Government moves to rein in dollarisation

Inflationary pressures are turning the screw on the economy

Dollars can be borrowed for importing goods and services, settling pre-mature foreign debt and investing overseas. According to a State Bank source, the tightening dollar lending could reduce the economy’s dollarisation and help the bank better control credit growth.

According to an International Monetary Fund’s rating, if foreign currency deposits in the total money supply (FCD/M2) of any economy exceeds 30 per cent, it means the economy is in dollarisation. In Vietnam, the ratio, after peaking at 41.2 per cent in 1991 due to hyper inflation, has been fluctuating between 20-30 per cent.

“This tightening is just the State Bank’s first step toward the abolishment of foreign currency credit in Vietnam’s banking system as the coexistence of dollar and dong interest rates has caused difficulties to the State Bank’s monetary management,” said the State Bank source.

Generally, in a dollarisation economy, controlling credit growth could be more difficult. The central bank’s tools such as raising reserve requirements and issuing central bank notes to withdraw money from circulation are just as effective to control local currency credit.

In response to the dollarisation issue, the prime minister worked out Decision 98/2007/QD-TTg dated July 4, 2007 requesting relevant authorities to reduce the economy’s dollarisation level. “Additionally, the decision to cap foreign currency credit growth has been attributed to total credit growth, a major drive to push the consumer price index (CPI) increase,” said the State Bank official.

According to a Vietcombank source, previously, local banks had two channels for using the dollar. These were lending to domestic enterprises and depositing at overseas banks enjoying an interest rate margin.
In the past, local banks’ dollar deposits at overseas banks sometimes hit $4 billion. However, over the last two years, with dollar rates continuously increasing and deposit interest rates being reduced overseas, local banks have had only one channel to lend to domestic customers.

“That’s why dollar credit growth has surpassed credit growth recently,” said the Vietcombank source.
Banking experts said that the high demand for the greenback was partly due to companies borrowing short-term dollars at better rates compared to the dong.

At present, the short-term dollar lending rates were around 9 per cent per year, while the dong rates were around 16 per cent for short-term loans and even 18-20 per cent for long-term loans. HSBC Asia economist Prakriti Sofat said the move would help curb credit growth and reduce the inflationary pressure on the economy.

Last year, Vietnam’s credit growth hit 53 per cent and was considered a major factor leading to its record annual CPI increase of 12.63 per cent.