Dollarization a case study of vietnam situation, measures and effects from 2000 2011,graduation thesis

BANKING ACADEMY GRADUATION THESIS STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty - - GRADUATION THESIS Dollarization – A case study of Vietnam Situation, Measures and Effects from 2000 to 2011 Lecturers: Tran Thi Thanh Giang (MA) Nguyen Minh Nguyet (MA) Student’s name: Nguyen Minh Trang Class: ATCB – K11 Hanoi, June 2012 Nguyen Minh Trang - ATCB i BANKING ACADEMY GRADUATION THESIS ACKNOWLEDGEMENTS First of all, on the completion of the study, I would like to express my deepest gratitude to my supervisors, Ms Nguyen Thi Minh Nguyet and Ms Tran Thi Thanh Giang for their immeasurable help, constant guidance and support during all stages of the study and beyond, from whom I have received valuable suggestions and careful critical comments My grateful thank also goes to all lecturers in Foreign Language and Banking Faculty, who enabled me to develop an understanding of the subject and implement the study progressive and smoothly Second, I would like to send my heartfelt thanks to all trade finance’s staff of Vietin Bank – Hanoi Branch for the internship period, in which I had opportunities to put all theory into practice I also owe a great debt of gratitude to my families and friends, particularly the whole ATCB – K11, Banking Academy, who have constantly encouraged me and supported me wholeheartedly during the time of conducting the research Last but not least, I would like to thank the readers who share their interest and feedback on this study Hanoi, 6th June 2012 Nguyen Minh Trang Nguyen Minh Trang - ATCB ii BANKING ACADEMY GRADUATION THESIS ABSTRACT Recently, dollarization and U.S dollar have long become hot keywords in Vietnam, especially in the trade liberalization period when Vietnam has joined in the WTO for years, 2006 It seems that the more export and import operations have been made, the more foreign currencies, particularly U.S dollars, have been used Moreover, in daily life, there is a mounting evidence for Vietnamese people to increasingly spend and speculate in U.S dollar, that make Vietnam’s economy come to be dual-currency economy As a result, U.S dollar explosion in Vietnam’s foreign currency market has pushed us to be listed as one of the highest dollarization ratio nations (>20%) over the world Therefore, to delve into this issue, the research paper, “Dollarization – a case study of Vietnam – Situations, Measures and Effects from 2000 to 2011”, aims at reviewing the fundamental theory of dollarization; then analyzing the real situation of dollarization in Vietnam based on the secondary data analysis By that way, dollarization’s pros and cons that impacted directly Vietnamese economy and society can be shown; finally assess the effectiveness of authorities’ solutions in law exercised during the 11-year period between 2000 and 2011 is assessed Even though there are some limitations in mining data and information, the research still has some specific achievement, especially successfully investigating into the de facto dollarization of Vietnamese economy as well as evaluating the applied monetary policies of Vietnamese government during the 11-year period Nguyen Minh Trang - ATCB iii BANKING ACADEMY GRADUATION THESIS TABLE OF CONTENTS ACKNOWLEDGEMENTS i ABSTRACT iii TABLE OF CONTENTS iv LIST OF FIGURES vi LIST OF TABLES vii LIST OF ABBREVIATIONS .viii CHAPTER 1: INTRODUCTION 1.1 Rationale to the study 1.2 Aim and scope of the thesis 1.3 Research questions 1.4 Research methodology 1.5 Organization of the thesis CHAPTER 2: THEORETICAL BACKGROUND 2.1 Definition of Dollarization 2.2 Causes of Dollarization 2.2.1 The economic development 2.2.2 Government’s economic policy 2.2.3 High – powerful currencies’ benefits 2.2.4 The people’s confidence 2.3 Types of Dollarization 2.3.1 Based on the function of foreign currency in economy 2.3.2 Based on the scope of U.S Dollar usage 10 2.4 Impacts of Dollarization 11 2.4.1 Positive impacts: 11 2.4.2 Negative impacts 13 Nguyen Minh Trang - ATCB iv BANKING ACADEMY GRADUATION THESIS CHAPTER 3: ANALYSIS OF VIETNAM’S CURRENT SITUATION AND MEASURES FROM 2000 TO 2011 17 3.1 Situation of dollarization in VN from 2000 to 2011 17 3.2 Causes of dollarization in Vietnam 23 3.2.1 Population’s distrust in monetary policies: 24 3.2.2 Vietnam economy’s nature: on cash 25 3.2.3 Varieties of foreign currency supply to Vietnam 26 3.2.4 Psychological factor 32 3.3 Impacts of Dollarization on Vietnam economy 32 3.3.1 Positive impacts 32 3.3.2 Negative impacts 33 3.4 Measures on anti-dollarization in Vietnam 34 3.4.1 Typical solutions 34 3.4.2 Assess the effectiveness of such solutions 37 CHAPTER 4: RECOMMENDATIONS AND CONCLUSION 