Laos battles rising inflation in 2023

In a blow to the Lao economy, inflation has risen steeply, with the country’s national currency, the kip, experiencing a significant decline. The root causes of these issues can be attributed to structural vulnerabilities that have been present for a long time and will require medium to long-term efforts to rectify.

In 2022, inflation rates accelerated for ten consecutive months, reaching a record high of 39.2 per cent in December, according to data. The Asian Development Bank predicts that inflation in Laos could hit 17 per cent in 2022, making it the highest in Southeast Asia. However, there is some uncertainty surrounding this projection as the impacts of external factors and occasional government interventions could lead to fluctuations. The current exchange rate in Laos stands at 17,400 kip to the US dollar.

Food and fuel prices saw a surge of 45.8 per cent and 50.4 per cent in December 2022, respectively, due to the spillover effects of increased commodity prices and the kip’s depreciation. A major fuel shortage, combined with a shortage of foreign currency at official exchange rates, resulted in a sharp rise in fuel prices mid-2022.

The global energy price hikes and the ongoing conflict between Russia and Ukraine have added further uncertainties to the equation. Export disruptions have interrupted global grain supplies, which could result in increased pressure on grain and edible oil prices if energy prices continue to rise.

The decline in Laos’ exports, tourism, and remittance earnings could further impact the value of the kip. This, in turn, would make fuels and other products even more expensive for the general population.

Higher prices reduce the purchasing power of poor households and could stall the country’s post-pandemic economic recovery. Inflated prices threaten living standards, particularly for the urban poor. A recent survey found that two-thirds of the Lao population reported spending less on healthcare and education in 2022, which could hinder the government’s efforts to improve human development and reduce poverty.

The Lao economy is projected to have grown by only 2.5 per cent in 2022, with slower growth reflecting high inflation, the depreciation of the kip, a less favorable global economic environment, and sluggish domestic reforms. Economic recovery is expected to be gradual, with real growth projected to reach around 3.7 per cent this year.

The increase in prices has also impacted income growth and real consumption, which make up 37 per cent and 56 per cent of GDP, respectively. Rising agricultural input costs and transport disruptions have also impacted economic activity in Laos’ agricultural and manufacturing sectors.

In an effort to ease currency depreciation, the Lao government has implemented policy measures such as raising interest rates and rationing foreign exchange reserves for essential goods imports. However, these measures will only have a temporary impact if the underlying structural problems are not addressed. If exchange rates are not stabilized, Laos could face significant currency depreciation and further inflation.

In the short-term, the government has established a mechanism to channel foreign exchange earnings into formal channels. To prevent market speculation from affecting the kip’s value, regulations, particularly the recently amended Law on Foreign Currency Management, must be better enforced.