tóm tắt tiếng anh điều hành chính sách tiền tệ nhằm kiểm soát lạm phát trong quá trình chuyển đổi nền kinh tế ở việt nam

1

THE MINISTRY OF EDUCATION AND TRAINING
NATIONAL UNIVERSITY OF ECONOMICS







KHUAT DUY TUAN


MANAGEMENT OF INFLATION-TARGETING
MONETARY POLICY IN VIETNAM'S ECONOMIC
TRANSITION PROCESS







SPECIALITY: ECONOMICS, FINANCE AND BANKING
CODE: 62.31.12.01




SUMMARY OF DOCTORAL THESIS

HANOI, 2012




2



THIS PROJECT WAS COMPLETED AT THE NATIONAL UNIVERSITY OF
ECONOMICS

Scientific instructors:

1. Prof. PhD. NGUYEN VAN NAM
2. PhD. NGUYEN DANH LUONG

Opponency 1:



Opponency 2:



Opponency 3:




This thesis will be defensed before the University-level thesis committee met at the National
University of Economics, Hanoi

At o’clock, day month year 2012


The thesis is available for examination at:

1. National Library

2. Library of National University of Economics
3


PREAMBLE

1. The necessity of the topic: The banking sector has played an important role in the
economic growth of Vietnam over the last years. Of which, the management of monetary
policies by the State Bank of Vietnam has made a remarkable contribution to macroeconomic
stabilization and economic growth. However, the real situation of monetary policy management
has shown numerous issues required to be continuously dealt with. In order to meet the current
practical requirements as well as the need for closer international economic integration in the
coming time, it is necessary to better implement monetary policy management in order to
achieve economic growth and inflation control objectives. That is the reason for my choosing the
topic of “Management of inflation-targeting monetary policy in Vietnam's economic
transition”.

2. Overview of study situation: Although a number of related projects have been
carried out in Vietnam and foreign countries, they fail to update the current situation of the
strong international economic integration phrase. In particular, such projects do not adhere to the
economic transition process of Vietnam.

3. Study objectives and contents: To systemize, analyze and clarify basic issues of
inflation-targeting monetary policy management in the economic transition process. To analyze
and assess the real situation of monetary policy management in Vietnam in the recent years,
present strengths and weaknesses, look for causes. To recommend some solutions to
accomplishing and improving the effectiveness and efficiency of inflation-targeting monetary
policy management in the economic transition process in Vietnam in the coming time.

4. Objects and scope of study: Basic arguments, experience of other countries, real
situation and solutions. This project mainly focuses on the management of monetary policies in
2006-2010 period.

5. Study method: dialectical materialism, investigation and survey, statistics,
summary and analysis, access to systems and comparison, etc. consulting several scientists,

managers.

6. Thesis structure: the thesis comprises of three chapters:

Chapter 1: Basic issues on inflation-targeting monetary policy management in the economic
transition process

In this Chapter, the thesis discusses about the following contents:

1. Basic issues on inflation

- In this part, the thesis studies, analyses concepts and measures in respect of
inflation; different schools of thought as to inflation and the causes of inflation: the theory of the
monetary school stated that "inflation is always and everywhere a monetary phenomenon." while
4

the theory of inflation structure argued that inflation is caused by inadequate economic structure,
economic imbalances due to uneven development, etc. or demand-pull inflation is asserted to
arise when aggregate demand in an economy outpaces aggregate supply. Another cause of
inflation is demand pull, that is, the increase in price and output exceeds the potential output,
causing a change in aggregate demand (the demand curve moves to the right), this is driven by
the adoption of a loose monetary policy and expansionary fiscal policy by the Government. Cost-
push inflation is caused by a drop in aggregate supply (potential output) (the supply curve moves
to the left). This is also due to increased prices of inputs. In addition, inflation arises when
money supply increases, i.e. monetary growth exceeds economic growth, which results in
imbalances between money and goods, causing a decline or increase in price. Factors affecting
inflation includes (i) Demand-supply imbalances (ii) supply shocks and (iii) production costs.

- The relationship between inflation and economic growth objectives in
monetary policy management. When inflation arises, it generates changes in the economic

growth rate, affecting the redistribution of income and wealth in the society, affecting the growth
and long-term investment. Instead of investments, people tend to hoard goods, making undue
increase in price, begetting further inflation, etc. Therefore, inflation is a complex economic
phenomenon. Various views have been raised in respect of the relationship between growth and
inflation. Researchers have drawn out various formulas, equations in order to measure the
relationship between growth and inflation such as linear or non-linear equations, etc.

- Inflation in transitional economies. Inflation is a big challenge which all
countries with the desire to enjoy material benefits from a market economy are required to
overcome in the transition from a centrally-planned economy into a market economy. The major
issue is that the Government must abandon the role of imposing prices and allow market forces –
supply and demand to set prices for most goods and services. Upon the formation of a free
market, although inflation still persists, inflation management will be more favorable and less
threatening than in the initial phase of the transition process. Inflation affects people’s life and
enterprises’ businesses. Inflation causes unemployment, increasing the number of the low-
income people. The price stabilization policy of the Government must not only encourage
economic growth but also curb inflation.

2. Management of inflation-targeting monetary policies

Monetary policies generate changes in aggregate supply and demand of the economy,
accordingly affect output and employment. The selection of objectives of a monetary policy
depends on the necessity of objectives, the acceptance of the trade-off among objectives and the
possibility to achieve such objectives. Monetary policy management experience of successful
countries suggests that inflation control is given top priority in their monetary policies. It is
possible to say that the final objective of monetary policies is to stabilize the value of a currency,
which contributes to economic growth and job creation. In order to fulfill the final objective, it is
necessary to well perform operational objectives and intermediate objectives.

It is possible to say that price stabilization is an umbrella and long-term objective of

monetary policies. There are four solutions to achieve such goal: (i) exchange rate targeting, (ii)
5

monetary quantities targeting, (iii) nominal GDP-targeting and (iv) inflation-targeting monetary
policy.

In order to pursue an inflation targeting policy, the central bank of a country must satisfy
two conditions as follows: (i) The management of monetary policy by the central bank must be
independent to a certain extent and (ii) the Government should not set some indicators such as
wage levels, employment levels, etc at a too high level. Important bases for establishing an
inflation targeting monetary policy include: (i) who will set inflation targets, (ii) measures of
target inflation rates, (iii) Appropriate time for pursuing an inflation targeting policy and (iv) the
enforcement of a monetary policy must be public, transparent and flexible.