40 4.1 Recommendations 40 4.2 Conclusion 43 REFERENCE 44 Nguyen Minh Trang - ATCB v BANKING ACADEMY GRADUATION THESIS LIST OF FIGURES Figure 1: Causes of Dollarization Figure 2: Dollarization ratios in Vietnam from 2000 to 2011 20 Figure Dollarization in Vietnam - the relationship between FCD and FCC 22 Figure The exchange rate of USD and VND 2000 - 2011 24 Figure Consumer price index 2000-2011 25 Figure Immigrant remittance into Vietnam 2000-2011 27 Figure International visitors to Vietnam 2000 – 2011 28 Figure FDI to Vietnam 1991 – 2011 28 Figure 9: Components of FDI 2001 and 2010 29 Nguyen Minh Trang - ATCB vi BANKING ACADEMY GRADUATION THESIS LIST OF TABLES Table 1: “Dollarized” Countries, Dependencies and Territories Table 2: List of Dollarized countries (based on FCD/M2 - 1988) 17 Table 3: Unofficial dollarization in selected countries (2004) 18 Table 4: Typical example of price quotation in USD – Que Vo industrial zone (Bac Ninh) 19 Table 5: U.S dollar Outstanding Loans on Total Loan of Vietnam 21 Table 6: Exchange rate USD/VND in 2005 26 Table 7: The number of FDI projects and FDI capital 2000-2011 30 Table 8: Export and import turnover 2004-2011 31 Table 9: Example for the smaller denomination paper of VND in comparison with USD or EUR 32 Nguyen Minh Trang - ATCB vii BANKING ACADEMY GRADUATION THESIS LIST OF ABBREVIATIONS ADB Asian Development Bank BOP Balance of Payment CPI Consumer Price Index ER Exchange Rate EUR Euro FCD Foreign currency deposit FDI Foreign direct investment GBP Great Britain Pound GDP Gross Domestic Product IMF International Monetary Fund M2 Broad money ODA Official Development Assistance SBV State Bank of Vietnam GSO General Statistics Office USD United States Dollar USD/VND The exchange rate between U.S Dollar and Vietnam Dong CVP Communist Party of Vietnam VND Vietnam Dong WB World Bank YEN Japanese currency Nguyen Minh Trang - ATCB viii BANKING ACADEMY GRADUATION THESIS CHAPTER 1: INTRODUCTION 1.1 Rationale to the study According to reports by the International Monetary Fund and World Bank reports, only a handful of countries throughout the world use dollars as their official currency However, unofficial dollarization is on the rise Nowadays, the U.S dollar has been taking over as the world's currency of account Much trade is now dollarbased; countries prefer to hold their central bank reserves in US dollars, and private companies as well as wealthy citizens often hold dollars or dollar-denominated assets This macroeconomic phenomenon has attracted the attention of researchers because of the risks resulting from domestic currency depreciation The most recent international working papers into dollarization have been done by Edwards, S (2001), Stanley Fischer (2006), Galindo, A and L Leiderman (2005), Benjamin Cohen (2000), Ali M Kutan et al (2010)… Most of the researches above have investigated the most fundamental theories of dollarization and also the generalization of global dollarization recently such as its effects and monetary policies in typical countries For example, Edwards, S (2001) draws the overview of dollarization, its function to curb inflation and support trading growth, especially in developing countries Describing some positive impacts and analyzing the most basic anti-dollarizing monetary policies are the main contents of the papers by Galindo, A and L Leiderman (2005) Besides, to take an insight into dollarization’s multi-faceted influences, Benjamin Cohen (2000) writes in his Dollarization: Pros and cons: “In general, for dollarizing countries, advantages include lower administrative costs, a firm basis for a sounder financial sector, and lower interest rates Disadvantages include the loss of monetary autonomy, seignorage, and a vital national symbol as well as greater vulnerability to foreign influence.” Regarding dollarization in the banking systems, Ali M Kutan et al (2010) illustrates the dollarization’s typical effects on bank profits, especially in the developing countries such as Latin American nations whereas Stanley Fischer (2006) investigates in the typical Israeli banking system Since 1975 – Liberation of Saigon, Unity of Vietnam - Vietnam has experienced many challenges and changes, especially in economy and politics Nguyen Minh Trang - ATCB BANKING ACADEMY GRADUATION THESIS Vietnam’s “DOI MOI” performed in 1980s with the goal of creating a “socialist – oriented market economy” has already transformed Vietnam’s economy in the business world From the close-door economic policy to the process of global integration, it was essential to spend increasingly foreign currencies (typically U.S dollar) alongside the local currency in all three of classic functions of money (medium of exchange, store of