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Laos Suffering From Limited Sources Of Foreign Currency

Source: Vientiane Times

Laos needs at least US$4 billion in foreign currencies to purchase goods from other countries each year, but sources offoreign currency reserves continue to be low.

Increasing demand is a big challenge in the management of foreign currency stability. Commercial banks and the State have not been able to buy more than US$2 billion from 2018, a 53 percent reduction compared to three years before.

Governor of the Bank of the Lao PDR, Mr Sonexay Sitphaxay, told the National Assembly on Thursday that at least US$4 billion in foreign currencies is needed every year, excluding imports for services and overseas debt payments, but only US$2 billion worth of foreign currencies can be purchased.

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Both domestic and overseas factors have resulted in low supplies of foreign currencies, and have played a large role in the weakening of the kip.

Since 2018, Laos has struggled to maintain stability in foreign currencies, even as the value of the US dollar and Thai baht rises on international markets.

Laos’ economy continues to rely heavily on imports and overseas services and overseas debt payments continue to increase, but sources of foreign currency are falling, including from foreign aid and foreign direct investment, which have been affected by the global economic slowdown.

At the same time, developing countries whose conditions are similar to those of Laos are competing strongly for overseas funding. These circumstances have resulted in the flow of foreign funding to Laos falling to US$755 million, down from US$1.3 billion in 2018 or 44 percent, and a drop of 55 percent compared to 2017.

Mr Sonexay said the rising demand for foreign currencies in the face of limited sources had made it difficult for Laos to build up its foreign reserves, which is key to driving macro-economic structure, while commercial banks and the State have a limited supply of foreign currencies.

Over the past six months, the Covid-19 outbreak has had a huge impact on the global economy, which is expected to add to Laos’ challenges in maintaining foreign currency stability.

The uncertain of the global economic situation has caused fluctuations in the price of shares, gold, petrol and silver on the international and Lao markets. Investments are also at risk.

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The Ministry of Industry and Commerce has announced two increases in the price of gasoline since May. At the same time, the price of gold products in the country skyrocketed more than 8 million kip per 15g.

Mr Sonexay said the global circulation of investment capital had been massively reduced because every country was pouring funds into the health sector and economic recovery after being hit by the virus outbreak. This was done to offset losses when businesses were shuttered and production was suspended.

This situation has discouraged people from investing in property, preferring instead to hold onto cash, especially the US dollar, as there is strong confidence in this currency on international markets. This means the US dollar has strengthened against currencies such as the Euro and yen.

There is also strong confidence in the Thai baht in this region and since April it has maintained a high value along with the US dollar.

Mr Sonexay said that with regard to the international situation, the maintenance of foreign currency stability was having a strong impact because of domestic factors that posed risks in many fields, especially as Laos relies heavily on imports and services with deficits.

The deficit value recorded in May was US$60 million.