Vietnam needs orderly rate rise, dong flexibility: ADB

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Vietnam needs to tighten monetary policy, raising interest rates in an orderly way, and should allow the dong greater flexibility, the Asian Development Bank said on Tuesday.

The bank raised its inflation forecast for the Vietnamese economy to 10 percent from 8.5 percent, and said it expected gross domestic product to grow by 6.5 percent this year.

The ADB said shortages of foreign exchange in the market may fuel inflation and hurt investment, and "should be addressed through a combination of tighter monetary policy and increased exchange-rate flexibility."

Vietnam's estimated foreign exchange reserves were around $15 billion by the end of 2009, ADB said. At the end of 2008 they stood at about $23 billion.

It said the fall posed no immediate risks but needed to be monitored.

"If the State Bank stays on track for further tightening, and if it, in fact, sees further widening of the official rate and black market rate, it should actually either adjust the trading band or raise rates", Yumiko Tamura, Deputy Country Director of ADB in Vietnam told Reuters.

The ADB and other agencies and economists have been advising Vietnam to further tighten monetary policy in the face of rising inflation, as well as to manage the dong more flexibly to keep pressure from building.

Pressure on the currency has eased significantly in recent months. Vietnam devalued the currency in February for the second time in three months as part of steps to exert control over the currency and ease a US dollar shortage.

On Tuesday, the interbank dollar-dong exchange rate was 19,000/19,100 while the unofficial, or black market, rate was VND19,030/19,070 per dollar, putting the two rates closer than they have been in more than a year.

The central bank raised the benchmark base rate to 8 percent from 7 percent in December, but has kept it steady since.

It removed the cap on medium- and long-term commercial bank loans, effectively allowing them to rise, and planned to further rationalize the system by freeing short-term loans from their official ceiling of 1.5 times the base rate.

The ADB forecast Vietnam's current account deficit to be 7.6 percent of GDP this year.

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