The impact of exchange rate on trade balance in vietnam through import and export performance

International School, Vietnam National University, Hanoi
Nante University
Program: Master in Finance Banking Insurance (Southeast Asia)

Thesis proposal
THE IMPACT OF EXCHANGE RATE ON TRADE BALANCE IN
VIETNAM (THROUGH IMPORT AND EXPORT PERFORMANCE).

Supervisor: Nguyen Van Dinh (Ph.D.,Assoc. Prof)
Student: Cu Thuy Nga

Hanoi, 2018


Acknowledgements
I would like to express my deep gratitude to Ph.D.,Assoc. Prof Nguyen Van Dinh, who
is not only my respectable supervisor but also my academic inspiration. I am so
thankful for all his guidance, support and encouragement during the period of writing
this thesis. He gave me a stronger confidence to deal with this dissertation. He is a
great teacher ever and from the bottom of my heart, I hope that all the best will come to
him.
I would like to thank the Nante University and International school, IS – VNU, to give
me a chance that enables me to fulfill the course with all classmates FBA8 and all the
lecturers for their useful lessons which make not only my Master course but my life.
To my family, no word can express all my love to them. They have always been my
biggest encouragement. I could not have finished this course without them.


Table of Contents
CHAPTER 1: INTRODUCTION .................................................................................. 2
Background of the problem ........................................................................................... 2

1.2

Reasons for researching ....................................................................................... 3

1.3

Research objectives ............................................................................................. 4

1.4

Research questions .............................................................................................. 5

1.5

Research subjects and scope ................................................................................ 5

1.6

Research general structure ................................................................................... 5

1.7

Data and research method.................................................................................... 6

CHAPTER 2: LITERATURE REVIEW ...................................................................... 7
2.1 Theory of trade balance ........................................................................................... 7
2.1.1 Definition ................................................................................................................................. 7
2.1.2 Factors affecting trade balance .......................................................................................... 7
2.2 Theory of exchange rate ........................................................................................ 10
2.2.1 Definition ............................................................................................................................... 10

2.2.2 Factors that influence the exchange rate ....................................................................... 13
2.2.3 Impact of exchange rate on import and export performance ................................... 14
2.3 Exchange rate system and trade balance ............................................................... 15
2.3.1 Exchange rate system ......................................................................................................... 15
2.3.2 Trade performance .............................................................................................................. 19
2.3.3 Trade balance........................................................................................................................ 23
2.4 Related research ..................................................................................................... 25
CHAPTER 3: DATA..................................................................................................... 28
3.1 Research data ......................................................................................................... 28


3.1.1 Data availability .................................................................................................................... 28
3.1.2 Descriptive analysis of data ............................................................................................... 28
3.2 Data analysis procedure ......................................................................................... 28
CHAPTER 4: MODEL ESTIMATION AND REGRESSION RESULT ................ 30
4.1 Descriptive statistic ................................................................................................ 31
4.2 Research model regression result .......................................................................... 33
4.2.1 Regression model between export – import and the exchange rate ........................ 33
4.2.2 Regression between real bilateral exchange rate USD/VND and import-export
ratio ...................................................................................................................................................... 36
CHAPTER 5: CONCLUSION ..................................................................................... 40
5.1 Summary ................................................................................................................ 40
5.2 Limitation of the study........................................................................................... 40
Bibliography .................................................................................................................. 42
Appendix ........................................................................................................................ 45


Table of Notations and Abbreviations
Abbreviation

Meaning

ASEAN

Association of South-East Asian Nations

CPI

Customer Price Index

GDP

Gross Domestic Product

GSO

General Statistics Office

EURO

European Monetary Unit

EXM

Export – Import ratio

IMF

International Monetary Fund

JPY

Japanese Yen

OER

Official exchange rate

NBER

The bilateral nominal exchange rate

NEER

The bilateral nominal exchange rate

REER

The real effective exchange rate

USA

The United Stated of America

USD

United Stated dollar

VND

Vietnam Dong


LIST OF FIGURES
Figure-1: Vietnam’s GDP and import, export from 2001 to 2016 (World Bank)
Figure-2: Value of import; export and trade balance 2007-2015 (General Statistics
Office of Vietnam)
Figure-3: REER index and Ratio Export/Import
Figure-4: Regression result between dependent variables “export” and independent
variables nominal exchange rate VND/USD “rate”.
Figure-5: Regression result between dependent variables “import” and independent
variables nominal exchange rate VND/USD “rate”.
Figure-6: Regression between real bilateral exchange rate VND/USD and importexport ratio
Figure-7: Regression between real bilateral exchange rate VND/USD and importexport ratio


