No adjustment to exchange rate

The central bank has disagreed with several economic experts who proposed depreciating the national currency (VND) by 4 percent this year, reasoning Vietnam’s inflation is higher than in the US.

Under pressure

Last year the average inter-bank exchange rate was kept stable at VND20,828 against the US dollar, and was increased by only 1 percent within the +/- 3 percent margin limit announced by the central bank.

However, the rate policy has not received support from export businesses and even commercial banks that complained that their profits were not as high as expected as a result.

Le Xuan Nghia, a leading finance expert, quoted forecasts saying that the national economy is likely to recover in the second half of the year which will stimulate demand for investment, production, business and consumption.   

According to Nghia, the economy will then need more imports to feed production and a consequent trade deficit is inevitable.  This means the exchange rate will be adjusted to support businesses that need foreign currencies to import materials.

He proposed that the government increase the exchange rate by an additional 4 percent this year to assist exports and increase the competitive capacity of Vietnamese commodities in the world.

Such a policy will also help reduce the need to import luxury goods, said the expert.

Nguyen Duc Huong, Vice President of the Management Board of the LienVietPostBank, echoed Nghia’s view, saying it’s time to depreciate the national currency to boost exports.  

The executive explained that the US has loosened its monetary policy by endorsing a number of rescue packages intended to fuel domestic consumption and increase demand for imports, including those from Vietnam.  

Vietnam has maintained its exchange rate below its real value maybe because it is worried about a reduction in foreign investment, Huong explained, suggesting the country needs to seize the opportunity to export more commodities to the US.

Not high time

However, a central bank representative said expert recommendations should be taken into account along with the implementation of the 2013 monetary policy.

He said the central bank is managing its 2013 monetary policy to meet the government’s targets of controlling inflation and achieving higher economic growth than in 2012.

It is taking a host of measures to ease difficulties for business production, including settling bad debts and warming up the property market.

It is considering adjusting the exchange rate in association with inflation after the consumer price index (CPI) rose 1.25 percent in January and it is expected to continue to climb in February which sees higher consumer demand due to the long Lunar New Year holiday.

The central bank is under mounting pressure to rein in inflation and it is not an ideal time to consider any rate adjustment, he said.

He explained that as domestic production relies heavily on material imports, any rate changes will drive up inflation. In addition, any changes will put pressure on the State budget which is partly used to pay foreign debt.

Dr Nguyen Tri Hieu, another finance expert, shared the view saying maintaining a stable exchange rate over a long period of time supports import activity but puts exports at a disadvantage.

He pointed to the fact that a stable rate will build up people’s trust in the domestic currency (VND), especially when as many as 50,000 businesses have declared bankruptcy, many other are yet to access bank loans and the unemployment rate is increasing.

Against the odds, Hieu argued 2013’s exchange rate should be kept stable unless there is substantial macroeconomic change.  He insisted if inflation exceeds the 10 percent mark, it will certainly have a negative impact on the exchange rate.

“I think the central bank should not depreciate the domestic currency this year, and instead it should adjust the exchange rate within the +/-3 percent limit,” he said “This means the bank does not intervene in the exchange rate market; let the economy adjust itself.”