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Vietnam should stop providing loans in foreign currencies: Expert
In 2010, the gap between the dong/dollar official exchange rate and the exchange rate on the black market once reached 2000 dong per dollar (10 percent), something that had never occurred in the history of Vietnam dong. The year also witnessed continued sharp increases of dollar values, which heavily influenced society and businesses’ operations. However, Dr. Le Xuan Nghia, Deputy Chair of the National Finance Supervision Council believes that if drastic measures are taken, the foreign currency market will be stabilized by the first quarter of 2011.
In the interview given to Dau tu newspaper, Nghia suggested some comprehensive measures in order to narrow the gap between the official exchange rate and the exchange rate on the black market to 200 dong per dollar. He also said that it is necessary stop providing loans in foreign currencies.
The government has officially announced that it will not adjust the dong/dollar exchange rate until Tet (February 2011). Does it mean that the government may think of adjusting the exchange rate after Tet?
With the current moderate level foreign currency reserves, I believe that the first thing we need to do is to intervene into the market in order to stamp out the expectations on the dollar price increases and narrow the gap between the official exchange rate and the exchange rate on the black market. After that, it is necessary to apply the measures to intervene the market and adjust the interest rates, adjust the compulsory reserve ratio, and adjust the Vietnam dong and foreign currency interest rates.
If we can do that, the foreign currency market may be stable in the first quarter of 2011, because the gap between the prime interest rate in Vietnam and in the US is not too big, about 5-6 percent. According to my calculations the inflation rate of Vietnam is 7.32 percent, while the figure of the US is 1.5 percent.
What are the biggest pressures on the stabilization of the foreign currency market?
The exchange rate remains the thorniest problem to date and it is also the biggest risk for the macro-economy. The first pressure on the exchange rate stabilization is the payment balance deficit. The payment balance deficit in 2010 reduced from $2.5 billion from $8.8 billion in 2009. As such, we have a firm reason to believe that we can stabilize the exchange rate.
The biggest pressure on the exchange rate now is inflation and therefore we need to control it well. Though basic inflation in Vietnam is not significant (If not counting on food prices and petroleum prices, the basic inflation rate in Vietnam in 2010 would be 7.3 percent only). However, the biggest problem for now is the feelings of people. People are worried about the depreciation of the Vietnam dong. Besides, illegal gold imports should also be cited as a reason that leads to the problems in the foreign currency market.
What measures for the foreign currency market can you suggest?
There are two problems 1/ what to do to stabilize the market and 2/ what to do to fight against dollarization in the national economy?
We believe that in the time to come, we need to both adjustments and intervention in order to narrow the gap between the official exchange rate and the black market’s exchange rate to 200 dong per dollar. After we bring the exchange rate to a stable level, we need to consider doing the second option– restricting and then stopping lending in foreign currencies.
In order to do that, we can use the compulsory reserve ratio. The required compulsory reserve ratio for foreign currency loans should be higher than that for Vietnam dong. Besides, it is necessary to create reasonable gaps between the Vietnam dong and foreign currency interest rates. If so, commercial banks will have to lower the interest rates on foreign currency deposits and raise the lending interest rates. This will lead a situation in which businesses will no longer be interested in loans in foreign currencies. The second measure is to do both the adjustment and intervention.
vietnamnet, Dau tu
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