Assessment of strengths and weaknesses of this policy. Strengths (i) public understanding
of inflation objectives; (ii) the transparency of inflation objectives making inflation estimate
close to the objectives; (iii) decreased pressure on the central bank in pursuing other objectives;
(iv) relative independence of the central bank in order to effectively cope with possible shocks
and (v) avoidance of sudden changes in monetary turnover. Weaknesses: (i) effects of the policy
on inflation are so slow in term of time, so it is not easy for the central bank to control inflation
and (ii) efforts for inflation targeting leads to unsustainable growth. The central bank uses tools
for the purpose of managing monetary policies such as providing for compulsory reserves;
interest rates of the central bank; open market operations, etc. furthermore, the central bank also
utilizes other tools such as exchange rates, foreign exchange swaps, etc.

3. Basic characteristics of transitional economy influencing management of
inflation-targeting monetary policy

Specific characteristics of the market economy include: (i) The circulation of materials
from stage to stage of the production process and from production to consumption is all made by

purchasing – selling; (ii) Persons involved in exchanging goods must have certain liberty when
engaged in trading in the market; (iii) Sales and purchases take place in a regular and stable
manner and on the basis of minimum infrastructure for safe and advantageous sales and
purchases; (iv) Market participants pursue their own benefits, namely profits, personal benefits
which are direct driving forces of the economic development but may not infringe benefits of the
others and the community; (v) competition is a major tenet in the market economy, a driving
force of economic and social progresses, quality improvements of goods and services in favor of
consumers and (vi) Movements of objective rules in the market economy, guiding conducts and
behaviors of subjects involved in the market. At the same time, this study indicates four specific
characteristics of a modern market economy: (i) The consistency of economic objectives and
socio-political and humanity objectives; (ii) The involvement of the state in management; (iii)
International economic integration among countries with an increasingly large size making the
world economy become a perfect whole of which each country constitutes a part with an organic
combination with other ones and (iv) a synchronous and consistent market system combined with
the regional and international market including output and input markets.

The thesis has shown nine basic features of a transitional economy as follows: (1) the
coordination of monetary policies and other macroeconomic policies. In economic transition
process, most macroeconomic policies are all incomplete while management coordination is not
6

yet close and synchronous enough, especially the coordination between fiscal policies and
monetary policies; (2) market institutions in the transition process. The system of laws and by-
laws is not only asynchronous, overlapped but also inappropriate to the course of development of
the economy, thus it is necessary to have more time to perfect the system; (3) Monetary policy
management tools: in the transition process, the central bank use not only direct tools
(administrative) but also indirect ones such as interest rates, exchange rates, compulsory
reserves, etc.; (4) Capacity and position of the central bank. Macroeconomic and monetary
statistics are still incomplete, inaccurate, hindering forecasts in developing and managing
monetary policies. The Government still interferes with the issuance of decisions of the central

bank; (5) the monetary market is still an infant. In the transition process, the monetary market
gradually takes shape, the central bank, therefore, still has to manage monetary policies in a
direct and indirect manner; (6) Awareness of the market economy and management of monetary
policies. Awareness of finance, monetary, growth is still uneven. In the initial phase of the
transition process, sectors and management levels usually interfere deeply with banking
operations, etc. while monetary policies are implemented for multiple purposes, creating a public
pressure on the management of monetary policies of the central bank; (7) The number of subjects
directly affected by monetary policies increases on a continuous and diverse basis; (8) public
sentiment of cash preference and dollarization. Cash use and dollarization among the public is so
popular, payment through banks is still undeveloped, etc. creating obstacles and limitations to the
management of monetary policies of the central bank and (9) the system of credit institutions
which communicate monetary policies. The classification of credit institutions gets more and
more diverse, so management capacity improvement, technology modernization, human resource
development and service diversification are so important, etc.

4. Experience of foreign countries in management of inflation-targeting monetary
policies: this thesis studies experience of five countries and some developed countries,
draws out lessons therefrom for Vietnam.

- The National Bank of Poland (NBP): In management of inflation-targeting monetary
policies, NBP is applying such refinancing methods as discounting of valuable papers, lombard
credit (overnight credit) and normal refinancing (longer term). In order that refinancing can meet
temporary shortage of capital in clearing, NBP has set up a short-term (10-day) information
system for monitoring the liquidity position of banks. So as to make use of abundant funds of
banks, NBP issued one-month notes. Other lending demands for refinancing are met in the form
of rediscounting notes or secured loans.

- The People's Bank of China (PBC) has used three important tools in management of
monetary policies, namely interest rates, exchange rates and compulsory reserves. The priority
objective of the interest rate policy is to promote the institutional accomplishment of the

financial and monetary market, facilitating the communication of monetary policies. At present,
PBC implements the regime of ceiling deposit interest rates and floor loan interest rates in order
to remove unhealthy competition among banks and financial institutions. Standard deposit
interest rate cap and loan interest rate floor are flexible in order to achieve the interest rate
balance of interest rates of the local country and those of foreign countries. Inflation is a factor
which is taken into account in adjusting interest rates, accordingly eliminating factors which
distort the market. Interest rates are considered taking into account between local currency
7

deposits and foreign currency deposits with the aim to secure the balance of deposit interest rates
of the local country and those of foreign countries. The interest rate reform of China was made
based on the market, interest rates is gradually free through liberalization of (i) interbank interest
rates, (ii) bond market interest rates and (iii) deposit and loan interest rates of credit institutions.
The liberalization of interest rates was made in accordance with the principle of liberalizing
foreign currency interest rates first and then local currency interest rates and loan interest rates
first and then deposit interest rates. For the local currency, PBC now manages loan interest rate
floor and deposit interest rate cap aimed at two objectives (i) restricting the lowering of interest
rates, controlling credit growth in the context of economic boom and (ii) limiting unhealthy
competition between large credit institutions and small ones. However, China still has to directly
use administrative methods to curb loans for sectors which record fast growth rates such as iron,
steel, cement, etc. The regulation of an adequate difference between loan interest rate cap and
deposit interest rate floor secures profits for credit institutions. Flexible use of compulsory
reserve tool by PBC, based on the real situation and with timely adjustments and other solutions
brings China to the list of countries with positive growth rates amid the global recession.
Compulsory reserve ratio is adjusted only by 0.5% each, thus no material change occurs in the
monetary market.

