"determine the value of money, control inflation, contribute to promoting socio-economic development, ensuring national defense and security and improving people's lives" (Article 2 of the State Bank Law No. 01/1997/QH10). The State Bank supports the Government in formulating national monetary policy, submitting it to the National Assembly for decision and organizing the implementation of this policy. Thus, according to the 1997 State Bank Law, the National Assembly is the highest body with the right to approve and monitor the implementation of regulations related to monetary policy.
In 2010, the Law on the State Bank was re-drafted and passed by the 12th National Assembly at its 7th session. The 2010 Law on the State Bank stipulates that “The State Bank shall perform the function of state management of currency, banking and foreign exchange activities (hereinafter referred to as currency and banking); perform the functions of the Central Bank in issuing money, banking of credit institutions and providing monetary services to the Government” (Clause 3, Article 2 of the Law on the State Bank No. 46/2010/QH12). The Law also re-stipulates that “national monetary policy is the decisions on currency at the national level of competent state agencies, including the decision on the target of stabilizing the value of the currency expressed by the inflation index, the decision on the use of tools and measures to achieve the set target; the National Assembly shall decide on the annual inflation target expressed by deciding on the consumer price index and supervising the implementation of the national monetary policy; The President performs the duties and powers prescribed by the Constitution and laws in negotiating, concluding and joining international treaties on behalf of the Socialist Republic of Vietnam in the field of currency and banking; the Government submits to the National Assembly for decision the annual inflation target. The Prime Minister and the Governor of the State Bank decide on the use of management tools and measures to implement the national monetary policy objectives according to the Government's regulations" (Article 3 of the Law on the State Bank No.: 46/2010/QH12)
Monetary policy management tools . The Governor of the State Bank decides to use tools to implement the national monetary policy, including: refinancing, interest rates, exchange rates, required reserves, open market operations and other tools and measures. Regarding the refinancing tool, the subject of application has been expanded to credit institutions, not just banks as in the 1997 Law on the State Bank.
- Interest rate tools. According to the 2010 Law on the State Bank, the State Bank announces interest rates in the management of monetary policy, regulates basic interest rates to limit usury and the mechanism for managing credit relations between customers and credit institutions to limit instability when the market experiences unexpected shocks that can harm economic stability.
- Exchange rate tools. According to the 2010 Law on the State Bank, the exchange rate regime and exchange rate management mechanism are under the decision-making authority of the State Bank.
- Compulsory reserve tool. Compared to the Law on the State Bank of Vietnam in 2007, the Law on the State Bank of Vietnam in 2010 no longer imposes a compulsory reserve ratio of 0% - 20%. This helps the State Bank of Vietnam to be flexible in operating monetary policy and helps enhance the State Bank's authority in paying interest arising from compulsory reserve deposits and deposits exceeding compulsory reserves of credit institutions.
- Open market operations. The 2010 Law on the State Bank of Vietnam allows the State Bank to regulate the types of valuable papers that can be traded through open market operations. The State Bank of Vietnam implements open market operations through the purchase and sale of valuable papers with credit institutions.
2.2 Monetary policy transparency, financial restraint and dollarization
Vietnam joined the WTO in late 2007. During the negotiation process, Vietnam paid great attention to the issue of policy transparency. Vietnam also committed to implementing policy transparency as soon as it became a member of the WTO. Some important contents related to monetary policy have been committed by Vietnam as follows :
(1) Regarding financial, monetary, foreign exchange and payment policies. “Vietnam, like all other newly acceding countries, commits to comply with relevant regulations of the WTO and IMF on financial, monetary, foreign exchange and payment policies;
27 Summary from the content of Official Dispatch No. 150/TTR-CP of the Government: On the results of negotiations to join the World Trade Organization and ratification of the Protocol on accession to the Agreement establishing the World Trade Organization, dated November 15, 2006.
