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Tightening monetary policy: tragedy and paradoxes
Le Xuan Nghia, Director of the Banking Development Strategy Department under the State Bank of Vietnam, has pointed out the paradoxes of the currently applied monetary policy.
VietNamNet would like to introduce the article by Nghia published in Tuoi tre newspaper, discussing the issue.
We are trying to tighten monetary policy in order to fight inflation. This means that the interest rates will go up. Investors will select business projects suitable for them. Those feasible projects, which can bear the interest rates, will be able to survive and develop, if not, they will go bankrupt.
However, those who are trying to tighten the monetary policy, are also the persons who want to set low interest rates in order to support businesses. This is the first paradox.
The second paradox, which is really worrying, is that the tightened monetary policy has been making difficulties for banks, but banks are not allowed to raise deposit interest rates in order to attract more capital. The problem has become more serious as small banks, which have to comply with the ceiling interest rate scheme, have to borrow capital on the inter-bank market at very high interest rates of 18-24% per annum, which are even higher than the ceiling interest rate.
As such, bigger banks now have the opportunity of mobilizing capital at low costs to re-lend on the interbank market at higher interest rates. This is considered a tragedy of the monetary policy. I can call this the failure of the monetary policy, as it has caused the serious liquidity deficiency to banks, especially small banks.
We are now in the process of implementing the commitments on global integration, which means that we have to follow the economic reform in accordance with the market rules and international practice.
However, at the time when the national economy was most healthy, difficulties rushed down, not from outside, but from policies, especially the policies on public investments and monetary policy.
The biggest challenge of the economic integration turns out to be not the competitiveness of enterprises as thought before, but the macroeconomic management capability.
What worries businesses most is not the lack of experience and corporate governance skills in the global integration, but the unsuitable policies which may push them in the disadvantageous position in the integration.
There have been signs which show that foreign direct investment tends to flow to real estate projects, while foreign portfolio investors eye to make profit from the attractive interest rates of Government bonds.
If the current situation remains, not only small and medium businesses, but big economic groups will suffer. All big real estate projects will fall into the hands of foreign businesses and funds.
How should we solve the problems? No one should think of running the market by his will. The market has its flaws, but regrettably, these are not the flaws which we are trying to fix. The administrative intervention would distort the market operation. In fact, all kinds of the administrative intervention, including the ceiling interest rate scheme or credit limit, show very limited effects.
Thanhnien
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