Economic Issues and Solutions in Lao PDR: A Case Study of Luang Prabang Province

Abstract

The objectives of this study are (1) to analyze the impact of inflation and exchange rate fluctuation on economic growth and (2) to propose policy guidelines for economic challenges, especially Luang Prabang Province. A mixed-methods approach was used: quantitative analysis included quarterly time series data (2021Q1–2024Q4) estimated with the Autoregressive Distributed Lag (ARDL) bounds testing and Error Correction Model (ECM) approach, which was supplemented with qualitative expert interviews from the central bank.

The empirical results reveal that exchange rate and inflation have no statistically significant effects on GDP in the long run. However, in the short run, the effect of exchange rate depreciation on GDP growth is negative, substantial and statistically significant (1% increase in the exchange rate leads to 11.95% contraction in GDP), which underscores the vulnerability of the import-dependent economy. Meanwhile, short-run inflation was reflecting temporary price-driven adjustments. The ECM coefficient (-1.859) exhibits oscillatory convergence to the long-run equilibrium. Structural import dependency, foreign currency shortages and parallel market premiums remain key domestic challenges, as evidenced by qualitative insights. Therefore, policy makers should pay more attention to the management of the inflows of foreign currencies, to reduce the unofficial market spreads and to promote the domestic production (“Product of Laos”) for sustainable macroeconomic stabilization.