value, unit of account) According to IMF’ Appendixes Report (2000), there were 19 countries whose proportion of deposit in foreign currencies was at a high level of more than 30% and 35 countries with the medium level of 16,4% including Vietnam When it comes to dollarization in Vietnam, there are some outstanding researches, namely Michaël Goujon (2006), Andreas Hauskrecht and Hai (2004), Hong (2010), Jeffries (2011), etc These studies have been based on the most common theories However, their methods and research aims are different; hence, there are some primary conflicts amongst these authors as well as applied monetary policies to Vietnam In general, until now, almost all the previous researches over Vietnam's dollarization have not emphasized the typical causes and effects of dollarization on Vietnam's economy In order to contribute a better and accurate understanding of dollarization both in theory and practice, especially in the case of Vietnam from 2000 to 2011 - a sensitive and unstable economic period, the research into “Dollarization – a case study of Vietnam – Situation, Effects and Measures from 2000 to 2011” was carried out 1.2 Aim and scope of the thesis Although dollarization has been touched on many pages by many experts and writers, its specific effects on Vietnam’s economy and the local anti-dollarization measure during the period of 2000-2011 receive little coverage Therefore, the aim of this study is to investigate the recent impacts of dollarization on Vietnam’s economy and the effectiveness of relevant anti-dollarization measures to tackle this trend Nguyen Minh Trang - ATCB BANKING ACADEMY  GRADUATION THESIS Other sources Salary in USD at foreign companies for Vietnamese workers, income of expatriates working, studying and living in Vietnam, USD drainage of illegal economic activities are one of the main factors leading to dollarization in Vietnam 3.2.4 Psychological factor Many Vietnamese people tend to have fear for the devaluation of VND; thus they choose to deposit the USD into banks or keep in hands instead of VND Moreover, VND’s denomination is still small compared to that of USD VND has the highest value of 500,000 but a 100 U.S dollar is equal to approximately 2.1 million VND Therefore, being aware of such a value Vietnam firms and Vietnamese people use U.S dollars in various transactions such as buying land, cars, houses, etc Table 9: Example for the smaller denomination paper of VND in comparison with USD or EUR 60 notes x 500,000 VND/ 300 notes x 100,000 VND 30,000,000 VND = 20 notes x 100 USD notes x 500 EUR 3.3 Impacts of Dollarization on Vietnam economy Due to the above situation and typical causes in Vietnam, dollarization has influenced both positively and negatively on Vietnam’s economy 3.3.1 Positive impacts  Reduce costs in foreign exchange transaction - Help minimize the expenditures in foreign exchange transactions - Help commercial banks not to reserve too many foreign currencies, so save operation outlay - Help narrow the gap between exchange rates quoted by the State Bank of Vietnam and foreign currency unofficial market Nguyen Minh Trang - ATCB 32 BANKING ACADEMY GRADUATION THESIS  Curb inflation - Dollarization helps reduce the influences of inflation on the economy When its monetary policies are tight, owing to Dollarization, VND supply is lessened because the amount of VND in population is absorbed into the banking system - The interest rates in deposits and loans remain stable  Strengthen flexibility of the economy and its banking system - Dollarization creates favorable conditions for import and export businesses due to the profuse supply of foreign currencies - Dollarization strengthens banks’ capability in credits and integration to the international banking system Banks have more opportunities to make loans and enhance the State Bank’s role in controlling foreign exchange - The deficit of BOP can be restrained 3.3.2 Negative impacts  Lose the sense of initiatives in tackling monetary issues - The banking system and authorities get ruled by dollarization and cannot react actively to deal with financial problems - Vietnam commercial banks’ liquidity is weak, so in a highly dollarized economy, the hazard of bankruptcy and loss is very prevalent because depositors would like to withdraw if adverse changes take place - Vietnam economy becomes vulnerable in case of a financial crisis or devaluation of VND  Diminish the effectiveness of monetary policies - Because the amount of foreign currency held by citizens is large, it is difficult to calculate FCD/M2 - There was an erratic behavior and large difference between the demand of domestic and foreign currency that makes them sensitive to external factors (liquidity