{"id":76326,"date":"2024-08-08T10:49:00","date_gmt":"2024-08-08T03:49:00","guid":{"rendered":"https:\/\/neu.edu.vn\/thoibaonganhang-vn-combating-dollarization-requires-policy-consistency-interview-with-prof-dr-tran-tho-dat\/"},"modified":"2024-08-08T10:49:00","modified_gmt":"2024-08-08T03:49:00","slug":"thoibaonganhang-vn-combating-dollarization-requires-policy-consistency-interview-with-prof-dr-tran-tho-dat","status":"publish","type":"post","link":"https:\/\/neu.edu.vn\/en\/thoibaonganhang-vn-combating-dollarization-requires-policy-consistency-interview-with-prof-dr-tran-tho-dat\/","title":{"rendered":"Thoibaonganhang.vn: Combating Dollarization Requires Policy Consistency. Interview With Prof. Dr. Tran Tho Dat"},"content":{"rendered":"

Applying a 0% interest rate to USD deposits has been one of the key measures helping combat dollarization, increase the attractiveness of the VND and strengthen its standing in recent years. Changing this policy could therefore have numerous consequences, both in the short term and for the policy direction and objectives of combating dollarization over the medium and long term.<\/p>\n

Should a pillar of the fight against dollarization be abandoned?<\/p>\n

Over the past two-plus years, high inflation worldwide, particularly in the United States, forced the U.S. central bank (the Fed) to step up monetary tightening, primarily through interest rates. It raised rates a total of 11 times from March 2022 to July 2023, bringing them to a range of 5.25\u20135.5%, the highest in more than two decades. Since then, although inflation has slowed sharply, the Fed has maintained this rate range at every policy meeting from September 2023 to the present. The Fed\u2019s continued high interest rates and sharp fluctuations in the dollar index, predominantly upward, combined with numerous uncertainties in the global economy throughout this period, have negatively affected and placed enormous pressure on other economies, including Vietnam, particularly in monetary and exchange rate matters.<\/p>\n

\n\n\n\n\n
\"Maintaining<\/td>\n<\/tr>\n
Maintaining a 0% USD interest rate has helped the State Bank of Vietnam (SBV) purchase substantial amounts of USD to replenish foreign exchange reserves<\/td>\n<\/tr>\n<\/tbody>\n<\/table><\/div>\n

In response to these pressures, some have suggested raising the interest rate on USD deposits above 0%, arguing that this could narrow the interest rate differential between the VND and USD and mobilize resources for economic development. However, many experts believe that such a policy change, if introduced, would do \u201cmore harm than good\u201d in both the short term and the medium and long term.<\/p>\n

According to Dr. Nguyen Duc Do, Deputy Director of the Institute of Economics and Finance at the Academy of Finance, combating dollarization is the right policy direction, and everyone recognizes that dollarization in Vietnam has declined markedly in recent years. To reduce dollarization in the economy, the SBV has implemented multiple measures in parallel over approximately the past decade. Alongside efforts to keep inflation low, with annual inflation averaging around 3\u20134%, and maintain exchange rate stability, with the VND depreciating against the USD by an average of less than 2% per year, a notable measure has been the application of a 0% interest rate to USD deposits. These policies and measures have made holding USD much less attractive than holding VND. One result has been a gradual decline in demand among individuals and businesses to hold USD, helping the SBV purchase foreign currency and increase foreign exchange reserves to their current level of USD 100 billion.<\/p>\n

Sharing this view, Prof. Tran Tho Dat, a member of the National Advisory Council on Financial and Monetary Policy, emphasized that the annual USD deposit interest rate cap of 0%, in place since 2015, is the principal pillar and policy for combating dollarization. It has made an important contribution to strengthening the standing of the VND, thereby supporting stability in the money market, exchange rates and the macroeconomy. As a result, the economy\u2019s dollarization rate has fallen sharply, USD holdings among the public have been converted into capital for economic development, and the foreign exchange market has been managed more effectively and efficiently. Together with the implementation of the central exchange rate mechanism, this has allowed exchange rates to fluctuate flexibly, better absorb shocks and more accurately reflect market supply and demand. Earlier expectations that exchange rates would invariably rise have diminished. Meanwhile, the gradual shift from foreign currency deposit-taking and lending to foreign currency purchases and sales has given the monetary authority greater control over the foreign currency resources mobilized to meet domestic demand.<\/p>\n

Do not revive an investment channel that has \u201ccooled\u201d<\/p>\n

Although the 0% USD interest rate policy is one of the coordinated measures implemented in recent years that have achieved important results, the economy continues to face pressure from the considerably uncertain outlook for global economic growth. Numerous factors still affect the foreign exchange market and exchange rates: the Fed continues to maintain high interest rates; the interbank interest rate differential between the VND and USD has narrowed, even turning negative on many occasions; and demand to hold USD persists\u2026<\/p>\n

