SBV strives for controlling inflation
| 11:13' 18/06/2007 (GMT+7) | ||
By asking commercial banks to increase their compulsory reserve for both the Vietnam dong (from 5% to 10% for deposits of less than 12 months) and foreign currencies (from 8% to 10%), the SBV has officially sent a signal: it will give priority to keeping inflation lower than the economic growth rate.
The consumer price index (CPI) of the first five months increased by 4.3% compared to that of late 2006. The CPI of June 2007 is forecast to increase 0.4%. Thus, the CPI of the first half of the year will be more than 4.7%. Will the CPI of the whole year be less than 8%, lower than the expected growth rate of 8-8.5%? Maintaining the inflation rate of 3.3% for the last six months of the year seems to be a difficult mission.
Before releasing the new regulations on compulsory reserve, SBV Governor Le Duc Thuy told the press that controlling inflation was one of the top missions of the central bank. He stated that this agency realised that it was necessary to take some measures to keep inflation under control.
Those measures had actually been realised regularly but the policy to control inflation was clearer in May.
Firstly, the SBV took a positive step in withdrawing the volume of cash circulating in the market through the operations of the open market. In May only, around VND12,000-VND15,000 billion (US$750 - $937.5 million) was withdrawn from circulation through auctions of quasi-money papers.
Secondly, banks were reminded very frequently about credit control, especially raising the quality of credit.
While the credit growth rate of state-owned commercial banks is less than 20% compared to the same period of last year, the outstanding debt balance of joint stock banks has quickly grown.
Many joint stock banks have boosted loans for stock investment and this has contributed to their credit growth. By warning banks to not give loans for stock investment that exceed 3% of their total outstanding debt balances the SBV has officially fixed the 3% limit for stock loans.
The third measure, which is being performed by the SBV, is flexibly controlling the foreign exchange rate.
Since mid May, the devaluation of the Vietnam dong against the US dollar has gone faster. By June 12, 2007, the US dollar/Vietnam dong exchange rate of the Bank for Foreign Trade of Vietnam (Vietcombank) was equal to the inter-banking exchange rate daily announced by the SBV.
Previously, in late December 2006 and the first quarter of 2007, the exchange rate of banks was always much lower than the daily-announced inter-banking exchange rate. Even in the first quarter of 2007, the Vietnam dong gained higher value (0.3%) compared to the US dollar. However, in the past three weeks, the devaluation of the Vietnam dong against the US dollar has reached 3.5%/year, according to the Hong Kong and Shanghai Banking Corporation (HSBC).
With the above measures, the SBV can completely maintain the devaluation of the Vietnam dong at 1% in 2007 as its goal. Once it can control the exchange rate, inflation control will be more effective.
However, some challenges still exist and the most difficult is the prediction of financial investment flow. It is difficult to know whether foreign investment in stocks from now to the year’s end will suddenly rise.
It is not accidental that the value of the Vietnam dong continuously increased against the US dollar in January 2007, the time foreign investors ‘pumped’ up to US$350 million into the stock market. At that time the forex limits of many banks were always full and they couldn’t change Vietnam dong for US dollars and the SBV had to buy US dollars, increasing the national foreign currency reserve.
(Source: TBKTSG) |
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