VINACHEM

The zero rate policy of the State Bank of Vietnam (SBV) for dollar deposits by enterprises and individuals has made banks’ operations less transparent and distorted the currency market, a lecturer at the Fulbright Economics Teaching Program said.

Do Thien Anh Tuan told the Daily he did not throw his weight behind the SBV’s rate cuts to zero for dollar deposits of individual and corporate customers last year as this move has placed negative impact on the currency and foreign exchange markets.

A number of banks have managed to offer dollar deposit rates above zero to raise funds for making dollar loans. On May 6, the SBV ordered banks not to offer higher-than-permitted interest rates for dollar deposits.

The SBV warned that if commercial banks are found to break the rule, they would be banned from opening new branches, transaction offices and automatic teller machines (ATMs), and from running certain operations.

This indicates the central bank’s determination to prevent dollar hoarding and stabilize macroeconomic conditions.

Tuan said macroeconomic instability does not result from fluctuations of the exchange rate between the Vietnam dong and the U.S. dollar. In contrast, exchange rate volatility results from macroeconomic instability.

He noted that controlling nominal exchange rates and setting a cap on the dollar deposit rate are not effective measures to cope with macroeconomic instability. In addition, the dollar deposit rate cap is considered an excessive financial control policy as it would distort the market, cause transaction fees in the economy to rise, and lead to an inefficient allocation of resources.

Higher-than-permitted rates offered by banks for dollar deposits show that interest rates have been distorted. Many people have taken advantage of this to benefit from price discrepancies.
Bank’s operations would be more non-transparent, making it hard for the central bank to adopt right policies.

Tuan said a zero dollar deposit rate is to deal with current macroeconomic instability but cause cyclical instability in future. The dollar rate cap may be unable to help the central bank meet short-term targets for macroeconomic stability and may force capital to flow out of the country. The U.S. Federal Reserve plans to hike interest rates to 0.25% while Vietnam applies a zero rate.

According to a SBV report, deposits of banks and other organizations in foreign nations have edged up, which is just partly attributable to rising demand for international payments of banks.

However, deposits of credit institutions and other organizations in foreign countries could amount to US$20 billion in the past two years, with credit institutions accounting for nearly US$6 billion.

Tuan said the huge amount indicates the forex market is unhealthy and non-transparent, so the SBV should find proper ways to fix it.
Controlling dollarization is necessary as it helps improve the efficiency of monetary policy but Vietnam should eliminate dollarization at all costs as this will cost dearly.

Tuan said enterprises hold on to dollars to ensure high liquidity. Meanwhile, to encourage residents to keep Vietnam dong funds, the central bank needs to keep inflation low and stable, and ensure profit for those holding the dong.

He said the central bank slashed the dollar deposit rate to zero to discourage dollar borrowing and lending but this policy must be adjusted to make it appropriate to different groups. Tuan said firms having foreign currency revenues should be allowed to get foreign currency loans.

A ban should be imposed on businesses that do not have foreign currency revenues and individuals who borrow foreign currency for speculation.

Financial reports of a couple of banks like Vietcombank, VietinBank, Sacombank, BIDV and Eximbank showed that dollar deposits inched down in the first quarter of this year compared to the year-earlier period.

Vietcombank saw non-term deposits in gold and foreign currency exceeding VND37.26 trillion as of March 31, a year-on-year drop of 6%. Deposits with terms had reached VND68.24 trillion, down 3%.

Dollar deposits at Eximbank had neared VND13.14 trillion by end-March, down over 7.8% year-on-year, with non-term deposits up 7.5% and those having terms down 12.7%.