not.

Structurally, Laos is different. The LPRP is far more insular, isolated, and protected than its Vietnamese counterpart. The pickings are smaller: Laos’ GDP is 7 percent the size of Vietnam’s. Vietnam has an identifiable pro-democracy and anti-communist movement, whereas Laos doesn’t. The LPRP, therefore, is less at risk of public pressure for not curbing corruption. Laos hardly trades with the West, so doesn’t face the same pressures to reform. The LPRP is also far more dynastic. We still see the power politics between the Siphandone and Phomvihane clans.

The same trends play out on the economic front. As such, the economic-political nexus varies significantly between Laos and Vietnam. While both of their communist parties see economic growth as their main (if only) source of legitimacy, the stakes are different. Perversely, for a state in so much economic jeopardy, from tumbling growth to a possible debt default, the LPRP is politically jeopardy-free. The current economic crisis won’t bring down the LPRP, but may put Phankham’s job at risk. A possible debt default would be the biggest test of the party’s resolve in decades.