If the exchange rate is managed well along with other solutions, inflation will be controlled, helping stimulate economic growth and stabilise the macroeconomy.

 

On February 11, the State Bank of Vietnam (SBV) decided to raise the interbank exchange rate to VND20,693 per US$1 and narrow the trading band from 3 percent to 1 percent on the other side of the rate. This decision had immediate impact on the domestic gold and US$ market.

 

Pressure of price hikes

 

Some international experts have warned of rising inflation and Vietnam’s risk of debt after SBV made the move even though it is considered a measure to speed up economic growth and reduce the trade deficit.

 

Speaking on Bloomberg News- a financial and business news agency, Dariusz Kowalczyk, a senior economist from France’s Credit Agricole CIB Bank in Hong Kong said he was very surprised at the adjustment of the US$ and VND exchange rate.

 

Talking to VOVNews on the same day, former SBV Governor Cao Sy Kiem said the exchange rate was adjusted this time for two main reasons: It was based on market demand and the real value of the VND, and to prevent banks and businesses from capitalizing on the exchange rate band to make the market healthier and more transparent.

 

“The devaluation of VND due to the adjustment will cause pressure on production costs and prices for businesses, particularly for those using US$,” Mr Khiem noted.

 

Right after the SBV’s decision, people flocked to buy US$. Regarding the situation, Mr Khiem said this is quite normal because many people failed to understand and estimate the situation which results in a “herd mentality” panic. It is essential to wait for a few days or a certain period of time to assess the policy.

 

The adjustment of the exchange rate is just one move but more attention should be paid to the fiscal policy, export-import and the balance of trade. All these solutions must be flexible.

 

Necessary to lower interest rate

 

The exchange rate and interest rates are always a “hot” story about managing monetary policy. The current high interest rate is putting many businesses in a fix.

 

Senior economic expert Bui Kien Thanh said, “The current interest rate is too high. It is essential to use all monetary tools to reduce it. The monetary policy is not to see prices soaring in order to increase the interest rate. Last year, we tried to drive interest rates up, hoping to curb inflation but it had no effect.”

 

According to Mr. Thanh, it is possible to lower the interest rate to 3-4 percent for commercial banks under articles 10 and 11 stipulated in the new Banking Law. Accordingly, the SBV is entitled to lend to commercial banks without dealing with issues related to mortgages, discounts or exchanging valuable papers through the open market. In this case, the SBV can open accounts for commercial banks to borrow the money they need then commercial banks can lend to businesses again. As the SBV does not have to borrow capital from anyone or mobilise capital from anywhere, its costs for capital are zero.

 

Central banks in many countries around the world lend to commercial banks at low interest rates, sometimes even at 0 percent. The difference is that what period of time central banks will fix for borrowers. For example, when commercial banks lack liquidity, central banks can provide them with enough money to ensure sustainable economic development and avoid inflation, said Mr Thanh.

 

Currently, many Vietnamese businesses lack capital to operate. Therefore, the SBV needs to find ways to stabilise “the blood pressure” of the national economy. The central bank plays an important role in State management. When the domestic market runs riot and harms the economy and macroeconomic stability, the SBV needs to perform its role as the highest body of power in stabilising monetary finance. If businesses invest in inefficient projects, the responsibility will be referred to the SBV. The SBV can ask commercial banks to lend to business and production projects without providing loans for financial investment and real estate.

 

“Some people are concerned that the reduction of lending interest rates will lead to high inflation, but Mr Thanh did not think so, saying that if the national economy has too much money, some of it can be withdrawn and if it has too little, we can pump more into it.

 

The monetary policy can be seen as an artery of the national economy. If the economy is fully provided for, businesses will be still strong enough to compete domestically and internationally,” said Mr Thanh.

 

(CPV/VOV News)