The Bank of the Lao PDR Mandates Exchange Bureaus to Tie Up With Commercial Banks – What to Expect?

The Monetary Policy Department of the Bank of the Lao PDR (“BOL”) issued Instruction No. 878/MPD on 2 August 2021 (“Instruction No. 878”) to implement its mandate requiring all currency exchange bureaus operating in the Lao PDR to become representatives of local commercial banks on or before 11 October 2021. Those that fail to do so will see their business operation licenses automatically revoked. The BOL issued this mandate on 12 July 2021 via Notice No. 758/MPD (“Notice No. 758”).

The Lao PDR currently follows a managed floating foreign currency exchange policy which prohibits commercial banks and exchange bureaus from offering exchange rates outside of the permitted official rates stipulated by the BOL in Decision No. 801/BOL dated 5 October 2015. Under the said decision, the official exchange rate band for USD to LAK is set at ±0.25% of the daily reference rate published by the BOL. The exchange rate for Euro to LAK is pegged at 0.50%; for THB to LAK at 0.75%; and for all other currencies at 2% of the BOL’s daily reference rate. However, until now, the BOL has not been able to implement its foreign currency exchange policy effectively, as U.S. dollars and Thai baht continue to be the preferred mediums of exchange in the Lao PDR. As a result, the majority of exchange rate bureaus have continued to offer market-determined rates across the country. The gap between the official exchange rates and the parallel market rates has continued to widen over the past year, with the USD to LAK market rate exceeding the official rate by more than 20% this month, resulting in a weaking Lao Kip and inflation in the costs of goods and services in the domestic market. According to the Annual Economic Report 2020 published by the BOL, a prolonged multiple currency phenomenon and a significant decline in foreign exchange earnings coupled with unprecedented challenges faced by the government due to the COVID-19 pandemic has resulted in the depreciation of the Lao Kip. As of today, the BOL’s official exchange rate for USD to LAK is set at LAK9,922/USD, whereas the exchange rate offered by the currency exchange bureaus is about LAK11,670/USD.

Other regulations issued by the BOL that set out the specific requirements for exchange bureaus when buying and selling foreign currencies from the public are Decision No. 109/BOL dated 1 February 2019 on currency trading between the general public and commercial banks and exchange bureaus, and Decision No. 393/BOL dated 2 July 2020 on currency exchange businesses.

Exchange bureaus must enter into a representative agreement with a commercial bank by 11 October 2021

All exchange bureaus that are currently licensed to operate in the Lao PDR are required to make a request to a commercial bank to act as its representative in providing foreign currency exchange services in the Lao PDR. An exchange bureau can only represent one commercial bank at a time; however, a commercial bank can have more than one exchange bureau acting as its representative, depending on its resources and capacity. Once a commercial bank accepts such a request, the parties must enter into a representative agreement that includes the standard terms specified in Instruction No. 878, particularly regarding following all of the BOL’s regulations governing currency exchange, on or before 11 October 2021.

Within 10 working days from the date of entering into the representative agreement, the exchange bureau must report it to the regional office of the BOL or the Monetary Policy Department of the BOL and provide a copy of the signed agreement, together with a copy of the certificate of representation issued by the relevant commercial bank.

Any exchange bureau that fails to enter into a representative agreement with a commercial bank in the Lao PDR by 11 October 2021 will not be permitted to operate foreign currency exchange services and their license will be revoked by the BOL.

What to expect?

Decision No. 801/BOL dated 5 October 2015 and Decision No. 109/BOL dated 1 February 2019 will be strictly implemented by exchange bureaus in the Lao PDR.

Exchange bureaus will no longer be able to provide higher rates than the official foreign currency exchange rate, as the rates will be fixed by the commercial banks and the exchange bureaus have to report their compliance with the terms of the agreement to the commercial banks on a daily basis.

Furthermore, exchange bureaus will now have to comply with the exchange limit (LAK10 million per person per day) and documentation requirements specified under Article 5 of Decision No. 109/BOL dated 1 February 2019.   

Any exchange bureau that operates an exchange currency business without entering into a representative agreement with a commercial bank is likely to be penalized.

If an exchange bureau continues to operate its business in violation of the requirements under Notice No. 758 and Instruction No. 878, in addition to the revocation of its business operation license, it will also be construed as a violation of the foreign exchange regulations of the Lao PDR as stipulated under Article 49 of the Law on the Management of Foreign Currency No. 55/NA dated 22 December 2014, which entitles the BOL to impose fines of up to LAK30 million.

For more information on the regulatory changes in the Lao financial sector, or for any other queries about the legal and regulatory environment in the Lao PDR, please feel to contact us at the VDB Loi Laos office: Daodeuane Duangdara ([email protected]), Sornpheth Douangdy ([email protected]), Sibasish Mohapatra ([email protected]).