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Currency, Exchange Rate, and Inflation

Currency, Exchange Rate, and Inflation

As a transitional economy, Vietnam faces challenges concerning its currency and exchange rate. The State Bank of Vietnam (SBV) is in charge of the monetary policy in the country, and they have to come up with a solution for the imbalanced inflation as well. Still, since the Vietnamese dong (VND) is pegged to the USD, the bank has still a safety net in terms of fiscal flexibility.


The limited band on the pegged VND was 1 to 2%, but it has been raised up to 3% and it serves as a yardstick for measuring macroeconomic stability. Besides monetary policy, the SBV tries to promote a healthy economic environment and growth, as well as to keep inflation in balance and to stabilize the exchange rate on the stock market. Still, the Bank has also a number of subsidiaries which are burdened with non-performing loans, and it uses interest rate limitations on loans as part of the monetary policy. The government juggles between the budget deficit and keeping alive its troubled subsidiaries which often takes its toll on the economy initiating inflation.


Inflation

The government does not leave enough room to borrowers as loans are very tight with high-interest rates, which usually ends up in shutting down a business. Such an approach led to multiple inflation because private entrepreneurship do not enjoy any loan privileges. The unwelcoming inflation causes GDP drop, leads to bankruptcy, and eventually, weakens the entire economy. the SBV needs to react fast in order to prevent a collapse.


Also, the inflation rate does not match the inflation rates of trading partners which affects the exchange rate, and it could seriously affect economic stability in the country. Therefore, to restore the balance regarding inflation, the dong had to be depreciated in accordance with the counterpart foreign currency. The SVB should remodel the monetary policy to improve Vietnam’s position as a competitor in the international market. All in all, the SVB needs to bring down inflation to reduce the real exchange rate.


Devaluation of the Dong

The Dong has been devalued which was a consequence of the Chinese Yuan dropping in value. Vietnam tries to protect the dong from fluctuating domestic and international markets, which strengthens Vietnam’s competitive position in the Forex market as well.