This will be the first time that Lao PDR - one of the smallest ASEAN economies - has faced such a massive trade deficit in recent decades. According to the World Bank, Laos' trade deficit was US$827 million in 2011 and US$424 million in 2010.
The deficit has soared amid rising foreign investment in Lao PDR. According to the World Bank, the value of Foreign Direct Investment (FDI) is projected to reach US$1,621 million. In 2011, FDI stood at US$1,128 million while in 2010 it was US$770 million.
According to the Ministry of Industry and Commerce, Laos' top three exports are mineral products (including copper and gold), garment products and hydropower, while the top three imports are fuel, construction materials and vehicles.
Economists say it is common to see a huge trade deficit in a developing country, adding that the inflow of FDI normally drives up imports. The construction of processing plants and large-scale real estate projects will result in increasing demand for construction materials, machinery and technology.
They say that one of the main challenges of such a large trade deficit is the management of foreign reserves and currency exchange, because increasing imports will result in a high demand for foreign currency. If the supply of foreign currency does not meet demand, it will negatively affect the value of the kip.
According to the World Bank, foreign reserves in Lao PDR reached a critically low level of US$620 million in December – a value equivalent to 2.5 months of non-resource imports.
The Bank of the Lao PDR has consistently pursued a managed floating exchange rate regime as the main instrument to maintain exchange rate stability.
The kip appreciated marginally by 0.3 percent against the US dollar from January to October 2012, while depreciating against the Thai baht by 2.8 percent in the same period because of the appreciation of the baht against the US dollar, according to the World Bank.
The World Bank has called on the Bank of the Lao PDR to curb credit growth, which can reduce domestic demand and the value of imports, in order to stabilize the country's economy.
Source:
http://www.vientianetimes.org.la/FreeContent/FreeConten_Laos%20to%20see.htm
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