Laos finding isolation far from splendid

Old Indochina hands like to talk of the pre-revolutionary days of 1960s Laos when the economy was so tiny, the currency was balanced every Friday afternoon by a World Bank official with a briefcase full of dollars.

If only it were so simple now, they say.

The belief that Laos' isolated, subsistence economy would give it a cushion to simply hibernate from the worst impacts of the regional crisis is fast fading, diplomats, investors and financiers warn.

Just as other nations start to recover, Laos is facing new and worsening problems and few signs of co-ordinated effort from its Communist Party rulers in tackling them.

The currency, the kip, is continuing to tumble against the US dollar and Thai baht on a burgeoning black market. Last weekend it was reaching 7,500 to the dollar - 1,500 kip above the official rate and 6,600 above its price two years ago.

And with freshly-minted notes emerging from Vientiane bank booths, there is little doubt far too much is being printed to reverse the cycle.

As it plunges further, a recent government bid to shore up the kip with treasury bills at 60 per cent interest no longer looks so attractive, despite official claims about 10 billion kip has already been pulled back into the system.

Inflation has hit three figures and rising and at the same time government revenues are falling after droughts and tax problems - all contributing to an expected fall in growth.

Suddenly things are looking very bleak indeed for an economy that is not just the smallest in South East Asia but one of the most opaque.

'Laos, in short, is in economic crisis right now,' one senior foreign diplomat said.

'The World Bank, the International Monetary Fund and the Asian Development Bank are all seeking urgent talks on the best way forward. But none of us ever really know if we are talking to the right people or exactly who will make the necessary decisions.' The land-locked nation's troubles began as the baht crashed two years ago, sending the kip into an even greater tailspin and exposing problems that pre-dated the economic crisis.

Last year was the first time foreign aid flows were not enough to shore up the budget deficit.

Laos was seen as over-reliant on Thailand for trade and investment. Most of its vital imports became more expensive and foreign capital flows dried up. Less than US$50 million in fresh disbursements entered the country last year.

Its goal of replacing a simple timber industry with hydroelectricity as a key source of foreign exchange was also thrown into doubt as Thailand was to be the key buyer.

A garment industry that blossomed under European Union preferential treatment is understood to be largely dollarised and safe but the volatility is scaring off potential newcomers.

Foreign bankers say the problems of a fledgling banking system were compounded when the crash hit. Credit expansion earlier in the decade left excess liquidity now being mopped up by transfers into foreign currency and gold.

'The banks have never really done anything to go out and shore up faith in themselves or the currency and the country is paying the price now,' one foreign businessman said, adding that many firms were being strangled by the struggle to obtain dollars.

Under Asian Development Bank-brokered changes, the country's seven public banks will be merged into three entities: the Lane Xane Bank, the Lao May Bank and the Lao Bank for External Trade.

The move will give a far clearer picture of the extent of bad loans as well as paving the way for new capital.

'As long as the central bank keeps printing money, any structural change will be theoretical . . . that is our fear,' one diplomat said.

Sources among the tiny band of government technocrats now under pressure to steer urgent reforms through a politburo dominated by ageing party cadres warn social discontent could rise.

Government efforts to improve education and health standards - the lowest in the region - are suffering, they warn.

'The leadership is very worried. They have to be able to improve the lives of the people. Internal social pressure is the only thing that drives reform here,' one senior civil servant said.