August 24, 2017

OPINION: Stabilising and creating confidence in Lao kip

By:  Somsack Pongkhao, Vientiane Times, August 24, 2017

VIENTIANE - Over the past decades, the Bank of the Lao PDR has tried to conduct stronger campaigns to encourage Lao people to use kip in trade exchange including displaying the prices of products in the nation’s own currency.

The move aimed to create awareness for people to use the kip in financial transactions instead of using foreign currencies, particularly Thai baht and US dollar.

Nevertheless, the implementation of the scheme has not always been succeeded as many traders continued to accept those foreign currencies when selling their products.

Unlike other foreign countries, traders would ask their customers to make an exchange and pay them in local currencies.

In Laos, many people are still wondering why prices of land plots and other properties are offered for sale in Thai baht and US dollars despite the fact that those properties are not linked to import and export businesses which required foreign currencies for trade or exchange.

In addition, many cars, houses for rent and hotel rooms are also being priced in US dollar or Thai baht.

A question raised: Why owners don’t charge their customers in Lao kip? Will we see contravention of these laws proceed with apparent impunity?

Perhaps entrepreneurs want to charge in foreign currencies since they don’t need to carry large sum of money. Secondly they might want to keep foreign currencies for importing goods including vehicles.

For instance, Laos shares long border with Thailand. Many Lao people particularly those in Xayaboury and Bokeo province prefer to keep Thai baht so that they can cross border to buy goods in Thailand easily.

Although the government tries to build confidence in the kip and reduce the use of foreign currencies, it is no easy task.

Stable over recent years, confidence in the kip last faced a considerable downswing when it saw a sharp depreciation against the US dollar and Thai baht during the Asian financial crisis of 1997-1998.

Many more works need to be done with regards to the use-of-Lao kip campaigns to improve the confidence for Lao people and their trading partners to use their own currency.

Dubbed as an import-dependent country, Laos is located at a geographical crossroads in Southeast Asia. The country is influenced by exchange with neighbouring countries which require currency to exchange for goods.

Bankers have attributed the depreciation of Lao kip to the market principle of supply and demand, as more and more people are demanding foreign currencies to import goods from other countries while foreign currency reserves in Laos are falling.

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

According to BCEL exchange rates on August 18, US$1 bought 8,268 kip, and sold for 8,308 kip. One baht bought 249.54 kip, and sold for 251.4 kip.

Nevertheless, the black market sell a US dollar for 8,500 kip and one baht for 270 kip respectively, sparking concerns that currency fluctuation could push up prices of products and fuel inflation.

Many commercial banks are willing to buy Thai baht and US dollars but they are reluctant to sell those foreign currencies, a cause of increasingly strident complaints from member of the public.

According to a report from the Bank of the Lao PDR early this month, Laos has sufficient foreign currency reserve notably Thai baht and US dollar to import goods for 4.14 months (lower than the target of five months).

There are a number of issues to deal with.

One is to boost exports and reduce imports of those goods that Laos can produce.

Second is to attract more investment to Laos by creating incentives and improving business environment so that more investors invest more US dollar and Thai baht to Lao enterprise and activity.

It’s also critical to ensure that investors are confident in the stability of the kip so they bring in the currency the country so sorely needs.

Third is to introduce a kip-payment electronic system, requiring people to pay for goods at shops or supermarkets in local currency. Such electronic payment systems also help address corruption.

It’s also vital to enforce the laws properly and crack down on illegal activities and ensure that more financial transactions can be done through the banking system.

Tourism is another sector that brings significant foreign currency to the country so tourism development and campaigns are important to ensure international visitors know about Laos and want to visit.

If there is a mechanism that foreign currencies are given priority to supply main importers, and these importers accept local currency, the currency fluctuation could also be minimised.

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