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Vietnam - Economists urge to loosen monetary policies

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Post by lexie Thu Dec 01, 2011 2:02 pm

December 1, 2011

Economists urge to loosen monetary policies

If the State Bank of Vietnam keeps tightening the monetary policies, this would lead to the sharp fall of the productivity, which may make the high inflation return, economists have warned.

Vietnam’s economy has shown signs of recovery in recent months with the inflation rate decreasing to 0.36 percent in October and 0.35 percent in November. The interest rates tend to decrease, while the payment balance witnesses the surplus of 3.5-4 billion dollars, and the foreign currency reserves have increased to 14 billion dollars.

Economists say that they can see some problems in the monetary policies and that it is now the right time to loosen the monetary policies.

Credit limits unreasonable

The worsening situation of the world’s economy has had negative impacts on the Vietnamese economy. Meanwhile, the exchange rate has been under a hard pressure caused by the hot foreign currency credit growth. The dollar price may rise one day, when the supply becomes short as businesses rush to buy dollars to pay bank debts.

Since the deposit ceiling interest rate mechanism was applied, trillions of dong has been withdrawn from the banking system. This shows that the 14 percent ceiling interest rate is not attractive to those people, who have idle money.

People tend to inject their money in other investment channels instead of bank deposits. Meanwhile, banks have been told not to let the credit growth rate exceed the 20 percent threshold, which is applied to all banks.

This has led to the fact that even big banks also have to bear the same credit growth rate cap. Some commercial banks have set up the same cap of 20 percent to all of their branches, including the ones in rural and remote areas. As a result, the capital provided to the national economy is redundant somewhere and lacking elsewhere.

Besides, the fluctuations on the gold market have also had big impacts on the monetary market. The report by the National Finance Supervision Council has shown that in 2011, billions of dollars left Vietnam, mostly because people spent dollars to import gold illegally. The policy on not allowing commercial banks to mobilize gold and lend in gold has also hindered the mobilization of idle capital from the public.

Therefore, international analysts have warned that if the monetary policies continue to be tightened in the time to come, the production would be stagnant, the output of goods would decrease, which would make the high inflation return.

Ceiling interest rate mechanism needs to be removed

Dr Le Xuan Nghia, Deputy Chair of the National Finance Supervision Council, said that the credit growth rate in 2011 is expected to reach 14 percent, much lower than the allowed threshold of 20 percent, while the money supply is forecast to increase by 12 percent, much lower than the yearly targeted level of 16 percent.

Analysts say that the inflation rate tends to decrease gradually this year, therefore, the government may issue a new resolution in 2012 to replace the resolution 11 on ensuring macroeconomic stability, restraining inflation, ensuring social security. The new resolution is expected to focus on ensuring the banking system and supporting businesses, under which the money supply would increase by 12-13 percent, while the credit growth rate by 16-17 percent.

In order to obtain the targets, finance experts believe that the monetary policies need to loosened, step by step. The State Bank should require higher compulsory reserve ratios from big banks, and use that sums of money to lend to smaller banks for one year, which would help drive the capital to the places where capital is needed.

After that, the central bank should remove the ceiling interest rate mechanism, because the liquidity of banks would be settled only when banks can mobilize capital from the public at the market interest rates.


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