JEPA Third International Conference, Meiji University, Tokyo, Japan
November 13-14, 2004

Dollarization in Laos: Evidence, Causes, and Policy Implications
Phetsathaphone Keovongvichith1

Graduate School for International Development and Cooperation (IDEC)
Hiroshima University

Abstract

Laos is only one of a few countries in ASEAN(after Cambodia) that has
experienced de facto a dollarized economy since the early 1990s and this situation has
continued to prevail even until to date. This paper defines dollarization in the case ofLaos(or sometimes is called currency substitution) as the holding by residents of a large
amount of theirs assets in the form of foreign currency-denominated assets(i.e. US
dollars and Thai Baht).
Firstly, the paper begins with the basic analysis through the examination ofpatters of dollarization experience in the Lao economy and then discusses the causesof dollarization during 1990s. The paper presents evidence on the relatively large size ofdollarization as measured by foreign currency deposit to broad money in the banking
system. The preliminary evidence is empirically clear that Laos can be regarded as ahighly dollarized economy. This is because, for example, the use of foreign currency
currently represents more than 70 percent of broad money. Residents in Laos are alreadyused to quoting prices and carrying out transactions in foreign currency, especiallylarge transactions are made in foreign currency, either in U.S. dollars or Thai Baht.
The reserve requirements of commercial bank are met with both domestic andforeign-denominated assets; deposits and loans in the domestic banks denominated in1

1-5-1 Kagamiyama, Higashi-Hiroshima-shi, Hiroshima-ken, 739-8529,Japan; Graduate School forInternational Development and Cooperation (IDEC),Hiroshima University; TEL:09097386229; Author’s Email

Address: phetkeo@hiroshima-u.ac.jp; phetsakeobol@hotmail.com

foreign currencies are generally high and have risen rapidly compared with domestic
currency. Dollarization in Laos appears to have directly caused by macroeconomic
instability such as episodes of high inflation and rapid currency devaluation. Thissituation has been observed similarly in several Latin America countries or thosetransition economies. However, this paper also believes that indirect causes were alsobehind the surge of dollarization( close trade link, economic openness resulting in large
foreign currency in forms of foreign investments and etc.).
Secondly, this paper believes that dollarization in Laos is rather unofficial thanofficial ones and the national authorities neither sought nor encouraged it. It is mainly
due to aforementioned factors. In this context, the question arises as to what are thepossible policy options for the national authorities to undertake in the wake of very highdollarization. This paper, therefore, goes on to shed some light on policy options that
may be adopted to deal with the prevalence of dollarization. It stresses the importanceof economic stability to affect dollarization, especially to avoid high inflation and rapid
currency devaluation. In addition, improvement of financial infrastructure (domesticpayment system etc.) has also an important implication. The policy options suggested
here are appropriate in the short to medium term.

Keywords: Dollarization, Causes, and Policy Implications
Proposed theme: International Monetary Affairs or Fiscal and Monetary Policy