LIST OF TABLES
Table-1: Vietnam’s exchange rate regime from 1999 – 2015.
Table-2: Vietnam's leading partners in international merchandise trade
Table-3: International merchandise trade of FDI enterprises (Customs Handbook on
International merchandise trade statistics of Vietnam 2015)
Table-4: Summary of data
Table-5: REER index and Ratio Export/Import


ABTRACT
This paper aims to determine whether exchange rate stability of Vietnam or not,
especially in the period from 2008 to 2015. Besides, this study used the available date
from 2000 to 2015 to calculate the real effective exchange rate. From that, the research
attempts to identify the relationship between the exchange rate of Vietnam dong

against United Stated dollar and individual trade, import and export. Also, the method
of ordinary least squares is used to estimate equation of explanatory variables ( GDP US,
GDPVN, RERVND/USD ) for explained variable ( EXM -export over import ratio). It
exhibits a significant relationship, which is highly sensitive. A change one basic point
in Vietnam dong can increase in thousands of USD. Other important result is that the
real exchange rate is an important variable to trade balance, and depreciation of
exchange rate has a positive impact on exports.

Key words: Import, export, trade balance, real exchange rate, ordinary least squares.
1


CHAPTER 1: INTRODUCTION
Background of the problem
Exchange rate is one of the important macroeconomic policies of every nation. The
exchange rate between USD and EURO, USD and JPY, as well as exchange rate
fluctuations between USD / VND in recent times shows that the exchange rate is
always an acute issue. In Vietnam, the exchange rate affects not only trade balance,
import and export, national debt, direct investment, but also the public's confidence.
On February 11, 2011, State Bank of Vietnam decided on the adjustment interbank
exchange rate to 20.693 VND, increased 9.3% compare with 18.932VND (State Bank
of Vietnam, 2009). This is the move in order to stabilize macro-economy and curb
inflation. As of 2015, the State Bank of Vietnam announced to keep the exchange rate
stable, the margin was anchored at no more than 2%. However, within just over a
month, the State Bank raised the exchange rate by 1% to 21.458VND per dollar due to
the signs of recovery for the US economy. The trading band has been adjusted many
times to intensify the flexibility of market exchange rate. There were two periods that
the band fluctuate the most. The first one was in 2009 due to global financial crisis (the
band was widened to +/- 5%), the second was in 2015, under a lot of pressure from
international market and decision of Fed raising Fed funds rates. Along with that, the

exchange rate that varies over a short period of time also have no small effect on all
economic sectors need to use foreign currency, especially in import and export.
Obviously, import and export activities play a vital role in development of Vietnam’s
economy. These is also considered by a lot of countries, especially developing
countries, because this is the most direct way to increase the accumulation of wealth, to
solve the debt burden for most countries in the world. Understanding this important
role, from small to large countries with high or low level development start entering a
new race to promote import-export activities, and the exchange rate is the most
effective tool to optimize the purpose. However, the exchange rate is one of the most
sensitive macroeconomic variables. Exchange rate movement is unpredictable due to
the impact of many factors such as trade deficit in both short-term and medium-term,
2


the level of the budget deficit appeared to be quite high, around 6 percent of GDP, the
increase in gold price, high demand in foreign currency especially USD. The
appreciation or depreciation of the currency affects the import-export turnover and the
trade balance.
Using the exchange rate tool to run a flexible economy in the current context is
necessary. However, how to adjust and conduct the exchange rate policy is also a
problem. To achieve this goal, policymakers must be cautious and firmly set the
regulations of the law on goods and currency mobilization in the current situation of
our country dominated by a number of countries with developed economies.

1.1 Research statement
Exchange rate has played a very important role in international trade, especially in such
a great open world economy. It fluctuates day by day and affects not only trade
balance, import and export, national debt, direct investment, but also the public's
confidence. Exchange rate adjustments can directly influent in social and economic
problems trade balance in Vietnam. For example, when the authority adjusts the

exchange rate, they will have to face other unexpected impacts, given that there has
existed high and long-term trade balance deficit and budget deficit that make the
balance of payment unstable. Therefore, exchange rate policy is always the primary
concern of Vietnamese government in order to stimulate export, reduce imports, and
guaranteeing macroeconomic stability and preventing inflation. For enterprises
engaged in import and export activities, understanding and making good use of
exchange rate will help to respond promptly to exchange rate movement and to reduce
the risks of doing business.

