MINISTRY OF EDUCATION AND TRAINING

EASTERN INTERNATIONAL UNIVERSITY

ECO 205
(MACROECONOMICS)

Report
(The Monetary policy in Viet Nam)
Lecturer: Mr. Le Quoc Nha and Dr. Huynh Cong Minh

Prepared by: Group 9

Name IRN Email

Vương Ngọc Châu 1732300146 chau.vuong.bbs17@eiu.edu.vn

Nguyễn Quốc Duy 1732309008 duy.nguyen.bbs17@eiu.edu.vn

Nguyễn Tấn Đạt 1732300160 dat.nguyentan.bbs17@eiu.edu.vn

Thi Thanh Tuyền 1832300545 tuyen.thi.bbs18@eiu.edu.vn

Đoàn Ngọc Linh 1832300386 linh.doanngoc.bbs18@eiu.edu.vn

Vu Dinh Huy 1932300072 huy.vudinh.bbs19@eiu.edu.vn

Quarter 2/2021
Submission Day: April, 5th 2021
 Contents
I. Introduction:
II. Background of Macroeconomics development:
2.1. Economic growth and inflation:
a) Definition
b) Economic growth
c) Inflation
2.2. Fiscal and monetary policy:
a) Definition
b) Fiscal policy
c) Monetary policy
2.3. Financial sector reforms and financial structures:
2.3.1. Financial sector reforms:
2.3.2 Financial structures:
a) Money markets:
b) Financial markets:
2.4. Foreign exchange rate policy and capital control:
a) Foreign exchange rate policy:
b) Capital control:
III. Monetary policy framework:
3.1. Legal framework
3.2. Monetary policy strategy:
3.3. Monetary policy instruments:
3.4. Monetary policy on aggregate demand:
a) Wealth effect:
b) Interest rate:
c) Exchange rate:
3.5. Determinants of inflation:
IV. Recommendation in monetary policy in Vietnam:
V. Conclusions:
VI. References:

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I. Introduction:
(Vietnam officially became WTO members in 2007)

Internationalization will create challenges for financial sectors in Vietnam

Internationalization will pose major challenges for monetary segment approaches,

underlining the importance of assisting advance with budgetary division changes and

changes of money-related policy. To adapt this, this report will demonstrate the importance

and reforms in monetary policy and display the current status of the reform change of

money related approach within the setting of economic and monetary division

improvements in Vietnam and distinguish key change issues concerning money related

approach. Section 2 would offer a summary of major economic and financial trends to put

monetary policy in the context of the Vietnamese economy. The new monetary policy

framework in Vietnam is defined in section 3, and section 4 presents the current monetary

policy framework in Vietnam empirical findings on inflation determinants and the role of

monetary factors.

2
II. Background of Macroeconomics
development
2.1 Economic growth and inflation in Vietnam

a) Economic growth

Walking around Ha Noi, Vietnam's capital, you can sense an abundance of

resources. People whizz by on scooters, buy and sell everything from phones to food in the

endless small shops, and rush to school or work. Vietnam is a young, developing country

where everything seems possible (Peter Vanham, 2018).

This wasn't always the case. The nation was one of the poorest in the world just 30

years ago. How did this Southeast Asian nation reach middle-income status?

Viet Nam's economy was one of the poorest in the world when the 20-year

VietNam War ended in 1975, and development under the government's subsequent five-year

central plans was anemic. Per capita GDP was trapped between $200 and $300 by the mid-

1980s. Then something happened. In 1986, the government implemented policy called “Đổi

Mới'', a set of economic and political reforms aimed at transforming the country into a

“socialist-oriented market economy” (Peter Vanham, 2018).

