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Central Bank Faces Challenge In Stablising Exchange Rate

Source: Vientiane Times

The Bank of the Lao PDR looks set to face a big challenge in keeping the value of the kip against the US dollar stable, as the local market is ignoring the official reference currency exchange rate.

A number of currency exchange units in Vientiane were on Friday offering an exchange rate of about 8,700 kip per US dollar, which is slightly higher than the reference exchange rate set by the Bank of the Lao PDR.

The central bank yesterday maintained an official exchange rate of 8,423 kip per US dollar, and this difference has significantly widened the margin between the official and the market rate.

Despite this, the main commercial banks were advertising an exchange rate relatively close to the reference rate on Friday. However, it was difficult for anyone to buy US currency from these banks.

Many banks only bought dollars at the reference rate but were also imposing restrictions on people who wanted to buy foreign currencies.

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This meant that people had to buy foreign currency from smaller operators, who were offering a higher exchange rate.

The value of the kip against the US dollar has seen a significant drop even though the Bank of the Lao PDR has set a reference rate in a bid to stablise foreign currency exchange.

A source monitoring the situation said the central bank must impose strict measures to prevent a further decrease in the value of the kip and ensure that the exchange rate cap is narrowed.

Failure to stabilise the exchange rate would have a negative impact on many sectors.

Analysis indicates that depreciation of the kip against the US dollar would make it even harder for the government to rein in inflation, which has risen in recent months.

Most consumer goods in Laos are imported so when the value of the kip drops against the major foreign currencies, product prices rise accordingly.

The Lao National Statistics Bureau announced recently that inflation was above 2 percent in June. The driving force of this rise was the higher fuel price, one of Laos’ major imports.

Analysis also shows that it is importers who are among those hardest hit by any fall in the value of the kip, as they rely on foreign currency to buy the goods they import while having to sell them in the local currency.

Many imported goods are subject to the Lao government’s price control policy. The enforcement of this policy may reduce the profit margins of importers, the source said.