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

Of which, the management of monetary policies by the State Bank of Vietnam has made a remarkable contribution to macroeconomic stabilization and economic growth.. In order to meet the cu

THE MINISTRY OF EDUCATION AND TRAINING NATIONAL UNIVERSITY OF ECONOMICS

-

KHUAT DUY TUAN

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

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

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

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)

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

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

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

* 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

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 3rd 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: %

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

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

ember

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