Laos

Laos experienced a series of upheavals in the first few years, before settling into a relatively strict form of central planning with a monobank, no real monetary policy but a frequently adjusted exchange rate fix. Two-tier banking was introduced among other reforms from the late 1980s, but financial market development and monetary transmission remained weak, dollarisation was high, and monetary policy continued to focus on exchange rate stability, albeit without pre-announced, precise or long-lasting targets.

Years

Targets and attainment

Classification

1974-78

coalition government following peace agreement of 1973 covering part of country (smaller and poorer zone under control of Pathet Lao forces); previously official rate was managed with respect to USD and dependent on large inflows of foreign aid (which now decline), capital flight first half of 1974 leads to heavy exchange controls from July, followed by large depreciation of parallel market rate; limited financial system and monetisation, some banking but no securities markets, central bank sets reserve requirements and regulates interest rates; from 1975 unification of two zones, wide-ranging state controls and nationalisations, other banks closed and central bank converted into monobank, lack of fiscal discipline and large monetary financing of deficits; new single currency with large devaluation mid-1976 only briefly improves competitiveness; exodus of skilled and managerial workers leaves serious shortages; monetary-fiscal (including state enterprise) stabilisation measures from mid-1977, with further devaluation 1978; statistical database very poor

unstructured discretion UD

1979-89

move to central planning, strict but sometimes pragmatic; currency reform late 1979 and large devaluation; ongoing large current account deficit financed by foreign aid; 1981 six-month closure of border with Thailand; growing volume and spread on parallel forex market, countered by (periodically reset) commercial exchange rate from 1982 and preferential rate from 1983; monetary policy largely passive, monetary growth driven by needs of SOEs; some continuing use of barter, heavy reliance on cash including some use of USD and Thai baht; recurring difficulties in controlling inflation; major devaluation of (most important) commercial exchange rate 1985, plus first change in interest rates for 6 years; second five-year plan 1986 initiates liberalisation of prices and of enterprise sector; 1988 overall credit ceiling set and interest rates raised; 1988 official exchange rates unified and then kept close to rate in parallel market, foreign exchange liberalised; some statistical improvements

multiple direct controls MDC

1990-2017

two-tier banking system: State Bank becomes central bank and its branches autonomous commercial banks, and new private banks now allowed; rising monetisation; reserve requirements and central bank window for short-term lending to commercial banks introduced (later replaced by discount facility), interest rates gradually liberalised and varied more actively, central bank sells own bonds via banks to public from 1992 and holds regular Treasury bill auctions from 1994, while direct credit controls and moral suasion reduced, but financial markets are underdeveloped and monetary control and transmission mechanism weak; official exchange rate parity abandoned 1995 after forex crisis, but float is heavily managed and forex market remains underdeveloped; issue of poor performance of state-owned commercial banks; Asian crisis 1997 (which severely affected main trading partner Thailand) briefly disrupts monetary policy and reform process and boosts dollarisation; monetary policy geared to inflation control, exchange rate stability and external balance, monetary control dependent on fiscal discipline and control of state-owned banks; 2009-10 quasi-fiscal activities of central bank (lending to local governments) raise reserve money and banks’ excess reserves; from late 2000s exchange rate moving (mostly depreciating) within +/-5% annually adjusted band vs USD (and Thai baht); monetary policy effectiveness remains limited by dollarisation (despite significant fall since 2000), monetary objectives diverse (though exchange rate has priority) and instruments mostly indirect but limited; IMF presses repeatedly for more exchange rate and interest rate flexibility, more financial market development, clearer monetary policy framework and improved statistical database

loosely structured discretion LSD

Selected IMF references: RED 1974 pp19-23; SR 1974 pp12-14; RED 1975 pp1-3, 19, 44-8; RED 1977 pp12-13, 18-19, 27; SR 1977 pp1-3, 5-7, 10; RED 1979 pp1-4, 17-19, 27; SR 1979 pp1-4, 8-10; RED 1980 pp1-3, 23-5, 35; RED 1982 p40; SR 1982 pp9-10; RED December 1985 pp17-18, 28-30; RED 1986 pp22, 34; SR 1988 pp7, 10; RED 1990 pp16-18, 32-3; SR 1990 pp2-3, 8-10, 13-14, 15-16; SR 1992 pp3-10; RED 1993 pp16-19, 33; BP 1995 pp7-9, 12-15 36-7 RED 1996 pp28 30-1, 43, 72-80; RED 1997 pp15, 22-6, 29-30; SR 1997 p12; RED 1998 pp13-15, 18-19; SR 1998 pp7, 8, 15; RED 1999 pp15, 23-7; SR 1999 pp6-7, 9; SISA 2001 pp5-6; SI 2002 pp3-12; SR 2006 p13; SR 2009 p11; SR 2011 pp7, 13-15; SR 2012 pp8-12; SR 2013 pp12-13, 22; SR 2014 pp9-10, 23; SRIA 2014 p3; SR 2017 pp13-15; SRIA 2017 pp3, 7-8.

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