Dollarization in vietnam

1. Introduction

Vietnam economy is in the process of the deep integration with the world. This provides Vietnam with chances as well as challenges for the economy, especially macroeconomic policies of the government to stabilize it. One of the major challenges we are dealing with is dollarization which attracted many public opinions about the unusual problem in the field of banking activities. This issue takes place in almost of the developing countries having the transition economy. Although this phenomenon is not new, it happens complexly in recent times and extremely impacts on the economy.

2. Overview about dollarization

2. 1. Definition

Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency as a store of value, unit of account, and/or medium of exchange within the domestic economy. The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency. There are two common indicators of dollarization. The first one is the share of foreign currency deposits (FCD) in the domestic banking system in the broad money including of FCD. The second measure is the share of all foreign currency deposits held by domestic residents at home and abroad in their total monetary assets.

2. 2. Types

Depending on the degree in using dollar in the economic and the nation’s attitude about recognizing or not, the dollarization is divided in to three types: Unofficial Dollarization; Official Dollarization; Semiofficially Dollarization * Unofficial Dollarization: Is the most popular type of dollarization. Unofficial dollarization happens when residents of a country choose to hold a significant share of their financial assets denominated in foreign currency although the foreign currency lacks the legers tender. They hold deposits in the foreign currency because of a bad track record of the local currency, or as a hedge against inflation of the domestic currency. * Official Dollarization: Official dollarization or full dollarization happens when a country adopts a foreign currency as its sole legal tender, and ceases to issue the domestic currency. Another effect of a country adopting a foreign currency as its own is that the country gives up all power to vary its exchange rate. * Semiofficially Dollarization: Happens when the foreign currency is legal tender alongside the domestic currency.

2. 3. Causes

Firstly, dollarization is caused by the demand to reduce all kinds of risks such as risk of inflation, the depreciation of local currency and so on. Besides, the government cannot make the commitment to stability and security of the economic systems. Therefore, to meet this demand, people have to find other store of value, that is gold and foreign currencies like USD. Moreover, dollarization derived from the monetary mechanism of the modern world in which the USD is used in the international transactions with the role “ world-currency”. In other words, USD is a strong currency which is freely convertible and has been circulated around the world. Hence, in the situation of international economic integration today, Viet Nam uses USD to make some monetary functions.

Thirdly, the economic policies of the Government such as deposits, loans, taxes, payments in foreign currency do not directly cause dollarization but they make this problem become more seriously. In particular, the government stimulates the economy by attracting the foreign currency inflows which will lead an increase in the supply of foreign currency but this make the VND depreciate. Lastly, the low economic benefits and the inconvenience of using the denomination of VND or the poor payment system of the bank cause dollarization.

3. Current situation of dollarization in Vietnam

Dollarization in Vietnam is stated as unofficial, and was first recorded since 1988 when commercial banks were allowed to receive US dollar deposits. According to Mr. Le Xuan Nghia, member of the National Advisory Council for Monetary and Fiscal Policies, on May 13, 2011, dollarization will be eliminated in Vietnam by the end of 2013. However, in the last quarter of 2012 (November 15), according to an article of Sacombank, Vietnamese Government scheduled to put “ an end to dollarization” by 2015. On the other hand, dollarization in Vietnam has been making the local currency VND lose its value, and creating difficulties for central bank to control monetary policies. Therefore, dollarization is still considered recently as an issue that may affect negatively to Vietnam economy.

Figure 1. The fluctuation of the exchange rate USD/VND In Vietnam, recently, in spite of the Ordinance of Central Bank, which bans all trading, paying, posting and advertising activities in dollars (Q. Nhu, 2012), the dollar currency is widely used both in trading and banking sectors. Many categories of products, such as cars, houses, high technological devices, imported clothing, cosmetic and some other luxury products are paid in dollars. Payment in 100%-foreign-capital firms, joint venture or branches of foreign companies in Vietnam, is also usually in this currency. Globalization creates the demand for a reliable currency that can be used universally, to conduct international trade. Thus, dollar is also used in some oversea trading activities, like when people do outsourcing or purchase things on online channels. Hence, dollar is used widely all over the world, including Vietnam, replacing gold as the “ World currency”. In banking activities, dollarization has been exhibiting through the rate of dollars sent to bank. Vietnamese people think that US’s dollar, which is from a developed economy, preserves well the real value of money.

Figure 2. FCD/M2 – Savings in dollar/Total savings Despite the fluctuation of the dollarization level in Vietnam from 2001 to 2012, the rate of dollar sent to banks is generally staying over 20%. It was 41% in 1992 then successfully reduced to 20% in 1996. However, as a consequence of the Asian financial crisis, which led to the devaluation of Vietnam Dong, the rate increased to a peak with 31. 7% by the end of 2001. In general, the dollarization level in Vietnam has been stabilizing over 20% for years, too, and is planned to be 15% in 2013. The draft ordinance of Central Bank, in the first half of 2012, stated that: payment, trading, advertisement, posting, quoting, fixing, or marking price in dollars are all banned (with 3 sections added). This may be the beginning of Vietnam’s Central Bank in the plan to eliminate dollarization.