But an attempt to curb the appreciation by purchasing more US dollars could fuel already high inflation, according to a recent Thoi Bao Kinh Te Saigon (Saigon Economic Times) article by Huynh The Du, a professor from Vietnam’s Fulbright Economics Teaching Program.

Du said the abundance of foreign currencies in Vietnam – made up mostly of inflows from foreign stock market investors and a sharp increase in foreign direct investment – was posing a dilemma for the government.

The central bank's purchase of more foreign currencies earlier this year would fuel inflation, he said.

But if the foreign currency were not bought, Du concluded the dong would likely become valuable enough to hurt the country's exports.

Trading partners abroad often count on low dong rates to make profits when buying and selling Vietnamese goods.

However, Du also said the fluctuation of dong has not affected the economy too severely in the past.

The weaker dong has done little to boost exports or curb trade gaps, he said.

Trying to support exports by periodically depreciating the currency could weaken domestic business competitiveness, he added.

Du suggested that moves to regulate the dong might not be as useful as more internal measures.

“For now, curbing the consumer price hike is more important,” he said.

Five-year statistics

In his article, Du compared Vietnam's trade over the last five years with eight major Asian economic partners — China, Singapore, Taiwan, Japan, the Republic of Korea, Thailand and Malaysia.

These economies' currencies gained 2-4 percent against the dollar over the first nine months of the year, while the dong lost 0.2 percent.

Yet Vietnam’s imports from these economies more than doubled over the period.

According to Du, the dong depreciated an average of four percent against these currencies through the 2001-2006 period.

At the same time, Vietnam’s trade gap against these economies rose from an average of 103 percent to 131 percent.

The dong gained against these currencies in 2005 but export growth (21.7 percent) was still higher than import growth (18.5 percent).

“Such statistics reveal that policies geared towards depreciating the dong did not affect Vietnam's exports significantly,” Du wrote.

“Vietnam’s exports and imports seemed to be influenced by inner economical problems rather than by foreign exchange rates.”

At this point, Du suggested, the central bank should buy only the dollar and should apply measures to neutralize the negative effects the purchases may have on inflation.

In the future, he said the bank should consider making its foreign exchange rate management more flexible and, if possible, base it on a basket of currencies instead of just the dollar.

Source: TBKTSG.