Evaluating Vietnam's Monetary Policy Management Process

published version. Commercial banks' business interest rates are still applied according to the agreement mechanism according to market supply and demand but cannot exceed 150% of the basic interest rate. However, the role of the basic interest rate as a market regulation tool of monetary policy has significantly decreased, mainly used as a measure against usury, since 2011 this interest rate is no longer reported in the Annual Report of the State Bank on monetary policy management. Along with the agreement interest rate mechanism, the refinancing interest rates, rediscount interest rates, open market operation bid rates and overnight lending rates in interbank electronic payments have become effective support tools for monetary policy management in recent times.

4.2.2.4 Refinancing policy

Refinancing is a form of credit provision by the State Bank to provide short-term capital and means of payment to credit institutions. The State Bank regulates and implements refinancing for credit institutions in forms such as loans secured by pledge of valuable papers, discounting valuable papers and other forms of refinancing (SBV 2020b).

The form of refinancing has changed through the documents of the Banking Ordinance in 1991, Decision No. 356/1999/QD-NHNN14 in 1999 and was uniformly regulated in the Law on the State Bank of Vietnam in 2007, accordingly refinancing includes lending secured by pledging valuable papers; discounting, rediscounting valuable papers; re-lending according to credit records. However, the form of re-lending according to credit records is no longer mentioned in the Law on the State Bank of Vietnam 2010, so the form of refinancing so far focuses on lending secured by pledging valuable papers; discounting, rediscounting valuable papers. The refinancing interest rate was issued under the Banking Ordinance in 1991 and began to be used as an important tool of monetary policy in Vietnam. The pair of refinancing interest rates and rediscount interest rates are considered effective tools to guide the market of monetary policy, especially since the role of the basic interest rate has faded due to the application of the negotiated interest rate management mechanism.

4.2.2.5 Exchange rate policy

The exchange rate of VND to USD is formed on the basis of foreign currency supply and demand in the market with State regulation. The State Bank announces the exchange rate, decides on the exchange rate regime, and the exchange rate management mechanism (SBV 2020b). The role of the exchange rate as a monetary policy tool has been clearly defined since the 1997 Law on the State Bank of Vietnam. Accordingly, the SBV determines to manage the exchange rate in combination with the synchronous and flexible management of monetary policy tools to regulate liquidity and VND interest rates, proactively promote communication and market orientation, thereby creating consensus among market members and improving the transparency and transmission efficiency of monetary policy.

Before 2015, the State Bank of Vietnam announced the average interbank exchange rate as a reference price for commercial banks to determine their business exchange rates with customers within the permitted range. 2016 marked a new phase in Vietnam's exchange rate management with Decision No. 2730/QD-NHNN issued on December 31, 2015 on announcing the central exchange rate of VND to USD. Accordingly, the central exchange rate of VND to USD is determined based on the reference to the weighted average exchange rate on the interbank foreign exchange market, the exchange rate on the international market of a number of currencies of a number of countries having trade, borrowing, debt repayment, and large investment relations with Vietnam, macroeconomic and monetary balances and monetary policy targets. The central exchange rate is flexibly changed in both directions, increasing/decreasing, helping to limit speculation and hoarding of foreign currencies.

BQLNH exchange rate

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BQLNH exchange rate Floor exchange rate Ceiling exchange rate VCB selling rate

Figure 4.15 Exchange rate (VND/USD) period 2009 - 2019

Source: State Bank of Vietnam (2009 – 2019)

4.2.3 Evaluation of Vietnam's monetary policy management process

Vietnam's monetary policy management in the period of 2009 - 2019 according to the provisions of the Law on the State Bank aims at the ultimate goal of stabilizing the value of money expressed by the inflation target. The SBV's management goal is not clearly mentioned in legal documents, but through the process of monetary policy management as well as through specific targets or commitments mentioned periodically every year, it can be seen that the SBV chooses the growth of total means of payment, credit growth as intermediate targets or interbank market interest rates, credit institutions' reserves as operational targets of the SBV. Intermediate targets often refer to targets with specific figures, but operational targets are often just commitments to maintain stability or adjust up or down in a ratio compared to the previous year. Using performance targets without providing a specific number that can be measured will make it difficult to consistently operate the monetary policy, which affects the feasibility of achieving the set policy goals. In fact, the indicators of total means of payment as well as credit growth in the period 2009 - 2019 have many years of implementation figures that differ greatly from the set targets. With the final target, the ratio

Inflation rate in the period 2009 - 2019, apart from some years at a level close to the set target, in reality there were years with very high increases such as 2010, 2011 or years with very low actual inflation rate compared to the target such as 2012, 2014 and 2015. This difference, in addition to external impacts, partly reflects the difficulty of Vietnam's monetary policy management process.