Vietnam has achieved sustainable and inclusive economic growth thanks to

extensive market-oriented and outward-looking economic policies. Vietnam must

modernize economic institutions, especially in terms of fiscal and monetary management,

and continue with market-oriented and outward-looking reforms in order to sustain and

improve growth efficiency. In practice, tighter credit policies, the improvement of capital

3
markets, and the creation of a new market infrastructure with appropriate resources for

financial system supervisors and regulators will all aid the financial sector's ability to sustain

long-term growth ( International Monetary Fund, 2019).

Since the start of the “ Đổi Mới” period in 1986, comprehensive market reforms and

a strict commitment to macroeconomic stability have laid the groundwork for steady,

inclusive growth that averaged 6.6 percent per year from 2014 to 2018 and hit a 10-year

high of 7.1 percent in 2018. (Figure 2.1.1) (International Monetary Fund, 2019).

Figure 2.1.1

Economic growth (2011-2018)

Year-on-year percent change

Following the conclusion of the National Party Congress in Hanoi, where the

country's leaders for the next five years were chosen, Vietnam has reaffirmed its

commitment to fast economic development. As it actively pushes for reforms and high-tech

development, Vietnam's ruling Communist Party approved plans to lift growth to 6.5 to 7%

4
for the period 2021-2025. Vietnam is expected to become more selective in attracting FDI

as it tries to step up the value chain from a low-cost labor destination to a hi-tech industry

hub while retaining environmental sensitivity (Pritesh Samuel, 2021).

Figure 2.1.2

Gross Domestic Product (2018-2020)

Annual percent

In the third quarter of 2020, Vietnam's gross domestic product increased by 2.62

percent year on year, up from a slightly revised 0.39 percent in the previous quarter.

Agriculture, forestry, and fisheries (2.93 percent), manufacturing and construction (2.95

percent), and the service sector (2.95 percent) all contributed to GDP growth (2.75 percent).

However, the economy's growth in the third quarter of this year was slightly lower than the

7.31 percent expansion posted in the same span last year, prior to the pandemic. The

economy grew 2.12 percent in the first nine months of 2020, compared to the same period

the previous year (Trading Economic, 2020).

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 The economy gradually returned to normal conditions after loosening the lockdown

measures to contain the spread of the coronavirus in the fourth quarter of 2020 (Figure

2.1.2), accelarating from a rather revised 2.69 percent growth within the previous year, in

step with the preliminary estimate, because the economy gradually returned to normal

conditions after loosening the lockdown measures to contain the spread of the coronavirus.

Agriculture, forestry, and fisheries (4.69 percent), manufacturing and construction (5.60

percent), and the service sector (4.69 percent) all contributed to GDP growth (4.29 percent)

( Trading Economic, 2020).

b) Inflation

The evolution of policy manipulating the Vietnamese economy has resulted in

dramatic developments and achievements, such as: the economic growth rate has been

relatively high (7 percent since the revolution period), while the poverty rate has been

decreasing, living standards have improved significantly in comparison to 30 years ago, and

Vietnam has been regarded as a country with a high standard of living. However, the real

world situation reveals that the Vietnamese economy continues to face numerous

challenges, including chronic inflation, a trade deficit, and high government and federal

debt. One of the most important problems facing the Vietnamese economy is that the job of

managing inflation is unsuccessful. As a result of this situation, it has become common

practice to conduct monetary policy in a way that encourages economic growth while still

keeping inflation under control. Between 2005 and 2014, the financial crisis and global

economic downturn had a significant impact on Vietnam's economy, rendering the country's

inflation extremely volatile and out of control in comparison to other countries in the region.

Figure 2.1.3 illustrates this practice by demonstrating the evolution of inflation in Vietnam

and other ASEAN countries. During this time, the money supply and credit had a propensity

to adjust (Tran Thi Hoai Thu, 2019).

6
 Figure 2.1.3 The Evolution of Inflation in Vietnam and ASEAN countries 2005- 2014

Figure 2.1.3 shows that in recent years, inflation in Vietnam has always been higher

than in other ASEAN countries. Furthermore, it contributes to the conclusion that inflation

in Vietnam is cyclical, as shown by the fact that the rate of inflation increases dramatically

every two years. Since 2012, the rate of inflation appears to have decreased and has

remained at a low level. In the current economic context of Vietnam, research and

application in monetary policy are unquestionably needed to achieve inflation goals (Tran

Thi Hoai Thu, 2019).

