The Development of Foreign Exchange Management in the Lao PDR

Background

The information provided below will help you understand the evolution of foreign exchange management by the Lao PDR government (the “GOL”) and the current situation.

Prior to the year 2023, the GOL and its authorities took a relatively relaxed approach to managing foreign currency. Although the Law on Foreign Currency Management (dated 22 December 2014 and amended on 7 July 2022) mandates the use of Lao Kip for everyday transactions involving purchases of goods and services, wage and salary payments, and repayments of local loans (Article 10), enforcement has been lenient. Therefore, many locals opted to use foreign currency, such as Thai baht or US dollars, when making major purchases and paying for imported goods, leading to a thriving currency exchange business environment.

2004

In 2004, the Bank of the Lao PDR (“BOL”) introduced the Regulation on the Management of Foreign Exchange Businesses No. 2 dated 6 August 2004, which allowed any individual or entity to apply for a currency exchange business license with the BOL, leading to the establishment of currency exchange bureaus in the Lao PDR, independent of commercial banks. It also allowed currency exchange bureaus to set their own exchange rates, while taking into consideration the rates set by the commercial bank where they have their accounts.

2011

On 16 November 2011, the BOL issued a new Regulation on the Management of Foreign Exchange Businesses, No. 5, which updated the regulations and replaced the previous one implemented in 2004. Some of the key changes are highlighted below:

• The required registered capital for currency exchange businesses was increased. For businesses in Vientiane Capital, it was set at LAK200 million (about US$24,900 in 2011, up from US$20,000), and for other provinces, it was set at LAK100 million (about US$12,450 in 2011, up from US$10,000).
• The validity of currency exchange business licenses was limited to one year with annual renewals required to be done within three months after the expiry date.
• Currency exchange bureaus were no longer allowed to set their own exchange rates; they were required to use the exchange rates set by the commercial banks where they have their accounts.

2014

Because of the insufficient legislative framework surrounding foreign currency and the considerable volume of foreign investment funds entering the Lao PDR, the GOL introduced the Law on Foreign Currency Management on 22 December 2014 to enhance the BOL’s ability to effectively regulate the foreign currency transactions occurring in the country.

2016

In 2016, the BOL once again amended and replaced the regulation on the management of foreign exchange businesses, now under the Decision on Currency Exchange Businesses No. 529 dated 1 July 2016, increasing the required registered capital to LAK1 billion nationwide (approximately US$123,000 in 2016).

2020

The Decision on Currency Exchange Businesses No. 529 was revised under the BOL’s Decision No. 393 dated 2 July 2020, which imposed a cap on the total currency exchange amount that currency exchange bureaus could process each day to no more than their registered capital.

2021

In 2021, the Lao PDR, like most other countries, experienced an economic decline as a result of the COVID-19 pandemic, seeing a massive depreciation of the Lao Kip and rapid inflation in the country. This decline was greatly exacerbated by a lack of transparency in currency exchange practices and the circulation of foreign currency outside official banking channels (commonly referred to as the “black market” or “out-of-bank rate exchange”).

Consequently, the GOL released Guideline No. 878 on 2 August 2021, which changed how they were allowed to operate—from operating somewhat independent of the commercial bank with which they were affiliated to acting as the commercial bank’s proxy—to facilitate more effective monitoring. By 2022, the number of currency exchange bureaus in operation decreased significantly—from more than 400 bureaus to only 113 bureaus operating as proxies for six major commercial banks.

2022

In response to the continued depreciation of the Lao Kip, the GOL amended the Law on Foreign Currency Management on 7 July 2022 to more strictly enforce the regulations on the usage, import-export, and trading of foreign currencies in the country. The amended law was not a huge overhaul of the regulations, but the notable changes were as follows:

• The BOL was granted the authority to select the foreign currencies allowed to be used or exchanged in the Lao PDR and to establish reference exchange rates in accordance with monetary macroeconomic factors for commercial banks to use as the standard in setting their exchange rates.
• It became mandatory to convert foreign currency into Lao Kip before engaging in the exchange of one foreign currency for another.

2023-present

To further enforce the amended Law on Foreign Currency Management, the BOL issued Notice No. 01 on 13 January 2023, which effectively terminated the operations of the 113 currency exchange bureaus still in existence, and officially restricted all currency exchange activities to be conducted by commercial banks only.

Since this change, banks have taken a more cautious approach when it comes to allowing the exchange of Lao Kip for foreign currency in cash or the withdrawal of cash from foreign currency bank accounts. They often require individuals to provide relevant documentation or proof that the funds are intended for specific needs, such as tourism, international education, or overseas medical expenses. Otherwise, the banks will require individuals who wish to withdraw their money to convert their foreign currency into Lao Kip.

On the other hand, the exchange of foreign currency for Lao Kip is relatively straightforward.

Latest initiative: a Centralized foreign exchange market

On 5 August 2024, the BOL and 15 commercial banks entered into a memorandum of understanding to jointly develop a centralized foreign exchange market system in the Lao PDR (known as the “LFX”) that would be featured in the banking applications of the banks involved. The objective of this action is to reinforce the stability of the national currency in light of the ongoing economic issues in the country, such as rising inflation, the demand for foreign currency for imports, significant foreign debt, and the difficulty of maintaining accurate exchange rate assessments.

The LFX was launched to the public on 22 August 2024, but is limited to the trading of three foreign currencies—the US dollar, the Thai baht, and the Chinese yuan. It will only utilize foreign exchange spot transactions, with the Lao Kip serving as the intermediary currency for the exchange of the other foreign currencies.

Therefore, users of mobile banking platforms can now convert their Lao Kip into the aforementioned foreign currencies.

On 7 October 2024, a partnership was established between the BOL and 11 domestic commercial banks to establish a company under the name “Lao Forex Exchange Limited Company” through a joint venture agreement, aimed at managing and operating the LFX.

For more information on the regulatory changes in the Lao financial sector, or any other queries about the legal and regulatory environment in the Lao PDR, please feel free to contact us at the VDB Loi Laos office.