Financial Institutional Management

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Since then, at least according to the banking law and accompanying implementation regulations, banks have been fully free in deciding all loan and deposit rates. However, according the civil code, this is not correct, and interest rate ceilings are still in effect .The situation is made even more opaque because of the difference between “base rate” as defined in Vietnam banking laws and the conventional interpretation of “base rate.”

In sum, despite significant improvements in interest rate policy management over the past two decades, implementation of interest rate liberalization decisions has often fallen well short of the stated because of the considerable confusion surrounding interest rates and interest rate liberalization in Vietnam. SBV undercuts its own interest rate liberalization policy through a combination of promulgation of its base rate, utilization of the above-cited civil code provisions, and aninterest rate agreement with the Vietnam Bankers Association - an industry cartel in which the SOCBs still play a dominant role. This has been especially evident during the current surge of inflation.

4/ Reserve requirements

Reserve requirements are an instrument used by central banks to manage the availability of credit. Therefore, reserve requirements will affect the amount of credit that firms in an economy can receive. In Vietnam, required reserves have never been a source of budget revenue, because although the required reserve ratio may be as high as 35 percent, it has never been above 15 percent in practice. Instead, required reserves have been used solely as a tool to execute monetary policy. SBV has utilized the USD required reserve ratio in a similar manner Until February 1994, the SBV maintained a formal reserve requirement ratio of 10 per cent of all deposits. Since May 2001 the reserve requirement ratio was further reduced to 3 per cent (Table 3.5). The reductions in reserve requirement ratio imply the government’s intention to relax credit supply in order to encourage firm investment.

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5/Foreign Exchange Policy and Exchange Rate Management

In Vietnam, both foreign exchange and the exchange rate are tightly controlled, although the fixed exchange rate regime has been replaced by a pegged float exchange rate regime . According to current laws, “the exchange rate of the Vietnamese currency is created by the demand for and the supply of foreign currencies in the market under the government’s regulation.” In practice, SBV announces the so-called inter-bank exchange rate of the VND against the USD every day. Based on this rate, banks decide their trading rates within a specified band around the announced rate. For other foreign currencies, banks are fully free to decide the exchange rates. If necessary, the government can “apply the regulations on the obligation to sell foreign currencies for institutional residents,” as well as some other administrative measures . At present, the IMF considers that Vietnam has implemented Article 8 of IMF regulations on the capital account and exchange rate controls

There have been several types of exchange rates during the reform process: the official rate announced by SBV, the rate at which commercial banks make transactions (nominal and effective), and the rate in the free market (black market). During the early years of reform the official and free market rate spread was very large, but the gap had closed significantly by the end of 2006 and begun to widen again during the current financial crisis, as has the difference between the nominal and effective exchange rates of commercial banks when SBV’s official trading band does not reflect market prices.