Weaning Vietnam off the dollar

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Vietnam's love for greenbacks has spurred spiraling inflation, a senior government advisor talks about what the country can do to kick the habit

A staff member counts US dollar notes at a bank in Ho Chi Minh City. A government advisor said Vietnam's dollar supply is strained and local businesses have failed to find an adequate source of greenbacks.

The Vietnamese dong has continued to sink despite the State Bank of Vietnam's efforts to stabilize it. The dong weakened to as much as 21,150 per dollar on Thursday morning on the unofficial market in Ho Chi Minh City, compared to 20,800, a week before.

Cao Sy Kiem, a member of the National Monetary and Financial Policy Advisory Council, says Vietnam's dollar supply is strained. Local businesses have failed to find an adequate source of greenbacks to cover their rising material imports and dollar loans.

Outsized demand continues to push prices up, while inflationary hikes, gold price increases and stock market fluctuation have inspired widespread hoarding.

Commercial banks are short on dollars while other firms continue to feed demand for the currency. The State Bank of Vietnam's policies have not succeeded in resolving the issue. We talked to Cao Sy Kiem to find out what this means for the people.

Thanh Nien Weekly: Why has the value of the dollar risen in Vietnam and fallen abroad?

Cao Sy Kiem: The world is not like our country - inflation has not risen as quickly abroad as it has at home in recent months. Others don't share our national idea of dollar hoarding as a viable means of saving.

How has the rising exchange rate affected production and business?

Higher exchange rates will continue to impact the investment environment. Firms, which import materials and equipment, will suffer higher production costs, and lower profits.

The dollar hikes will increase the price of everyday goods and force firms to drive up the value of dollar loans.

Ultimately, the rises will widen the trade deficit.

Investors may halt production if they fail to see profits. They will also stop and consider their investments more carefully and spirits may flag. Some foreign investors may try to capitalize on dollar hikes by adding currency to the local supply.

An estimated US$10-11 billion are floating around in the Vietnamese market. Should banks seek to attract these dollar deposits?

It could be a good idea, but commercial banks buy dollars only when there are policies in place to protect their interests and prevent risks posed by black market dollar sellers. Nobody wants to sell a dollar for VND18,000, and buy it back at VND20,000.

What can be done to stabilize the exchange rate?

To stabilize the exchange rate, we have to deal with a number of issues. We must narrow the trade deficit, increase exports, reduce state budget overspending and pour more capital into production and business to create jobs.

We have to boost economic growth, produce more goods and balance the capital flows. An increase in the currency supply will help lower interest rates and reduce downward pressure on the dong.

However, it's most important to address the psychology of reserving dollars by disclosing reliable market information and ensuring policy transparency.

What do you think of the view that the current dong value is higher than its actual worth?

\Subscribers to this school of thought want us to continue to devalue the dong, but we only devalue the dong to boost exports. Meanwhile, many of our exports are the result of outsourced production, which depends on imported materials.

Many Vietnamese export industries import up to 60-70 percent of their production materials. For every 10 dong we earn on exports, we spend 6-7 importing materials and equipment.

The world is facing rising inflation. We may be affected by this global trend if we do not carefully consider (the situation). We may even suffer losses if we export too much.

So, we have to carefully calculate how we should encourage exports. If we devalue the dong, it will widen the trade deficit. The wider our trade deficit, the more seriously we will be affected by global inflation.

Vietnam's overseas debts are mainly in dollars, estimated at $19-20 billion. If we devalue the dong by only 1-2 dong per dollar, our debts will increase greatly, damaging business.

The regulated value of the dong is high compared to its actual value, but we should adjust the exchange rate to create better balance. We should not continue to devalue the dong.

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