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Central Bank Removes Foreign Currency Borrowing Restrictions

Source: Vientiane Times

The removal of barriers to bank lending and borrower withdrawals foreign currencies are set to benefit enterprise in Laos after the Bank of the Lao PDR removed restrictions in this regard, according to an announcement from the central bank.

The central bank recently announced that it had cancelled an administrative note that barred commercial banks in Laos from offering loans in foreign currencies.

The central bank had ordered commercial banks in Laos to stop providing loans in foreign currencies to businesses at the end of 2016, as it believed at the time that this restriction would prevent dollarisation in Laos and promote the use of the national currency.

The central bank said the main reason behind the cancellation of the administrative order suspending the provision of loans in foreign currencies was that despite the positive effect of the order, commercial banks had faced restrictions in releasing loans in foreign currencies for which they had already mobilised.

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According to data from the Bank of the Lao PDR, Lao kip deposits in commercial banks have witnessed 7 percent growth compared to the previous year, and account for about 46 percent of total deposits.

Foreign currency deposits witnessed 15 percent growth, and accounted for more than 53 percent of total deposits.

The data shows Lao people have maintain more confidence in foreign currencies than the Lao kip despite a massive campaign to promote the use of the Lao currency domestically.

A source said one of the reasons behind the central bank’s decision to remove the restrictions was due to the fact that commercial banks would not be able to mobilise funds from external sources to inject into the Lao economy.

The Lao government has a policy of mobilising funds from abroad to boost economic growth.

Thus, it was not logical to prevent commercial banks from offering loans in foreign currencies, said the source.

Although the central bank has allowed commercial banks to offer loans in foreign currencies, it demanded that they restrict withdrawal of cash in foreign currencies, which means that borrowers have to withdraw funds in Lao currency.

Loan receivers can settle their debt payments in foreign currencies only via commercial banks, according to the notice that has been posted on the official website of the central bank.

Analysts consulted by the Vientiane Times asserted the new monetary policy of the central bank should be more practical as it is in line with the government’s policy to promote the inflow of foreign funds.

At the same time, measures to prevent dollarisation in Laos will require efforts to control the circulation of foreign currencies in the market.