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Laos Table of Contents


Money Supply and Inflation

Money supply--measured by both M1 (demand deposits and currency outside banks) and M2 (M1 plus quasi-money such as checking accounts)--expanded between 1980 and 1989 (statistics are only available from 1980 on), in part because of the remonetization of government salaries, rising wage and price levels in industry, and extension of credit to indebted state-owned enterprises. World Bank figures indicated that money supply as measured by M2 increased at an annual rate of between 35 and 75 percent--except for 1984, when money supply was steady--until 1987, when, fueled by increases in domestic credit to public enterprises and foreign currency deposits from public enterprises, it jumped by over 300 percent. During the next two years, the money supply--measured by M1 and M2--continued to grow rapidly, reaching a growth rate close to 90 percent in 1989.

The average annual inflation rate was about 11.5 percent from 1985 to 1989. In 1989, however, inflation increased dramatically, to 52 percent, fueled by the massive increase in the money supply and a devaluation of the kip and exacerbated by a reduction in foreign exchange caused by the ban on forestry exports and the temporary reduction in exports of hydroelectricity to Thailand. Monetary policy was tightened in 1990; credit allocated to unprofitable state-owned enterprises was restricted through Decree 17 and through higher interest rates. As a result, growth in M2 was held to just 2.3 percent in 1990. Lower food prices as a result of good harvests in 1989 and 1990 following the years of drought also helped to slow inflation to about 20 percent; inflation continued to decline slowly through 1994--to about 9 percent.

Data as of July 1994