Total Means of Payment Development Target and Implementation

still plays an important role in pursuing the goal of price stability and maintaining low inflation rates in the medium and long term.

2.2.2. Total means of payment target

Total means of payment reflects the amount of money in the economy at a given time, helping policy makers to monitor and evaluate the changes in the amount of money in the economy, thereby making decisions on the use of monetary policy tools, controlling money supply, maintaining the stability of the banking system, curbing inflation and promoting economic growth. Total means of payment includes: Cash in circulation; Deposits and deposits of economic organizations in Vietnamese Dong and foreign currencies, non-term and term; Savings deposits in Vietnamese Dong, foreign currencies and gold, non-term and term; Issuance of valuable papers in Vietnamese Dong, foreign currencies and gold (TCTK, 2015). Calculation method Cash in circulation is calculated by the total amount of money issued by the State Bank minus cash in circulation at the State Bank, the State Treasury and at credit institutions and other financial institutions in the financial institution sector. The indicators are expressed in the form of balances and are extracted from accounts in the accounting system of the State Bank, credit institutions, other financial institutions, and the State Treasury (TCTK, 2015).

Chart 2.4: Development of total means of payment target and implementation

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50%

25%

40%

20%

15%

30%

10%

20%

10%

-5%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Target TPTTT

TPTTT implementation

Inflationary

Source: Author's synthesis from the General Statistics Office's Annual Report, 2000-2014

The actual developments in the target of total means of payment and the target level set over the years are presented in Chart 2.4, clearly showing the relative fluctuations.

of money supply. From here, the period 2001-2003 showed that the money supply was tightened because the total actual means of payment was lower than the set target. Similarly, the period 2004-2007, the money supply was continuously expanded, showing the gap between the total actual means of payment and the target that needed to be controlled was wide. However, inflation appeared and increased continuously from the end of 2007 and in 2008, forcing the SBV to tighten monetary policy, resulting in the growth rate of the total means of payment in 2008 being pulled down. The global crisis reduced the economic growth rate in the second half of 2008 and early 2009 (TCTK). Therefore, the economic growth target was prioritized again and the money supply was expanded through a stimulus package of about

143,000 billion VND, equivalent to 8 billion USD (Le Chau, 2009). For that reason, the total means of payment increased and exceeded the control target in the period of 2009-2010. However, the instability of inflation recurred, forcing the State Bank to be more cautious in operating monetary policy, and as a result, the gap between the target and the reality of the total means of payment in the period of 2011-2014 was narrowed.

2.3. Monetary policy implementation tools

The monetary policy tools used by the State Bank are very flexible depending on the context of inflation and the level of economic growth. For that reason, there are tools that have not been used for a long time but are reused to control inflation. Therefore, this content will provide an overview of the monetary policy tools used but will focus on the related tools that change the supply and demand of bank credit.

2.3.1. Required reserve instruments

Required reserves are a monetary tool used by many central banks of countries because of their quick transmission to the banking system. If the central bank wants to quickly adjust the total means of payment or money supply as well as limit hot credit growth, then adjusting the required reserve ratio will be the measure that central banks often think of and use. However, countries with developed financial systems often do not use direct tools such as required reserves but instead use tools through open market operations. On the contrary, if the central bank wants to expand credit to support economic growth, reducing the required reserve ratio and maintaining it at a low level for a long time will create a larger money multiplier, increasing the ability of banks to expand credit.

Article 45 of the 1990 Ordinance on the State Bank of Vietnam is the first legal document regulating the implementation of compulsory reserve instruments (REMs) for banks.

TCTD, from 10% to 35% of the total mobilized deposit balance. The required reserve ratio (RER) has been officially operated by the State Bank since July 1992 after the Reserve Mandatory Regulations for Credit Institutions were issued on June 9, 1992. The regulations on the RRR have changed after the State Bank Law was issued in 1997. The RRR was adjusted down and regulated within a range of 0% to 20%. The improvement in the method of operating the RRR tool is shown in Decision No. 581/2003/QD-NHNN1, dated June 9, 2003, on the promulgation of the RRR Regulations for CIs. The RRR is regulated separately for domestic and foreign currencies, and differs between demand deposits, term deposits under 12 months and over 12 months; Distinguish between urban and rural credit institutions, commercial banks, cooperative credit institutions, and people's credit funds.

The DTBB tool was only really put into effect after 2000 because of its flexible changes according to the SBV's expansionary or tightening monetary policy target (Chart 2.5). The DTBB in VND deposits began to decrease to 7% from 10% since March 1999 and to the bottom of 2% maintained in the period 08/2003-06/2004 and then rebounded due to inflationary pressure. In the context of high CPI in the first months of 2004, to stabilize the currency and pursue the economic growth target, the SBV adjusted the DTBB from July 2004. Specifically, term deposits under 12 months increased from 2% to 5% for VND and from 4% to 8% for foreign currency deposits. For term deposits from 12 months or more to less than 24 months, the increase from 1% to 2% applies to both VND and foreign currency deposits (BCTN SBV 2004). To stabilize inflation, SBV continues to maintain the reserve requirement ratio at the above level until May 2007.

