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Foreign Currency Deficit Among Economic Challenges Confronting Laos

Source: Vientiane Times

Laos’ overall balance of payments situation is negative despite a trade surplus of US$1.32 billion in 2021 because foreign exchange inflows represent only 26.45 percent of the total export value.

While summing up the result of the first meeting of the Monetary Policy Committee in Vientiane last week, the Director General of the Monetary Policy Department of the Bank of the Lao PDR, Mrs Khankeo Lamaningao, outlined the challenges facing the country.

She highlighted the main reasons for the supply-demand mismatch for foreign currencies in Laos, notably the Thai baht and the US dollar.

One of the main challenges for Laos is that the rising demand for external debt servicing and the demand for foreign currencies needed to import goods have resulted in the current foreign exchange pressure. The depreciation of the Lao kip is impacting inflation in the country as businesses need to spend more to buy foreign currencies to import goods.

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The international service deficit was US$86.46 million, which is in addition to the deficit in income transfers as a result of high interest payments by the public and private sectors and dividend payments.

Actual foreign investment inflows through the banking system was much lower than the agreed value of investments.

There was, therefore, a net outflow of US$548 million, or about US$45.7 million per month in 2021, which was higher than the numbers for 2020. Besides, internal production has been impacted by natural disasters and the Covid-19 pandemic, and the prices of imported goods have been increasing while inflation was sharply elevated.

In order to achieve monetary targets approved by the National Assembly, the Monetary Policy Committee is focused on implementing a monetary policy that supports the government’s policy for economic recovery; implementing a foreign exchange rate policy by applying the market-based foreign exchange system managed by the government in a more flexible way, and in a manner more suited to the country’s actual economic foundation and condition.

The Committee has also improved the mechanism for foreign exchange management in order to strengthen the country’s international reserves.

According to the Committee, adjusting the foreign exchange rate setting band was among the outstanding achievements, since this helped reduce the gap between the official and the parallel rate from 22.12 percent in mid-July 2021 to just 4.51 percent by the end of 2021.

The narrower difference helped commercial banks to buy more foreign exchange from the market and to provide more foreign exchange for importing priority goods, especially petrol.

Over the past two years, the foreign currency revenues of Laos have declined due to the pandemic. The tourism, investment and services sectors (which are key income earners) have been severely affected by the pandemic.