1.2 Reasons for researching
The balance of trade compares the value of a country's exports of goods and services
against its imports. When exports are greater than imports, this is a trade surplus. Most
nations view that as a favorable trade balance. Therefore, a lot of countries try to create
3


trade policies that encourage trade surplus because it is like making a profit as a
country. Also, improving the trade balance is one of the top macroeconomic objectives
in Vietnam, contributing to increase foreign exchange reserves, stabilizing the
domestic currency, ensuring economic growth. Finding suitable solutions to get better
balance of trade in macroeconomic management is very important.
It is known that banks in Vietnam hold a large amount of US dollar in exchange
reserves. The US dollar has a strong impact on the foreign exchange market. Most of
the foreign currency transactions in Vietnam often use the US dollar, even when listing
rate. The dollar is considered a major payment currency in import-export activities.
Thus, the USD/VND exchange rate movements are easy to observe. To some extent, it
is highly representative in the fluctuation of other currencies. Thus, the author kept
track of the US dollar movements in the market to assess the manifestations of the
import - export and policy response to the trend of currency appreciation.
To achieve the target of trade surplus, besides improving the quality and design of

exported products, many experts believe that significant depreciation of the currency
can bring about international competitive advantage in terms of price. At the same
time, it is necessary to maintain the exchange rate policy in line with the economic
development strategy of each period. Understanding the Vietnam situation related to
exchange rate problem, it is a motivation that prompted me making a quantitative
estimate of exchange rate movement on the merchandise trade balance.
Also, it can be seen that in spite of many attention on the effects of exchange rate on
trade balance, little attention is paid on the trade flow individually, import and export
flow. Given that, this research focuses on revealing the dynamics of imports and
exports in response to shocks of exchange rate.

1.3 Research objectives
Focusing on general study of the theoretical questions regarding to exchange rates and
the impact of exchange rate activity on economic activity, the study aims to look at real
situation of the current Vietnamese exchange rate policy and clarify the impact of
4


exchange rate on trade balance through the response of imports and exports in the
presence of exchange rate’s shock.
At the same time, the thesis also investigates the problems of the exchange rate policy
to give some solutions to avoid deficits trade balance in Vietnam.

1.4 Research questions
In order to reach these objectives, the study was carried out to answer three questions
as following.
Question 1: Does the exchange rate affect trade balance through export and import
activities?
Question 2: What is the relationship between real effective exchange rate and
Vietnam’s competitiveness?

Question 3: Does exchange rate volatility between Vietnam dong against United Stated
dollar influence on the ratio of export to import?
1.5 Research subjects and scope
The target subjects of the research are as following:
- The theoretical basis on the impact of exchange rates on trade balance.
- The relationship between exchange rates and trade balance.
- Exchange rate policy of Vietnam
- Import and export activities in Vietnam.
- Recommendations to improve the effectiveness of the exchange rate policy in the
coming time.
Scope of research: focusing the data of import and export activities and exchange rates
in Vietnam in the period 2000 to 2015.
1.6 Research general structure
The first part of the dissertation shows the background, the research questions as well
as the significance of the study. The remaining parts include:
5


- Part 2: provides the over view of the overview about trade balance and the exchange
rate theory as well as the exchange rate system in Vietnam
- Part 3: summarizes the related literature review
- Part 4: points out the data and methodology used in the regression model of the study
- Part 5: gives the estimated result and discussion for Vietnam
- Final part summaries the study, its contribution as well as its limitation and suggest
areas for further researches.

1.7 Data and research method
In order to implement the study, annual time series data on exchange rate, gross
domestic product, consumer price index, exports and imports, trade balance which
cover the 2008-2015 period, were used in this study. Following that, using method of

aggregate analysis, evaluation based on the number of import and export volume, CPI,
GDP, nominal exchange rate and real exchange rate, especially the use of econometric
model appreciate the impact of exchange rates on the trade balance in Vietnam.