\n\n\n\n
At a meeting with economic experts organized by the SBV in mid-July to discuss foreign currency policy and USD deposit interest rates, SBV Deputy Governor Pham Thanh Ha said that the 0% USD interest rate policy is one of the coordinated measures the SBV has implemented to stabilize the foreign exchange market, anchor exchange rate expectations and strengthen the standing of the VND. This policy has helped keep exchange rates and the foreign exchange market stable. The economy\u2019s dollarization rate has fallen sharply: foreign currency deposits as a proportion of the total money supply declined from 11.06% in 2014 to approximately 6.05% as of June 2024, while foreign currency credit as a proportion of total credit has trended downward.<\/em><\/td>\n<\/tr>\n<\/tbody>\n<\/table><\/div>\n

Prof. Tran Tho Dat argued that, amid these continuing challenges, changes to the 0% USD interest rate policy or acceptance of a \u201cstep backward\u201d in combating dollarization would likely trigger incentives for individuals and businesses to hoard foreign currency. This could revive an investment channel that has \u201ccooled,\u201d negatively affect macroeconomic stability and inflation, and in turn adversely affect interest rates and the standing of the VND.<\/p>\n

Sharing this assessment, Dr. Nguyen Duc Do said that a hypothetical small adjustment to USD interest rates would have little effect in attracting USD deposits into the system. However, raising rates substantially to a level sufficient to attract individuals to deposit USD in the banking system could encourage them to buy and hold more USD for speculation. This could cause exchange rates to rise sharply and reduce the SBV\u2019s ability to manage and control exchange rates, among other effects. That, in turn, would affect interest rate management and cause dollarization to return and increase sharply.<\/p>\n

Agreeing with this view, a banking expert said that mobilizing the public\u2019s USD holdings does not require raising USD interest rates. Rather, maintaining a 0% USD interest rate has significantly curbed the inclination to hoard foreign currency, with quite a few people even selling USD to obtain VND for savings deposits or investment in production and business activities. \u201cThat is precisely the most effective way to mobilize USD for the economy,\u201d the expert emphasized.<\/p>\n

In other words, efforts to combat dollarization over the past 10-plus years have yielded positive results, but ensuring a \u201chappy ending\u201d over the next 10 years requires persistence and consistency. Experience in many countries shows that combating dollarization must be treated as a long-term process, with consistency in policy implementation. Offering his perspective, Prof. Tran Tho Dat said that, for the 0% USD deposit interest rate policy to remain the principal pillar of efforts to combat dollarization, its implementation roadmap must be pursued consistently. The policy must consistently be regarded as a tool that actively supports stability in the money market, exchange rates and the macroeconomy. At the same time, a comprehensive set of other policies and measures is needed to strengthen the standing of the VND and reduce the attractiveness of holding USD. The principle of making VND holdings more beneficial than USD holdings must be upheld consistently over the long term throughout interest rate and exchange rate management.<\/p>\n

At the same time, efforts must continue consistently to shift from foreign currency deposit-taking and lending to foreign currency purchases and sales. Specific measures are needed to strengthen the legal framework for foreign exchange management toward limiting the use of foreign currency within the country and preventing foreign currency speculation and hoarding. Attempts to circumvent the USD deposit interest rate cap must be tightly controlled through stronger inspection and supervision and greater market discipline\u2026<\/p>\n

Elaborating on his views, Dr. Nguyen Duc Do emphasized that mobilizing financial resources, including USD, should not rely solely on the SBV\u2019s policies and measures. Institutional reform and reductions in administrative procedures to create an open business and investment environment are also fundamental measures to encourage people to channel capital into production and business activities. Alongside these efforts, developing capital markets, such as bond and stock markets, also plays a very important role in reducing dollarization in the economy.<\/p>\n

Do Le<\/div>\n

Link: https:\/\/thoibaonganhang.vn\/chong-do-la-hoa-can-kien-dinh-giai-phap-154275.html<\/a><\/p>\n

