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Vietnam warned by IMF
By Amy Kazmin in Bangkok
Published: March 10 2008 23:39 | Last updated: March 10 2008 23:39
The International Monetary Fund has warned Vietnam that its fast-growing economy is overheating. It has advised Hanoi to adopt a more flexible exchange rate regime and to tackle imprudent lending practices by commercial banks, in order to help control inflation.
“There are increasing signs that the economy is overheating, threatening sustained economic growth in the medium term,” Shogo Ishii, the assistant director of the IMF’s Asia and Pacific department, wrote on the fund’s website.
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Edited transcript: Nguyen Tan Dung - Mar-02
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In meetings with top government officials last week, Benedict Bingham, the IMF’s resident representative, suggested that authorities rely on “controlled increases in interest rates”, rather than quantitative targets, to curb credit growth, which rose to about 50 per cent last year.
In a statement on Monday Mr Bingham also said a more flexible exchange rate regime would “help make monetary policy more effective in controlling inflation, and help ease the current disequilibrium in the foreign exchange market”.
The IMF also called for the government to impose greater restraint on borrowing by state enterprises. It also noted that Vietnam’s current account deficit is preliminarily estimated to have risen to about 10 per cent of GDP in 2007.
Vietnam’s Communist authorities are battling to curb inflation, which, driven by higher food and energy prices, hit 15.7 per cent in February and has fuelled labour unrest, especially among factory workers who say they cannot make ends meet.
The State Bank of Vietnam, the central bank, currently sets a daily exchange rate, which was 16,025 to the dollar on Monday, but the currency, the dong, has appreciated only 0.5 per cent against the dollar this year. In unregulated gold shops, meanwhile, the dong was trading at a far stronger 15,500 to the dollar.
Banks are only allowed to trade the currency within a narrow band around the official rate every day, although the central bank widened the band on Monday to 1 per cent up or down, from the previous 0.75 per cent.
However, economists say Vietnam needs a more flexible policy for fixing its daily official exchange rate, rather than just widening the band.
Vietnam has been buffeted by global currency realignments that have seen many Asian currencies, including the Chinese renminbi, strengthening against the US dollar.
With the US as the largest market for its exports, Hanoi had tried to peg its currency to the dollar, thus weakening the currency. But since China is Vietnam’s biggest supplier, imports have become more expensive, fuelling inflation already fanned by credit growth.
The central bank has sought to curb inflation by sucking liquidity out of the financial system. But that has created a shortage of the local currency hindering normal business transactions.
