Banning general public members from owning foreign currencies may be an option for the government to address money-related problems including kip depreciation and rising inflation, according to the Governor of the Bank of the Lao PDR (BoL).
“Our advisers from neigbouring countries China and Vietnam have said that they faced similar situation like us 20 years ago. Then, they unanimously decided that no general public members could be allowed to own foreign currencies. Only local currencies could be deposited in the bank and only import and export businesses could open bank accounts in foreign currencies,” said BoL Governor Sonexay Sithaphaxay on May 27.
“For many years our society has been accustomed to using many foreign currencies. So it is not easy to introduce this method.” Mr Sonexay also said that there need to be a meeting with the participation of a number of stakeholders to decide whether the prohibition of general public ownership of foreign currencies is possible.
The government is about to issue bonds with high interest rates to reduce the volume of cash in circulation next month. Meanwhile, BoL has pledged to work with the public security to take stricter actions against businesses illegally exploiting benefits from trading foreign currencies.
Illegal exchange businesses have limited the inflow of foreign currencies through the banking system and this weakens banks’ capability of providing foreign currencies, according to Mr Sonexay.
BoL is also preparing to submit revised draft amendments to the law on foreign currency management to the coming ordinary session of the National Assembly.
In the third quarter of 2021, BoL suspended the issuance of business license for exchange shops. The nationwide number of currency exchange shops was reduced from 550 to currently 416. More exchange shops are expected to have business license revoked over months to come.
In the first four months of 2022 which witnessed prevailing Covid-19 pandemic and worsening Ukraine situation, the national currency Kip depreciated 18% against US dollars and 9.4% against Thai baht as compared to the same period last year.
Meanwhile, the US dollar appreciated 8.18% against Euro, the highest appreciation in two years. Oil price rose by 65% year on year.
“In pre-Covid-19 years, Laos imported 600-800 million US dollars in oil per year. Today, the rising oil prices make us pay 1-1.2 billion US dollars per year for oil,” said BoL Governor.
Mr Sonexay also attributed the sharp depreciation of the kip to the imbalance between the inflow and outflow of foreign currencies through the banking system.
Of the total export values, only 30% were traded through the bank. Meanwhile, up to 98% of the import values were settled through bank accounts.
“Although we record almost 600 million of trade surplus, almost 50% higher than the same period last year, only 33% (US$3.2 billion) of the export payments have been paid through the bank,” said BoL Governor.
Electricity, the number one export product of the Lao PDR, has witnessed only US$350 million, 14% of its export value (US$ 2.6 billion) paid through the bank.
“Most electricity payments were made outside the Lao PDR. Some have rational reasons for doing so but we need to establish certain duration when payment should be made overseas and when not. We could just allow them to do so before they reach the break-even point, especially for concessional projects, after that the payment must be made domestically,” said Mr Sonexay Sitphaxay.
Source: Lao News Agency