Laos: The Collapse Of The Kip

1999

E.C. Chapman & Ian Wilson

The Lao currency, the kip, is now in freefall at a time when other regional currencies have steadied, following the first wave of devaluations accompanying the economic crisis. In 20 months it has lost 80 percent of its June 1997 value of just under 1,000 kip to the US dollar. It is now trading at 6,750 kip, a sharp drop since mid-February when it stood at the official rate of about 4,300, and only a little more on the black market.

The floating of the Thai baht in July 1997, which triggered the Asian crisis, resulted in the baht losing only 30 percent of its value. It is now sitting at about 36 to the US dollar, following Government and bank measures to restore confidence. Inflation is under control at about 12 percent. Laos has not been as fortunate and is now learning to live with nearly three digit inflation.

It was inevitable that the Lao People's Democratic Republic would suffer as soon as Thailand experienced problems. Over 50 percent by value of Lao imports come from Thailand and 30 percent of Lao exports go to Thailand, although these are official figures and should be boosted to account for the considerable non-official or smuggling trade. Laos also had an accumulated trade deficit with Thailand of a massive US$213 millions in 1996. Laos actually managed a balance of payments surplus of US$45 million in 1996 but this became a deficit of US$30.5 million in 1997 as the crisis began to bite.

The effects of the crisis were: firstly, that Thai imports became more expensive for Laos and, as the kip drifted down, so did all other imports. As confidence in the kip fell, many people withdrew their holdings of kip and foreign currencies from the state and commercial banks, leading to a grave shortage of liquidity throughout the system.

At the same time, foreign investment in Laos has been crippled, falling in 1997 to only 12 percent of its 1996 level and in 1998 to only 9.5 percent. Foreign direct investment and foreign aid had long served as props for the weak economy.

Secondly, Lao exports have been largely concentrated in the timber and hydro power sectors. Thailand's capacity to utilise electric power and timber was immediately curtailed as the economy faltered. Then, because the Lao kip was falling more quickly than the Thai baht, Laos gained little benefit from what sales could be made in these sectors and in the infant garment and manufacturing sectors. Some of these industries, including the garment sector, largely depend on imported raw material, including textiles, or on imported equipment, spares and fuel. Prices for all these have increased. The government is attempting to encourage import substitution measures to lessen Lao dependency on international markets but this is a long process, particularly given the underdeveloped state of the country's infrastructure.

Thirdly, the impact of these problems on the Lao population has been serious inflation, felt particularly in urban areas and among government employees and those working for Lao employers. Some estimates have it at 100 percent for 1998. Prices for consumer goods have shot up, making medicines, household items, much food, much clothing and most school books prohibitively expensive. Government steps to lessen hardship, like selling some imported goods at subsidised prices and pegging fuel and electricity prices, distorted the market economy and created a black market.

Early in 1998 state employees received a modest one-off salary supplement but more significant has been the distribution of small allotments near Vientiane and the shift from a six-day working week to five days. Many government workers now eke out a better living from growing rice or vegetables or by raising large and small livestock. Those thrown out of work through the failure of some enterprises are frequently able to return to the countryside. There the economy is less dependent on cash and barter is practised at the local level. The Government has won high praise in some villages for its initiative in providing relatively cheap, small-scale irrigation by importing low-cost Indian pumping equipment. This has made possible more second crop rice growing, with startling results in those lucky villages which otherwise find the dry season very hard. Government officials also speak of the contribution small-scale irrigation can make to social stability.

The outlook for Laos remains bleak and it has little prospect of climbing out of the category of one of the world's poorest nations. Real recovery in Thailand, restored confidence among foreign donors, and effective import substitution will all take time. Tourism is perhaps an opportunity to be exploited but this alone cannot forestall what threatens to become a currency collapse.

WATCHPOINT: Will the Lao kip crash through the 10 thousand barrier?

 

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