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Businesses And People Hit By Depreciating Local Currency

Source: Vientiane Times

The value of the Lao kip has dropped significantly since last year against the backdrop of volatility in the global fuel market due to the Russia-Ukraine conflict.

A supply-demand mismatch has led to a widening of the gap between the official and parallel market currency rates, ramping up pressure on importers and driving up inflation.

The continuing depreciation of the kip is significantly impacting the Lao economy as a fuel shortage deepens, driving up the price of products in the country and creating more hardship for the poor.

The gap between the official exchange rate and the parallel market rate continues to widen, in which the US$/kip market rate could exceed the official rate by up to 19 percent and the Thai baht/kip exchange rate by roughly 9 percent on Wednesday, according to a reliable source.

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The kip has suffered the biggest loss in value against the baht and dollar since the Asian financial crisis of 1997-98. The kip has plunged to its lowest value in decades due to the rising demand for foreign currencies to import goods, including fuel.

The Governor of the Bank of the Lao PDR, Mr Sonexay Sitphaxay, told the National Assembly last year that the gap in the kip/US dollar exchange rate between commercial banks and the parallel market had widened by as much as 22.1 percent in July. 

The Governor said the increasing difference in exchange rates was linked to the rising demand for foreign currencies needed to import goods against the backdrop of the Covid-19 pandemic.

With commercial banks unwilling to sell US dollars and Thai baht, many businesses have been forced to buy foreign currencies on the parallel market so they can continue to import goods.

As a result, most businesses base the price of their products on what it costs them to buy foreign currencies on the parallel market, which are traded based on supply and demand.

An independent local economist, Mana Southichack, told Vientiane Times recently that he backed the government’s policy to reopen the country to foreign visitors as Laos has lost hundreds of millions of dollar due to the absence of tourists after borders were closed in 2020.

“One of the most urgent steps to be taken is to narrow the gap between official exchange rates and parallel market rates, minimising the loopholes for speculation by opportunists,” he said.

“In addition, we need to boost exports and further improve the investment climate to encourage more foreign entrepreneurs to do businesses in Laos.”

Vice President of the Lao National Chamber of Commerce and Industry, Mr Daovone Phachanthavong, said another essential move was for the government to allow people of Lao origin currently living abroad to buy land in Laos. This would entice people of means living in other countries to bring their wealth, in the form of foreign currencies, into Laos.