Laos’ central bank (BOL) has proposed to postpone direct lending for new state investment projects in a bid to safeguard the country’s banking and financial system.

BOL Governor Somphao Phaysith suggested these projects should now seek funding from commercial banks in line with market mechanisms and commercial banks policies.

Over the past years, the central bank has provided large amounts of special loans for dozens of state investment projects, Somphao said, adding that the bank has offered the Lao Ministry of Finance 20 loans, worth 2,885 billion kip or 360 million USD, which allow the ministry to pay back construction firms that have financed the state investment projects.

While Somphao did not point out any risks associated with the direct lending policy, the Vientiane Times newspaper noted that the central bank is not responsible for direct lending since its main role is to act as the final source of funds to ensure the solvency of commercial banks.

The newspaper quoted economists as saying that if the central bank continues to provide direct lending to the government and state enterprises, it could face the challenge to maintain money supply at an appropriate level. Once the central bank fails to ensure suitable money supply, the economy will face rising inflation that may trigger macroeconomic instability.-VNA