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Fluctuating Exchange Rate Increases Pressure On Lao Economy

Source: Vientiane Times

The gap between the official and parallel market exchange rates has widened in recent months, driven by a mismatch in supply and demand, resulting in pressure on importers and inflation.

While US$1 sold for 9,238 kip in the official market on Friday, it sold for 10,000 kip in the parallel market which is higher than historical norms.

The restriction of commercial banks to sell foreign currencies, including the Thai baht and US dollar, has forced many traders to rely on parallel markets to buy the foreign currency they need to import goods.

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However, the consequence is huge since many firms are effectively conducting business and basing their pricing on foreign currencies sold in the parallel market.

The move has resulted in rising food prices and growing inflation in Laos, affecting the urban poor, as urban consumers make up 77 percent of all food consumption.

According to the World Bank report in June, the official kip/US dollar exchange rate depreciated by 4.2 percent, while the parallel market rate depreciated by 9 percent in April 2020 compared to last year. At the same time, the kip/baht rate depreciated by 7 percent.

The shortage of liquidity in the official market continues to cause a demand-supply mismatch and thereby widening the spread between the official and parallel rates above the historical average.

Subsequently, many more people moved to hold foreign currency deposits to hedge against the depreciating kip and reduce their risk of losing money when importing goods.

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In the meantime, the Lao Statistics Bureau reported that the value of the kip fell by 4.29 percent against the US dollar and 10.3 percent against the Thai baht in July, compared to the same month last year.

The owner of Chareunxay Stainless Company, who asked not to be named, told Vientiane Times recently that a vast amount of foreign currency is available on parallel markets, but the selling rate is higher than that sold on the official market.

Laos is a country that imports more than it exports. In August this year alone, the trade deficit reached US$7 million, according to the Ministry of Industry and Commerce as reported by Socio-Economic Daily recently.

The value of the country’s exports in August attained US$377 million while imports reached US$384 million.

The Covid-19 pandemic is further disrupting exports and the inflow of foreign visitors and investment into Laos considered the nation’s primary sources of foreign currency earnings.

Disruption to logistics due to tightened border processes and the continued depreciation of the kip are expected to keep inflation high.

The COVID-19 crisis has worsened the long-standing structural vulnerabilities in the economy. The country has a legacy of weak macroeconomic management, resulting in limited fiscal and foreign currency buffers even before the global pandemic.

With limited access to commercial borrowing at a reasonable cost, Laos will need considerable support from its development partners to avoid balance-of-payment problems in 2020, according to the World Bank.