- The Central Bank of Malaysia: the central bank introduced a standard formula for
calculating base interest rates. In accordance with such formulas of the central bank, commercial
banks calculate their interest rates based on base interest rates. Commercial banks will adjust

their base interest rates with a range of +/-0.5% of the base interest rates of such two big banks.
Actual lending level of commercial banks will be base interest rates plus risk premium (not
exceeding 4% and applying flexibly to each loan).

- Singapore Monetary Authority: Because of characteristics of the financial market,
Singapore Monetary Authority only pays attention to exchange rates while interest rates will be
determined by the market.

- Bank of Korea: The interest rate policy is the main tool for speeding up the economic
growth rate. Currently, the Bank of Korea manages maximum interest rate cap at which credit
institutions make loans to customers. Based on this interest rate cap, the central bank flexibly
provides for refunding for commercial banks depending on objective requirements of increase or
decrease in the amount of money they may lend out by setting refinancing interest rates.

- Central Banks of several developed countries: Some developed countries tend to turn
into indirect management of monetary policies on the basis of development level of the market,
management and controlling capacity of credit institutions and capacity of central banks to use
indirect management tools in respect of monetary policies. In countries using indirect tools for
management of market interest rates, due to the development of the monetary and financial
market, standard market interest rates have been established and the market interest rate curve
has been set up accordingly. Floating exchange rates are determined by the interaction of supply
and demand. The top priority objective of central banks is to control inflation, stabilize the
financial market and secure the payment system for the economy. Because of specific
characteristics and objectives of each country, tools used in management of monetary policies
are different.
8


* Lessons drawn for Vietnam:
- Using compulsory reserve tool in a flexible and effective manner. This is a strong and

useful tool which exerts great impacts on credit institutions. Thus, it is important to gradually
make adjustment with the range of 1% per each adjustment and to concurrently combine with
other tools in order to neutralize impacts on the market. Bases for calculating compulsory
reserves should include amounts from issuance of valuable papers, forward contracts or even
total liabilities of commercial banks in addition to deposit balances.

- Selecting target interest rate control models. Changes in official interest rates are
conditional upon the selection of objectives of monetary policy and macroeconomic movements,
available capital position of commercial banks. Official interest rates are indicative of the role of
the central bank in the market.

- Change of the monetary policy management method to the management method
through refinancing tools. As the final lender of commercial banks which encounter liquidity
issues. Therefore, it is advisable to use refinancing tools in a flexible manner in order to avoid
shocks for commercial banks, for example, FED usually notifies commercial banks in advance of
its management tendency so that commercial banks may be active in their businesses.

Other lessons: the building of refinancing interest rates should base on interbank market
interest rates; Refinancing is only reserved for commercial banks which are really short of
available capital, when using such funds, it is better to combine with compulsory reserves, open
market operations, etc.; the State Bank should issue notes so as to mobilize capital from
commercial banks with abundant capital, especially in high inflation periods; refinancing loans
should be collaterized by liquid assets and refinancing interest rates should be extremely flexible.

Chapter 2: Real situation of inflation-targeting monetary policy management in economic
transition process in Vietnam.

In order to assess the real situation of inflation-targeting monetary policy management in
economic transition process in Vietnam, the thesis has deeply studied three contents as follows:

1. Inflation situation and causes of inflation in Vietnam in economic transition process.

In this part, the thesis has studied, analyzed and assessed:

- Basic features of Vietnam's economy in the economic transition process: There is still
no synchronous and close coordination among monetary policies, fiscal policies, investment
policies and commercial policies. Meanwhile, monetary policies pursue quite a few objectives.
Institutions governing operations of the monetary-financial market are not yet complete. The
State Bank still has to use numerous direct tools for managing monetary policies. The
Government participates directly in the conduct of monetary policies or the State Bank has to
report to and consult the Government about changes of monetary policy management tools. The
capacity to build institutions remains limited, economic information and monetary statistics
systems are still inadequate. Thoughts and awareness are still dominated by those of the subsidy
9

system, terms, knowledge, rules and requirements of the market economy are controversial, ways
of understanding and approaches are still different. In the first phase, state-owned enterprises
were so popular in the economy while non-state enterprises only started developing. Income of
people remained low and the sentiment of using cash in payment was so popular, bank payment
services were still undeveloped, the value of the local currency remained unstable, inflation rates
and dollarization levels were still so high. The organization and operation structure was
gradually transformed from subsidy mechanism into market mechanism, etc.

- Inflation situation in 1999-2011 period:
+ Growth in the period of deflation, 1999-2003. Due to the regional economic downturn,
as well as the frequent fluctuation of the national economy, the country witnessed the lowest
inflation rate than ever before. The government had to implement a demand stimulus policy to
stop the economic downturn. However, because of the inefficiency in monitoring financial,
monetary and products policies, this policy was considered not meeting the expected result.
+ Inflation and growth in 2004 – 2010 period.

After a long period of deflation, in 2004, Vietnam recorded important socio-economic
achievements. Vietnam ranked the 3
rd
by economic growth in East Asia and South East Asia,
following China and Singapore, numerous macroeconomic indicators fulfilled and outperformed
the set plan. In the next 2 years, 2005-2006, Vietnamese economy continued to attain remarkable
achievements, GDP reached 8.44% in 2005 and 8.17% in 2006, respectively.

Table 2.2
: Growth rates and Inflation rates in the period 2004-2007
Unit: %
Year 2004 2005 2006 2007
Inflation rate 9.51 8.42 6.66 12.63
Growth rate 7.79 8.44 8.17 8.48
Source: General Statistics Office [24]

In 2007, the first year of Vietnam's WTO membership, Vietnamese economy maintained
the GDP growth rate of 8.48%, the highest figure over the last 10 years. However, weaknesses
and shortages from the previous years started to be unveiled, this was a warning sign for both
long-term and medium-term economic development. Inflation was higher than savings, which
led to negative real rates of interest, signs of explosive growth of the economy were revealed. In
2008, the fluctuation of the economy was presented in all aspects, even though GDP was
continuously decreased but still failed to fulfill the set target (only reached 6.18%). Besides,
Vietnamese economy had to face the record inflation rate over the last decade. Inflation occurred
due to subjective and objective causes, but the direct cause was that monetary policies was
continuously relaxed in many years, particularly in 2007, resulting in fast increase in total means
of payment and total outstanding credit of the economy, while inspection and supervision
capacity of the Government could not keep up with the changes so the monitoring of the
commercial bank activities was ineffective and inefficient, especially securities lending and real-
estate business. Whereas, wasteful public spending remained and investment efficiency was low.

