IMF floats a key monetary framework

The IMF's recommendations were made at the conference titled "Vietnam: Retaining stability, enhancing the competitive edge, and replacing the growth potential." The conference took place in Hanoi last week with the cooperation of State Bank of Vietnam (SBV) and IMF.

According to IMF, Vietnam's monetary policy makers are facing multiple challenges including conflicting policy objectives, no operational autonomy, impaired banking sector and low international reserves.

IMF senior economists pointed out that SBV Law stated the objective as stabilising currency value expressed by inflation target. "But SBV is guided by multiple policies such as promoting economic growth, containing inflation, preserving financial stability and exchange rate stability."

Analysing the monetary policy transmission to inflation, IMF emphasised that headline inflation was not persistent. It is influenced largely by monetary factors and food prices after a three quarters' horizon. Interest transmission to inflation seems weak while exchange rate is more effective. On average, the credit channel has worked but independently of interested rates.

Therefore, IMF pointed out characteristics of desired monetary policy framework for Vietnam such as the clarification of low and stable inflation as priority, clear monetary policy communication, phase out administrative control, support role for policy interest rate and sterilize intervention.

"SBV should simplify monetary policy mandate, increase operation autonomy, strengthen accountability framework and with impaired credit channel, and SBV should rely more on the market-based instruments," said IMF economists.