risk, interest risk…) - The State Bank of Vietnam loses its role in controlling foreign currency loans Nguyen Minh Trang - ATCB 33 BANKING ACADEMY GRADUATION THESIS  Increase exchange rate risk - The exchange rate USD/VND is alarmingly increasing and devaluing VND, which makes the prices of goods and services, especially imported ones tend to be quoted in USD Accidentally, dollarization becomes more serious - Dollarization indirectly pushes national debts to rise and limits the competitiveness of Vietnam’s exports  Dependence on America’s economy and monetary policies 3.4 Measures on anti-dollarization in Vietnam 3.4.1 Typical solutions  From 2000 to 2011, the SBV and the Government promulgated many decisions, decrees, laws and circulars to stipulate the foreign currency speculation and transactions amongst credit institutions in particular and in the public as a whole Take some articles as typical examples (Source: SBV): - Decree No 63/1998 promulgated on 17/08/1998 sets the regulations in foreign exchange management: “Residents and nonresidents who are individuals or organizations shall not quote prices of goods and services in foreign currencies” - Decree No 202/2004 promulgated on 10/12/2004 stipulates in term article 18 that “all illegal actions, namely purchasing, settling, quoting commodities and services in foreign currency are fined from VND 5,000,000 to VND 12,000,000”; and in term “…from VND 45,000,000 to VND 70,000,000 in case of individuals or institutions organizing illegal foreign exchanges which are not permitted or due to expiration of license…” - Laws No 28/2005 promulgated by the Permanent National Assembly Committee regulates the fundamental rules: + Article 6: liberalize the current transactions, “all foreign exchange transactions and remittances to residents and nonresidents are permitted” + Article 22: impose restrictions on the usage of foreign currency: “except for transactions by Credit institution, every case of transactions through an intermediary, including collections, authorities, agencies and others shall be permitted by the Prime Minister” Nguyen Minh Trang - ATCB 34 BANKING ACADEMY - GRADUATION THESIS Decree No 107/2008 promulgated on 22/9/2008 sets the punitive sanction on illegal foreign currency transactions Term article 9: “Concerning the quotation of commodities and services or obtaining payments in foreign currency without the SBV or Authorities’ permission, the fine ranges from VND 20,000,000 to VND 30,000,000” - Circular No 20/2011 promulgated on 29/8/2011 stipulates buying and selling foreign currencies between individuals or companies with credit institutions Article 3: “the foreign currency trade (buying and selling) shall only occur at places belonging to the agency network of credit institutions and be permitted to trade by the SBV or the Government”  Typically, in 2011, the State Bank of Vietnam has initiatively carried out many reactions against dollarization (Banking articles): - Complete the procedures of managing foreign currency through drafting and promulgating terms and articles: On 24/2/2011, the Government issued Resolution No 11/NQ-CP to guide central and local authorities in taking drastic solutions to curb inflation, stabilize macro-economy and guarantee social security This plays an important role in building the public and corporations’ credibility To work out the solutions in Resolution No.11, the SBV has enforced legal documents to control strictly the foreign exchange market, transform mobilization – credit relationship to a buying - selling one and gradually deal with dollarization in its economy More specifically, the Central Bank has promulgated a Circular to regulate credits in foreign currency for the limited number of residents, along with raising credit institutions’ reserve requirement in foreign currency and setting up the maximum deposit interest rate in the USA for organizations and individuals After that, another Circular stipulates foreign currency trading limitations on the national Groups and Corporations when immigrating or emigrating, or transacting with credit institutions The priority purpose is to collect the foreign currency flow into the banking system and enable commercial banks meet the suitable and legal demand of population Nguyen Minh Trang - ATCB 35 BANKING ACADEMY - GRADUATION THESIS Put these solutions timely into practice to sustain stability in the foreign exchange market Early 2011, when dollarization was a serious matter and the foreign exchange market fluctuated wildly, the SBV increased the average inter-bank foreign exchange rate by 9.3% and decreased transaction bands from 3% to 1% Drastically, the executive monetary policies and export improvements in 2011 brought about