Other reasons including bad demand and supply balancing, price stabilization and market
control, etc. had a negative effect on the economy. In this situation, the Government introduced 8
classes of solutions to inflation control, macroeconomic stability and social security. SBV
reduced base interest rates to pull down loan interest rates. This was the first time that the SBV
10

had ever used basic interest rate tools together with regulations on the ceiling loan interest rate to
navigate the market and provide capital support for enterprises for their production and business.
In parallel, the SBV lowered compulsory reserve ratio and loan interests on rediscount, raised
compulsory reserve deposit interest rates, etc. to support capital for commercial banks.

Inflation in 2009 and two- side effects of the “demand stimulus package”. In spite of the
shadow of the global financial crisis, inflation and GDP growth were curbed at 6.82% and
5.32%, respectively. The most important solution in 2009 was the consumption and investment
demand stimulation, economic downturn prevention, sustainable economic growth and social
security policy. The main solution to promote demand was using the state budget to directly pay
for investment activities and spending according to the schedules approved by competent
authorities. The first demand stimulus package worth USD1 million was used to support 4%
interest of commercial banks for loans with the term of less than one year of small and medium-
size enterprises with the charter capital of under VND10 billion, less than 300 employees, no
overdue debt and outstanding taxes. The second package was of larger size, with longer lending
period (2 years), looser conditions and expanded eligibility. The two-side effects of the “demand
stimulus package”: (i) positive effects: being a buoy to rescue enterprises that were in difficult
situation, offering more chances for them to expand production, contributing to lower
unemployment rate and ensuring social stability. Helping commercial banks to improve fund
raising and credit lending, without lowering their deposit interest rates, expand outputs due to not
increasing loan interest rates. In addition, demand stimulus capital sources facilitated investment
activities in socio-economic infrastructure development, maintained economic growth rate. (ii)
negative effects: misuse and uncontrolled and ineffective use of demand stimulus packages could
cause some unpredictable negative consequences such as loss or waste of funds, increase of the

debt burden and the phenomenon of "hot speculation" causing bad consequences for both the
Government, enterprises, banks and the society because of low quality of projects, increasing
corruption, etc., prejudicing the competitiveness and prolonging the inequality in the market.
Particularly causing re-inflation in the medium term; ineffective use of a stimulus package boosts
the accumulative imbalance of money and goods, violating monetary circulation rules.

It can be said that from 2004 to 2009, Vietnamese economy experienced great national
and international changes. High inflation came back due to several reasons: cost-push inflation;
demand-pull inflation; monetary inflation (upon implementation of the demand stimulus policy,
the State Bank of Vietnam pumped a large amount of cash, which resulted in an increase in
money supply and prices) and inflation due to the economic structure. The relationship between
growth and inflation in this period persisted.

In 2010 alone, the thesis studied and presented 9 causes and nature of inflation: (1) the
seasonality of supply-demand of goods; (2) implementation of the policy of education
socialization and providing for several markets under control of the Government; (3) natural
disasters; (4) fluctuation of prices in the international market; (5) Impacts of the urbanization
process and infrastructure development; (6) effects of increased exchange rates; (7) impacts of
increase interests; (8) fluctuation of gold price and public opinion and (9) monetary issues. The
mentioned monetary issues included those of banks and the state budget. Data analysis shows
that money is not the main cause but an important cause of increasing prices of houses and
building materials.
11

1.36%
1.96%
0.75%
0.14%
0.22%
0.06%

0.23%
1.31%
1.05%
1.86%
0.27%
1.98%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
J
an
ua
r
y
February
March
April
M
ay
J
u
ne
J
u
ly
Au
g

u
st
September
October
No
vemb
er
December

Source: General Statistics Office [24]
Chart 2.5. Changes in CPI in 2010

The objective of monetary policy management of the State Bank of Vietnam in the
economic transition process is to influence money supply M2 (intermediate objectives or
operational objectives) in addition to stabilizing the value of the local currency and promoting
economic growth.

2. Current situation of inflation-targeting monetary policy management in economic
transition process of Vietnam

The transition of the banking system from one layer to two layers together with the
introduction of the two banking laws creates the conditions for the State bank of Vietnam to
gradually change the monetary policy control from direct to indirect tools, such as: interest rate;
exchange rate; compulsory reserve; refinancing; credit line, open market; Swaps, etc.
- Interest rate tools: from 1986 until now, interest rates has been gradually liberalized,
SBV has changed management tools from direct to indirect ones, e.g: from 1986 to June/2002,
SBV used interest rates as a direct tool in controlling market interest rates. The interest rate
policy started to be loosened step-by-step according to the market mechanism (1986 –
May/1988). Interest rates have moved in the direction of ensuring interest rates and making
adjustments based on inflation (1988 – June/1992). SBV has maintained the policy of positive

real rates of interest, SBV set the loan interest rate ceiling and deposit interest rate floor (June
/1992 - 1995). Liberalizing deposit interest rates (1996 – July/2000). Controlling base interest
rates plus the margin and removing the lending interest rate ceiling (from August/2000).
Liberalizing foreign currency lending interest rates, switching to negotiable lending interest rate
mechanism (from June/2001 to 2008). Liberalizing VND lending interest rate, switching to
negotiable lending interest rate mechanism (from 6/2002 to June/2008). From June/2002 to date
12

SBV has managed the market interest rate through indirect instruments. From April/2010 to the
end of 2011, credit institutions have managed lending interest rate based on the base interest rate
announced by SBV. The liberalization of interest rate aims to clarify lending activities of
commercial banks, limit unfair competitions and bring back interest rates to the real value. SBV
continues to take flexible control of refinancing rates, discount and interest rates on open market
operations (OMO) to regulate the monetary market interest rates.

