Government’s roadmap of fighting “dollarization” on right track: economist

The Government’s roadmap of fighting “dollarization” is on the right track, flexible and timely, Le Tham Duong, Head of Business at Ho Chi Minh city University of Banking told the online newspaper Dat Viet.

Duong welcomed the State Bank of Vietnam (SBV)’s moves to raise dollar reserve requirements and cut dollar deposit interest rate cap, adding that these measures will make it less attrative to hold the dong rather than dollars, helping to discourage dollar hoarding, speculation and step up to wipe off “dollarization” in the economy.

Raising dollar reserve requirements by 100 bps will force local banks to withhold a larger portion of their funds and boost up dollar lending interest rates to make up for higher cost of capital, discouraging the public and firms to borrow dollars, Duong pointed out.

“The more dollars local banks could attract, the more reserves they must set aside, but these dollars reserves can’t generate profits to the banks”, causing less incentives for banks to attract dollar deposits, he said.

When dollar deposit interest rates plunge, the public and enterprises will switch from dollar to dong deposits at the banks, the economist added.

The SBV’s series of measures will affect both supply and demand for dollars, pulling dollar exchange rates to equilibrium point and helping to discourage dollar hoarding, speculationn sentiment, he noted.

At first, the above-mentioned measures will help bring dollar exchange rates down, yet it’s impossible to determine which level the rates will fall to, Duong said, adding that the utmost goal is fighting dollarization and stabilizing dollar exchange rates.

He refuted the bias that lower dollar exchange rates will hurt exporters, pointing out that 80-90% of materials to manufacture exporting goods are imported. – Stoxplus.com

Tags: Dollarization