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CHAPTER 2: LITERATURE REVIEW
2.1 Theory of trade balance
2.1.1 Definition
There are many national and regional currencies in the world. Each country has its own
currency, such as the United States dollar of the United States, Yuan currency of
China, Euro currency of Euro zone, or Yen currency of Japan. The balance of trade is
the difference between the value of exports and imports of a country in a certain
period.
Export means sending goods or services produced in a country to another country.
Import means bringing in goods or services into a country from another country.
It is trade surplus if a country’s value of exports is greater than its value of imports.
Conversely, trade deficit happens when the value of imports greater exports.
The balance of trade is also known as Net Export. It is calculated by a simplified
formula: imports minus exports.
2.1.2 Factors affecting trade balance
The balance of trade of a country can be affected by what influence its import and
export. They are Gross Domestic Product (GDP), inflation, Government policy and
exchange rate.
GDP
GDP at purchaser's prices is the sum of gross value added by all resident producers in
the economy plus any product taxes and minus any subsidies not included in the value
of the products. It is calculated without making deductions for depreciation of
fabricated assets or for depletion and degradation of natural resources. Data are in

current U.S. dollars. Dollar figures for GDP are converted from domestic currencies
using single year official exchange rates. For a few countries where the official
exchange rate does not reflect the rate effectively applied to actual foreign exchange
transactions, an alternative conversion factor is used. (The Economic Times)

7


How GDP affects trade balance can be seen under two angle of view.
- Domestic GDP
If GDP of a country increases, the income raises a home. Consumers are more likely to
buy products and services. It may result an increase in import. At the same time,
because of increasing in demand, firms may pay more attention into domestic market,
decreasing export may occur as a result. The result is fall in net export (NX)
Vietnam's GDP and Export, Import
2001 - 2016
250

$ billion

200
150
GDP
100

Export
Import

50
0

Figure 1: Vietnam's GDP; Export and Import 2001 - 2016 (World Bank)
According to data of World Bank, from 2001 to 2016, there was an upward trend in
GDP in Vietnam. Since open period, GDP of Vietnam has raised impressively six
times from around $ 30 Billion to around $200 billion at the end of 2016. During that
time, we can also recognize the increase of both export and import value but there was
always a gap between the demand of imported and exported goods and services. This
gap was largest on the period of 2008 – 2010 because of financial crisis.
- Foreign GDP
If GDP of foreign countries increases, so does their demand of import. It leads to the
increase of export to foreign countries.
8


Inflation
Inflation as measured by the consumer price index reflects the annual percentage
change in the cost to the average consumer of acquiring a basket of goods and services
that may be fixed or changed at specified intervals, such as yearly (World Bank).
Increases in domestic inflation lead to higher prices for exported goods and a decrease
in exports as foreign consumers substitute in favor of lower-priced alternatives
produced within their own country or imported from elsewhere. Substitution occurs in
the home market as well. As the prices of domestically produced goods increase,
import prices remain constant and shoppers turn their fancy toward imports, which
have fallen in price relative to inflating domestically produced goods. The net result for
a country with a rise in inflation is decreased exports and increased consumption of
imports. The result is a fall in net export. (The University of Colorado Boulder).
Government Policies
A country’s policies can have major effects on trade balance. Trade policy includes any
policy that directly affects the flow of goods and services between countries, including
import tariffs, import quotas, voluntary export restraints, export taxes, export subsidies,

and so on.
For example, there is increasing concern in the United States about the environmental
and labor policies of many U.S. trade partners. With regard to environmental policies,
some have argued that more lenient environmental regulations in many less-developed
countries give firms in those countries a competitive edge relative to firms operating in
the United States. The same argument is used in regard to labor practices. Many U.S.
industry representatives argue that low foreign wages, lenient occupational safety
regulations, and in some cases the use of child labor or prison labor give some
countries a competitive edge in international markets.
In general, for small countries, domestic policies will affect domestic prices,
production levels, trade flows, and welfare but will not affect foreign prices, production
9


levels, and welfare. This means that countries like the United States may not need to
worry much about domestic practices in very small countries. However, when a
country is large in international markets, domestic policies will affect prices,
production levels, profits, and welfare, both domestically and internationally
(Suranovic, 2007).
Exchange rate
Exchange rate has a significant influence directly to export and import. For instance,
suppose the exchange rate becomes $1 = VND 22.500, the value of the dollar has
appreciated or gone up. The price in dollars of Vietnamese goods has fallen while the
price of the US goods has increased for the Vietnamese. Lowering the value of
domestic currency tends to raise exports by making goods cheaper for foreigners.
Imports from abroad expensive in Vietnam dong, as a result, Vietnam exports will rise
and imports will fall.
If the exchange rate, instead, became $1 = VND 21,000, the value of the dollar has
fallen or depreciated. Now, the US goods are cheaper in terms of VND while
Vietnamese products are more expensive for the US consumers. Exports will fall and

