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Central bank looks to keep money supply in check
The Bank of the Lao PDR has vowed to keep money growth at appropriate levels as Laos continues to struggle with rising inflation.
The central bank made a statement on its monetary policy at a special government meeting on measures to combat inflation held in Vientiane last week.
The bank did not provide details on how it plans to curb the growing money supply, with possible options including raising official interest rates, which will pressure commercial banks to increase their interest rates; increasing the reserve requirements for commercial banks; or managing the inflow of foreign currencies.
Money supply, which is a measure of the total amount of money available in the economy at a certain point in time, grew by 23 percent in March compared to September of last year and by 36 percent compared to the same period last fiscal year.
Officials from the central bank, who wished to remain unnamed, said the bank would not raise official interest rates as governments in some other countries have done to curb inflation, saying this would not be effective in Laos.
They explained that most businesses and major investment projects do not rely on loans from Lao banks but rather external sources, the refore increases or reductions in the central bank's interest rate would be unlikely to have any effect on investments and money supply.
According to a report from the Ministry of Planning and Investment, the government approved US$1 billion worth of investment projects in the first six months of this fiscal year, of which US$692 million came from international investors and the remainder from domestic sources.
The officials said the central bank raised the official interest rate in September last year, from 5 to 6.5 percent, a strong signal that Laos is moving to address inflation. However, they noted that most commercial banks kept their interest rates unchanged, a further indication that increasing interest rates would be ineffective in addressing growing money supply
They said one of the most effective measures to curb money supply is likely to be the monitoring of foreign currency inflows. As foreign currency can only enter the country through banks, it would be easy for the central bank to manage money growth.
Laos still has a multi-currency system, with most people having bank deposits in a foreign currency. The country also relies heavily on imported consumer goods.
Several international economists have warned that growing investment in the resources sector will lead to inflation problems. People employed by foreign-backed projects in Laos tend to have relatively high incomes and therefore have more disposable income.
However, the big challenge is helping the vast majority of people who do not directly benefit from foreign investment projects and still have to deal with high inflation.
The best way for the government to address this disparity is to boost domestic production and increase investment in non-resource sectors and small and medium size enterprises, with the aim of producing more goods for the domestic market.
vientiane times
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