So why is SBV hesitating to buy dollars?

Because when buying dollars to increase the national foreign currency reserve, SBV has to throw a big sum of VND into circulation, putting pressure on inflation, which has reached the worrying level of 7.32% in the first nine months of the year.

Several weeks ago, the government requested that ministries register a CPI growth rate at below 0.3% in October, 0.3% in November and 0.4% in December.

If the scenario occurs, the inflation rate for the whole of 2007 will be 8.2-8.3%, lower than the expected GDP growth rate of 8.5%.

The top priority task of the central bank now is to curb inflation, while boosting exports is just a secondary goal.

The central bank has been facing sharp criticism from the public that it is the culprit behind the high inflation as it pumped too much VND into circulation.

The central bank, under heavy pressure from the public, needs to prove that it can control inflation, and that is the reason why it currently does not want to buy more foreign currencies.

In fact, the central bank can interfere in the monetary market and minimise the VND volume spent to buy dollars. An official from the Monetary Policy Department under SBV said that 80% of the VND spent to buy dollars had been withdrawn from circulation. However, it will take more than two months to see the effects of the work and of the monetary policies.

“I can say for sure that the inflation rate will be lower than the GDP growth rate,” the official said.

The central bank is responsible for curbing inflation, the Ministry of Industry and Trade bears responsibility for decreased exports, the Ministry of Finance is at fault if it disburses capital slowly, and the Ministry of Planning and Investment is blamed if the economic growth rate is lower than targeted.

However, the move made by one ministry may impact moves by other ministries; if the central bank does not buy dollars, the VND will revaluate, and Vietnam cannot encourage exports.

Earlier this year, Vietnam planned to keep the VND’s devaluation at 1% this year. Meanwhile, the local currency has devaluated by 0.27% only so far this year.

The devaluated greenback has led to a problem: enterprises like making deposits in VND and borrowing in foreign currencies, which may lead to an imbalance in the capital structure of commercial banks.

In January 2007, commercial banks lent $76 for every $100 they could raise, but now the ratio is $100:$92.

Source: TBKTSG.