Chart 2.1: Changes in VND lending interest rate and deposit interest rate
from April 2010 to June 2011

Source: SBV [1] [2] [48]

- Exchange Rate tool: During the past years, Vietnam has made a dramatic progress when
adjusting exchange rates in line with the market mechanism. Before 1989, Vietnam
implemented fixed exchange rates. From 1990 to 2009, Vietnam ran the market exchange
rate regime under the Government’ control, exchange rate managing mechanism has been
gradually relaxed. Official exchange rate plus the trading margin (1990 – February/1997);
Official exchange rate plus the trading margin has been gradually relaxed (February/1997 –
1998), the average exchange rate regime in the market has been gradually relaxed (from 1999
to present). This has been a breakthrough in the exchange rate management mechanism so
far.

Table 2.8: Movements in exchange rate adjustment in the 1990-2008 period

(Unit: VND/USD)
Year Applied month

Official
exchange
rate
Average exchange
rate in the Inter-bank
market
Trading
margin
Before February of 1997
11,055 - 1%
February 11,175 - 5%
1997
October 11,175 - 10%
February 14
th
11,8 - 10%
August 6
th
12,998 - 7%
1998
December 31
st
12985 - 7%
Deposit interest rate

13

1999
February 26
th
,
1999
-
Average exchange rate
in the Inter-bank
market of that day
±0.1%
2002 July -
Average exchange rate
in the Inter-bank
market of that day
±0.25%
2003 -
Average exchange rate
in the Inter-bank
market of that day
±0.25%
2004 -
Average exchange rate
in the Inter-bank
market of that day
±0.25%
2005 -
Average exchange rate
in the Inter-bank

market of that day
±0.25%
2006 December 31
st
-
Average exchange rate
in the Inter-bank
market of that day
±0.5%
2007 December 24
th
-
Average exchange rate
in the Inter-bank
market of that day
±0.75%
March 10
th
-
Average exchange rate
in the Inter-bank
market of that day
±1%
June 27
th
-
Average exchange rate
in the Inter-bank
market of that day
±2%

2008
November 7th -
Average exchange rate
in the Inter-bank
market of that day
±3%
Source: State Bank of Vietnam [1] [2] [48]

- Compulsory reserve ratio tool: a strong tool used by the State Bank of Vietnam (SBV)
to affect lending and then affect the money supply. SBV implemented it over various periods:
Compulsory reserves on total sum of deposits, separated account are not entitled to interests
(from 1992 to 1994), compulsory reserves on 12-month deposits, together with payment
accounts, are maintained on a daily and interest-bearing basis for excessive compulsory reserve
(from 1995 to 1998); increasing compulsory reserves and applying compulsory reserves to the
average balance of current deposit balance (from 1999 to 2003); prolonging the compulsory
reserve period to less than 24 months (from June/2003 to January/2008); prolonging the
compulsory reserve period to more than 24 months (from February/2008 to 2009); paying
interests for compulsory reserves and not paying interests on excessive reserves in VND, and
vice versa for reserves in foreign currencies.

Table 2.10: Movements in compulsory reserve ratio in the 2002-2011 period

14

Applied day Under 12 months Above 12 months
VND
Foreign
Currencies
VND
Foreign

Currencies
December of 2002 3 5 0 0
August of 2003 2 4 1 1
July of 2004 5 8 2 2
June of 2007 10 10 4 4
February of 2008 11 11 5 5
November of 2008 10 9 4 3
December of 2008 8 9 2 3
December of 2008 6 7 2 3
January of 2009 5 7 1 3
March of 2009 3 7 1 3
February of 2010 3
4
1
2
May of 2011 3
6
1
4
June of 2011 3
7
1
5
Source: State Bank of Vietnam [1] [2] [48]

- Refinancing and rediscounting tools: In 1991 - 1992, the regulations specified that
refinancing interest rates was generally calculated by the monthly percentage for commercial
banks; from 1993 to 1996, the refinancing rates was equal to the percentage of lending interest
rates of each commercial bank for customers; from May of 1997 to 2012, refinancing interest
rate has been specified as % per month in accordance with international practices, this is a sign

of tightened or relaxed monetary policy; from March of 2003 to present, refinancing interest
rates has served as ceiling interest rates, while rediscount interest rates has acted as floor interest
rates in the inter-bank monetary market and OMO interest rate has been the regular management
instrument of the SBV.

- Credit line tool: Since 1994, the SBV has used credit lines for big commercial banks to
limit lending speeds in order to control inflation. However, because the SBV has only distributed
credits to some commercial banks, the equality in competition has been restricted, and credit
lines not adjusted flexibly in accordance with market signs have affected the ability to meet
capital demands for the economy, thus, since 1998, this tool hasn’t been used regularly, only
when the economy is in danger of high inflation.

- Open market tool: Since July of 2000, the SBV has launched open market operations
and this has become SBV's flexibly-regulating and main instrument so far. This is the new step
in managing monetary policy, shifting from direct to indirect management in accordance with
international common practices and development trends of the economy. The trading instrument
in the market is short-term and long-term valuable papers. Over the past year, the SBV has used
open market operations flexibly and efficiently to ensure the implementation of policy purposes
targeting at interest rates and liquidity for credit institutions. The trading turnover in the open
market has recorded year-on-year increase for both sales and purchases and the trading volume
in each session gets higher and higher with the average increase of from 2,577 billion dong per
session in 2008 to 3,240 billion dong per session in 2011. This shows that OMO is an important
15

channel for money supply and capital mobilization of the SBV in order to implement the
purposes of monetary policy.

Table 2.16: Trading revenues of open market operations over the years from 2008 to
2011.

Unit: Billion dong
Year
Purchasing
revenue
Selling
revenue
Total
trading
sales
%
compared
to the
previous
year
The
number
of session
Average
sales
/session
2008
947,205.900

88,859

1,036,066

260,1%

402

2,577

2009
966,880.460

100,162

966,980

-

329

2,939

2010
2,101,420.401

7,294.919

2,108,715

211,5%

491

3,240

6 months

of 2011
2,300,062

0

2,300,062


241

9,544

Source: State Bank of Vietnam [1] [2] [48]

Especially, in the first six months of 2011, for inflation control, the SBV used the open
market operations flexibly, carefully, efficiently.