imports will rise. So generally, the exchange rate and the trade balance move in
opposite directions.
2.2 Theory of exchange rate
2.2.1 Definition
Although economic integration and globalization have been increasing, a lot of
countries still hold their own currency. According to Investopedia, an exchange rate is
the price of a nation’s currency in terms of another currency. Thus, an exchange rate
has two components, the domestic currency and a foreign currency (Investopedia). In
Vietnam, according to the Ordinance on foreign exchange No.28/2005/PLUBTVQH11, Article 4, Clause 9, exchange rate of Vietnamese Dong means the price

10


of one unit of foreign currency calculated in Vietnamese Dong (Standing Committee
National Assembly, 2006).
To identify the impact of exchange rates on the Vietnamese economy in general, export
and import activities in particular, the change rates are classified as following: (Le,
2014)

Based on exchange rate management
- Fixed exchange rate is the rate the central bank sets and maintains as the official
exchange rate. It usually remains unchanged for a period of time as a basis of reference
for transaction activity. A set price is determined against a major world currency such
as the U.S. dollar, euro or Japanese yen. In order to maintain the domestic exchange
rate, the central bank buys and sells its own currency on the foreign exchange market
in return for the currency to which it is pegged.
- Floating or flexible exchange rate is the rate formed through specific transactions,
and is determined by the private market through supply and demand. Floating
exchange rate means that currencies change relative value all the time. This exchange
rate fluctuates frequently depending on the supply and demand of foreign currency in

the foreign exchange market.
Based on the time of capital transfer
- Spot exchange rate is the current rate of exchange between two currencies. The spot
refers the prices buyers pay in one currency to purchase a second currency. The
exchange rate applied in the transaction where the transfer of capital occurs at the same
time with the contract is signed.
- Forward rate is the exchange rate applied in a transaction where the capital transfer is
conducted after a certain period of time, at a predetermined rate and at the time of
signing the contract.
Based on the form of payment used
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- Telegraphic transfer rate is the foreign exchange rate for which bank has
responsibility for transferring foreign exchange by electronic method. It is utilized
primarily for overseas transactions. The telegraphic transfer rate is the rate used as the
basis for determining other exchange rates.
- Email or letter transfer rate is the foreign exchange rate that the bank has
responsibility for transferring the foreign exchange by letter or mail. It is cheaper but
also slower than the telegraphic transfer.
- A bill of exchange is a written order used primarily in international trade that binds
one party to pay a fixed sum of money to another party on demand or at a
predetermined date. Bills of exchange are similar to checks and promissory notes. Bill
of exchange rate is the exchange rate determined by the foreign exchange rate minus
the interest arising from the time the bank buys the draft until the bill is paid. A bill of
exchange can be drawn by individuals or banks and are generally transferable by
endorsements.

Based on the relation between exchange rate and the inflation index
Exchange rate is price determined in the FOREX market. It is a rate at which a nation’s

currency will be exchanged for another currency or simply, exchange rate is the price
of one currency measured in terms of another. Thus, an exchange rate has two
components, the domestic currency and a foreign currency.
- The nominal exchange rate is the price of a currency denominated in other currencies.
The exchange rate, which is a weighted average of nominal exchange rates of a
national currency excluding tendencies for change in prices of country under
consideration with respect to prices in countries – partners in trading, it called a
nominal effective exchange rate (NEER).
- The real exchange rate is the exchange rate determined on the basis of the nominal
exchange rate adjusted by the inflation rate between domestic and foreign countries,
thus reflecting the purchasing power ratio between domestic and foreign currencies.