Tools for implementing Vietnam's monetary policy include open market operations, reserve requirements, interest rate policies, refinancing policies, exchange rate policies and other tools and measures as prescribed by the Government. Open market operations are conducted daily, mainly transactions to buy short-term valuable papers by volume bidding or interest rate bidding. By conducting transactions in both directions of buying and selling valuable papers, open market operations have been effective in regulating the available capital of credit institutions according to the objectives of monetary policy in each period. The volume of open market operations transactions has increased sharply over the years, and the transaction periods have also been increasingly strengthened. Transaction terms have been gradually diversified to suit the needs of the available capital situation of credit institutions and the monetary regulation needs of the State Bank. Open market operations in Vietnam have proven to be a fairly effective tool in monetary policy management when the frequency of using the tool is quite frequent with the number of trading sessions often at a high level. The compulsory reserve tool is used with a lower adjustment frequency, mainly at times when it is necessary to create a difference to avoid hoarding foreign currency (implementing an increase in the compulsory reserve ratio for foreign currency deposits) or support lending to priority sectors (reducing the compulsory reserve ratio for credit institutions with higher lending rates to rural and agricultural areas). Interest rates are also used by the State Bank with operating interest rates including refinancing interest rates, base interest rates and other interest rates such as overnight lending rates in interbank electronic payments, which have also been announced by the State Bank in recent years. In which, the refinancing interest rate and overnight lending interest rate in interbank electronic payments are used more frequently, the base interest rate is mainly used to control usury activities according to the provisions of the 2005 Civil Law. The exchange rate as a tool of monetary policy has been regulated.

established a long time ago and is still used regularly today to regulate supply and demand in the foreign exchange market.

4.3 RESEARCH RESULTS ON THE IMPACT OF FINANCIAL INTEGRATION ON MONETARY POLICY INDEPENDENCE IN VIETNAM

4.3.1 Descriptive statistics of variables

Table 4.7 presents the descriptive statistics and Figure 4.16 shows the trends of the variables in the period 2009Q1 – 2019Q2. In which, MI is the independent index of monetary policy, IFI is the level of HNTC, ES is the exchange rate stability index and RES is the foreign exchange reserve ratio.

Table 4.7 Descriptive statistics of variables in the ARDL model

MI	IFI	ES	RES
Medium	0.535561	1.115472	0.865819	0.170416
Median	0.558672	1.077120	0.888494	0.175110
Biggest	0.857464	1.371515	0.980623	0.272721
Smallest	0.079182	0.803677	0.485141	0.091843
Standard error	0.214468	0.174065	0.101982	0.044658

