Inflation Rate

The Consumer Price Index (CPI) series in the Lao PDR is computed only for the prefecture of Vientiane. There are plans, however, to increase the coverage of the series for the entire country. Year-on-year inflation rate was computed at 9.0% in December 1993, somewhat higher than the rate of 6.0% registered the year before the higher rate inflation in 1993 was due mainly to services which registered an increase of 34.1% in December 1993 compared to the same month of the preceding year. The price of food, which accounts for around 62. 1% of total consumption (based on the recently concluded Lao Expenditure and Consumption Survey), was relatively stable, increasing by only 0.2% in December 1993.

The average increase for 1993 was 6.3%, thereby maintaining a single digit inflation rate for the second consecutive year. preliminary estimates for the first half of 1994 indicate that inflation will continue to be constrained at a single digit level. Year-on-year rate was computed at 9.4% in March and 7.0% in June 1994.

Figure 1.7 Money Supply Growth and Inflation, 1988-1993

Money Supply

As of December 1993, liquidity broad money supply) was reported by the Bank of the Lao PDR at Kip 125,848 million, representing a hefty increase of 64.6% from Kip 76,463 million as of and of 1992. narrow money ( currency in circulation plus demand deposit ) was at the level of Kip 52,239 million, representing an increase of 48.6% while quasi money ( time and savings deposits, including foreign currency deposits ) was at Kip 73,609, representing an increase of 78.2%.

Notwithstanding this expansion of liquidity, the inflation rate was contained at single-digit level , possibly reflecting continued magnetization of economic transactions in the country.

The marked for financial inter mediation continued to improve 'in 1993 with the opening of branches in Laos of two other foreign commercial banks. meanwhile, technical assistance to the bank of the Lao PDR ( central bank) continued to strengthen its capacity for bank supervision.

INTEREST RATE

Real interest rates for deposits in the Lao PDR continued to be positive in 1993. The positive interest rate regime should encourage generation add mobilization of domestic savings to counterpart increasing inflow of foreign savings for private and public investments.

The minimum savings deposit rate of interest prescribed by the Bank of the Lao PDR for 1993 was 12%, several percentage points higher than the average inflation rate for the year. The maximum lending rate, on the other band , was pegged at 24 %, regardless of the nature of economic activities to be financed by the loan.( In 1992, there were different maximum lending rates ranging from 14 to 26% depending on the purpose and duration of lending).

Commercial banks can set their own interest structure and margin provided they meet the minimum deposit and maximum lending rates prescribed by the central ban-k. They normally adopt a 5% margin in their lending policy. Subsidized credit from the state-owned Agriculture Development Bank was available at subsidized interest of 7% to 10%.

Actual lending rates for the corresponding period ranged from 14 to 28%, depending on duration and purpose of lending Short-term lending for trade, transportation and services had the highest 'interest rates. For agriculture and forestry, lending at subsidized interest rates ranging from 7 to 14% was provided by the Agriculture Development Bank.