SBV insists on stable dong/dollar exchange rate policy

Feb 25th at 22:47

25-02-2013 22:47:33+07:00

While economists have urged to devaluate the local currency to help boost exports, the central bank believes that it’s not the right time to do this.

Economists: 4 percent devaluation needed
The dong/dollar exchange rate has been stabilized for two years, which has been praised as a great achievement of the State Bank. However, Dr. Nguyen Duc Thanh from VEPR, a policy and economics research center under the Hanoi National University said he does not think this is good for Vietnam.

Thanh said that while the exchange rate keeps stable, the inflation rate has been high, which has resulted in the overvaluation of the dong. He believes that the local currency has appreciated by 11 percent.

“The exchange rate stabilization has been hailed as a great achievement. But I personally think that this has weakened the Vietnamese exports’ competitiveness,” Thanh said.

The catfish industry, which was an advantageous industry of Vietnam, is now also facing great challenges with a series of businesses got bankrupted. “The bad corporate governance may lead to the bankruptcy of some enterprises, while it must not be the reason behind the stagnation of the whole industry,” Thanh said.

What Thanh implied was that the unreasonable policies, not the mismanagement, have put big difficulties for catfish enterprises.

VEPR has suggested that the State Bank should devaluate the local currency slightly by 3-4 percent to facilitate the export.

If Vietnam devaluates its dong by four percent per annum, it would be able to double the foreign currency reserves after 15 years.

Dr. Le Xuan Nghia, a member of the National Advisory Council for Monetary Policies, agreed that it’s necessary to devaluate the dong by four percent.

Nghia believes that the dong has been overvalued by 23 percent against the dollar, because the Vietnam’s inflation rate has been always higher than the US over the last many years, 12 percent vs. 2 percent.

As such, the actual exchange rate has fluctuated, while the State Bank has been trying to stabilize the nominal exchange rate, which has badly affected the export.

State Bank: curbing inflation is top priority

Meanwhile, the central bank believes that it’s not the right time to adjust the exchange rate.

A senior official of the State Bank of Vietnam said that the depreciation of the dong may lead to the inflation increase. The inflation rate was 1.25 percent in January 2013, which is forecast to be higher in February. Therefore, any move of adjusting the exchange rate at this moment would make it worse.

Besides, once the dong weakens, this means that the Vietnam’s foreign debts would increase, which would put a heavy burden on businesses and the government.

He went on to say that the inflation import would not be the only threat. The State Bank fears that if it adjusts the dong/dollar exchange rate now, it would create people’s expectations on gradual dong devaluation in the future.

If so, all the efforts by the State Bank to stabilize the exchange rate would be in vain. This would lead to a more serious consequence – the dollarization in the national economy, which means that people would convert dong into dollars and keep dollars instead of the local currency for fear of further dong devaluation in the future.

In other words, the unexpected changes would always lead to a consequence that people lose their confidence on the state policies and the macroeconomic stability.

“Therefore, the State Bank believes that the exchange rate adjustment would do more harm than good,” he said.