This undated file photo shows tourists watcing elephants, from a distance, at a conservation center in Laos. (PHOTO PROVIDED TO CHINA DAILY)
Laos’ economic recovery could be further delayed by the country’s weakened currency and soaring inflation, experts say, hoping to see more efforts from the government to stabilize the economy.
“The sharp depreciation of the Lao kip and the high inflation rate have reduced the speed of economic recovery in Laos,” said Sithanonxay Suvannaphakdy, lead researcher of the ASEAN Studies Centre at Singapore’s ISEAS-Yusof Ishak Institute.
As a result, the local cost of producing goods and services has increased, while consumers’ purchasing power is reduced, said Sithanoxay.
The Asian Development Bank projected Laos’ inflation to reach 17 percent in 2022 and then moderating to 4.5 percent in 2023
The Asian Development Bank projected Laos’ inflation to reach 17 percent in 2022 and then moderating to 4.5 percent in 2023.
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The bank said the Lao kip fell in value by 37.4 percent against the US dollar and 32.9 percent against the Thai baht in the official market from January to August this year, with the year-on-year inflation rate in August hitting a 22-year high of 30 percent.
Laos now has one of the highest inflation rates in Southeast Asia. It has surged significantly since 2021.
The Lao economy is expected to grow 2.2 percent in 2022, and then 3.1 percent in 2023, according to an updated report from the International Monetary Fund on Oct 15.
The reason behind the kip’s depreciation is that Laos has a low foreign exchange reserve to finance imported goods and services, which reduces the Lao central bank’s capacity to supply foreign exchange, said Sithanonxay.
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“Before the pandemic, the foreign exchange reserve covered only 3.59 months of imports in 2019,” he said, noting the foreign exchange reserve further deteriorated during the pandemic when major sources of foreign exchange such as agricultural exports and tourism were disrupted.
The fact that Laos has to repay external debt in foreign currencies, such as US dollars, will further reduce the availability of foreign exchange in the Lao economy, said Sithanonxay, adding the rising interest rate in the US leads to the dollar’s appreciation against other currencies, including the kip.
Adisorn Semyaem, director of the Mekong Studies Center of Chulalongkorn University in Thailand, said it is undeniable that the US Federal Reserve’s decision to raise interest rates has had a negative impact on the Lao economy due to a supply-demand mismatch of external debt servicing and the demand for foreign currencies
Adisorn Semyaem, director of the Mekong Studies Center of Chulalongkorn University in Thailand, said it is undeniable that the US Federal Reserve’s decision to raise interest rates has had a negative impact on the Lao economy due to a supply-demand mismatch of external debt servicing and the demand for foreign currencies.
“Despite a trade surplus of $1.32 billion 2021, foreign exchange inflows from Lao exports represented only 26.54 percent of the total export value,” Adisorn said.
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“As a result, Laos has a foreign currency deficit, (as) real foreign direct investment flows into the banking system were much lower than the agreed value of investments.”
Sithanonxay, at the ISEAS-Yusof Ishak Institute, said he expects the Bank of Lao PDR to consider raising the policy interest rate to curb inflation, if inflation continues to rise.
“There is no silver bullet to address currency depreciation and reduce the high inflation rate in the Lao economy in the short run,” said Sithanonxay, noting the Lao government, with low foreign exchange reserves and chronic budget deficits, has limited policy space to provide financial assistance to producers and consumers.
He said the country, in the medium term, should implement fiscal consolidation, improve transparency and efficiency in public revenue and expenditure, and establish a threshold of public debt to GDP ratio that limits government borrowing from internal and external sources.
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“Although there is a climbing in rate of inflation, currency depreciation … I still haven’t seen any signs of default debt obligations,” said Adisorn at Chulalongkorn University.
On a note of optimism, Adisorn said there is a possibility the dollar will weaken, which could provide some relief for the kip exchange rate.
Adisorn said the China-Laos railway would have a positive impact for trade and the opening up to Chinese tourism after the pandemic.
Since its opening in December, and as of Oct 1, the China-Laos railway had transported nearly 1.42 million tons of cross-border freight, according to Xinhua News Agency, citing data from Kunming Customs in Southwest China’s Yunnan province. The value of goods transported totals 11.1 billion yuan ($1.54 billion).
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But there are still many challenges for the Lao economy, as Adisorn said the government will have to face the surge in the debt level due to the depreciation of the kip against the dollar.
In September, the Lao government vowed to further address mounting public debt and the vulnerability of the macroeconomy to prevent the country from being dragged into default, the local Vientiane Times reported.
kelly@chinadailyapac.com