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Expert: exchange rate adjustment will not have big impacts on inflation   2011-02-17 - Viet Nam Net

In a recent interview given to the local press, Chair of the National Finance Supervision Council, Le Duc Thuy, said that he does not think the dong/dollar exchange rate adjustment will have big impacts on inflation.

 

 
The State Bank of Vietnam has raised the exchange rate by 9.3 percent, the sharpest dong devaluation in recent years. How will the move impact inflation in 2011?

 

We (the National Finance Supervision Council) once calculated that every one percent change in the exchange rate would have the 0.15-0.2 percent impact on the inflation. However, the situation is somewhat different now.

 

In principle, when the exchange rate increases, the inflation would bear influences. However, the latest exchange rate adjustment would not have big impacts because the new official exchange rate has been existing in reality for a long time. And for a long time, enterprises have been referring to this exchange rate when setting up their business plan. Therefore, I believe that the exchange rate adjustment will not create big influences to the inflation. I mean the exchange rate adjustment is just a move to recognize the exchange rate which has been existing for some months already.

 

How will the central bank’s move to adjust the exchange rate affect the import and export activities?

 

In theory, the local currency depreciation would bring certain benefits to exports, and to some extend, would help restrict imports. However, we sill need to consider many other related factors in order to assess the possible impacts of the move on the national economy. The story is not so simple that if a government wants to boost exports and control imports, it just need to devaluate the local currency.

 

For example, when the local currency depreciates, export products will be cheaper, thus becoming more competitive in the world market. However, in order to increase exports, Vietnamese companies have to pay higher for import materials due to the weaker local currency. As a result, the benefits would not be big, while the disadvantages would increase.

 

Do you think that now is the right time for the central bank to adjust the exchange rate?

 

I think that this is a reasonable move. In November 2010, the Vietnamese Government announced that it would not adjust the exchange rate until after Tet. The effort to keep the exchange rate stable did not help force the exchange rate down, while people still expected an adjustment to come after Tet. As such, with these expectations, the dollar was always traded at price levels higher than the average levels in the market. It would be better to make adjustments to stop the expectations rather than letting people cherish the expectations continuously.

 

If weighing the pros and cons of the move by the central bank to adjust the exchange rate, what are more dominant at this moment?

 

There are always two sides of a coin, and one only makes the decision to do something if he believes that the moves would bring more benefits than disadvantages. Regarding the latest exchange rate adjustment, I can see that the adjustment is unavoidable. If we can regulate the exchange rate well, the exchange rate would stabilize around that level this year, or it may reduce if the flows foreign capital are bigger.

 

After such a strong exchange rate adjustment, those businesses who only want to borrow loans in foreign currencies would rethink their strategies. They would think that in fact, the borrowing in foreign currency would not really bring benefits. The interest rate gap between the dong and dollar loans is not really big, while borrowers always worry about dollar price increases.

 

Adjusting the exchange rate and setting the rate at reasonable level is a very important thing which helps businesses calculate their business plans.



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