This is an automated translation. If you notice any errors, please contact the Department of Communications, National Economics University at phongtruyenthong@neu.edu.vn<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Applying a 0% interest rate to USD deposits has been one of the key measures helping combat dollarization, increase the attractiveness of the VND and strengthen its standing in recent years. Changing this policy could therefore have numerous consequences, both in the short term and for the policy direction and objectives of combating dollarization over the medium and long term. Should a pillar of the fight against dollarization be abandoned? Over the past two-plus years, high inflation worldwide, particularly in the United States, forced the U.S. central bank (the Fed) to step up monetary tightening, primarily through interest rates. It raised rates a total of 11 times from March 2022 to July 2023, bringing them to a range of 5.25\u20135.5%, the highest in more than two decades. Since then, although inflation has slowed sharply, the Fed has maintained this rate range at every policy meeting from September 2023 to the present. The Fed\u2019s continued high interest rates and sharp fluctuations in the dollar index, predominantly upward, combined with numerous uncertainties in the global economy throughout this period, have negatively affected and placed enormous pressure on other economies, including Vietnam, particularly in monetary and exchange rate matters. Maintaining a 0% USD interest rate has helped the State Bank of Vietnam (SBV) purchase substantial amounts of USD to replenish foreign exchange reserves In response to these pressures, some have suggested raising the interest rate on USD deposits above 0%, arguing that this could narrow the interest rate differential between the VND and USD and mobilize resources for economic development. However, many experts believe that such a policy change, if introduced, would do \u201cmore harm than good\u201d in both the short term and the medium and long term. According to Dr. Nguyen Duc Do, Deputy Director of the Institute of Economics and Finance at the Academy of Finance, combating dollarization is the right policy direction, and everyone recognizes that dollarization in Vietnam has declined markedly in recent years. To reduce dollarization in the economy, the SBV has implemented multiple measures in parallel over approximately the past decade. Alongside efforts to keep inflation low, with annual inflation averaging around 3\u20134%, and maintain exchange rate stability, with the VND depreciating against the USD by an average of less than 2% per year, a notable measure has been the application of a 0% interest rate to USD deposits. These policies and measures have made holding USD much less attractive than holding VND. One result has been a gradual decline in demand among individuals and businesses to hold USD, helping the SBV purchase foreign currency and increase foreign exchange reserves to their current level of USD 100 billion. Sharing this view, Prof. Tran Tho Dat, a member of the National Advisory Council on Financial and Monetary Policy, emphasized that the annual USD deposit interest rate cap of 0%, in place since 2015, is the principal pillar and policy for combating dollarization. It has made an important contribution to strengthening the standing of the VND, thereby supporting stability in the money market, exchange rates and the macroeconomy. As a result, the economy\u2019s dollarization rate has fallen sharply, USD holdings among the public have been converted into capital for economic development, and the foreign exchange market has been managed more effectively and efficiently. Together with the implementation of the central exchange rate mechanism, this has allowed exchange rates to fluctuate flexibly, better absorb shocks and more accurately reflect market supply and demand. Earlier expectations that exchange rates would invariably rise have diminished. Meanwhile, the gradual shift from foreign currency deposit-taking and lending to foreign currency purchases and sales has given the monetary authority greater control over the foreign currency resources mobilized to meet domestic demand. Do not revive an investment channel that has \u201ccooled\u201d Although the 0% USD interest rate policy is one of the coordinated measures implemented in recent years that have achieved important results, the economy continues to face pressure from the considerably uncertain outlook for global economic growth. Numerous factors still affect the foreign exchange market and exchange rates: the Fed continues to maintain high interest rates; the interbank interest rate differential between the VND and USD has narrowed, even turning negative on many occasions; and demand to hold USD persists\u2026 At a meeting with economic experts organized by the SBV in mid-July to discuss foreign currency policy and USD deposit interest rates, SBV Deputy Governor Pham Thanh Ha said that the 0% USD interest rate policy is one of the coordinated measures the SBV has implemented to stabilize the foreign exchange market, anchor exchange rate expectations and strengthen the standing of the VND. This policy has helped keep exchange rates and the foreign exchange market stable. The economy\u2019s dollarization rate has fallen sharply: foreign currency deposits as a proportion of the total money supply declined from 11.06% in 2014 to approximately 6.05% as of June 2024, while foreign currency credit as a proportion of total credit has trended downward. Prof. Tran Tho Dat argued that, amid these continuing challenges, changes to the 0% USD interest rate policy or acceptance of a \u201cstep backward\u201d in combating dollarization would likely trigger incentives for individuals and businesses to hoard foreign currency. This could revive an investment channel that has \u201ccooled,\u201d negatively affect macroeconomic stability and inflation, and in turn adversely affect interest rates and the standing of the VND. Sharing this assessment, Dr. Nguyen Duc Do said that a hypothetical small adjustment to USD interest rates would have little effect in attracting USD deposits into the system. However, raising rates substantially to a level sufficient to attract individuals to deposit USD in the banking system could encourage them to buy and hold more USD for speculation. This could cause exchange rates to rise sharply and reduce the SBV\u2019s ability to manage and control exchange rates, among other effects. That, in turn, would affect interest rate management and cause dollarization to return and increase sharply. Agreeing with this view, a banking expert said that mobilizing the public\u2019s USD […]<\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[724],"tags":[],"class_list":["post-76326","post","type-post","status-publish","format-standard","hentry","category-economic-information","post-no-thumbnail"],"acf":[],"_links":{"self":[{"href":"https:\/\/neu.edu.vn\/en\/wp-json\/wp\/v2\/posts\/76326","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/neu.edu.vn\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/neu.edu.vn\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/neu.edu.vn\/en\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/neu.edu.vn\/en\/wp-json\/wp\/v2\/comments?post=76326"}],"version-history":[{"count":0,"href":"https:\/\/neu.edu.vn\/en\/wp-json\/wp\/v2\/posts\/76326\/revisions"}],"wp:attachment":[{"href":"https:\/\/neu.edu.vn\/en\/wp-json\/wp\/v2\/media?parent=76326"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/neu.edu.vn\/en\/wp-json\/wp\/v2\/categories?post=76326"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/neu.edu.vn\/en\/wp-json\/wp\/v2\/tags?post=76326"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}