Chart 2.5: Development of DTBB ratio for VND and USD deposits in the period 2000-2014

16%

14%

12%

10%

VND (Term <12 months)

USD (Term <12 months)

VND≥12 months

USD≥12 months

Source: Author's synthesis from the State Bank's Annual Report, 2000-2014

Although the SBV maintained a high reserve requirement ratio to stabilize the currency, other tools were used to support economic growth. During the period from September 2003 to January 2008, the discount rate ranged from 3% to 4.5%, while the refinancing rate was only 5% to 6.5%, which helped banks expand credit. High and continuous credit growth put great pressure on inflation, so the SBV had to increase the reserve requirement ratio for deposits with terms of less than 12 months to 10% from May 2007. However, prolonged hot credit growth pushed inflation to double digits from November 2007, after a long period of maintaining a level above 5% since March 2004. This was the starting point of a period of rapid inflation until the end of 2008. Facing inflation of more than 20% in 2008, the State Bank of Vietnam was forced to continue adjusting the reserve requirement ratio to 11% from February 2008, applied to term deposits under 12 months for both VND and foreign currencies.

Because the State Bank of Vietnam focused too much on controlling inflation, monetary tightening had a significant impact on economic growth. In 2008, economic growth reached only 6.3% - the lowest level compared to the high growth rate of 6.8% to 8.5% in the 2000-2007 cycle. Therefore, the State Bank of Vietnam loosened monetary policy by rapidly and deeply reducing the reserve requirement ratio. If in December 2008, the reserve requirement ratio for VND deposits with terms of less than 12 months decreased to 6% from 10% applied in November 2008, then by January 2009

only 2% and then down to 1% in March 2009 and lasted until December 2009, and then the SBV increased it back to 3% from January 2010 and maintained it until the current implementation. The DTBB ratio for foreign currency deposits decreased less to continue pursuing the goal of anti-dollarization (Annual Report of the SBV, 2009).

2.3.2. Credit limit

Credit limit (CLL) is a direct, administrative intervention tool of the State Bank, used to control total outstanding credit, thereby controlling the growth rate of total means of payment according to the target set in the annual monetary policy management. Thus, the CLL is an administrative tool through which the State Bank imposes on credit institutions and controls implementation during the year.

The credit limit has been used by the State Bank since 1994 through imposing a credit growth limit on 4 state-owned commercial banks. The application of the credit limit was then expanded to joint-stock commercial banks and large foreign bank branches to limit lending rates and control inflation. In the context of an underdeveloped secondary market, the State Bank has not been able to use the open market to control the increase in total means of payment, so the use of this tool is necessary. The credit limit continues to be developed through regulations allowing credit institutions to buy and sell credit limits to each other in case the allocated limit is not fully used (Decision No. 43/QD-NH14 dated February 26, 1996 on the Regulation on buying and selling credit limits between credit institutions).

After more than 13 years of being abolished, in 2011, the HMTD tool was used again by the State Bank in management. Specifically, according to Directive 01/CT-NHNN, dated March 1, 2011 on implementing monetary solutions and banking operations, the Governor of the State Bank requested that commercial banks develop credit growth plans for 2011 that must not increase by more than 20% of outstanding loans compared to the end of 2010 and must be approved by the State Bank. In addition to the general HMTD, in 2011, the State Bank also stipulated that the HMTD for non-production sectors, such as: real estate, securities, other consumer loans... by December 31, 2011, is a maximum of 16%. It can be seen that the state management agency's determination to reduce the speed and proportion of non-production credit is correct! Because, lending activities in this area are mainly in domestic commercial banks (Nguyen Van Ha, 2013). The results of implementation by the end of 2011, the credit balance of the whole economy only reached 12%, much lower than the plan, the credit limit for non-production sectors also ensured serious implementation.

In 2012, the State Bank decided to allocate credit limits to each commercial bank based on the following criteria: quality of debt assets, assets, capital scale, management and administration capacity, risk management, human resource quality and compliance with regulations. Accordingly, the groups classified by the State Bank are subject to the following limits: Group 1 has a maximum credit growth rate of 17%; Group 2 has a maximum credit growth rate of 15%; Group 3 is allowed to grow by 8%; Group 4 is subject to restructuring and is not allowed to grow credit. After 6 months of implementation, the State Bank of Vietnam will consider adjusting the credit growth target for credit institutions in accordance with developments in currency, credit, and banking activities, ensuring the achievement of monetary policy objectives (Directive 01/CT-NHNN, dated February 13, 2012).

