Dollar dominance

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In response to falling faith in Vietnam's currency, many businesses have been conducting their daily transactions in dollars, prompting a government crackdown.

Last Friday, the government posted a report on the prominence of greenbacks in Vietnam's economy on its website. The report cited rampant use of the US dollar in setting prices and conducting transactions throughout the country and reminded individuals and businesses that the practice is against the law.

Many products and services from automobiles to English courses all quote their prices in dollars.

Even when payments are made in dong, prices are often calculated based on the dollar exchange rate of the day and sometimes the hour.

No one seems to question the practice anymore.

Nguyen Thi Kim Nga, an office worker in Ho Chi Minh City, said many downtown spas and restaurants now list their prices in dollars and she no longer finds it strange.

"It's just a common practice now. People can still pay in dong if they want, but prices are actually based on the dollar," she said.

A spa in HCMC's District 1 that wanted to be unnamed said since most of its clients are foreigners, it's necessary to have a dollar price list. Local customers pay in dong based on official exchange rates.

It is easier for the company to keep track of its business with dollar inflows, given that a lot of products have to be imported, a representative from the spa said.

Other retailers and service providers also reason that because they pay for imported goods and other cost inputs in dollars, they need to price their goods in dollars to avoid exchange rate-related risks.

Those risks are simply passed on to buyers.

Bui Tien Thang, deputy general director of Sacomreal, the real estate trading arm of Sacombank, was quoted in Monday's Tuoi Tre newspaper as saying that many property developers financing their projects with dollars calculate prices in dollars to avoid losses.

For homebuyers who pay for properties in installments, a rising dollar against the dong means they actually have to pay more than the price set at the beginning of the payment term, Thang said.

The Asia Development Bank (ADB) said, last October, that the share of foreign currencies accounted for around 20 percent of all currency in circulation in Vietnam, compared to about 50 percent in Laos and more than 90 percent in Cambodia.

Last week, economist Nombulelo Duma wrote in a working study for the International Monetary Fund that dollarization had remained at 20 percent in Vietnam .

"˜The worst'

Despite the relatively low-levels of dollarization, the ADB found that Vietnam, in its current situation of incomplete dollarization, is in "the worst of all possible worlds."

In its study, Dealing with Multiple Currencies in Transitional Economies, the Manila-based bank found that dollarization was not an issue in Vietnam until the 1990s, when a floating exchange rate regime was adopted, causing public confidence in the dong to decrease and leading to an increase in foreign currency holdings, especially the dollar.

Dollarization in Vietnam increased steadily from 9.4 percent in 1988 to a peak of 41.2 percent in 1991. It then gradually decreased to between 22.4 to 31.5 percent from 19932005.

Coming together with the opening and development of the economy, dollarization has had some positive effects as it has helped deepen the financial market and increase credit, the ADB said. But it also noted that the potential effects of increasing dollarization still remain a threat to Vietnam.

Unlike nearly all other Asian currencies, the dong has continued to weaken against the dollar.

Sherman Chan, an economist at HSBC, said that one of the challenges Vietnam now faces (in addition to stubborn inflation and a large trade deficit) is a local currency that is "under persistent depreciation pressures."

Expectations that the local currency will face further devaluations have inspired a rush on gold and widespread dollar hoarding.

"This, in turn, exerts even more pressure on the [dong], which has already weakened notably in the past three years," she said.

Dong decline

The central bank has devalued the official exchange rate by more than 20 percent over the past three years. The most recent devaluation, of 9.3 percent, occurred just last month.

According to Bloomberg, the dong has been one of the worst performers in the world this year against the US dollar.

In the government report on Friday, Professor Le Dat Chi of HCMC Economics University warned that when foreign currencies play a dominant role in an economy, local currencies decline in value, causing food prices and inflation to rise.

Chi said that in order to lower the level of dollarization, the country needs to halt dollar exchanges once and for all. There have not been strong efforts, so far, to tackle dollarization in Vietnam and that's why the country has always faced a foreign currency shortage.

Other experts say that, in order to reduce the circulation of foreign currencies, the government needs to increase public confidence in the dong, control dollar trading and encourage the holding of dong-denominated assets.

Interest rates on dollar deposits need to be lowered and higher reserve ratios on dollar deposits should be established to make the dollar less attractive to banks, they said. Dollar deposit rates now stand between 5 and 6 percent at local banks.

Authorities are stepping up efforts to eliminate unofficial dollar trading in the local market. It seems as though they are paying off.

Many gold shops in Hanoi and HCMC that doubled as money changers have either held back on dollar trading or abandoned the business entirely, following a black market crackdown.

Local banks are only allowed to sell dollars to individual clients who demonstrate proof that they are going to travel, study or seek medical treatment abroad. As a result, many Vietnamese have grown accustomed to buying and selling dollars on the black market, mainly for the sake of convenience.

On Thursday, the dollar was quoted at a major gold shop in HCMC at VND21,600. The rate eased from VND22,070 two weeks ago.

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