09 Nov, 2023

Stricter Fiscal Management, Tighter Monetary Policy Key to Sustainable Growth

Laos’ economy is expected to maintain its recovery from the COVID-19-pandemic in 2023. But currency depreciation and surging inflation are challenges to sustaining the economic recovery. Ensuring tighter discipline in fiscal and monetary policies is essential to re-establish macroeconomic stability.These conclusions are highlighted in the 2023 Annual Consultation Report on Laos published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report is based on AMRO’s Annual Consultation Visit to Laos in May, and data and information available up to July 3.Economic outlookThe country’s economic growth is projected to accelerate to 4.8 percent this year from 4.4 percent in 2022, bolstered by the service sector. Following the full reopening of borders and the operation of the high-speed Lao-China railway, the tourism and logistics sectors benefited from enhanced connectivity with neighboring countries, especially China. Inflation surged to 23 percent year-on-year in 2022, driven by rising food and fuel prices, and is projected to average about 30 percent in late 2023.The external balances are expected to improve this year, supported by the recovery of tourism and FDI, on the back of enhanced connectivity and increased business opportunities in renewable energy. The exchange rate depreciated sharply in H1 2022, triggered by an increase in fuel imports and amplified by accelerated currency substitution. Monetary tightening through the issuance of short-term central bank bills to mop up excess liquidity has helped stabilize the exchange rate. Notwithstanding, the currency started to depreciate again in February.A sustained cut in current expenditure and rebound in revenue led to an improvement in the overall fiscal balance in 2022. The deficit is expected to widen towards the end of the year due to an increase in capital expenditure and a drop in overall revenue due to the absence of one-time licensing fee revenue from the crypto industry and some mining pilot projects. Despite continued improvement in the primary balance, public debt has increased due to the issuance of arrear clearance bonds in 2021 and the recent currency depreciation. Risks, vulnerabilities, and challengesThe external environment poses a risk to the economic outlook. A slower than expected recovery in China would weigh on Laos’s growth and external position via lower exports and FDI. Another round of kip depreciation could accelerate inflation and weaken the balance sheets of firms, particularly those with currency mismatches in debt service versus revenue.The government debt-to-GDP ratio would increase further with renewed kip depreciation. Ongoing arrear clearance could also increase the government’s debt. Continued financial weakness in state-owned companies could impose a fiscal burden on the government.Pockets of financial vulnerability remain as banks’ impaired loans could be higher. Nonperforming loans could increase upon the withdrawal of regulatory forbearance and/or if restructured loans in the electricity sector were to turn into bad debt. The recent kip depreciation would likely affect the debt servicing capacities of borrowers with foreign currency loans but with earnings in local currency.Policy recommendationsThe central bank should tighten its monetary policy further. The central bank should reduce its credit provision to banks and other sectors in the economy. Issuing BOL bills with high interest rates to mop up liquidity outside the banking sector should be minimized. The central bank should sterilize the liquidity injected from its purchase of arrears-clearance bonds by raising the reserve requirement ratio or issuing BOL bills to the banks.The authorities are encouraged to adopt market-friendly policy measures to increase the FX supply in the onshore market. The use of FX management measures, which are administrative in nature, should be temporary and time-bound. Policy details should be clearly communicated to the relevant stakeholders in a timely manner. Policy measures to strengthen the banking sector’s soundness should be stepped up.Ensuring fiscal discipline is crucial to prevent further arrears from recurring. The capital expenditure ceilings introduced to ministries and local governments should be accompanied by rigorous monitoring and enforcement of spending commitments. Furthermore, the authorities should increase efforts to enhance public finance management. The authorities should continue their fiscal consolidation efforts by improving revenue mobilization. The VAT rate should be restored to 10 percent. The reform of the state-owned electricity company should be accelerated to repay its debt to the government, which will reduce the risk of government contingent liability. The government should consider raising electricity tariffs to the cost-recovery level for all sectors while providing subsidies to offset the impact on vulnerable groups. Over the long term, the government should consider how to maximize the benefits from the transfer of hydropower assets to the government under the Build-Operate-Transfer scheme to meet their financing needs. Structural reforms should be expedited to bolster the momentum toward inclusive and sustainable growth. The transitioning of the Ministry of Industry and Commerce’s SME promotion department to the SME Promotion Agency is a welcome move to strengthen the operations of the existing SME Promotion Fund and to enhance SMEs’ production capacity. The vocational training program should also be reinforced to increase the supply of skilled workers, and business processes should be streamlined.

