Scant Regard For Market Forces Breeds Woes

In the following interview with the Saigon Times, Le Xuan Nghia, vice chairman of the National Commission for Financial Supervision, reflects on the detrimental impacts of the Government’s scant regard for market forces in exchange rate management

Q: The Government says it will not adjust exchange rates until the Lunar New Year. What about the subsequent period?

A: The Government will focus on stabilizing prices and gradually lowering interest rates in 2011 as part of its macroeconomic goals. This probably means exchange rates will stay stable and, if adjusted, will hinge on market forces. The timing of adjustment is hard to predict.

The State Bank of Vietnam (SBV) often waxes lyrical about the importance of flexible exchange rates, based on market forces. However, this did not seem to be the case last year. What do you think?

I think exchange rate policies must be more comprehensive and consistent. First, the reserve ratios for foreign currency deposits must surpass those for dong deposits by a suitable margin to make the local currency more attractive and ease pressure on exchange rates.

Foreign currency deposit interest rates must be relatively lower than dong deposit interest rates and foreign currency lending interest rates should be extremely high. SBV can intervene in the forex market as a final buyer and seller to balance demand and supply and, where necessary, make flexible adjustments.

Read more …