ISSUE

High food insecurity, environmental degradation, and low resilience to a changing climate.

In 2024, food inflation in Lao PDR averaged 22% and one in five rural households experienced food insecurity. Agriculture employs more than half the population, yet contributes just over 20% to GDP. Most farmers are smallholders facing multiple challenges, including degraded natural resources, low climate resilience, inadequate productive infrastructure such as irrigation systems and rural roads, and limited access to financial and technical services. Markets are fragmented, and logistics systems are weak. Recent sharp increases in input, fertilizer, and fuel prices have further strained many farming households. At the same time, a small but growing number of farmers are connected with domestic and regional markets, and produce high-value commodities with strong market potential. The regional demand presents significant opportunities for sector growth. To enable more farmers to shift toward commercial production and income-generating crops, several constraints must be addressed. These include the fragmented production and lack of scale; the inadequate financial, technical, and business services; the weak supply chain linkages and logistics; and the limited resilience to climate impacts.

How did ACGF help?

In 2022, ACGF organized an Innovative Finance Clinic on Green Agricultural Value Chain Financing, initiating the collaboration between ACGF and the ADB sector teams. The clinic provided a platform for discussions at a very early stage, allowing ACGF to contribute to project conceptualization, component design, and the integration of climate considerations from the start. Following the clinic and utilizing funds from GCF, ACGF supported a study on agriculture value chains to identify commodities with export market potential. This informed the technical advisory services component, ensuring a sustainable, private sector driven delivery model with long-term impact. ACGF also supported a review of the financial sector’s capacity for agri-finance, which, combined with ACGF team expertise, helped shape the project’s financial intermediation component. Additional support included a climate risk assessment and a report on the project’s alignment with the Paris Agreement, which helped embed climate resilience as a core project attribute. Ahead of approval, ACGF continued to support due diligence and financial structuring. This included the initial environmental examination and risk assessment, preparation of social safeguards documents such as the gender action plan, and a debt sustainability analysis. These efforts were funded by both GCF and the UK. ACGF’s timely and flexible technical assistance was critical throughout project preparation. Overall, ACGF support significantly enhanced the project’s climate finance ratio and ensured that the project could meet the ACGF Investment Principles and Eligibility Criteria. This included qualitative improvements such as strengthening sector-wide adaptive capacity and promoting transformative practices to better respond to extreme weather events like droughts and floods. The combination of ACGF’s in-house expertise and technical assistance funding from its partners—GCF and UK—was instrumental in shaping the project into a sustainable, private sector-driven initiative. With inclusion and resilience at its core, the project directly addresses food insecurity, one of Lao PDR’s most pressing challenges, and a key priority also for ADB. Concessional finance from AIF and EU, along with a financial intermediation component based on access to credit rather than grants, helped expand the project’s scope, reduce risk, and ensure that the public debt burden remains sustainable.