3.2. Micro inefficiency

conversion requirements for foreign currency deposits. These requirements have acted as a tax on Myanmar exporters (who were previously able to convert foreign exchange earnings at the market rate), reducing their price competitiveness on international markets and hindering necessary external adjustments. In addition, the authorities in Myanmar have imposed onerous trade restrictions, including the reinstitution of import and export trade license requirements, import bans and quotas.

While Lao PDR has experienced the sharpest exchange rate depreciation in the region, foreign liquidity pressures persist. The external current account has improved on stronger exports and higher prices for some key commodity exports, but foreign liquidity pressures have prevailed, largely due to exporters retaining earnings off-shore, in part to make payments abroad (related to external debt, imports, dividends, and so forth.) but likely also because of devaluation expectations and perceived confiscation risks. The authorities have accommodated external pressures by allowing the official kip/Us$ exchange rate to depreciate by almost 60 percent over the past 12 months, but a persistent premium in the parallel market points to further depreciation pressures. External liquidity constraints are exacerbated by Lao PDR’s large external debt service obligations (amounting to over US$1 billion per year) while FX reserves remain precariously low, standing at US$1.3 billion, less than two months of import coverage4. To ease pressures on the kip, the Bank of Lao has tightened domestic liquidity, including through a recent issuance of a six-month savings bond, priced very aggressively at an annualized 20 percent interest rate, significantly above prevailing deposit rates. in addition, the authorities have resorted to various administrative measures, limiting the functions of currency exchange units and granting commercial banks a greater role in the purchase and sale of foreign currencies by importers, exporters, investors and other legal entities. Currency exchange units are now only allowed to change money for individuals and tourists, up to a maximum of 15 million kip per person per day. Further capital controls are being considered, including FX surrender requirements for exporters in an attempt to corral more FX into the domestic market. Meanwhile, foreign currency liquidity shortages caused a demand-supply mismatch and widened the spread between the official and parallel market rates, with the spread reaching 38 percent in mid-June, before declining to 16 percent by the end of July. The combination of foreign exchange shortages (at the official rate) and a fuel price cap have also led to widespread fuel shortages in the country, which have been temporarily eased by a credit line to fuel importers and the lowering of fuel excises for three months.

High inflation requires frequent price adjustments for goods and services by firms to maintain their profitability. These price adjustments are usually asynchronous (“staggered price setting”), leading to relative price distortions that undermine the efficient allocation of resources and productivity growth (nakamura et al. 2018). High inflation obscures relative price changes, creating a need for costly information searches, increasing uncertainty about the future value of assets, and hence discouraging investment and economic growth (figure 39; box 4). similarly, price control measures to curb inflation can hinder the allocation of resources to their most productive use and thus hurt productivity (box 5).

4 There have been significant debt service deferrals from key bilateral creditors since 2020, which have partly eased some of these pressures.