Laos recorded an annual average growth of more than 7 percent of its gross domestic product (GDP) between 1985 and 2019. It is nothing short of an „economic miracle”. Since 2019, the country’s economic growth has collapsed not only due to the outbreak of Covid-19, but also due to the country’s huge debt burden.
According to the Asian Development Bank’s “Comprehensive Country Strategy for Lao PDR” released in February, the size of the country’s economy shrank from about $18.7 billion in 2019 to $14.1 billion in 2023. During the same period, the country’s GDP per capita has declined. $2,600 to $1,858. The Lao Kip depreciates from below 14,000 per US dollar in 2021 to 24,000 in 2023. Meanwhile, annual inflation rose from around 3.0 percent in 2019 to 31.2 percent in 2023. Poor economic conditions have put severe pressure on the poor and the poor. Sections of the country’s 7.5 million people.
Using the full range of stress tests, in May 2023, the International Monetary Fund delivered its verdict: Laos is in debt crisis. It highlights that Laos’ public debt has risen from 69 percent of GDP in the pre-Covid-19 years to 128.5 percent in 2022, while interest payments have risen from 10 percent of public revenue in 2019 to 24 percent in 2022. , a European trade credit insurer, has warned that the country is sinking into a sovereign debt default. In February this year, Moody’s downgraded Laos’ sovereign debt rating to well below investment grade. Laos’ immediate challenge is to effectively address its huge debt – by any means necessary.
In response to the crisis, the Lao government introduced strict restrictions. Directed the Finance Ministry to collect taxes and revenues from businesses and exporters in foreign currencies if these businesses earn income in foreign currencies; Bank of Lao (BOL) ordered to upgrade its electronic payment system; and asked the Ministry of Industry and Commerce to develop an electronic payment system that would enable sharing of data with BOL. It also advised that importers and exporters should have bank accounts mandatorily; Emphasized that exporters who wish to keep their earnings abroad in foreign currencies should seek prior approval from BOL; and prohibited anyone other than a foreign expert or expatriate employee from receiving their salary in foreign currencies. The Prime Minister instructed the government officials to strictly implement these measures.
Ironically, a long list of restrictive measures is being introduced at a time when the country needs the opposite policy liberalization. Encouragingly, Laos now needs a simple liberalization program that connects the small landlocked country to the global economy. It underscores the need for the country to implement a three-pronged liberalization plan: privatize the economy; remove all restrictions on the country’s foreign trade and capital flows; Finally, and most importantly, the dollar makes the economy. The country can and should implement the three-pronged reforms as quickly as possible. Due to space constraints, I will focus on the linchpin of the reform agenda: dollarization.
As a small economy with sufficient human capital, Laos is an ideal candidate for more, not less, dollarization. There are two options to consider. It can go Judge Dollarization, under which the dollar systematically replaces the kip. If abolishing the GIP is not politically desirable, a second option may be Truly Dollarization. Under this system, the government could keep the kip, but then maintain a dollar-kip balance, so that the kip remained a unit of account, but not a medium of exchange and a store of value. Instead of using its scarce human capital in managing a national currency, the BOL will take more time on its hands to effectively exercise its regulatory and supervisory functions in the country’s financial system.
In January 2003, Alberto Alesina and Robert J. Pharaoh „One Country, One Currency?” published an article titled This begs the question: As the number of countries has increased dramatically since World War II, does each new country need a new currency? Their answer is a simple „no”. To summarize their argument, there is no good economic reason why „every national flag” should have a „new currency”. In subsequent papers, other economists have argued that a sharp increase in the number of currencies has not only hindered international trade, but also caused more currency crises around the world.
Encouragingly, in one fell swoop, the euro was introduced in 1999, unifying the currencies of numerous European countries. From their experience, the European countries found that each of them continued to pursue competitive devaluations, leaving them to the detriment of the socio-economic development of the region as a whole. More recently, the intergovernmental regional bloc commonly known as BRICS, which includes founding members Brazil, Russia, India, China and South Africa, as well as Iran, Egypt, Ethiopia and the United Arab Emirates, has been considering introducing a common currency. across the board. It may sound like a pipe dream – but one could have said that about the European Monetary Union before the introduction of the euro. The Euro is now one of the most important currencies in the world, used by more than 350 million people.
Closer to home in Laos, Cambodia was used Truly Dollarization has been good since the early 1990s. With Cambodia’s more open economic policies, the Truly Dollarization contributed to Cambodia’s own sustained economic growth. The country’s financial system allows banks to accept dollar-denominated deposits and issue dollar-denominated loans. Laos has a good example among its neighbors which has done well in socioeconomics Truly Dollarization. Above all, The Truly Dollarization boosted domestic and foreign investor confidence in the Cambodian economy. It protected the economy from the severe effects of the 1997-1998 Asian financial crisis.
If all these sources do not convince Laos to dollarize its economy at this critical juncture of its debt crisis, it is hard to imagine the country simply sailing from one current crisis to another. The nation’s day of reckoning has arrived. The country needs more dollarization Judge Or Truly.
The views expressed in this paper are solely those of the author and should in no way be attributed to Bannassastra University of Cambodia and/or the Asian Development Bank.
„Oddany rozwiązywacz problemów. Przyjazny hipsterom praktykant bekonu. Miłośnik kawy. Nieuleczalny introwertyk. Student.