12


When a currency becomes more valuable relative to another currency, it is
appreciation. For example: $1 buys 25,000 VND instead of 20,000 VND previously.
When a currency becomes less valuable relative to another currency, it is depreciation.
For example: $1 buys 15,000 VND instead of 20,000 VND previously.
2.2.2 Factors that influence the exchange rate
There are numerous factors affect exchange rates, the following are some of main
determinants of exchange rate based on a research of a group of authors. According to
Prof. Pareshkumar J. Patel and co-authors, there are six main important factors which
can affect the valuation of FOREX (Prof. Pareshkumar J. Patel, Dr.Narendra J. Patel,
Dr.Ashok R. Patel, March 2014).
First is inflation. Inflation plays an important role in valuation of currency of any
country. If the rate of inflation in the India is lower than other countries comparatively,
then Indian exports will increase. There will be an increase in demand for Rupee to buy
Indian goods. Also foreign goods become cheaper and so Indian citizens will pay less
ultimately import decreases. Therefore lower inflation rates tend to see an appreciation

in the currency value of any country.
Second is interest rate. If rate of interest in India increase relatively to other countries,
it will become attractive to invest money in India. Investor will get a higher return from
saving in the Indian banks. Therefore demand for Indian Rupee will rise. Higher
interest rate is an appreciation for money inflow which will have negative impact on
local businesses of the country. Higher interest rate reduces purchase power of the
consumer while the loan borrowers have to pay more interest.
Third is capital account balance. For any country current account deficit indicates
higher values of imports of services and goods in comparison to the values of exports.
Countries having surplus in their financial account are benefited than countries with
deficit. They can attract more capital from other countries and can see appreciation in
the currency value relative to the countries with capital account deficit.
Fourth is public debt. Countries’ spending more on public sector projects and fund for
social upliftment of the society has more debt on the country. Such spending stimulates
13


the domestic economy. Countries with higher public debt are not attractive to foreign
investors. Because higher debt of the country leads to higher inflation ultimately
increases debt to control inflation. Some standard organizations like Standard &
Poor’s, Moody’s gives debt rating of the country, and it is very important determinant
of its exchange rate.
Fifths is Gross Domestic Product. GDP gives best measure of health of country’s
economy. It is the number calculated by consolidation of total expenses of government,
money spent by business, private consumption and exports of the country. Increment in
GDP indicates economic growth. Foreign investors get attracted towards the countries
with economically strong countries with good GDP. It leads to better valuation of the
currency of the country because more and more money comes to the country
Sixth is Political stability and Economic performance. Countries with stable
government can give better growth in economy through completion of the projects in

hand. Investors invest their money in the countries with strong economic performance.
As India has coalitions government and no party has got full majority so there are lot of
problems for stability of the government and the government can’t take decisions
strongly. So, it causes loss of confidence in foreign investors. It affects economic
growth and money moves out of the country.
2.2.3 Impact of exchange rate on import and export performance
Devaluation means decreasing the value of the country’s currency in terms of other
currencies (Asmamaw, 2008). The representation of currency devaluation is the
increase of exchange rate. When exporting goods in overseas market, if the exchange
rate is high in the home country (Vietnam) compare with the same amount of foreign
currency, the exporter will receive more domestic currency in the case exchanging
foreign currency into local currency. For example, a Vietnamese exporter sold an
amount of goods overseas that had USD 200.000 in value with payment term of three
months. The exchange rate of one USD equals twenty thousand Vietnam dong at
present, but after three months the forward rates becomes 22.720 VND for 1 USD. As
the result, exporter get more money with amount of (22.720 – 20.000)* 200.000 =
14


544.000.000 in Vietnam dong. Besides, with the devaluation of currency or increase in
exchange rate, commodity of goods become cheaper and more competitive in the
global market, by extension, volume of goods exported increase. Conversely, the
volatility of exchange rate affects the import goods volume in the opposite way. When
the exchange rate increases, the volume of import commodities could decrease, as the
prices of foreign goods and service increases sharply. The change in exchange rate
would not impact on volume of goods exported immediately because of time lagging,
but impact on the price of import and export goods. If the foreign exchange rate raises,
value of export goods decrease in foreign currency, value of import goods rises in
domestic currency.
2.3 Exchange rate system and trade balance

2.3.1 Exchange rate system
There are three mains way that a country manages its currency and the foreign
exchange market.
First is Freely Floating Exchange rate system. It means a country's decision to allow
its currency value to change freely. The currency is not constrained by central
bank intervention and does not have to maintain its relationship with another currency
in a narrow band. The currency value is determined by trading in the foreign
exchange market. The system is allowed to move due to market forces without
intervention by country governments (NASDAQ).
Second is Managed Floating Exchange rate system, also known as “dirty” float. This is
a system of floating exchange rates with central bank intervention to reduce currency
fluctuations.
Third is fixed exchange rate system (Pegged).A country's decision to tie the value of
its currency to another country's currency, gold or another commodity, or a basket of
currencies. (NASDAQ)

