US Dollar, Thai Baht Appreciation Increasingly Impacting Lao Economy

The US dollar and Thai baht have continued to appreciate against the Lao kip over recent weeks, sparking concerns that the currency fluctuation could further drive up prices of products sold in Laos.

Bankers attributed depreciation of the Lao kip to the market mechanisms of supply and demand since Laos has faced falling foreign currency reserves over the past years.

Deputy Director of Lao Development Bank Sengphet Manivong told Vientiane Times on Wednesday that “Our foreign currencies reserves are dropping but our demand for foreign currencies for imports is rising, leading to appreciation of the Thai baht and US dollar.”

The falling foreign currency reserves have forced the central bank to implement stricter foreign currency controls in a move to stabilise exchange rates and sustain economic growth.

Many commercial banks are willing to buy Thai baht and US dollars but they are reluctant to sell those foreign currencies, causing strong complaints from members of the public.

Nevertheless, the main importers including fuel companies can submit a letter asking to buy the foreign currencies to import goods.

Other justified reasons for buying foreign currencies from the commercial banks include trips for health treatment or studying overseas. However, this will also depend on the capacity of the commercial banks to find the foreign currencies to sell.

The falling reserves are the result of Laos’ exports, predominantly in mining and agricultural commodities, which have fallen. Moreover tourism, one of the main sectors bringing in huge amounts of foreign currency, recorded only 4.23 million overseas visitor arrivals in 2016 – a drop of 10 percent from 2015.

In addition, continued growth of the Lao economy has driven rising demand for imports such as goods for the industrial sector and food to satisfy the needs of local people, and this trade has to be paid for in foreign currencies.

According to BCEL, the exchange rates on June 14 were: US$1 bought 8,216 kip, sold for 8,256 kip. One baht bought 242.93 kip, sold for 244.74 kip.

However, US$1 is sold for 8,500 kip while One baht is sold for 250 kip on the black market, according to traders who bought this rate in Vientiane this week to further fund import of goods.

Amidst the fluctuating exchange rates one trader in Done Noun village Ms Noi said she was struggling to maintain prices for customers because most products were imported.

Experienced independent economist Dr Mana Southichak commented that commercial banks might face falling foreign currencies reserves but the whole of Laos did not face a shortage of foreign currency (Thai baht and US dollars).

He said the main challenge for Laos is that foreign currency transactions are being made outside the banks. Many people kept foreign currencies in hand so they could easily import goods from other countries.

Most companies and vendors accept Thai baht and US dollars when selling their products, which makes it difficult for the central bank to manage foreign currencies.