the balance in BOP, import restriction and the balance of foreign currency demand-supply In September 2011, the Governor of the SBV announced the policy in exchange rate adjustment to maintain and until late 2011, the rate of below 1% was based on the factors impacting on USD/VND That illustrated the management target to put control on estimated inflation and devaluation of VND, restrict USD speculation and create the favorable condition for export and import companies Late 2011, the average inter-bank exchange rate was flexibly changed on the purpose of relative stability, but fixed As a result, the exchange rate at the end of 2011 remained fairly constant and became a positive result of the exchange rate policy for many years The Central Bank also intervened ahead on the inter-bank exchange market by forcing big commercial banks to sell in advance to the public essential demands, obviously in a moderate and suitable amount - Intensify the foreign exchange supervision or inspection in both legal and illegal markets Over the first half of 2011, a lot of supervision and management methods were applied; especially the cooperation with the Ministry of Public Security in accelerating the inspection of the foreign exchange trading activities in the free market and gradually suppressing illicit ones was established Another step was to issue Decree No 95/2011 on 20/10/2011 to correct and supplement the previous Decree No 202/2004 about the fines towards the monetary and banking administration violations Simultaneously, related officials and local authorities also were required to coordinate with each other in enforcing Decree No 95 that formed an effective treatment regulation in foreign exchange management Nguyen Minh Trang - ATCB 36 BANKING ACADEMY GRADUATION THESIS 3.4.2 Assessment on the effectiveness of such solutions The 11-year period between 2000 and 2011 is an erratic and hard period in foreign exchange management particularly and dollarization in general However, the SBV has long proved its leadership ability even in the most urgent time The monetary policies performed have certainly resulted in the positive reactions of the whole economy The people’s psychology in devaluation of VND or inflation has been stabilized and Dollarization has partly been curbed These policies have been considered to be timely, accurate and appropriate After implementing foreign exchange management policies, the authorities probably could draw major lessons: (1) Dollarization is an inevitable economic phenomenon which exerts both positive and negative influences on monetary policies and macroeconomic management Antidollarization is not an easy task; it requires a long-term process and continuously supportive resource However, the priority aim is to recover and raise the confidence and belief of citizens in VND Additionally, the whole strict economy supervision is very necessary together with consistent and determined management (2) Exchange rate adjustment has been effective on the free market and supportive for the speculation restriction and foreign exchange stability (3) Through management procedures, it is required to apply the clear-cut and comprehensive commitments, as well as punitive sanctions to ensure a long-term exchange rate stability Similarly, considerable reputation and leadership ability of the SBV have increasingly improved as a result of fulfilled financial commitments For later period, that would likely be a substructure for other advanced economic policies Obviously, it is hard to develop absolutely successful policies because of many internal and external factors It goes without saying that “USD black/illegal market” in Hanoi has never stopped their activities, even in March 2011, a hot month of foreign exchange Perhaps they happened in secret and more carefully That means to their patrons, they kept in touch by phone messengers to quote bid and ask price, not through calls; and if having transactions, customers have to trade face-to-face On the first days of Circular No 20/2011 exercised, it seems that “black market” suddenly became quiet; however, after – weeks, it came back to where it was Therefore, the Nguyen Minh Trang - ATCB 37 BANKING ACADEMY GRADUATION THESIS efforts to seal off the non-official foreign exchange market became ineffective According to Association Professor Tran Hoang Ngan – Vice Principal of Ho Chi Minh Economics University, along with the State Bank’s legal solutions, the authorities need to provide financial solutions to stabilize the people’s psychology Moreover, “black market” has long been rooted in people’s mind, so it is not easy to convince them to exchange legally in the banking system Nguyen Minh Trang - ATCB 38 BANKING ACADEMY