Vietnam’s Central Bank takes steps to downsize foreign currency credit


Having bought a large amount of foreign currency to increase forex reserves, the State Bank (SBV) is continuing its strategy to downsize foreign currency credit.

The director of the Monetary Policy Department said SBV is buying foreign currencies in large quantities, though the purchase frequency is less intense than the previous year.

The central bank projects 14 percent credit growth rate for 2019, the same as last year. The foreign currency loans will fall and the dollar deposit interest rate will be at zero percent.

In late 2018, SBV issued Circular 42 stipulating regulations related to lending in foreign currencies, re-affirming its policy on restricting dollarization in the economy.

Vietnam is following a roadmap of gradually shifting foreign currency from mobilization-lending into buy-sell. Instead of borrowing dollars from banks, businesses will buy dollars.

Under the circular, businesses can get short-term loans in foreign currency to make payments for imported products and services until March 31.

Businesses can also get medium- and long-term loans to pay for imports and until the end of September.

When credit institutions disburse the loans, borrowers will have to sell the money to lenders under the form of spot delivery.

In the past, dollarization was alarming because of high inflation. A report showed that the ratio of deposits in foreign currency to the total money supply (M2) was over 20 percent.

At that time, businesses and individuals tried to hoard dollars in anticipation of the dollar price hike in the future. There existed a big gap between the official exchange rate announced by SBV and the exchange rate in the black market. This put pressure on the official forex market and badly affected the SBV’s exchange rate policy.

The government of Vietnam and SBV vowed to eliminate dollarization because the uncertainties in exchange rate and forex market are both causes of macroeconomic instability.

According to SBV, in order to attract non-dong resources for production and business, it is necessary to stabilize the macroeconomy and the dong value.

Once the dong value becomes stable, the demand for assets in foreign currencies and gold will decrease.

SBV said that the dollarization rate fell from 11.06 percent in 2014 to 8.21 percent in late 2017. Credit institutions began buying foreign currencies more than selling in 2016 instead of net sales.

SBV Governor Le Minh Hung said SBV bought $6 billion more in 2018 to increase forex reserves, affirming that the zero percent dollar deposit interest rate policy does not have a negative impact on foreign capital and overseas remittance inflows.

Source: / SBV

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