- Foreign currency swap operation (Swap): Since July of 2001, the SBV has used
currency swap between foreign currency and Vietnam dong between the SBV and commercial
banks in order to handle irrationality in VND and foreign currency capital for credit institutions.
This operation has made contribution to changing domestic and foreign currency reserve
structure in order to satisfy different currency demands of customers. This is considered to be a
measure for preventing exchange rate risks upon the occurrence of one-way fluctuations and a
monetary policy tool to solve difficulties in credit institutions for stabilizing banking activities as
well. The operation has exerted positive impacts on the regulation of the dong volume in the
monetary market, helping commercial banks use mobilized foreign currency capital sources on a
effective and flexible basis.

3. Evaluating inflation-targeting monetary policy management situation in economic
transition process of Vietnam

Over the past years, Vietnam’s monetary policy has pursued multiple purposes:
stabilizing the value of the local currency; curbing inflation; boosting socio-economic
development; ensuring national defense, security and improving the people’s lives. Monetary
policy management has recorded successes and restrictions as follows:

* About success: (1) To contribute to stabilize macro-economy, push back and control
inflation, stabilize the purchasing power of currency to help Vietnam economy obtain high
growth speed, move economic structure, create employment and eradicate hunger and alleviate
poverty; (2) tools for the management of monetary policy is more and more improved, gradually
changing from the direct to indirect management based on the market rules. The monetary policy
16

becomes a key tool promoting the economic growth and stabilizing macro-economy; (3) to
strengthen public belief to the banking system, prevent the situation of monetary disorder and the
risk of insolvency of credit organization. To create the opportunity for enterprises, production
households to access to the loan stock from banks, contribute to prevent economic depression;
(4) measures for interest rate management of the State Bank of Vietnam is valid, effective to
commercial banks representing the inter-bank market interest rate fluctuated in the corridor
among refinance interest rate and rediscount interest rate, mobilizing rate and lending rate of
commercial banks based on the demand and supply, increase or decrease together with the
margin of management levels of the SBV; (5) Basic interest rate is both the tool for market
regulation and the signal for guidelines and solution to the SBV’s management of monetary
policy and has become an important index in the monetary finance market followed by the public
and domestic and foreign investors; (6) basic interest rate of foreign currency has been
liberalized and the management mechanism of local currency interest rate is also following such
trend and the currency market increasingly integrates into local markets and the international
market; (7) to create self-control, dynamic and more flexible rights for credit organizations in
making decisions on the mobilizing rate and lending rate on the basis of market developments
and tools; (8) to quickly promote the capital turnover in the economy and the capital turnover

between different regions and fields. The interest rate is actually affecting decisions and the
relationship of accumulation – consumption, saving – investment…in the society and (9) create
the equality in the relationship between clients and banks with the nature of agreement on the
deposit rate and lending rate.

* About restriction: (1) The management of monetary policy pursues multi-objectives so
the policy management is inconsistent, sometimes this objective annuls other ones; (2) the ability
to predict the inflation is largely weak in the method of calculation, collection, data processing in
developments in the market…The management of consumption price is passive and not highly
effective; (3) the relatively high degree of dollarization in Vietnam affects the monetary policy
planning and management, sometimes causing the total payment facilities (M2) with the price
and output not to comply with the rule, therefore, the intermediate objective of M2 is not
completely promoted; (4) The largest restriction in using tools of the monetary policy is
constructing and using tools for the management of monetary policy. Newly built indirect tools
are in the process of completion, the combination among tools is irregular, ineffective. The
determination of the amount of money supplied annually which is inaccurate results in
difficulties in controlling the growth speed of the total payment facilities; (5) The interest rate is
not a power tool of the SBV which partly declines the effectiveness of monetary policy. The
function of types of interest rate which is overlapped, complicated, has not had enough ability to
regulate the market, the relationship between monetary market rate and official interest rate is
not tight and the role of monetary market regulation of interest rate is limited. The inter-bank
market rate has not correctly reflected the relationship of capital demand and supply. The
mechanism of impact transmission by the official interest rate is weak in intensity and the time-
lag is considerable. The Central Bank has not determined the mechanism of short-term interest
rate management in a standard manner, virtually short-term interest rate does not affect medium-,
long-term capital market, (6) the use of tools of compulsory reserve ratio has not closely
combined with other tools of monetary policy o decrease unexpected changes in the market, (5)
Open-market operations are not compulsory, the number of members participating in every
session is not much. The money injection through OMO must be in the target approved by the
17

Government so the sense of initiative in managing OMO by the SBV is reduced. Sometime, the
SBV is embarrassed when regulating OMO’s interest rate in the relationship with other interest
rates.

* Reason for restrictions:

- Objective reasons: Firstly, Vietnam economy is in the process of conversion with low
point of departure. The monetary policy is newly built and enforced for more ten last years it is
still like a fish out of water in both theory and practice. Secondly: Commodity economy of
Vietnam is in the first stage therefore the market is not stable. The efficiency of market rule has
not been promoted completely, supply – demand relationship is intervened by subjective factors
not complying with the market rule. Thirdly, the monetary finance market which is
underdeveloped makes tools of monetary policy difficult to promote their efficiency. Fourthly:
the SBV has actually not been a monetary policy planning agency, basically, it is merely a
monetary policy implementing agency and the SBV’s management of monetary policy is
governed by the Government’s decisions. The monetary policy is also excessively dependent on
other policies and relatively many other agencies participate in directing and supervising the
construction and implementation of monetary policy. Fifthly: information deficiency causes
difficulties for the construction and implementation of monetary policy. The accuracy of
calculation results given is not high and this makes the SBV regularly passive in adjusting at this
market demand contrary to the nature of monetary market which takes the initiative in creating
changes in the amount of money in order to direct monetary demands to macro-economic targets.
Sixthly: The combination between ministries and branches is significantly limited in
promulgating policies and instructing the implementation of laws.