GRADUATION THESIS CONCLUSION TO CHAPTER 3: As can be seen clearly, Chapter delivers the major content of this graduation thesis Based on the theory foundation, an in-depth analysis into the case of dollarization in Vietnam from 2000 to 2011 was conducted Various features of the economic infrastructure among nations lead to basic differences in causes, effects, real situations and definitely anti-dollarization measures Consequently, there are some typical conclusions:  In Vietnam, USD is not legal tender; however, USD is widely used in quoting prices of many goods and services in the daily life and up to a point, VND is gradually replaced by USD as currency’s three main functions  Dollarization in Vietnam has been resulted mainly from inflation, various sources of foreign currencies and citizens’ fears for VND devaluation  Dollarization in Vietnam has promoted export and import trade and curbed inflation; however, it brings about the ineffectiveness in performing monetary policies and dependence on USD value and US’s economy  To tackle Dollarization, Vietnam Government has promulgated many regulations and they have demonstrated the activeness and determination of authorities in stabilizing exchange rate, as well as population’s credibility in VND Nguyen Minh Trang - ATCB 39 BANKING ACADEMY GRADUATION THESIS CHAPTER 4: RECOMMENDATIONS AND CONCLUSION 4.1 Recommendations Dollarization is an unvoidable phenomenon for developing countries like Vietnam in the renewal and global integration process Dollarization in Vietnam has widely fluctuated; however, most of the time its rate is fairly high and largely affects the economy The fundamental causes of dollarization in Vietnam are people’s worry of Vietnam Dong’s inflation and tendancy to use imported goods, which are not easily abolished in the short run Therefore, solutions put forwards find it hard to take an immediate effect In the local - foreign currency management system, the USD flow is not restricted and appropriately recorded In a free market like Singapore’s, different currencies are accepted but all transactions are recorded as both foreign and domestic currencies whereas transaction related to foreign currencies in Vietnam has no lawful evidence Putting a cap on dollarization is ultimately needed for Vietnam’s economy at the mean time but can face high risks The Vietnamese transaction system only allows the domestic currency while Vietnam is currently experiencing non-official dollarization The process of converting the usage of USA to VND without careful plans is likely to cause an increasing need of money and monetary inflation This is the hard lesson gained in 2007 when the Vietnamese government decided to add USD billion to the foreign reserve budget The Vietnam’s Communist Party (VCP), Vietnamese government and the Central Bank have formulated absolutely clear policies in restricting dollarization in multiple steps to correspond to different stages of Vietnam’s development Also, it is important to work out other relevant policies, such as regulations on modifying the citizens’ tendancy of using foreign currencies as well as transactions’ procedures along with the process of strengthening Vietnam Dong As part of the main policies in the fourth resolution of VCP’s central committee (8th session), the section of monetary and banking issues strongly states that it is necessary to convert all transactions into VND based transactions The goal set forth by the VCP is to decrease the foreign currency based transactions and foreign savings Nguyen Minh Trang - ATCB 40 BANKING ACADEMY GRADUATION THESIS from 20% to 15% in 2010, and to abolish the dollarization in an illegal price listing, valuating and trading of foreign currency To fight against dollarization, some recommendations to the State bank of Vietnam, Government and Officials involved are suggested as follows: (1) - Enhance VND value It is necessary to strengthen and improve banking services and applications, especially non-cash payment systems - Instead of using only the U.S dollar as before, the exchange rate parity should be associated with a "basket" of currencies (including a strong currency such as USD, EURO, JPY and some other currencies of intra-regional like China, Korea) Such a way can help reduce the dependence of the Vietnam dong on U.S dollar, and reflect the real relationship of supply and demand in the market on the basis of taking into account the trend of the currency fluctuations in the largest trading country - It is advisable to attract USD notes from population into the banking system Dollarization in banks’ deposits and credits is much better than in underground market + Developing a wide network of foreign exchange agency + Issuing banking