Do not apply measures to restrict current transactions contrary to the provisions of
WTO and IMF” (Point 2, Section 1, Part 2 of Official Dispatch No. 150/TTR-CP)
(2) Regarding the framework for policy development and implementation. Vietnam makes three commitments in this section. “First, we will ratify the accession documents in accordance with the provisions of Vietnamese law. Second, all legal documents, if amended or supplemented, will still comply with WTO regulations. Third, judicial agencies (trial agencies) will maintain independence and objectivity when considering lawsuits and administrative decisions in areas regulated by the WTO” (Point 8, Section 1, Part 2 of Official Dispatch No. 150/TTR-CP)
(3) Regarding transparency. Vietnam “commits to comply with all WTO transparency regulations. In addition, we commit that, upon joining, we will publicly announce draft legal documents in the fields regulated by the WTO issued by the National Assembly, the National Assembly Standing Committee and the Government to collect comments from relevant organizations and individuals. The minimum time limit for comments is 60 days. We also commit to publicly posting legal documents in magazines or electronic news sites (websites) of ministries and branches.” (Point 32, Section 1, Part 2 of Official Dispatch No. 150/TTR-CP)
Particularly in the banking services sector, Vietnam has made many changes in regulations to ensure that its WTO commitments are implemented according to the roadmap. Some official documents have been issued such as Decree No. 22/2006/ND-CP dated February 28, 2006 on the organization and operation of foreign bank branches, joint venture banks, 100% foreign-owned banks, and representative offices of foreign organizations in Vietnam; Decree No. 69/2007/ND-CP dated April 20, 2007 on foreign investors purchasing shares of Vietnamese commercial banks. Other policy changes have also been updated. On June 16, 2010, the National Assembly officially passed the Law on Credit Institutions. This Law clearly stipulates the forms of credit institutions licensed to be established in Vietnam. In addition, after joining the WTO, the policy environment, especially credit policy, has become more open and procedures have been simplified for people and businesses.
Enterprises easily access capital (Nguyen Thi Ngoc Ha & Vu Thanh Huong,
2012).
As stated in section 2.1, the Law on State Bank of Vietnam was also passed by the National Assembly in 2010, contributing to the completion of legal documents expressing Vietnam's compliance with its commitments during integration.
However, what observers expect are changes in practice when Vietnam joins the WTO. If it properly implements its declared commitments, the SBV will also gradually increase the level of transparency in monetary policy. One of the expectations for transparency in monetary policy is the issue of information disclosure and the mechanism for interest rate liberalization. If interest rates are not liberalized according to market supply and demand but depend on the decisions of competent agencies of the SBV and even the Government, it will lead to information asymmetry. That is the information asymmetry between the SBV and the market; the information asymmetry between the system of state-owned commercial banks and joint-stock commercial banks and the public. This information asymmetry will certainly make the monetary policy transmission mechanism less effective.
After joining the WTO, the biggest change in the banking sector is the change in the competitive trend in commercial banks. The State Bank allows foreign commercial banks to operate fully as domestic commercial banks. With this regulation, foreign commercial banks can mobilize capital and lend in all fields. As a result, deposit and lending interest rates become more competitive in the face of changes in interbank interest rates or policy interest rates. The thesis expects that this can partly help interest rate pass-through reach a higher level than in the previous period. However, during this period, the State Bank still imposed regulations on interest rates. The policy of applying ceiling interest rates on deposits and loans was implemented quite commonly in the period 1999-2014. According to Beim
& Calomiris (2001) interest rate ceilings are a form of financial repression28 and are detrimental to depositors and capital allocation.
In the following section, the thesis reviews the interest rate management mechanism that has recently evolved towards financial restraint with deep intervention by authorities in the monetary market (specific regulations are summarized in Table 2.2).
From January 1996 to July 2000: The State Bank applied the regulation on interest rate ceilings according to the loan term. The State Bank also controlled the difference between the lending interest rate and the average capital mobilization interest rate at 0.35%/month (equivalent to 4.2%/year). By January 1998, the interest rate differential regulation expired but the lending interest rate ceiling was still applied.
From August 2000 to May 2002: The State Bank applied the basic interest rate policy with a margin. The State Bank announced the basic interest rate and the fluctuation margin in each period. Based on this announcement, commercial banks set the corresponding VND lending interest rates to ensure that they do not violate regulations. Commercial banks apply the agreed interest rate if customers borrow in foreign currency.
By mid-2002, Decision No. 546/2002 dated May 30, 2002 of the State Bank was issued, regulating the implementation of the negotiated interest rate mechanism in commercial credit activities in Vietnamese Dong, which was a major turning point in the management of monetary policy, increasingly closer to market rules.
From mid-June 2008 to April 2010, the interest rate ceiling was applied to both deposit and lending rates. After April 2010, the interest rate ceiling was only applied to
28 According to McKinnon (1973), financial repression is understood as government policies of controlling interest rates, imposing high reserve requirements on bank deposits or directly applying the allocation of financial resources to government investment purposes. Beim & Calomiris (2001) said that there are 6 common types of financial repression used by countries including:
i. Issue interest rate ceilings for bank deposit interest rates.
ii. Issue high reserve requirements for banks.
iii. Industrial lending and/or bank credit direction.
iv. Taking ownership and/or micromanagement of banks gives them almost no autonomy.
v. Restrict participation in the financial sector, especially by foreigners.
vi. Restrict international capital inflows and outflows.
mobilize deposits, banks are allowed to apply agreed interest rates to loans.
Dollarization .
