State-owned groups, corporations and enterprises that are over 50 per cent State-owned will have to sell foreign reserves (US dollar) to commercial banks from next month, pursuant to a circular released yesterday by the State Bank of Viet Nam, in a move seen by many as controversial.

The circular regulates that eligible enterprises should sell their dollars from fixed-term and non-term deposit accounts, and other sources of foreign income from July 1. They will then be able to buy dollars from commercial banks to feed legitimate needs.

“The circular is good news,” Le Duc Tho, Vietinbank’s Deputy General Director, told Viet Nam News in a telephone interview yesterday. “The decision, together with other measures, aims to absorb excess liquidity, restrict accumulation and bolster dwindling foreign reserves,” he said.

Foreign reserves have slid from a level of nearly US$24 billion at the end of 2008 to only about $12 billion, some foreign financial institutions have estimated.

“Enterprises should focus on their core businesses and not accumulate and trade money as they used to,” Tho said.

The order comes at a time when the commercial banking system has plenty of dollars in hand and has been lowering deposit interest rates.

“The main problem is how banks will buy dollar reserves when we don’t have sufficient Vietnamese dong to exchange,” an executive board member of a Ha Noi-based State-owned bank told Viet Nam News.

Moreover, the overloaded dollar supply would continue to weaken the dollar, encouraging enterprises to import more, especially with manufacturing costs in the domestic market increasing, she said.

By the end of March, 78 economic groups, corporations and enterprises held over $1.6 billion on deposit, including $376 million in fixed-term deposits, according to the State Bank of Viet Nam Governor Nguyen Van Giau.

Meanwhile Viet Nam’s trade deficit in May is estimated at about $1.7 billion, the highest since January 2010, taking the deficit so far this year to $6.59 billion.

“The total dollar reserves that enterprises hold are only enough to meet one month of imports,” the female bank manager said. “The circular doesn’t make sense.”

The SBV had previously ordered major groups and corporations to sell dollars back to commercial banks to ease a shortage of dollar supply, a situation that increased tension on both official and black forex markets.

“But in this context, it should not be so rash and hurried. The decision may even make the US dollar appear weaker, which will widen the trade deficit,” deputy head of the Central Institute for Economic Management (CIEM) Vo Tri Thanh told Viet Nam News.

Commenting on the circular, the deputy head of the financial department in a State-owned economic group who wished to remain anonymous yesterday said: “Anyway, we have to comply, and in fact we have been selling dollar reserves to banks for months.”

“We have suffered immensely from serious exchange rate risk,” she said, adding that the value difference of the exchange rate between the point of selling and the point of buying reached into hundreds of billions of dong.

The long love affair the Vietnamese public has with the greenback has caused numerous economic and social problems and interfered with effective policy management in recent years.

The circular is seen as an aggressive move in a series of measures taken by the central bank in the past three months to try to reduce the accumulation of the dollar in the economy, to regain control of unstable foreign exchange markets and to ease the downward pressure on the value of the Vietnamese dong – forces which have resulted in several currency devaluations, higher inflation and a widening trade deficit.

The year-on-year consumer price index in May was estimated to rise 19.78 per cent, the General Statistics Office said.

The central bank also raised compulsory reserves in foreign currencies at credit institutions this month from 6 per cent to 7 per cent, in a move to cut dollars for credit businesses.

As reported by the SBV on Tuesday, in comparison with the slight rise in the previous week, the forex rate had stabilised again. Currently, commercial banks are listing the rate at around VND20,520-20,610 per dollar.

Source: VNS