Nguyen Dai Lai, Deputy Director of the Banking Development Strategy Department under the State Bank of Vietnam, talks about the side effects of the widening of the foreign exchange trading band.
Why do you think there are so many problems in the forex market which have been seriously affecting export companies?
Nguyen Dai Lai, Deputy Director of the Banking Development Strategy Department under the State Bank of VietnamFor the last many years, Vietnam has been pursuing a stable forex policy. Since 2002, Vietnam widened the forex trading band four times. Previously, when the dollar kept revaluating, the real VND/US$ exchange rates applied in transactions always were equal to the ceiling exchange rates allowed by the central bank. However, the situation is different now, when the dollar keeps devaluating, the real VND/US$ exchange rates are equal to the floor exchange rates allowed by the central bank.
This means that the market has its own rules, while the state always wants to impose its management on the market. Of course, the state management authorities want the exchange rates to be stabilized, while the market performs in its own way.
The greenback is becoming weaker in Vietnam because of its weaker position on the world’s financial market. Meanwhile, the dollar is a hard foreign currency, which accounts for a big proportion of international payments.
To some extent, the US FED acts as the central bank of many countries in the world, and its every action affects the decisions of many other central banks in the world.
Statistics show that for every three dollars issued by the FED, less than $2 will stay in the US. Therefore, it is understandable that once the dollar weakens in the US, the currency will also devaluate outside the US.
A lot of countries in the world have been trying to change the foreign currency reserve structure, and change the trade habits. Many countries have reduced the dollar volume in their reserves. As a result, the demand for dollars is decreasing and the supply is increasing. Vietnam is not the exception.
What are do you think the best solutions for now?
The VND is revaluating, but it is not because it is really increasing in value, but because the dollar is devaluating too rapidly. Meanwhile, in fact, among the 19 currencies which trade with Vietnam, 17 of them are stronger than VND.
I think the best solution now is to issue bonds in foreign currencies to Vietnamese citizens and foreigners living in Vietnam. However, Vietnam should prevent the foreign capital from flowing into Vietnam to buy the bonds.
The bond issuance will bring two good things.
First, foreign currencies will go directly to those who really need foreign currencies to make payment for foreign trade deals.
Second, the holders of foreign currency bonds, exporters for example, can use the bonds to mortgage at Vietnam’s banks for loans
The second solution, I think, is that commercial banks should diversify the foreign currencies used to serve short term foreign currency credit. They also need to give up the habit of providing loans in US$ as the main foreign currency.
Businesses should give up the habit of using the dollar as the only currency in foreign trade deals. The central bank should also think of a suitable foreign currency reserve structure.
Will the said solutions bring the desired effects to the national economy?
Vietnam may not fulfill the export targets for this year, and we may witness the collapse of several businesses.
However, we have to accept the ‘bitter pills’ to gain a better thing. Our top priority task now is to curb inflation. Vietnam will not have enough VND to spend to stabilize the VND/US$ exchange rate and to rescue export companies. Besides, the oversupply of the VND in circulation will lead to inflation, while people in the non-export areas will suffer.
The policies should serve the interests of the whole nation instead of the benefit of a smaller group.
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