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What solutions for interest rate and exchange rate problems?
Improving liquidity and pumping dollars into the market to ensure the availability of foreign currency are the two solutions businesses think need to be carried out urgently to help ease their difficulties.
Improving liquidity
Improving liquidity and pumping dollars into the market to ensure the availability of foreign currency are the two solutions businesses think need to be carried out urgently to help ease their difficulties.
Vo Quoc Thang, Chairman of Dong Tam Company, said that a lot of businesses have had to halt production because they cannot afford the current high interest rates. The lending interest rate has risen from 11% to 21% since the beginning of the year, thwarting enterprises’ business plans. As they really need capital, they have to borrow money at any interest rate available.
Thang said that he has to keep cash to pay monthly salaries to his staffs as the company cannot withdraw cash from banks as banks lack money.
Truong Van Phuoc, General Director of Eximbank, said that Vietnam needs to adjust the basic interest rate in order to make it more truly reflect the inflation situation. If the interest rate is overly low, people will withdraw money from banks to purchase commodities to save their assets. If so, banks will not have money and their liquidity will become worse.
Local media in the last few weeks has reported about the jam of imported commodities at ports as importers cannot borrow money from banks to make payments. The lack of money may worsen Vietnam’s trade deficit, while the import jam will prevent the circulation of imported commodities, making inflation worse.
The central bank should restrain the lending interest rate by applying necessary monetary operations. For example, it could pay interest to commercial banks for compulsory reserves; commercial banks would be able to lend at lower interest rates because their input capital costs would be lower.
Pham Do Chi, who was an advisor to the policy on dealing with high inflation in 1991-1992, said that the government should not require a large quantity of compulsory reserves, but should issue bonds to the public at high interest rates in order to withdraw money from circulation, thus helping ease inflation.
Narrowing gap between official and black market exchange rates
Phuoc of Eximbank, formerly Director of the Forex Management Department under the State Bank of Vietnam, said that the pressure of the high trade deficit and VND devaluation is now a reality. The government needs to take actions to narrow the gap between the official and the black market exchange rates, and ensure the availability of foreign currency by pumping foreign currencies into the market.
It might be asked where the foreign currencies would come from. Phuoc believes that the total sum of foreign currency Vietnam has is not only the sum of $20bil announced by the State Bank of Vietnam, but also the money lying among people and at businesses. The problem now is that the government does not have suitable policies to use the foreign currencies.
Meanwhile, Cao Thi Ngoc Dung, Chairwoman of PNJ, thinks that the government needs to apply the policy it applied in 1991-1992, under which businesses had to sell the foreign currencies they got to banks.
At that time, the policy helped reduce the exchange rate from VND14,000/US$1 to VND11,000/US$1.
Phuoc has also suggested a measure which he thinks can help increase the supply of foreign currency to the national economy. He thinks that the central bank should expand the list of those subjects eligible for foreign currency loans instead of narrowing the list as it has done recently. If so, this would encourage commercial banks which have deposits in foreign currencies at foreign banks to withdraw deposits from the banks (with which they can enjoy the low interest rate of 2%) to lend to domestic businesses (at higher interest rates, 10% on average).
VNN
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