bonds in foreign currency in order to fund national infrastructure projects + Adopting the floating managed exchange rate, narrow the transaction bands between the formal and informal market - It is recommended to improve the flexibility of VND, in order to increase the confidence of the public and coporations in VND + Stablize and maintain a sustainable growth as well as low inflation risk + Restrict the objects allowed to borrow in USD + Encourage the Vietnamese to receive immigrant remittence in VND + Strictly control the quotation prices and gradually approach the prohibition about trading commodities and services in foreign currency + Raise the foreign currency reserve in the long run Nguyen Minh Trang - ATCB 41 BANKING ACADEMY GRADUATION THESIS With the amount of foreign currency obtained into credit institutions, there would be a large number of important projects and export strategies supported, that leads to the robust economic growth and increasingly reducing unemployment (2) Form the local favorable investment environment to absorb the foreign money in population - Offer opportunities to create favorable and competitive conditions in different economic areas like manufacturing, trade, service, banking and finance - Expand the govenrmental investment into population and encourage the people to contribute and grant fund - Diversify financial tools: shares, bonds, stocks, investment portfolio,etc - Offer insurance to the foreign exchange risk for potential investors in foreign currency business (3) Other recommendations: - Vietnam’s government should stimulate or force Vietnamese people to use VND, rather than U.S dollar Vietnam needs a consistent policy of managing foreign currency circulations in light of "The country of Vietnam adopts payments only in Vietnam dong." For this, there should be regulations on the use of foreign currency by individuals such as individuals For example, people are not allowed to pay by U.S dollar in Vietnam, only the State Bank of Vietnam has the function of buying and selling foreign currencies - It is advisable to strengthen the coordination amongst Government, State bank of Vietnam, Ministry of Finance, Ministry of Public Security - Preventing illegal foreign exchange activities and controlling smuggle and corruption drastically and thoroughly are also recommended Nguyen Minh Trang - ATCB 42 BANKING ACADEMY 4.2 GRADUATION THESIS Conclusion As can be concluded from the paper, Vietnamese economy is not a promising candidate for a unilateral monetary unification with the U.S.; in other words, dollarization is not beneficial as basically all requirements derived from Optimal Currency Area literature are not in place The typical reasons why Vietnamese economy is dollarized can be tracked back to the various foreign currency sources into Vietnam as well as authorities’ monetary policies in accepting dollar denominated deposits in the domestic banking system The current situation of Vietnam having two currencies that are used parallel in the economy is the worst of all world Unavoidably, considerable currency mismatches occur within and outside the banking system A significant devaluation of VND against the U.S dollar would jeopardize the entire financial system The only way to avoid such currency mismatches is to keep U.S dollar invested abroad This, however, demonstrates the uselessness of dollarization for economic development; therefore, to address dollarization, it is well needed of cooperation amongst authority, banking system and the people also Dollarization produces short-term advatages that may transfer into unexpected risks for the economy as whole Therefore, anti-dollarization is a necessary and pressing task To reverse the process of dollarizing, the financial and legal infrastructures has to be improved; furthermore, step-by-step, VND must enhance its value and USD must be transfered from the population into the banking system Besides, capital in foreign currency needs to be invested in local investment projects and administrative management and education about foreign currency restriction should be accomplished and put into practice Given the foreseeable opening of the Vietnamese economy in the context of WTO, a successful de-dollarization is necessary Within a 40-page graduation thesis, due to the limited time and data resources, it was only carried out with dollarization’s situation and impacts in the public as whole The study has not investigated deeply into that inside banking system that the researcher expects to be able to involve thoroughly in the data and findings Nguyen Minh Trang - ATCB 43 BANKING ACADEMY GRADUATION THESIS REFERENCE Adriano Armas, Alain Ize, and Eduardo Levy Yeyati (2006) Financial