Thailand currency

Laos’ currency deficit, an economic challenge

Khankeo Lamaningao, director general of the Monetary Policy Department of Bank of Laos at a meeting of the Monetary Policy Committee in Vientiane last week. BANK OF THE LAO PDR

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

While summarizing the results of the first meeting of the Monetary Policy Committee in Vientiane last week, the Director General of the Monetary Policy Department of Bank of Laos, Khankeo Lamaningao, highlighted the challenges facing the country.

She pointed out the main reasons for the mismatch between supply and demand of foreign currencies in Laos, especially the Thai baht and the US dollar.

One of the main challenges for Laos is that the growing demand for external debt service and the demand for foreign currency needed to import goods has resulted in the current pressure on currencies.

The depreciation of the Lao kip has an impact on inflation in the country, as companies have to spend more to buy foreign currencies in order to import goods.

The international service deficit was $86.46 million, which is in addition to the income transfer deficit due to high interest payments by the public and private sectors and dividend payments. Actual inflows of foreign investment through the banking system were well below the agreed value of investments.

So there was a net outflow of $548 million, or about $45.7 million per month in 2021, which was higher than the 2020 numbers.

In addition, internal production was impacted by natural disasters and the Covid-19 pandemic, and the prices of imported goods increased while inflation was very high.

In order to achieve the monetary objectives approved by the National Assembly, the Monetary Policy Committee focuses on the implementation of a monetary policy that supports the government’s economic recovery policy; implement an exchange rate policy by applying the market-based exchange system operated by the government in a more flexible manner, and in a manner more suited to the country’s real economic base and situation.

The committee also improved the foreign exchange management mechanism to strengthen the country’s international reserves.

According to the committee, the adjustment of the exchange rate fixing band was among the remarkable achievements, as it reduced the gap between the official rate and the parallel rate by 22.12% by mid-July 2021. to just 4.51% at the end of 2021. .

The narrower difference has helped commercial banks buy more foreign exchange in the market and provide more foreign exchange for the import of priority goods, especially gasoline.

Over the past two years, Laos’ foreign exchange earnings have declined due to the pandemic. The tourism, investment and service sectors (which are the main sources of income) have been badly affected by the pandemic.