When foreign currency is widely used in a country to replace one or more functions of the domestic currency, that economy is said to be dollarized. This issue has been recognized by the Vietnamese Government in Decision No. 98/2007/QD-TTg dated July 4, 2007. In Vietnam, dollarization is expressed in the following forms: (1) Dollarization of asset replacement: to assess this aspect, people often use the ratio of foreign currency deposits to total means of payment (FCD/M2); (2) Dollarization of means of payment: is the level of use of foreign currency in payment. However, illegal payments in foreign currency are difficult to assess and this is a fairly common phenomenon in cash economies like Vietnam; (3) Dollarization of pricing and listing: that is, listing, advertising and pricing in foreign currency. Dollarization in this respect is often illegal and therefore difficult to determine (Decision No. 98/2007/QD-TTg dated July 4, 2007).
Dollarization is also a challenge in monetary policy management in Vietnam, because the amount of foreign currency in cash payments similar to VND is not included in the M2 money volume. Furthermore, as mentioned in section 1.2.3, dollarization can reduce the effectiveness of monetary policy transmission. For the monetary policy transmission mechanism through the interest rate channel when dollarization occurs, if market interest rates decrease and foreign currency is expected to appreciate, consumers can borrow domestic currency to buy foreign currency for storage instead of borrowing for investment. This behavior has made it difficult for the State Bank to implement the policy of reducing interest rates to promote growth. The exchange rate transmission channel is also affected if enterprises have outstanding foreign currency credit that accounts for a large proportion of capital sources, because when the domestic currency depreciates, it can encourage exports but the financial costs of these enterprises also increase. Thus, the increase in exchange rate (VND depreciation) has both a supportive and negative effect on enterprises. In terms of policy making, the Government also recognizes the negative impacts of dollarization. Dollarization reduces the quality of
The role of the central bank as “lender of last resort” may not be achieved in a highly dollarized economy (Decision No. 98/2007/QD-TTg dated July 4, 2007).
The level of dollarization can be determined through the ratio of foreign currency deposits to the money supply M2 (FCD/M2). According to IMF practice, when the FCD/M2 ratio is 30% or higher, it is considered highly dollarized. Using IMF statistics, Vietnam had a high level of dollarization in the years 1999-2001. Dollarization has been on a downward trend in the following years and by 2014 the FDC/M2 ratio was around 11%. If the research data is divided into 2 parts, the median value of FDC/M2 is about 19.6%. Almost the period from December 2006 to July 2014 is the time when FDC/M2 is lower than the median. However, compared to China, Vietnam's dollarization level is many times higher. China's FDC/M2 ratio averaged only about 3.3% during the 2002-2014 period.
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
FDC/M2
Median
Figure 2.1 Dollarization rate in the period 1999-2014
January 1999
Jun 2000
2001 Jul
April 2002
January 2003
October 2003
2004 Jul
April 2005
January 2006
October 2006
2007 Jul
April 2008
January 2009
October 2009
2010 Jul
April 2011
January 2012
October 2012
2013 Jul
April 2014
Source: Author's calculations from IFS statistics
Table 2.1 Interest rate regulations in Vietnam 2000-2013
Time | Interest rate | Loan interest rate | Document | |
1 | 1/96 –7/00 | Control the average difference between deposit interest rate and lending interest rate at 0.35%/month | Interest rate ceiling | 381/QD-NH1 December 28, 2012 1995 |
2 | 8/00 –5/02 | Control the average difference between deposit interest rate and lending interest rate at 0.35%/month | ≤ base interest rate +0.3% for short-term loans and +0.5% for long term loans | 241/2000/QD-NHNN1 August 2, 2018 2000 242/2000/QD-NHNN1 August 2, 2018 2000 |
3 | 6/02-1/08 | According to the base interest rate + amplitude | Agree | Decision 546/2002/QD State Bank of Vietnam on May 30, 2002 |
4 | 2/08-5/08 | Interest rate ceiling ≤ 12% | Telegram No. 02/CD- State Bank of Vietnam February 26, 2008 | |
5 | 6/08-1/09 | ≤ 150% base interest rate | ≤ 150% base interest rate | Decision 16/2008/QD State Bank of Vietnam, May 16, 2008 |
6 | 2/09-2/10 | ≤ 150% base interest rate | ≤ 150% of base interest rate. For Loans for living and credit card issuance are satisfied. Interest Rate | Circular 01/2009/TT State Bank of Vietnam January 23, 2009 |
7 | 3/10-4/10 | ≤ 150% base interest rate | Agreed but with Short-term loans for production and business ≤ 150% base rate | Circular 07/2010/TT State Bank of Vietnam February 26, 2010 |
8 | 5/10-3/11 | ≤ 150% base interest rate | Negotiate all loans | Circular 12/2010/TT State Bank of Vietnam April 14, 2010 |
9 | 4/11 onwards | ≤ 150% base interest rate | Negotiate all loans | Circular 02/2011/TT State Bank of Vietnam March 3, 2011 |
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Source: Author's synthesis