Will Vietnam gain high economic growth if it tightens the monetary policy?

It is surely a dilemma. I think that as we don’t know exactly where the money flows are going to, it would be better to tighten the monetary policy. However, we need to discuss how tightened the monetary policy is.

I have to repeat that curbing inflation is a must, because the inflation rate is overly high, and it is more than people can stand.

Where is do you think the money flowing to?

A big volume of money is being injected into real estate. However, if we stop funding real estate projects, we may face a bigger risk, the collapse of the real estate market.

The real estate now is overly tight, and the state certainly has to think of loosening it. However, if unsuitable measures are taken, the market will collapse.

Why does the central bank try to withdraw money from circulation, and then pump VND20tril into circulation?

There are two measures to take when foreign currencies flow too much. First, the central bank does not make intervention into the market, while floating the VND/US$ exchange rate. The exchange rate will be decided by the supply and demand basis. Second, the central bank provides more money if it aims to keep the exchange rate stable.

To date, the Government of Vietnam still wants to keep the exchange rate stabilized at VND16,000/US$ to encourage exports which can bring high economic growth. Therefore, the central had to spend a lot of VND to buy dollars to increase the foreign currency reserves (the reserves reportedly reached $20bil in 2007). As a result, Vietnam is importing inflation from the outside, since the dollar is weakening on the world’s market, while the dollar is stable in price in comparison with VND.

In general, in order to curb inflation, the central bank either has to let the dollar devaluate, or withdraw money from circulation. There are many ways to withdraw money from circulation, including the open market operations (issuing bonds, promissory notes, raising compulsory reserve ratios). However, the open market in VIenam proves to be not powerful enough, and the central bank has to release an administrative order on forcing commercial banks to purchase compulsory promissory notes.

What should Vietnam do if the foreign currencies keep inflowing this year like in previous years?

The state does not have many choices. If foreign currencies flow in big quantities the state will have no other choice than letting the dollar devaluate. However, I think that the state should not take strong measures in adjusting the exchange rate. For example, the VND/US$ exchange rate should be lowered to VND15,700/US$1 from VND16,000/US$1

Thailand had to let its local currency revaluate in order to fight against inflation, though its exporters complain about the revaluation. Currently, one dollar can be converted into baht33 instead of baht42 like three years ago.

China also applied a similar policy when it saw a lot of foreign currencies flowing. The yuan/US$ exchange rate was gradually adjusted from yuan8.2/US$1 to yuan7.4/US$1. I think Vietnam should learn something from the exchange rate policies from the two countries.

Which do you think is better, floating the exchange rate or supplying more money?

We cannot float the exchange rate right at this moment, but we should consider adjusting the rate gradually. If the central bank supplies more VND to buy dollars as it did last year, it will finally take measures to take the VND volume back.

ADB’s Chairman, in his recent visit to Vietnam, said that with the currently applied tightened monetary policy, Vietnam will be able to reduce the inflation rate to 7-8% in several months. Do you think that the forecast is reasonable?

It is very difficult to reduce the inflation rate, even to the 10% level. The CPI increase in January was 2.4%, and the increase is expected to reach 2.5-3% in February, which means the increase of nearly 6% in the first two months of the year. In theory, the CPI increase may slow down in the next months, but it is not likely to happen in the context of the world’s continued price increases.

As you may know, a team of Harvard’s researchers has released a report, which said that there are four latent signals in Vietnam, which may lead to a financial crisis. What do you think about this?

I don’t think that it is possible to see a crisis in Vietnam because of two reasons. First, state owned enterprises still hold the most important fields of the national economy. You know, state owned enterprises have to follow the administrative instruction from the Government to stabilize the market. Second, Vietnam has not absolutely liberalized capital transactions, and foreign investors cannot withdraw money easily. Moreover, VND remains unconvertible on the international market. However, a small-scale crisis is possible.

Source: SGTT