SBV implementing too rigid monetary policies: expert

Monday, April 28, 2008
Prof Dr Tran Ngoc Tho of the HCM City Economics University, said that the uncertain monetary market in recent days has been putting big difficulties on businesses. He has called for suitable policies in order to ease difficulties for businesses.

He said:

In the last several months, people have been suffering a lot from the fluctuations on the monetary market. The US$ price dropped unexpectedly and then went up unexpectedly. The market had an excess of foreign currencies, and then suddenly was short of foreign currencies. The interest rate unexpectedly jumped to 12-13% per annum. These uncertainties all have badly affected people and businesses.

Is that the price Viet Nam has to pay to curb inflation?

When applying measures to curb inflation, there are always difficulties for some groups. However, the noteworthy thing is that the above fluctuations originated from unclear signs given by the State Bank of Viet Nam.

Let’s take an example. The VND/US$ exchange rate dropped dramatically and then surged sharply after the State Bank of Viet Nam announced its intention to raise the VND/US$ exchange rate.

As a result, people who had dollars in hand rushed to sell them. They thought that the superfluous supply of dollars would lead to the fall of the dollar price. However, the reality was far different from that. Viet Nam has been witnessing big trade deficits for more than 10 years; therefore, it will never happen that the country will have dollars in excess.

An interest rate race among banks broke out after the interest rates on the interbank market surged to a level never before seen in history, over 30% per annum. In order to extinguish the interest rate war, the State Bank of Viet Nam imposed the ceiling interest rate scheme, a solution that has not been welcomed.

However, the State Bank of Viet Nam has been trying its best to stabilise the market with many solutions taken…

Only several commercial banks have met with difficulties and if the State Bank had found the solutions to settle the problems of these few banks, the market would not be as chaotic as now. It is true that the central bank tried to intervene in the market and pumped money into circulation, but the money did not get to the banks that needed money. The State Bank only finances commercial banks if banks have bonds; banks that don’t have bonds can’t get loans.

Imagine that a borrower only has a motorbike, but the lender (in this case the central bank) demands a house as a mortgage asset for the loan. Therefore, the borrower and lender cannot reach an agreement.

I think that the State Bank should be more flexible in this case in order to help ease difficulties on commercial banks. The lender still can accept a motorbike instead of a house as a mortgaged asset to provide a loan, and it can require stricter conditions on the loan.

What should Viet Nam do to settle the current problems?

Viet Nam is trying to curb inflation, but this does not mean that the central bank needs to tighten the monetary policies as tight as possible. This measure will help stabilise the macroeconomy in the immediate time, but will cause uncertainties in the microeconomy as people have to deal with too many difficulties. It is necessary to be determined to take action, but it is also necessary to be flexible.

If the dollar is in excess, the central bank should boldly spend VND to purchase dollars. The bank should also give interest rate liberalisation back to the market, while using necessary tools (exchange rate, interest rate) to regulate the monetary policies which aim to curb inflation and encourage economic growth.

It also requires flexible behaviour towards credit growth control. The 30% cap of credit growth rate should be understood as a cap for the whole economy, not for every bank. If every bank must restrain the credit growth rate at less than 30% as currently, a lot of banks will only be able to collect debts, not provide more loans, while businesses and individual cannot access bank loans anymore.

People are the main subject covered by the monetary policies; therefore, they have the right to get clear information about changes in policies in order to make suitable decisions. Don’t put more difficulties on businesses and people.

The tightened monetary policies have led to the stock and real estate market falls. Businesses, especially exporters, complain that they are facing too many difficulties. If the situation continues it could cause a lot of problems.

The most important thing is defining the right time for implementing policies. In early 1990s, Japan applied a harsh monetary policy (raising interest rates, raising compulsory reserve ratio, controlling the real estate market). The severe policy reduced inflation; however, Japan’s central bank’s blunder was that the country maintained the harsh policy for too long. As a result, the country fell into deflation ten years ago. Japan’s economy then experienced great difficulties. (Tuoi tre)