Vietnam is following a process on easing the dollarization and it hopes the dollarization would be stopped by the end of 2013, according to Dr Le Xuan Nghia, Deputy Chair of the National Finance Supervision Council.

These words were spoken by Nghia to answer the questions raised by economists from Ireland, about the dollarization in Vietnam at the workshop on the cooperation of Irish and South East Asian businesses held in HCM City on May 13.

Nghia said that Vietnam, like other South East Asian economies, have been affected by the US dollar. The dollarization level in Vietnam’s economy now is over 20 percent.

The dollarization, plus the high inflation have been badly affecting the macro economy, which had made the local currency lose its value and made it difficult to curb inflation. Once an economy becomes fully dollarized, central banks will not keep their functions any more.

A question posted for Nghia by foreign businesses was “what measures the government of Vietnam will take to ease the dollarization in Vietnam and encourage the local currency.”

The government has drawn up a plan to eliminate the dollarization, under which Vietnam will completely stop the dollarization by 2013, where banks will not accept deposits in dollars and not lend in dollars.

Dr Nghia has emphasized that instead of applying administrative measures, Vietnam will use the legalized measures. He said that Vietnam has learned the lessons from the failures of fights against the dollarization in Latin America, Brazil or Argentina and Mexico. In those countries, people were allowed to deposit in dollars, but they must get money in the local currencies. The method led to the fact that people refused to deposit dollars at domestic banks, but deposit dollars at foreign banks. This has resulted in the failure of the second stage of the plan to eliminate dollarization.

In the years from 2011 to 2013, the government of Vietnam plans to do five things. Firstly, it may increase the required compulsory reserve ratio on dollar deposits, possibly to 12 percent in 2011. Brazil once also required the high compulsory ratio at 35 percent to fight against the dollarization in the country, which was considered a successful measure.

According to Nghia, the higher compulsory reserve ratio aims to widen the gap between the dong and the dollar deposits’ interest rates. This will force commercial banks to lower the interest rates for dollar deposits and raise the interest rates for dollar loans. As a result, people will not prefer making deposits in dollars any more, and they will sell dollars for Vietnam dong to deposit dong. This will prompt businesses to borrow in dong instead of dollars. Especially, banks will realize that it is less profitable to lend or accept deposits in dollars than in dong.

Secondly, the government may reduce the allowed foreign currency position from +/-30 percent of the chartered capital to 20 percent, to be applied to both foreign and domestic banks. However, sources say the government is considering allowing foreign banks to enjoy higher foreign currency positions than domestic banks, because foreign banks always have more deposits in foreign currencies (it is likely that 20 percent would be applied domestically, and 25 percent to foreign banks).

Thirdly, ceiling interest rates for dollar deposits would be set up, possibly at 3 percent applied to individual depositors and one percent applied to institutions.

Fourthly, state owned enterprises would be forced to sell 100 percent of the foreign currencies they can earn

Fifthly, the government would provide a list of the production and business sectors which can borrow foreign currencies and the ones which cannot.

“With a strong determination and drastic measures, Vietnam has every reason to believe that it will escape from the dollarization by the end of 2013,” Nghia said.

Tam Nhin