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IMF talks about exchange rate and interest rate issues in Vietnam

Benedict Bingham, Chief Representative of the International Monetary Fund (IMF) in Vietnam had an interview with NDHMoney on the issues of exchange rate and interest rate in Vietnam.

Talking about the gap of nearly 2,000 dong per US dollar between official and unofficial FX rate and the sudden rises of saving and lending rates in the recent weeks, Bingham said the first thing is to determine where the pressure on FX market comes from. According to IMF’s representative, the pressure does not come from the shortage of supply. If looking at the balance of payments, current account deficit is fairly large, but it could be offset by FDI inflows.

It is not the dollar shortages flowing into the economy, but in the last few months, Vietnamese people have become reluctant to keep dong as they are not clear which direction both monetary and fiscal policies would follow.

The crucial issue for the government at present is to reassure the people that inflation is under control and to handle the concerns about monetary policy.

Banking system is now responding to concerns about lack of dong liquidity in the system. That is why interest rates on interbank market change rapidly. Commercial banks are uncertain about interest rates next week and next month.

Bingham said that they believe part of the problem on the currency market in the last two to three weeks and in the last few days is that the central bank has put interest rates to very high levels, through tightening liquidity. In addition, the central bank also strongly increased base interest rate. However, this might not take effect immediately.

IMF recommends that more flexible base interest rate tool should be used in orienting interbank market and banking system. By using base interest rate, the State Bank of Vietnam (SBV) could control well interest rates in the banking system, it would then gradually adjust deposit and lending rates in predictable ways.

In short, regarding foreign currency market, IMF hopes that the government would give clear direction on the change of monetary and fiscal policies for investors to have more confidence that inflation and budget deficits are handled decisively.

Regarding the currency market, IMF hopes SBV would use interest rate policy tools, for commercial banks to be aware of SBV’s orientation to dong interest rates in the near future, so the overwhelming influence of interest rates as in the last few weeks would not be seen. Businesses would also have orientation for their future.

Talking about the need for an exchange rate adjustment from the management agency, Bingham said at present dong devaluation is only the second step. The essential issue is to handle the concerns which put pressure on dong exchange rate. These pressures arise primarily from the psychology of investors in Vietnam, due to their uncertainty on how monetary policy would handle the inflation issue.

They also do not know how fiscal policy would solve the deficit problem. Bingham said the government should firstly handle the psychology concerns of investors, provide clear orientation to foreign exchange market and banking system and method to handle budget deficit problem.

Once confidence is strengthened, foreign exchange market and banking system would be stabilised. Once there is stability, the government could start thinking about which exchange rate is considered most suitable for Vietnam.

Sharing about whether the tightening monetary policy of the government is appropriate in the current situation, Bingham said the monetary policy change is a right move. IFM recommends that instead of tightening monetary policy through tightening liquidity, which has been creating significant fluctuations on the interbank market, SBV should use more flexible interest rate policies.

Concerning the most difficult issue for Vietnam’s economy in short term and the solutions, Bingham said the most important thing is the government should resolve the pressure on foreign exchange market and issues relating to macro economy, then strengthen the economy to ensure that the pressure would not return cyclically to the foreign exchange market.

The monetary policy tightening is the right decision. Any policy change should be clearly announced, especially monetary policy.

IMF also expects a fiscal policy that shows clear capacity in cutting deficits.

Finally, IMF’s message is after overcoming this volatile period, the government should use more market policies to ensure the economy grows based on market economy.

From VietNamBusiness

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