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• Pre-tax Profit of Bidv Tien Giang in the Period 2011-2015 zt2i3t4l5ee zt2a3gsnon-credit services, joint stock commercial bank zt2a3ge zc2o3n4t5e6n7ts At that time, the Branch had to set aside a provision for credit risks, which reduced the Branch's income. Chart 2.2. Pre-tax profit of BIDV Tien Giang in the period 2011-2015 Unit: Billion VND 140 120 100 80 60 40 20 0 63.3 80.34 89.29 110.08 131.99 2011 2012 2013 2014 2015 Profit before tax (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) However, through chart 2.2, it can be seen that BIDV Tien Giang's profit is still increasing continuously, and its operating efficiency is currently leaking. This is a contribution of non-credit services, and this service segment will be increasingly focused on growth by BIDV Tien Giang to ensure the highest profit safety because credit activities have many potential risks. At the same time, focusing on developing non-credit services is consistent with one of the contents of restructuring the financial activities of credit institutions in the project "Restructuring the system of credit institutions in the period 2011-2015" approved by the Prime Minister in Decision No. 254/QD-TTg dated March 1, 2012 [14]: "Gradually shifting the business model of commercial banks towards reducing dependence on credit activities and increasing income from non-credit services". 2.2. Current status of non-credit service development at BIDV Tien Giang. 2.2.1. BIDV Tien Giang has deployed the development of non-credit services in recent times. Along with the development of the Head Office, BIDV Tien Giang's products and services are constantly improved and deployed in a diverse manner to ensure provision for many different customer groups in the area: individual customers, corporate customers, and financial institutions. Typical services are as follows: Payment services, treasury services, guarantee services, card services, trade finance, other services: Western Union, insurance commissions, consulting services, foreign exchange derivatives trading, e-banking services,... 2.2.1.1. Payment services: In accordance with the Prime Minister's Project to promote non-cash payments in Vietnam [15], banks in Tien Giang province have continuously developed payment services to reduce customers' cash usage habits through card services and electronic banking services such as: salary payment through accounts, focusing on developing card acceptance points, developing multi-purpose cards, paying social insurance by transfer, paying bills through banks, etc. Chart 2.3. Net income from payment services in the period 2011-2015 Unit: Million VND 6000 5000 4000 3000 2000 1000 0 3922 4065 4720 5084 5324 2011 2012 2013 2014 2015 Net income from payment services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Along with the technological development of the entire system, BIDV Tien Giang has a payment system with a fairly stable transaction processing speed, bringing many conveniences to customers. The results of observing chart 2.3 show that the income from payment services that the Branch has achieved has grown over the years but the speed is not high and the products are not outstanding compared to other banks. Domestic payment products such as: Online bill payment, electricity bills, water bills, insurance premiums, cable TV bills, telecommunications fees, airline tickets, etc. bring many conveniences to customers. Regarding international payment, this is an indispensable activity for foreign economic activities, BIDV Tien Giang is providing international payment methods for small enterprises producing agriculture, aquatic food and seafood that have credit relationships with banks in industrial parks in Tien Giang province such as: money transfer, collection, L/C payment. 2.2.1.2. Treasury services: BIDV Tien Giang always focuses on ensuring treasury safety and currency security, always complies with legal regulations, and minimizes risks in operations such as: counting and collecting money from customers, receiving and delivering internal transactions, collecting from the State Bank (SBV) or other credit institutions, receiving ATM funds, bundling money, etc. BIDV Tien Giang's treasury service management department is always fully equipped with modern machinery and equipment such as: money transport vehicles, fire prevention tools, money counters, money detectors, magnifying glasses, etc. to ensure absolute safety in treasury operations, immediately identifying real and fake money and other risks that may affect people and assets of the bank and customers. In addition, implementing regulation 2480/QC dated October 28, 2008 between the State Bank of Tien Giang province and the Provincial Police on coordination in the fight against counterfeit money, in the 3-year review of implementation, BIDV Tien Giang discovered, seized and submitted to the State Bank of Tien Giang province 475 banknotes of various denominations and was commended by the Provincial Police and the State Bank of Tien Giang province [17]. Chart 2.4. Net income from treasury services in the period 2011-2015 Unit: Million VND 350 300 250 200 150 100 50 0 105 122 309 289 279 2011 2012 2013 2014 2015 Net income from treasury services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) However, as shown in Figure 2.4, income from treasury operations is not high and fluctuates. Specifically, in the period 2011-2013, net income increased and increased most sharply in 2013, then in the period 2013-2015, there was a downward trend. This fluctuation is due to the fact that fees collected from treasury services are often very low and can even be waived to attract customers to use other services. 