To put an end to the state of dollarization, the Government of Vietnam has taken very aggressive and drastic measures like tightening foreign exchange management, increasing forex reserve ratio at commercial banks, and applying interest rate ceiling. Dr Le Xuan Nghia, Vice Chairman of the National Financial Oversight Committee, shared his opinions with reporter Huong Ly on impacts of these measures on the Vietnamese foreign exchange market.
How do you think about the Government’s recent measures to put a stop to dollarization?
I think the Government's latest decision that put the cap on interest rates of foreign currencies [applicable to individuals] to as low as 3 percent, equal just a half of the previous rate, will discourage people from depositing foreign currencies at banks [to gain interest margin] but encourage them to convert into the Vietnamese dong. The ceiling rate of 3 percent is only a tentative move and the central bank will make necessary adjustments in the coming time. Meanwhile, interest rates on deposits in Vietnamese dong are standing at 14 percent per annum but the rates on foreign currency deposits are just 2-3 percent. Naturally, people will place their money at banks in the form of Vietnamese dong and this will help boost the dong liquidity and bring down dong interest rates.
Besides, the government forced [commercial] banks to increase foreign currency reserve ratio by 2 percentage points from May 2011 in an effort to curb foreign currency mobilisation. I think measures the Government have adopted are necessary. However, their effects are impossibly generated in a very short time but they need more time. The government must resolutely implement this strategy in several years to realise the goal of eliminating foreign currency credits from the banking system and changing the current status from lending to buying/selling foreign currencies. Taking medicines must be enough as prescribed. If it only implements just a few months like in 2008, the dollarization will recur with a strong force and more complex situation.
Why has the Government just taken these measures to mitigate the long-standing dollarization?
For a long time, macroeconomic policies had to deal with both local currency and the dollars at the same time. This year, apart from macroeconomic stabilisation programme, the government also adopted anti-dollarization programme. We proposed a similar programme since 2001 but the market was less "threatened" by the dollars at that time. In the past years, especially in 2008, the Government had applied measures to curb foreign exchange activities on the so-called “black market” but it did it in just a few months. To date, the dollarization is getting serious not only at the banking system but also on the free market. The situation is more serious with the support from gold market.
Many businesses complain that they cannot lend dollars for importing. Where does the shortage of dollars come from?
To find out the answer to the dollar shortage in Vietnam, we analyzed data on the liquidity of foreign exchange market. Vietnam collected US$98.7 billion and spent US$97.3 billion in 2009, thus enjoying a surplus of US$770 million. The surplus was US$1.27 billion in 2010 and was estimated at US$2 billion in 2011. Hence, Vietnam does not fall short of dollars in nature.
However, in reality, Vietnam still sees dollar shortages because it causes it, not caused by any forces. Partly, we badly organised the foreign exchange market which was governed by many elements like rigid exchange rate mechanism (changed in every three years). This prompted many people to expect that the exchange rate will rise and the central bank will raise the exchange rate, and they of course hoard foreign currencies.
Secondly, interest rate policies seem to "favour" foreign currency credits. Exchange rate and interest rate difference between foreign currencies and Vietnamese dong are not large enough to create a more “prioritised” Vietnamese dong on the monetary market. All strengths are put into dollars.
Thirdly, the State Bank maintains a 30 percent differential in foreign exchange. To be more specific, if a commercial bank has US$100 million, it can accumulate up to US$130 million on expectations that exchange rate will rise or cut their holdings to US$70 million on anticipation that exchange rate will fall. This also encourages commercial banks to hoard dollars.
Do you think the black market will be put to an end?
Producers, traders and investors are feeling extremely insecure because they do not know where to purchase foreign currencies. When they come to banks, banks do not sell or sell with many charges levied on them. These problems caused miscalculations for the foreign exchange market.
Other drawbacks include weak organisation of foreign exchange market. When the liquidity in the banking system is weak and borrowers cannot access enough dollars, the free market will be form as a matter of fact. We do not recognise the legality of this market but we do not eliminate it either. This leads to a contradiction that we cannot interdict the free market but we cannot build a formal market.
Will the exchange rate fluctuate as in 2010?
In my opinion, in 2011, exchange rate will fluctuate in a narrow range.
The recent adjustments to exchange rate are suitable to supply/demand relations. The hike of 9.3 percent in exchange rate will support export, evidenced by a growth of 33.7 percent in the first quarter. I think advantages accrued from exchange rate change will decrease toward the end of 2011. Thus, we should have immediate measures to improve the export structure to take advantage of exchange rate. It is argued that if the exchange rate rise, Vietnam’s [foreign] debts will increase accordingly but I do not completely agree with this because the source of repayments is export. If export does not increase, we will have nothing to pay debts.
Vietnamese
