VietNamNet Bridge – The Vietnamese dong has been appreciating against the U.S. dollar since early September as the central bank has been reluctant to add more dollar funds to its reserves for fear that this will result in higher inflation.

The greenback peaked at VND16,245 per dollar on August 16, then fell to VND16,080 on Tuesday, 0.25% higher than the level at the beginning of this year. The State Bank of Vietnam's (SVB) targeted dong depreciation in all of 2007 is 1%.

An executive at Vietnam Export-Import Bank (Eximbank) told the Daily that the SBV had recently reduced its dollar buying as it did not want to fuel the already high inflation. "If it buys more dollars, it has to infuse dong into the economy, thus leading to higher inflation, while its top priority now is to curb inflation."

Ly Xuan Hai, general director of Asia Commercial Bank (ACB), shared the view, saying, "The central bank was told to put inflation under control at all costs, so that's why it has been hesitating to buy more dollars." 

The SBV is facing a dilemma when it has to both keep a flexible exchange rate in favor of export and ensure an inflation rate lower than the country's economic growth. These targets not only involve monetary and exchange rate policies but also fiscal, trade and investment ones.

"The central bank has been criticized for injecting too much cash into circulation, causing high inflation over the past months. Under such pressure, we think inflation control is its top priority, so an export-favorable exchange rate or economic growth seems to be its secondary ones," a banker said but asked not to be named.

Given the recent dong appreciation, more companies are expected to borrow in the dollar rather than the local currency as it appears more cost-effective, which in turn may lead to an imbalance between dollar deposits and loans at commercial banks.

If a HCMC-based bank used US$76 of its US$100 mobilized to make loans in January, the ratio now is 92:100, according to figures from the SBV's city branch. This means more and more corporations prefer taking out loans in the greenback.

Hai from ACB said, "This trend may stop soon as we've heard that the central bank is considering to trim the list of corporate candidates eligible for dollar loans."

(Source: SGT)