2.2.1.3. Guarantee and trade finance services: BIDV Tien Giang, thanks to the advantages of the province and the favorable location of the Branch, has continuously focused on developing income from guarantee services and trade finance. Chart 2.5. Net income from guarantee and trade finance services in the period 2011-2015 Unit: Million VND 14000 12000 10000 8000 6000 4000 2000 0 5193 5695 2742 3420 8889 3992 11604 12206 5143 5312 2011 2012 2013 2014 2015 Net income from guarantee services Net income from Trade Finance (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Through chart 2.5, we can see that BIDV Tien Giang's income from guarantee services and trade finance has grown over the years. The reason is: Among BIDV Tien Giang's corporate customers, the construction industry is the industry with the highest proportion of customers after the trading industry, this is a group of customers with potential to develop guarantee services. The second group of customers is corporate customers in the fields of agricultural production, livestock and seafood processing with high import and export turnover in the area. are the target of trade finance development. In addition, BIDV Tien Giang also focuses on continuously developing these customer groups to increase revenue for many other products and services in the future. 2.2.1.4. Card and POS services: As a service that BIDV Tien Giang has recently developed strongly, it can be said that this is a very potential market and has the ability to develop even more strongly in the future. Card services with outstanding advantages such as fast payment time, wide payment range, quite safe, effective and suitable for the integration trend and the Project to promote non-cash payments in Vietnam. Cards have become a modern and popular payment tool. BIDV Tien Giang early identified that developing card services is to expand the market to people in society, create capital mobilized from card-opened accounts, contribute to diversifying banking activities, enhance the image of the bank, bring the BIDV Tien Giang brand to people as quickly and easily as possible. BIDV Tien Giang is currently providing card types such as: credit cards (BIDV MasterCard Platinum, BIDV Visa Gold Precious, BIDV Visa Manchester United, BIDV Visa Classic), international debit cards (BIDV Ready Card, BIDV Manu Debit Card), domestic debit cards (BIDV Harmony Card, BIDV eTrans Card, BIDV Moving Card, BIDV-Lingo Co-branded Card, BIDV-Co.opmart Co-branded Card). These cards can be paid via POS/EDC or on the ATM system. In addition, with debit cards, customers can not only withdraw money via ATMs but also perform utilities such as mobile top-up, online payment, money transfer,... through electronic banking services. In order to attract customers with card services, BIDV Tien Giang has continuously increased the installation of ATMs. As of December 31, 2015, BIDV Tien Giang has 23 ATMs combined with 7 ATMs in the same system of BIDV My Tho, so the number of ATMs is quite large, especially in the center of My Tho City, but is not yet fully present in the districts. Basic services on ATMs such as withdrawing money, checking balances, printing short statements,... BIDV ATMs accept cards from banks in the system. Banknetvn and Smartlink, cards branded by international card organizations Union Pay (CUP), VISA, MasterCard and cards of banks in the Asian Payment Network. From here, cardholders can make bill payments for themselves or others at ATMs, by simply entering the subscriber number or customer code, booking code that service providers notify and make bill payments. Chart 2.6. Net income from card services in the period 2011-2015 Unit: Million VND 3500 3000 2500 2000 1500 1000 500 0 687 1023 1547 2267 3104 2011 2012 2013 2014 2015 Net income from card services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Through chart 2.6, it can be seen that BIDV Tien Giang's card service income is constantly growing because the Branch focuses on developing businesses operating in industrial parks, which are the source of customers for salary payment products, ATMs, BSMS. Specifically, there are companies such as Freeview, Quang Viet, Dai Thanh, which are businesses with a large number of card openings at the Branch, contributing to the increase in card service fees [25]. Table 2.6. Number of ATMs and POS machines in 2015 of some banks in Tien Giang area. Unit: Machine STT Bank name Number of ATMs Cumulative number of ATM cards POS machine 1 BIDV Tien Giang 23 97,095 22 2 BIDV My Tho 7 21,325 0 3 Agribank Tien Giang 29 115,743 77 4 Vietinbank Tien Giang 16 100,052 54 5 Dong A Tien Giang 26 97,536 11 6 Sacombank Tien Giang 24 88,513 27 7 Vietcombank Tien Giang 15 61,607 96 8 Vietinbank - Tay Tien Giang Branch 6 46,042 38 (Source: 2015 Banking Activity Data Report of the General and Internal Control Department of the Provincial State Bank [21]) Through table 2.6, the author finds that the number of ATMs of BIDV Tien Giang is not much, ranking fourth after Agribank Tien Giang, Dong A Tien Giang, Sacombank Tien Giang. The number of POS machines of BIDV Tien Giang is very small, only higher than Dong A Tien Giang and BIDV My Tho in the initial stages of merging the BIDV system. Besides, BIDV Tien Giang has a high number of cards increasing over the years (table 2.7) but the cumulative number of cards issued up to December 31, 2015 is still relatively low compared to Agribank, Vietcombank, Dong A (table 2.6). div.maincontent .content_head3 { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: bold; text-decoration: none; font-size: 14pt; } div.maincontent .p { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; margin:0pt; } div.maincontent p { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; margin:0pt; } div.maincontent .s1 { color: black; font-family:"Courier New", monospace; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; } div.maincontent .s2 { color: black; font-family:"Times New Roman", serif; font-style: italic; font-weight: normal; 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Source: Author synthesized results from Eviews10 software