The goal of operating monetary policy in 2013 is to continue to be tight, cautious, flexible, closely linked with fiscal policy to control inflation lower, promote economic growth higher than in 2012, forcing the State Bank to control credit growth for credit institutions to ensure credit expansion in line with the capital mobilization capacity of credit institutions and to target credit growth of about 12% for the whole year, at the same time as controlling credit quality and handling bad debts. Different from assigning credit growth limits to banking groups, the State Bank announces credit growth targets for credit institutions in line with the scale, credit quality, liquidity management capacity, governance capacity of credit institutions and the Government's policy on removing difficulties for production and business activities, supporting the market (Directive 01/CT-NHNN, dated January 31, 2013). Haunted by the consequences of high inflation, monetary policy in 2014 must still be closely coordinated with fiscal policy to control inflation according to the set target, stabilize the macro economy, and support economic growth at a reasonable level. Therefore, the credit growth limit continues to be implemented and assigned to each financial institution as in 2013 (Directive 01/CT-NHNN, January 15, 2011).

2.3.3. Interest rate tool

Refinancing rate, Discount rate

The refinancing interest rate and discount rate are tools that affect bank deposits/credit. Obviously, in the period 2000-2008, the State Bank maintained credit expansion to support economic growth (Chart 2.6) by maintaining the refinancing interest rate and discount rate at a low level, thereby allowing credit institutions to borrow at a lower cost. However, in the face of inflationary pressure in 2009 that could cause public unrest and loss of confidence, the State Bank pushed up interest rates

refinancing and discount rates were raised to very high levels, double those in 2008, to reduce credit and thereby control inflation.

Chart 2.6: Developments in discount rates and refinancing rates during the period 2000-2014

16%

14%

12%

30%

25%

20%

10%

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-5%

Discount rate

Refinancing rate

yoy inflation

Source: Author's synthesis from the State Bank's Annual Report, 2000-2014

After inflation was controlled in 2010, the SBV cut the refinancing interest rate and discount rate to low levels. However, due to prolonged credit growth and hot growth, the impact on inflation was delayed and inflation increased again in 2010-2011, forcing the SBV to increase the refinancing interest rate and discount rate. Chart 2.6 shows the two times when the SBV adjusted the refinancing interest rate and discount rate, which were when inflation was at a very high level and then decreased when inflation was controlled. Thus, it is clear that these two tools are only used in the short term to help prevent inflation from rising, and then they return to their original position of maintaining at a low level to support liquidity and short-term capital needs mainly. And as presented above, the State Bank began to strictly use credit growth limits for each bank and each group of banks from the end of 2011 to control inflation and stabilize the macro economy.

Deposit interest rate ceiling

The difficult macroeconomic situation, high inflation, complicated fluctuations in the gold and foreign exchange markets, and sharp declines in the stock and real estate markets have forced the State Bank of Vietnam to take strong measures to control inflation and stabilize the macro economy. The Vietnamese banking system is facing increasing risks, notably

The most prominent are credit risk, exchange rate risk and interest rate risk, causing many credit institutions (CIs) to continue to face liquidity difficulties due to high bad debt, causing insecurity in the banking system. Therefore, in the last months of 2011, the liquidity situation of some CIs was greatly lacking and was in an alarming state, the monetary market had many potential risks of instability, and lending interest rates were high at 20-25%/year. To ensure order and discipline in the monetary market, on September 7, 2011, the State Bank of Vietnam issued Directive No. 02/CT-NHNN requiring CIs to set mobilization interest rates including promotional expenses in all forms not to exceed 14%/year and to impose sanctions on individuals who are managers and executives of CIs and CIs that violate regulations on interest rates. Although market interest rates have been pulled down to a deep level, the State Bank still maintains the ceiling on deposit interest rates in order to reduce capital costs and thereby credit institutions will reduce lending interest rates. From here, businesses will reduce the burden of interest costs.

2.3.4. Exchange rate

The SBV's exchange rate management in the 2001-2014 period has undergone many changes, creating fewer shocks after each adjustment compared to the previous period. Specifically, in the 1997-1998 period, the exchange rate management policy under the pressure of the Southeast Asian financial crisis forced the SBV to adjust the exchange rate band to expand to ±5% in February 1997 and continue to increase to ±10% in October 1997. In addition, the SBV adjusted the exchange rate from 11,175 VND/USD to 11,800 VND/USD in February 1998 to reduce the pressure on the VND to appreciate relatively, adjusting the standard exchange rate (SBV).

Chart 2.7: Official exchange rate announced by the State Bank at the end of the month

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