State-owned firms in Vietnam have been ordered to sell US dollars to commercial banks to address a rising trade deficit and stabilize a weak currency.
The State Bank of Vietnam has instructed firms that are more than 50 percent government-owned to sell their dollars held in fixed term and non-term deposit accounts from July 1.
It said the move was part of efforts to regain control of unstable foreign exchange markets and to ease downward pressure on the dong that has led to several currency devaluations, higher inflation and a widening trade deficit.
Companies will be able to buy dollars from the banks if needed.
Central bank governor Nguyen Van Giau siad 78 state firms held more than $1.6 billion, including $376 million on fixed terms, at the end of March.
Prime Minister Nguyen Tan Dung flagged the sale of state firms' funds in February as part of measures to stabilize an economy facing challenges including inflation close to 20 percent, one of the highest rates in the world.
"We are in economic turbulence now," said Giang Thanh Long, a vice dean at the National Economics University in Hanoi.
With prices soaring, Vietnamese householders are unwilling to give up their extensive personal holdings of dollars, which they see as a safe-haven. This has forced authorities to turn to the extensive reserves held by some government-controlled firms in a bid to boost the State Bank of Vietnam's coffers, Long said.
"This is really a serious issue in Vietnam now," he said.
Central bank reserves can be used to support a weak currency.
Vietnam has been spending more on imports than it earns from exports, with the trade deficit reaching about $6.6 billion in the first five months of the year, up 23 percent from the same period of 2010.
In February Vietnam announced a 9.3 percent devaluation of the dong, which is good for exports but has also driven up imports costs.
Economists say the central bank wants to avoid further devaluation.
Long said the exact amount of Vietnam's foreign exchange reserves is a secret but it could be as low as about $10-15 billion, which is below the ideal range of about $20 billion to $25 billion.
State firms typically buy and sell foreign exchange at the official rate, which on Thursday was 20,638 dong to the dollar, against up to 20,650 on the black market.
World Bank officials said Thursday the official and unofficial rate gap has narrowed, in one sign that government measures are helping to restore economic stability.
But the Hanoi Young Business Association said in a report last week that workers, consumers and companies are "losing confidence in the home currency and existing monetary, foreign exchange and banking policies."
Some state firms have already been selling their dollars so it was unclear what additional benefit would accrue from the central bank's directive, said Deepak Mishra, the World Bank's lead economist in Vietnam.
Similar efforts in the past were not strictly implemented and led to only short-term results, he said.
There has been a "biased allocation of funds to inefficient state-owned conglomerates," the Hanoi Young Business Association said.
Problems at state-owned firms were dramatically illustrated at shipbuilder Vinashin, which government inspectors accused of "rampant and inefficient investment" that left debts of about $4 billion at the end of 2009.
Lao Dong newspaper reported the inspectors' findings on Thursday.
It said that since 2006 Vinashin had signed 85 contracts worth 58,224 billion dong ($2.8 billion) but fulfilled only 15 of them.
A police investigation is under way into former executives of the firm.