Besides, there are some other reasons such as small scale of economy, weak capacity of
competition. The monetary policy is implemented in a multi-target manner, so the management
mechanism becomes difficult, complicated. Public awareness is limited, the economy is greatly
risky, the dollarization state is rather high and the lag of policies is large not following market

developments…

- Subjective reasons: Firstly: The Central Bank has not taken initiative and been
independent in managing monetary policy because agencies are under the direct management by
the Government, so they are excessively governed by the Government and this reduces the
initiative and efficiency of using tools of monetary policy. Secondly: there have not had close
combination between the SBV and the Ministry of Finance in implementing the interest rate
policy to stabilize the market rate of interest and serve the management of monetary policy. For
this reason, the interest rate has not exactly reflected the relationship of capital supply and
demand. Thirdly, the SBV fails to exactly forecast the situation of capital supply and demand in
the market, fluctuations of consumption price index so it is difficult for its monetary policy
planning and interest rate policy. Fourthly, the co-ordination between the exchange rate – control
of exchange policy and the interest rate policy has not created any favorable mutual impact. The
objective of policy management is different, even contrary in some cases. Fifthly: The
qualification of staff managing and implementing the monetary policy is not equal, managerial
staff is inexperienced, deficient in practical experience, while many matters require high
flexibility and sensitivity. Staffs fail to meet the practical demand. Sixthly: The organization
18

apparatus of the SBV is now unreasonable, its functions and tasks which are overlapped decrease
the efficiency of management.

Chapter 3: Solutions to the completion and effective improvement of the management of
inflation-targeting monetary policy during the economic conversion in Vietnam.

On the basis of researching fundamental issues in the management of inflation-targeting
monetary policy in Chapter 1 and the state of management of inflation-targeting monetary policy
during the past time in Chapter 2. In Chapter 3, the thesis proposes a number of solutions to the
effective improvement of management of inflation-targeting monetary policy during the
economic conversion in Vietnam.

The SBV’s orientation of management: At present, the SBV’s management of monetary
policy has been implemented in the multi-objective way, namely: stabilize money value, curb
inflation; promote socioeconomic development, ensure national defense, security and improve
the people’s life, so the management is inconsistent, sometimes policies towards this objective
annuls other ones while tools of managing monetary policy is incomplete and inconsistent.
Hence, the efficiency of monetary policy is not high, not achieved as desired. In the next time,
the management of monetary policy should be changed from multi-objectives to the leading
objective namely curb inflation, stabilize money value and ensure the safety for system.
Accordingly, the management of monetary policy should be changed from the volume control to
the interest rate control, it is necessary to continue implementing tools: refinance, interest rate,
exchange rate, compulsory reserve, open-market operation and other tools based on the market
principle. The system of processes should be continued completing in the transparent, clear and
stable direction to ensure the equality, safety for subjects participating in the market.

In order to implement the monetary policy taking the inflation control as a management
objective, it is necessary to have conditions such as (i) improve the SBV’s independency,
associated with the reform of organizational structure and improving the SBV’s capacity. To
strengthen the Central Bank functions of the SBV to implement the monetary policy in the
flexible manner. To rearrange and clearly determine functions and tasks of units under the SBV
in the direction of focusing on management, control and improvement of specialization; (ii) To
strengthen the ability to forecast the inflation, the calculation of CPI inflation index should be
reconsidered. The basic rate of inflation should be applied in addition to the inflation rate
nowadays; (iii) To strengthen the ability to control tools of monetary policy to obtain objectives
proposed such as interest rate tool, open-market operation, refinance tool and compulsory reserve
tool…(iv) to increase the obviousness, consistence and reliability of monetary policy and (v) the
close coordination between ministries and branches is required, especially the Ministry of
Finance, the Ministry of Industry and Trade, the Ministry of Planning and Investment. In the
construction work, the system of inter-ministerial circular on the information collection,
exchange as well as information supply to the public. The SBV and the Ministry of Finance is

required to closely coordinate in the monetary policy and fiscal policy management. The
objective of inflation control is a strategic heading for the management of monetary policy of
Vietnam at present. In order to achieve the objective of inflation control, the SBV should
continue improving the system of tools and the process of application based on the market
principle:
19


Firstly: With regard to the interest rate policy, it is necessary to follow the capital supply
and demand in the market to have flexible adjustments based on the market principle for the
purpose of stabilizing the interest rate towards implementing positive real rate of interest.

Secondly: With regard to the exchange rate policy, it is necessary to implement the
control of all currency flows including foreign currency and budget receipts and payments in the
economy. The exchange rate is managed according to the supply and demand relationship and
developments in the market, but the Government still intervenes to stabilize the exchange rate if
required. The exchange rate policy should combine harmoniously between export and import
useful for the general growth of the economy. In the current condition, it is the best appropriate if
the SBV implement the mechanism of floating exchange rate with the macro-regulation.

Thirdly: To improve tools of compulsory reserve rate in the management of monetary
policy. To gradually improve the calculation base of compulsory reserve. Currently, the
compulsory reserve has not defined all amount of money in the economy. The calculation base of
compulsory reserve should be expanded so as to be appropriate to developments of the actual
situation. In order to prevent any large change against the market, the expansion of base for
calculating compulsory reserve should be gradually implemented. The period of calculation and
the period of maintaining compulsory reserve should be adjusted to be coincided so that the
compulsory reserve is based in a more accurate way than the situation of capital mobilization and
control of money coefficient. The form of maintaining compulsory reserve is carried out
according to the method of average calculation so that credit organizations may temporarily use

compulsory reserves to ensure the ability to make payment, stabilize interest rate. The Central
Bank should regulate a portion of compulsory reserves in the form of public bond with the view
of creating conditions for the development of bond markets. The interest rate of compulsory
reserves should be appropriately prescribed to reduce expenses in activities of credit
organizations.

Fourthly: To synchronously coordinate other tools of monetary policy to improve the
efficiency of currency regulation. The use of tools of compulsory reserve shall rapidly,
drastically affect the market; therefore the close coordination with other tools is required to
ensure that the market is not significantly disordered. Every adjustment of compulsory reserve
ratio should be only from 0.5% t 1% and other tools must be used to support, neutralize and
annul adverse impacts of compulsory reserve on money market.

Fifthly: To improve the quality of forecasting currency developments because this is an
important base, a decisive phase to the efficiency of control and the initiative in the management
of monetary policy. For this reason, specialized software must be equipped to serve the forecast
work; to build data stocks and regularly update information serving the forecast work; to
regularly train and improve the professional qualification for forecasting staffs; to establish the
network system to monitor developments in the currency market in a timely, accurate and
updated manner as the basis for analyzing and adjusting forecasts in a timely way.

Sixthly: To perfect the system of information technology in the management of monetary
policy. To regularly upgrade leased lines to ensure the through-transmission of information about
20

the compulsory reserve of credit organizations when the number of credit organizations grows
more and more increasingly.