Dollarization: The Policy agenda, IMF Ali M Kutan, Erick W Rengifo and Emre Ozsoz (September 2010) Evaluating the Effects of Deposit Dollarization in Bank Profitability Discussion paper series, No 2010-07 Department of Economics, Fordham University Baliño, Thomás, J.T et al (1997) Currency Board Arrangements: Issues and Experiences, Occasional Paper 151 IMF Benjamin Cohen (2000), Dollarization: Pros and cons Santa Barbara, CA93106 Berg Andrew and Eduardo Borensztein (2000) The dollarization debate, Finance and Development, Carlos Óscar Arteta (2002), Exchange rate regimes and Financial Dollarization, Paper No C02-123 Dao Thi Thu Huyen (October 2011), The situation of Dollarization in Vietnam, its impacts on accounting system and economy of Vietnam and actions to fight it Graduation project submitted to the Department of Business Studies, HELP University College Edwards, S (May, 2001), “Dollarization and Economic Performance: An Empirical Investigation”, in NBER Working Paper Series, Cambridge: National Bureau of Economic Research, No.8274 Feige, Faulend, Sonje and Sosic’s paper (2007) Currency Substitution – Unofficial Dollarization and Estimates of Foreign currency held abroad 10 Fisher, S (April 1982), “Seigniorage and the Case for a National Money”, Journal of Political Economy, Vol.90, pp.295–313 11 Fisher, S (December 1993) “The Role of Macroeconomic Factors in Growth”, Journal of Monetary Economics, Vol.32, pp.485–512 12 Gabriele Camera, Ben Craig and Christopher J Waller (May, 2001) Dollarization via Currency Substitution 13 Galindo, A and L Leiderman (2005) “Living with Dollarization and the Route to Dedollarization” IDB Working Paper No 526 Nguyen Minh Trang - ATCB 44 BANKING ACADEMY 14 15 GRADUATION THESIS General Statistics Office [Online] http://www.gso.gov.vn Ian Jeffries (2011) Contemporary Vietnam, A guide to economic and political developments, the first publish by Routledge 16 Ian Katz (March 2000), Greenback Magic, General analysis on Nation and States, Journey Business week, p.30-36 17 IMF Annual Report 1998 [Online] http://www.imf.org/external/pubs/ft/ar/98/pdf/file03 18 Joint Economic Committee Staff Report, (Jan 2000), Basics of Dollarization U.S Congress, Washington DC 19 Nguyen Thi Hong (MA) (2010), Dollarization and monetary policies in Vietnam Working papers of macroeconomic issues, State Bank of Vietnam 20 Michaël Goujon (July 2006) Fighting inflation in dollarized economy: The case of Vietnam CNRS and University of Auvergne 21 Ministry of Planning and investment / Foreign investment Agency http://fia.mpi.gov.vn 22 Monetary Policies in Dollarized Economies [Online] Available from: http://www.imf.org/external/pubs/nft/op/171/index.htm 23 Nguyen Quang Huy (2012) Management measures to control exchange rate, foreign exchange currencies and gold trade Available online http://www.gso.gov.vn/Modules/Doc_Download.aspx?DocID=14633 on (accessed 15/07/2012) 24 Nguyen Thanh Hai (July 2004) Dollarization in Vietnam Working paper for the 12th Annual Conference on Pacific Finance, Economics, Accounting and Business, Bangkok, Thailand 25 SBV (May 2011), Sign of increasing Dollarization in Vietnam’s Banking Sector: April 2011, monthly report of SBV, available on http://www.vietnamica.net/sign-of-increasing-dollarization-in-vietnams-bankingsector-apr-2011/ (accessed 30/05/2012) 26 Schuler, Kurt “Dollarization, Basic understanding”, published 2001 Socorro Heysen (May, 2005) Back to basics: Dollarization & Controlling risk is key, Finance and Development, p 44-45 27 Stanley Fischer (2006), Dollarization research, Bank of Israel Nguyen Minh Trang - ATCB 45 BANKING ACADEMY 28 GRADUATION THESIS Stephen A Meyer, 2000, the summary of presentation to Philadelphia Council of Business Economists, the Federal Reserve Bank of Philadelphia 29 Stephen Weymouth, (February 2007) Political Institution, Policy Instability and Financial Dollarization University of California, San Diego 30 Tomás J T Baliño, Adam Bennett and Eduardo Borensztein (2002) Monetary policy in dollarized economies 31 The State Bank of Viet Nam [Online] http://www.sbv.gov.vn/wps/portal/vn VBN (May 2011), Vietnam plans to end Dollarization completely by 2013, Banking Finance, Online Business Times, available on http://businesstimes.com.vn/vietnamplans-to-end-dollarization-completely-by-2013/ (accessed 02/05/2012) 32 33 Vietnam economy (online) http://vneconomy.vn/ Vietnam national administration of tourism http://www.vietnamtourism.gov.vn/ 34 Vietnam needs to reduce dollar’s use in economy, ADB aide says [Online] Available on: http://www.saigon-gpdaily.com.vn/Business/2011/4/91267 35 What does Dollarization mean? Available on http://www.investopedia.com/terms/d/dollarization.asp Nguyen Minh Trang - ATCB 46