Vietnam's flexible exchange rate regime needs "more transparency": World Bank

By April 11, 2016 | 02:03 am PT

An employee counts U.S. dollar bank-notes near Vietnamese dong bank-notes at a bank in Hanoi : Reuters/Kham

Vietnam’s shift to a more flexible exchange rate regime “is the best way at this point” as it would help improve the country’s “relatively low” foreign exchange reserves, said Sandeep Mahajan, lead economist of the World Bank office in Vietnam on Monday.

“If you try to fix the exchange rate, which means you will have to spend your foreign reserves to keep the rate at certain level,” the economist explained.

Earlier this year, the State Bank of Vietnam (SBV) decided to adopt a more flexible exchange rate mechanism, setting the official mid-point rate of the Vietnamese dong against the U.S. dollar on a daily basis.

Vietnam previously used a system in which the dong was allowed to trade around a fixed rate that the central bank only adjusted a few times each year.

The current mechanism calculates the daily reference rate based on a weighted average of Vietnamese dong prices against eight major foreign currencies in the U.S, China, the European Union, Japan, Taiwan, South Korea, Thailand and Singapore.

According to Mahajan, Vietnam has adopted the new exchange rate regime due to more “external financial volatilities” and because the country’s “foreign exchange reserves have remained relatively low to be able to defend the exchange rate”.

Vietnam's foreign exchange reserves excluding gold were estimated at $37 billion at the end of July last year, up from 2014's record of $36 billion, domestic press quoted former governor of the central bank Nguyen Van Binh as saying.

"If we include other items like gold and deposits in foreign currencies by the State Treasury and credit institutions at the State Bank of Vietnam, it is about $40 billion," said Nguyen Van Binh.

Sandeep Mahajan stressed the need for greater transparency in the mechanism, indicating that the central bank should make the method of fixing the reference rate clearer to the public.

Although Vietnam is following a more flexible exchange rate regime to better reflect pressure from the foreign exchange market and to maintain competitiveness, it is not ready to let the dong/dollar exchange rate to float freely as demand and supply vary, said Bui Quoc Dung, head of the central bank’s monetary policy department in a recent interview with VnExpress.