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About Vietnam Exchange Rate Regime, according to a research of Lan Hoang, since
1999, trading in the interbank market had to take place at exchange rates within ranges
stipulated daily by the State bank of Vietnam (SBV). Only SBV, state-owned banks,
joint-stock banks, joint-venture banks, and branches of foreign banks could participate
in the inter-bank market. The official exchange rate (OER) has been set based on the
daily average exchange rate in the interbank market during the previous business day.
Participating banks must quote rates no more than the allowed trading band compared
previous day’s official rate. The trading band has been adjusted many times to intensify
the flexibility of market exchange rate. Vietnam has experienced many types of
exchange rate structures, from pegging within horizontal bands in 1999 to managed
floating without pre-announced in 2002, conventional peg in 2006, and stabilized

arrangement from 2008 onwards. Although SBV announced the exchange rate anchor
based on basket of currencies since 1999, the International monetary fund (IMF) has
only recognized this since 2012 (Hoang, 2016).
The article “Select the exchange rate policy in the context of economic recovery” by
Nguyen Thi Thu Hang and her corporate author indicates the exchange rate regime in
the period from 1999 to 2015 as following:
Table 1: Vietnam’s Exchange Rate Regime in 1999 – 2015. (Nguyen Thi Thu Hang,
Đinh Tuan Minh,To Trung Thanh, Le Hong Giang, Pham Van Ha, 2010)

Time
1999 - 2000

Exchange

Definition by IMF

Vietnam's Exchange Rate

Rate Regime

(IMF, 2004)

Regime in reality.

Conventional

The country pegs its

The official exchange rate

fixed peg

currency at a fixed rate

(OER) set based on the

arrangement

to another currency or a

daily average exchange

basket of currencies. The rate in the interbank
exchange rate may

market during the

fluctuate within narrow

previous business day.

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margins of less than +/-

Exchange rate fluctuation

1 percent around a

in commercial banks

central rate-or the

dropped to no more than

maximum and minimum

0.1%.

value of the exchange

OER kept stable at 14,000

rate may remain within a VND / USD.
narrow margin of 2
percent-for at least three
months. Central bank
can adjust the central
rate, but not regular.1
2001 - 2007

Crawling Peg

The currency is adjusted

OER was gradually

periodically in small

adjusted from 14,000

amounts at a fixed rate

VND / USD in 2001 to

or in response to

16,100 VND / USD in

changes in selective

2007.

quantitative indicators,

Exchange rate band at

such as inflation.2

commercial banks was
adjusted to +/- 0.25%.

2008 - 2014

1

Crawling

The currency is

OER was gradually

bands

maintained within

adjusted from 16,000

certain fluctuation

VND / USD to 16,500

margins of at least +/- 1

VND / USD in early

percent around a central

2008, and gradually

rate-or the margin

increased to 20,828

between the maximum

VND/USD at the end of

Classification of Exchange Rate Arrangements and Monetary Policy Frameworks

17


and minimum value of

2012.

the exchange rate

The exchange rate band

exceeds 2 percent-and

was adjusted to +/-

the central rate or

0.75%, +/- 1%, +/- 2%,

margins are adjusted

+/- 3%, +/- 5% in 2009

periodically at a fixed

then narrowed down to

rate or in response to

+/- 1% in 2014.

changes in selective

OER remained at 20,828

quantitative indicators.3

VND / USD from January
2012 to June 28, 2013,
raised by 21,036 VND/
USD. OER was adjusted
at 21,036 VND / USD to
21,036 on June, 19, 2014
from January 2012 to
June 28, 2013, increased
by 21,458 VND/ USD on
Jan, 2015.

Monthly data on exchange rate fluctuations of home currency are explained by changes
in anchor currencies and an exchange market pressure index reflecting the degree of
currency flexibility. Vietnam's exchange rate policy revolves around the US dollar as
an exchange rate anchor, announcing the average inter-bank exchange rate and
restricting the band of exchange rate. On the basis of this exchange rate anchoring
policy, the official exchange rate and the fluctuation band change in different periods
to response the shocks.

23

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18