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Figure 4.16 Evolution of indicators in the ARDL model during the period 2009Q1 – 2019Q2

Source: Extracted from Eviews10 software

Monetary independence (MI) : Monetary independence in Vietnam averages approximately 0.5 and is unstable throughout the research period. MI was very low from the beginning of the period (just over 0.2), suddenly increased to a very high level in the next quarter and continued to fluctuate throughout the research period and is also the variable with the highest standard error among the four research variables. The level of monetary independence fell to its lowest level in the second quarter of 2013 when the index had not reached 0.1 and has been on a continuous downward trend since 2017, only increasing again in mid-2019 until now.

HNTC (IFI): Vietnam's HNTC level has increased continuously since 2009 until now. From the lowest level of just over 80% at the beginning of the period and the highest level of nearly 140%, the average of the period is over 100%.

Exchange rate stability (ES) : The VND/USD exchange rate remained stable at a very high level throughout the period, averaging 0.86 compared to the maximum within the index band of 1. The exchange rate stability bottomed out in the fourth quarter of 2009 but remained quite high, reaching approximately 0.5.

Foreign exchange reserves (RES): Foreign exchange reserves declined sharply in the early stages of the study with a low of 9.14% of GDP in the fourth quarter of 2011. Since then, RES has been on an upward trend but has been unstable, with sharp declines and is currently at its highest level of 27.27% of GDP.

In general, during the research period, Vietnam had an increasing level of HNTC along with a relatively stable and high exchange rate. In contrast to the increasing and steady trend of the two corners in the Impossible Trinity, monetary independence showed many fluctuations. According to the Impossible Trinity theory, MI should have shown a decreasing trend as a trade-off when the other two corners increased, but in reality, Vietnam did not follow that trend. Looking at the development of foreign exchange reserves during this period, it can be seen that although there was an increasing trend, there were periods of quite large declines. The quarters of decline in foreign exchange reserves seemed to follow the quarters of declining monetary independence. However, with the increasing trend of foreign exchange reserves, monetary independence did not show a clear increase but changed direction very quickly and continuously. To clarify this issue, the study continues to empirically analyze the impact of HNTC, exchange rate stability and foreign exchange reserves on the level of monetary policy independence in the next section.

4.3.2 Unit root test

The unit root test results show that the variables MI and ES are stationary at the original level, while the variables IFI and RES are not stationary at the original level and are stationary at the first difference. According to Pesaran & Shin (1996), for variables that are stationary at different levels, the ARDL method is appropriate.

Table 4.8 Stationarity test results of data series in ARDL model

Variable

Original String I(0)	First difference series I(1)	Conclude
MI	-5.529607***		Stop I(0)
IFI	-1.190094	-7.086586***	Stop I(1)
ES	-4.593593***		Stop I(0)
RES	-0.635382	-4.458891***	Stop I(1)

Note: *** corresponds to 1% statistical significance level.

Source: Source: Author synthesized results from Eviews10 software

4.3.3 Determine the optimal delay

The results from Eviews10 show that the optimal lag of the ARDL model is determined respectively with the variables MI IFI ES RES as (1,1,2,0).

4.3.4 Long-term impact estimates

Before considering the estimated coefficients, it is necessary to determine whether there is a cointegrating relationship between the variables through the envelope test method. With the hypothesis H 0 : there is no cointegrating relationship in the model, the alternative hypothesis H 1 : there is a cointegrating relationship in the model.

If the F statistic value is greater than the upper envelope value corresponding to the linkage degree I(1), the hypothesis H0 is rejected, concluding that there is a cointegrating relationship - a long-run relationship between the variables. Conversely, if F is less than the lower envelope value corresponding to the linkage degree I(0), then there is no basis to reject H0 or H1 can be accepted , concluding that the variables do not have a long-run relationship.