03 Nov, 2023

How Blockchain is Transforming Cross-Border Payments

Cryptocurrency has the potential to revolutionize the way we make cross-border payments and remittances in 2023 and the coming future. The decentralized nature of crypto allows for faster and cheaper transactions compared to traditional banking systems.Blockchain transactions can be completed 24/7 and without the need for intermediaries which can reduce costs and increase efficiency. This can make cross-border payments and remittances more accessible and affordable for individuals and businesses, particularly those in developing countries who may not have access to traditional banking services.Primary Benefits of Implementing Blockchain PaymentsOne of the key advantages of using crypto for cross-border payments and remittances is its ability to bypass traditional financial systems. This can help to avoid issues such as high fees in long wait times associated with traditional money transfer services. Crypto transactions are processed in minutes and at a fraction of the cost, making it a more accessible option for individuals and small businesses.For example, a small business in Africa can easily receive payments from customers abroad in crypto and then convert it to their local currency without having to worry about the high fees and conversion rates associated with traditional banking systems.Another advantage is the level of security and transparency that crypto can provide. Transactions are recorded on a public ledger and can be tracked easily which can help to reduce the risk of fraud and money laundering. This can be especially beneficial for cross-border payments and remittances as it can provide an extra layer of security for both the sender and the receiver.For example, a person who’s sending money to their family in another country can track the transaction on the blockchain ensuring that the money has reached the intended recipient, and also the recipient can confirm the receipt of the funds.The use of crypto can also open up new opportunities for businesses operating in different countries. With crypto, businesses can easily send and receive payments in different currencies without having to worry about the high fees and conversion rates associated with traditional banking systems. This can make it easier for small businesses to expand their operations and reach new markets. Additionally, the use of crypto can also enable businesses to access new markets that were previously difficult to reach due to the higher fees and long wait times associated with traditional banking systems.In addition to the benefits mentioned previously, crypto can also help to promote financial inclusion and access to financial services for those who are unbanked, particularly in developing countries. This could enable individuals and businesses to participate in the global economy even if they don’t have access to traditional banking services.For example, a person who doesn’t have access to a bank account can easily open a crypto wallet and start sending and receiving money from anywhere in the world.Challenges in Adopting Blockchain PaymentsHowever, it is worth noting that there are still several challenges that need to be addressed for crypto to fully realize its potential for facilitating cross-border payments and remittances. These include regulatory uncertainty, lack of mainstream acceptance, and volatility of crypto prices.For example, a lack of regulatory clarity can make it difficult for businesses to operate and for individuals to feel secure about using crypto for cross-border payments and remittances. Additionally, the volatility of crypto prices can make it difficult for businesses and individuals to plan and budget for cross-border payments and remittances.Regulatory uncertainty is one of the main challenges facing the crypto industry. Different countries have different regulations regarding crypto making it difficult for businesses to operate in multiple jurisdictions.However as the industry matures, it’s likely that governments will begin to develop more consistent regulations making it easier for businesses to operate in multiple jurisdictions.Despite these challenges, the future looks bright for crypto in facilitating cross-border payments and remittances with the increasing adoption of crypto and blockchain Technology, it’s likely that these challenges will be addressed in the future and crypto will play a greater role in cross-border payments and remittances.Positive Signals of Developing Blockchain PaymentsAs more and more businesses and individuals start using crypto for cross-border payments and remittances, it will become more widely accepted and mainstream. Additionally, as governments and financial institutions start to recognize the potential benefits of crypto they will likely start.However, with the exception of the occasional outliers this has until recently mostly seen digital innovators and challengers embrace cryptocurrency while established payment companies remained skeptical about the technology.But in the last 12 months, this has changed major companies including Microsoft MSFT, Tesla TSLA, Expedia, and WeWork have begun to accept payments in cryptocurrencies while established payment companies have announced their own initiatives to accept the technology.Visa and MasterCard have both announced hesitant moves in the space, the former having settled its first crypto transactions using U.S Dollar-packed USD coin, while MasterCard has announced plans to accept payments in cryptocurrency on its network.There has also been increased support for crypto and cross-border e-commerce, most notably with PayPal. The company initially made it possible for users to buy and hold cryptocurrencies before adding the capability for U.S customers to pay merchants around the world in a variety of cryptocurrencies which are converted into local currency during the transaction. And on August 8th, they introduced PYUSD, a stablecoin pegged to the USD, which further enhances the promise of cryptocurrency payments.Remittances are a vital source of foreign income in many developing countries frequently, surpassing foreign direct investment and overseas development assistance. According to World Bank data, total Global remittances totaled $702 B in 2020 despite the economic slowdown due to the pandemic.More consumers are now connected to the internet and are more comfortable with digital payments than ever before. So the demand for fast, cheap, safe, and convenient digital payment solutions has been increasing over the last several years.The Future of Blockchain In Cross-border PaymentsIt’s clear that the future of cross-border payments is likely to be reshaped by the increasing adoption of blockchain technology. Blockchains can significantly improve the speed, efficiency, and cost-effectiveness of such transactions. The adoption of these systems is already underway. And it is likely to continue to grow in the coming years.Lao National Digital Technology Group (LADT) is also preparing to make its mark in Laos. Get ready to revolutionize cross-border payments in the ASEAN region through blockchain tech & USDA stablecoin payments.