Country Report Laos June 2009

The domestic economy: Laos records deflation, despite rising food prices

Year-on-year deflation occurred in April, despite the seasonal price rises that are expected in the lunar New Year festival in mid-April. According to the national statistics office, the consumer price index rose by 0.8% month on month, but fell by 0.2% year on year. Inflation reached a peak of 10.3% in May last year, but fell to 1.6% in February and 0.7% in March. Local economists attribute the deflation-the first period of falling prices recorded in Laos since the 1975 revolution-to an oversupply of beer. Beer consumption is high in Laos, with the state brewery, the Lao Brewery Company, widely seen as the most successful and best-run company in the country. Alcohol sales peak in the New Year period, traditionally tempting traders to charge higher prices. However, the advent of competition and expansion in the beer market seems to have ended the practice. Perhaps more significantly, fuel prices were 11% lower than they were in the year-earlier period.

Food prices rose over the holiday, showing a year-on-year increase of 3.4%. Hot weather and water shortages at the end of the dry season (which traditionally runs from November to April) led to vegetable prices rising by as much as one-third in March. Normal seasonal trends were exacerbated by problems with the irrigation network, a legacy of damage caused by the 2008 floods. Many farmers have shifted production to crops which require less water, such as sweetcorn and potatoes. A member of the National Economic Research Institute, Leeber Leebuapao, has welcomed the increase in vegetable prices as a stimulus for agricultural production, but has also warned that purchasing power has begun to drop across the country.

Several state banks have lowered interest rates, which generally range from 9% to 16%, depending on the repayment terms and customer credit rating. The 1-percentage-point reduction is an attempt to stimulate investment and reduce bank losses on savings accounts. Meanwhile, expansion of the deregulated banking sector continues. A new Lao-French bank is set to open by the end of the year, the result of a joint-venture between BCEL and the BRED Banque Populaire Group, also known as COFIBRED. The bank intends to open branches in Vientiane, Luang Prabang, Savannakhet and Pak Se, and is looking to attract investment from Europe and Asia.

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