Rising baht poses inflation risk for Laos
The government is facing bigger challenges to keep the price of goods in the country stable as the value of the Thai baht continues to rise against the Lao kip.
The baht reached a value of 265 kip yesterday, according to the reference exchange rate posted on the official website of the Bank of the Lao PDR. Last month the baht was worth 264 kip.
The baht rose to its strongest level since July 1997 amid optimism that the country's improving economy will draw more funds from abroad, according to the Bangkok Post, one of the country's English language newspapers.
Yesterday the baht climbed another 0.5 percent to 29.39 baht against the US dollar. The latest move comes as global funds purchased US$2.1 billion more Thai government bonds than they sold this month till yesterday.
This figure adds to net purchases of US$2.7 billion in February and US$3.7 billion in January, Thai Bond Market Association data shows.
Economists have expressed concern that the rising value of the baht against the kip would add more pressure on the Lao government to keep the price of goods stable and the inflation rate down, as most manufactured goods on the Lao market are imported from Thailand.
“Importers have to adjust the price of their goods when the baht rises so they can maintain their business profits, which will put pressure on the government to regulate the price of goods,” said an economist at the Lao National Economic Research Institute.
He said the inflation rate in Laos is now fluctuating between five and six percent, which is considered as one of the higher rates in the region.
The economist said it is difficult for Laos to regulate the price of many goods since it imports most manufactured goods consumed domestically from foreign countries, mostly Thailand.
He said that increasing the supply of domestic goods is one measure that would help to keep inflation low.
However, he acknowledged that it is not easy for Laos to produce goods for domestic consumption as the local manufacturing industry and SMEs are facing strong competition from foreign rivals.
Lao businesses need more investment incentives in order to compete. For example, vegetable growers needs tariff free fertilisers so they can keep their production costs as low as possible. Currently, Thai growers can sell their goods at lower prices because they do not have to import fertilisers.
Officials from the Bank of the Lao PDR said they were keeping a close eye on the appreciation of the baht and aim to keep the exchange rate stable within a five percentile range of movement for the duration of this year.
They admitted, however, that if the baht continues to rise it will have a considerable impact on inflation in Laos.
On the bright side though, they said that the higher value of the baht will create conditions conducive for Lao businesses to produce goods for export.