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Exchange rate adjustment should be more flexible

Update: June, 28/2014 - 10:47

HA NOI (VNS)— While saying the dong-US dollar exchange rate should not be floated during the next two years, experts suggested that the rate should become more flexible, within allowed limits.

In a report concerning the 2014 macro economy, released this week, members of the National Assembly's Economics Committee said the central bank should avoid raising the forex rate unexpectedly and then keeping it unchanged for a long period, as is currently being done. Instead, it said, the central bank should adjust the rate up and down in small increments, but more regularly.

The committee explained that, in fact, though the official dong-dollar rate has been maintained at VND20.828 for the past year, prior to an increase of 1 per cent decided by the central bank on June 19, the forex market saw strong movement this year due to the psychology among investors of waiting for the expected adjustment.

Further, there is a controversial requirement to devalue the dong to support exports amidst a decreasing inflation trend, and the committee said that the devaluation of the dong against the US dollar would not contribute significantly to improving Viet Nam's balance of trade, as the country's exports mainly depend upon imported materials.

However, the report says, if keeping the dong overvalued will cause difficulties in developing the country's supporting industries, then the dong overvaluing policy encourages imports, rather than domestic production. Also, this policy will not motivate foreign direct investment firms to increase their technological content and domestic value-added assistance.

The report also recommends that the exchange rate policy should be based upon a basket of various strong currencies, instead of only the US dollar.

Viet Nam currently anchors its exchange rate only to the US dollar, while the country's exports and borrowing do not only depend upon the US currency, the report says, reporting statistics that bilateral trade between Viet Nam and the US was 11 per cent last year, while the figures with China, Japan and the EU were 19 per cent, 9.5 per cent and 12.8 per cent, respectively.

Besides the US dollar, most of Viet Nam's foreign loans are in yen, Singapore dollar and euro, it noted.

The large dependence on the US dollar, while trade and loans depend upon other currencies, causes negative impacts on trade and investment ties between Viet Nam and large trading partners.

The policy to base its exchange rate on many currencies will help Viet Nam minimise negative impacts and risks caused by strong volatility in the world's monetary market and the global commodity market, the report says.

In the report, the committee has also suggested that in the mid-term of 2016-18, when the country's macro economy and financial markets are much improved, a policy to float the forex rate with State management will be a suitable option.

However, before that, the country must improve the restructuring of the economy and the financial and banking sector to successfully build a healthy financial market.

Capital control should be considered a temporary measure in the restructuring period, before the opening of financial markets occurs in 2018, according to the report. — VNS


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