Seventhly: To strengthen the inspection and check of compliance with the SBV’s
regulations to credit organizations. The SBV establishes the information system reporting daily

figures to monitor the management of monetary policy.

Eighthly: Other supplementary solutions such as building the Central Bank so as to be
modern and strong enough, the SBV’s independency should be raised in the management of
monetary policy, the SBV’s Governor makes decision on using tools and control measures for
implement objectives of national monetary policy, at the same time, the Central Bank must
dignify the transparency in managing monetary policy. To determine other macro-economic
policies on the basis of taking the inflation as an objective. To choose the foundation of
monetary policy to implement transparent objectives including curbing inflation in combination
with renovating the method of calculating the inflation index. To strengthen the close
coordination between the SBV with other ministries and branches in the macro-economic
management. To strengthen the work of information propaganda. To heighten the quality of
capital management of commercial banks. Fiscal policy and other solutions.

CONCLUSION


There are many different mechanisms of managing monetary policy established by
Central Banks subject to specific circumstances of each nation. It is very difficult to assess that
the mechanism of managing monetary policy is more optimal than the mechanism of other ones.
Even just in a country, there is not any mechanism of managing monetary policy suitable and
best to all circumstances. From 1989 up to now, 26 countries have applied the model of
managing monetary policy on the basis of taking the inflation as an objective. This mechanism
has affirmed certain advantages and extensive popularization and appropriateness at different
qualifications and advantages. A new method of approach through taking the inflation as an
objective of the monetary policy breaks through the traditional mechanism of managing
monetary policy and mainly focuses on the inflation rate as a sole and direct objective of the
monetary policy. The author thinks that Vietnam should also seriously research, consider these
issues in the theory as well as practice and ability of application in Vietnam to orient the strategy
of monetary policy to 2012 or vision 2020. The thesis researches the relationship between the

inflation and economic growth, analyzes Vietnam economic situation during the past years and
brings out the optimal inflation threshold to Vietnam.
21

LIST OF RESEARCH WORKS RELATING
to theses promulgated of the author

1- Khuat Duy Tuan (2000) “International experience about reorganizing and strengthening the
banking system”, Banking Magazine, No.8-2000, Pages 62-64.

2- Khuat Duy Tuan (2000): “Solutions to improve the system of organization, auditing control to
the State Bank of Vietnam and credit organizations in Vietnam”, Banking industry-level
Scientific Research Topic at the, Code KNH 98.04, decision on recognizing the topic completion
No.451/2000/QD-NHNN9, dated October 20, by the Governor of the State Bank of Vietnam.

3- Khuat Duy Tuan (2002): “A number of issues about trade and investment in executing the
Vietnam-US trade agreement”, Banking Magazine NO.1+2-2002, pages 114-117.

4- Khuat Duy Tuan (2004): “Competition, awards importantly contributed to the success of
banking operation”, Competition and Awards Journal No.10-2004, pages 29-31.

5- Khuat Duy Tuan (2005): “Promoting consumption lending – Indispensable trend banking
operations in the market economy”, Banking Magazine No.9-2005, pages 51 – 53.

6- Khuat Duy Tuan (2010): “The SBV’s management role against risks in the operation of
commercial banks”, Banking Magazine No.5-2010, pages 18-20.

7- Khuat Duy Tuan (2011): “Discussing the coordination between the fiscal policy and monetary
policy in the inflation control in Vietnam”, Banking Magazine No.2-2011, pages 12-15.
22

NEW CONTRIBUTIONS OF THE THESIS

Topic of the thesis: Management of inflation-targeting monetary policy in Vietnam’s economic
transition process
Speciality: Economics – Finance – Banking Code: 62.31.12.01
Postgraduate: Khuat Duy Tuan Postgraduate code: NCS29.25TCNH
Instructing teachers: 1. Prof. PhD Nguyen Van Nam 2. PhD Nguyen Danh Luong
Training unit: National Economics University
New contributions about learning, argument
In researching the management of inflation-targeting monetary policy in Vietnam’s
economic transition process, the thesis indicates three additional characteristics in managing
monetary policy in, relating to (i) capacity and position of the Central Bank; (ii) tools of
monetary policy and (iii) system of credit organizations where the monetary policy is
transferred.

The thesis has analyzed and brought out the method of approach on the basis of taking
the inflation as an objective of managing monetary policy in economic transition process to seek
an inflation threshold sensible for Vietnam’s economic condition and economies in the transition
process similar to Vietnam.

Conclusions, new proposals inferred from research results:

The thesis affirms that Vietnam’s inflation during the past time is originated from 3
causes including: demand-pull inflation, cost-push inflation and monetary inflation. However,
monetary inflation is still a basic cause.

The thesis states opinions that the management of monetary policy may not implement
multi-objectives, but implement in a consistent way on the basis of taking the inflation as a basic
objective in managing monetary policy.

The thesis proposes the close, synchronous coordination among between monetary
policy, fiscal policy and other macro-economic policies to help Vietnam’s economy to obtain a
reasonable rate of inflation and high growth not only in quantity but also in quality.

The thesis asserts that during the management of inflation-targeting monetary policy, the
method of approach taking the inflation as an objective in managing monetary policy is effective
to Vietnam’s economy. This new method of approach shall break through the traditional
mechanism of managing monetary policy nowadays, because when taking the inflation rate as a
sole and direct objective in managing monetary policy, tools for managing monetary policy must
focus on and aim at such sole objective. On the basis of seeking a inflation threshold reasonable
for Vietnam, the thesis proposes a number of specific solutions to the management of monetary
policy in the economic transition process including: (i) for interest rate policy, the inter-bank
short-term interest rate should be chosen for the management objective; (ii) for exchange rate
policy based on the market supply and demand with the State’s regulation; (iii) solution to
improve compulsory reserve tools, expand the base for calculating compulsory reserve, adjust
the period of calculating compulsory reserve and the period of maintaining compulsory reserve,
23

pay reasonable interest rate to compulsory reserve deposits…; (iv) coordinating to improve the
efficiency of monetary regulation; (v) improving the quality of forecasting monetary
developments…and some supplementary solutions to enhance the efficiency of managing
inflation-targeting monetary policy in Vietnam’s economic transition process

Scientific instructors Postgraduate

Prof. PhD. Nguyen Van Nam





PhD. Nguyen Danh Luong





Khuat Duy Tuan