Vietnam makes big leap in non-dollarization

VietNamNet Bridge – Vietnam vows to reduce the foreign currency deposit ratio to 15 percent by 2015 and stop the dollarization by 2020.

dollarization, economy,  central bank, SBV

According to the International Monetary Fund (IMF), an economy is listed as the dollarized economy when the foreign currency deposit ratio in it accounts for 30 percent or more of the total money supply,

As such, Vietnam has been listed as unofficial dollarized economy. This means that though the dollar is not considered a legal currency in circulation in Vietnam, people still make transactions with dollars and keep dollars as their assets.

A report showed that in 2000-2003, the foreign currency deposits accounted for 28-30 percent of the total money supply. The ratio sometimes reached 32 percent.

According to Dr. Le Xuan Nghia, Head of the Business Development Institute, the State Bank kicked off the program on fighting against the dollarization in 2011, striving to stop the dollarization by 2020.

The first thing the State Bank did was raising the required compulsory reserve ratio for foreign currency deposits, which aimed to enlarge the gap between the local currency and foreign currency deposit and lending interest rates.

This has forced commercial banks to lower deposit interest rates and raise the lending interest rates in the dollar. As a result, the dollar has become no longer attractive in the eyes of people.

Having realized that it is not profitable to keep dollars, people and businesses tend to convert their dollar into dong. Meanwhile, commercial banks have also found it more profitable to lend in dong than in the dollar.

The State Bank has also released the decisions aiming to reduce the foreign currency positions of commercial banks, lowered the ceiling foreign currency deposit interest rates. Especially, it has requested state owned enterprises to sell 100 percent of the foreign currencies they earn from exports to commercial banks.

The comprehensive measures taken by the State Bank have brought satisfactory achievements. The foreign currency deposits had decreased from 19.5 percent in 2011 to 14.6 percent of the total mobilized capital, while the foreign currency deposits ratio on the total money supply had decreased from 15.84 percent to 12.36 percent.

The ratio of outstanding loans in foreign currencies had dropped from 20 percent to 17.5 percent of the total outstanding loans.

By the end of August 2013, the ratio of foreign currency deposits on the total money supply had reduced further to 11.82 percent. Commercial banks and businesses, which were the foreign currency lenders and borrowers, have become the sellers and buyers. This has helped reduce the foreign currency outstanding loans to 11.5 percent, while the dong outstanding loans had increased by 10.4 percent over 2012.

The dollarization reduction has helped put the foreign currency market under the State Bank’s control.

The State Bank once had to devaluate the dong sharply by 9.3 percent on February 2011. However, over the last two years, the dong/dollar exchange rate has been stabilized at VND20,828 per dollar, while the trading band has been staying firmly at one percent (the buy and sale prices quoted by commercial banks could be 1 percent higher or lower than the interbank exchange rate announced by the State Bank).

Kim Chi

dollarization, economy, central bank, SBV