Monetary Policy Reform In Vietnam

The main aim of the Vietnamese government has been to bring about monetary policy reform in Vietnam. A vital achievement of the government in Vietnam was the Vietnam-US Bilateral Trade Agreement or BTA. Foreign banks have already started operating in the country. The Socio Economic Development Plan for five years, from the year 2006 to 2010, aims at making Vietnam a middle income nation by the year 2010. To this effect, the annual economic rate of growth has been set between 7.5 percent to 8 percent for five forthcoming years.

Monetary policy reform in Vietnam- strategies adopted:

The State Bank of Vietnam introduced monetary policy reform in Vietnam. The two important elements of the same include:

• The State Bank of Vietnam or the SBV set an annual depreciation target for dong- the currency of Vietnam.
• Credit as well as total total liquidity to the economy was targeted at by the SBV.

Exchange rates:

In the year 2004, 2005 the State Bank of Vietnam declared targets pertaining to exchange rates. This only indicated that exchange rates are used by the SBV as an anchor. It was targeted that dong depreciation as compared to US dollar ought to be maintained below 1percent. The Bank was successful in attaining the target in the year 2005.

Total liquidity:

In addition to the targets pertaining to exchange rates, targets pertaining to total liquidity was also worked out. As mentioned above, targets pertaining to credits were also taken care of by the State Bank of Vietnam. Attaining targets pertaining to credits were more vital because it is taken care of by the International Monetary Fund. During the period 2004 to 2005, credit targeting was fixed at 25 percent. Surprisingly, targets far outdid the expectations and the growth of 42 percent was recorded in the year 2004 alone.

Interest rates:

The commercial banks applied interest rates in the year 2005. The main goal of keeping the interest rate stable was to stabilize the economy so that the impact of a fluctuating interest rate is not resulted. An interest rate, which keep changing may negatively impact the economy of Vietnam.

Monetary policy reform in Vietnam- the tools used for the reform:

Tools for monetary policy reform in Vietnam made use of several instruments to effect the reform introduced by the State Bank of Vietnam.

The different tools or instruments for monetary policy reform in Vietnam include:

• Refinancing
• Reserve requirements
• Facilities related to discount lending.

Operations related to open markets as well as foreign exchange interventions are also used as tools for bringing about monetary policy reform in Vietnam. The Vietnamese government used administrative instruments for controlling prices. The State Bank of Vietnam also makes use of reference rates to impact rates of interest. Besides using monetary policy tools, which are indirect in nature, the SBV makes use of rates of lending and deposits directly. It is reckoned that the monetary policy reform in Vietnam, which indirectly effect reform, are not of much use. The reason being they are not efficient enough to control rates of inflation in the country.

The State Bank of Vietnam is of the opinion that inflation is influenced not by monetary policies but by supply shocks.

• In a nut shell, the monetary policy reform in Vietnam ought to include the under mentioned.
• All responsibilities pertaining to monetary strategies ought to be handed over to the State Bank of Vietnam.
• The primary aim of monetary policy reform should include stability in prices and prioritizing monetary policy aims.
• Flexibility should be induced in the monetary policy reforms in Vietnam. Inflation targeting should also be kept in mind. In this context, it may be said that the causes of inflation also need to be addressed.