The apparent lack of a relationship between the inflation rate and the growth of

money and credit to the economy, as seen in Figure 2.1.4, is a striking feature of the period

since 1996. During this time, the average annual money growth was 31%, while the average

inflation rate was 3.7 percent. Despite the fact that money growth in Vietnam has been

higher than in comparable transition countries, a rapid rate of monetization in Vietnam, as

reflected in a sharp decline in velocity, appears to be one reason for the disconnect between

money growth and inflation rate.

7
 Figure 2.1.4 Vietnam’s inflation rate, money and credit growth rate, 1996-2009

After a brief respite, inflation began to rise again, with annual inflation rates of 9.5

percent in 2004, well exceeding the government's target of 6 percent. Since 2003,

money/credit and inflation tend to have a higher degree of correlation, as shown in Figure

2.1.4. Inflation continued to increase as money and credit began to rise again. As the Asian

crisis' negative impact on growth diminished, demand began to increase. Prices rose in 2003

as a result of growing demand and rising nominal salaries in both the civil service and the

FDI sectors. The supply side shocks triggered by bird flu outbreaks and bad weather have

led to the rise in inflation. The Vietnamese government seems to accept the above theory.

These supply shocks largely impacted food prices, which rose by 15.5 percent in 2004

compared to 9.5 percent overall inflation and 5.2 percent non-food inflation (Nguyen Thi

Thu Hang & Nguyen Duc Thanh, 2010).

Because of its high degree of transparency, Vietnam's economy could be vulnerable

to rising inflation as a result of rising global commodity prices (Figure 2.1.5). Vietnam's

consumer price index (CPI), rose 3.2 percent in 2020 compared to the previous year, falling

short of the government's 4.0 percent target. In January, inflation remained poor, with the

CPI dropping by nearly 1% year over year. When compared to the same time last year,

8
dropping inflation was largely due to lower food and fuel prices. In contrast to last

December, the CPI increased by nearly 0.1 percent on a monthly basis (Ngoc Mai,2019).

Figure 2.1.5

Vietnam’s Inflation recently

Percent annualy

Inflation is expected to be significantly lower this year than in 2020, according to

our panelists. As a result, the State Bank of Vietnam should be able to maintain its

accommodative monetary policy and cut rates even further if necessary to help the

economy. Inflation is expected to average 3.0% in 2021, according to the Focus Economics

Consensus Forecast group, which is unchanged from last month's forecast. Inflation is

expected to average 3.7 percent in 2022, according to the panel (Focus Economics, n.d).

2.2. Fiscal and Monetary policy

The typical objectives of fiscal and monetary policy are to reach or sustain full

employment, a fast degree of economic growth, and market and wage stability. The

production of tools to accomplish these ends as proper goals of governmental economic

9
policy and the creation of these ends as proper goals of governmental economic policy are

also creations of the twentieth century.

Fiscal policy is the process by which a government changes its spending and tax

rates in order to monitor and control the economy of a country. A central bank controls a

country's money supply through this strategy, which is analogous to monetary policy.

The demand side of economic policy is monetary policy, which applies to measures

taken by a country's central bank to regulate money supply and accomplish macroeconomic

targets that foster long-term economic development.

a) Fiscal policy:

Fiscal policy is divided into two categories: expansionary and contractionary. Fiscal

policy's area of operation in taxes and spending is limited to matters under the government's

immediate control. The effects of such decisions are largely predictable: a reduction in

personal taxes, for example, will result in a rise in spending, which will stimulate the

economy. Similarly, lowering the corporate tax burden would stimulate investment. Actions

taken to boost government spending have a similar expansionary impact. A reduction in

government spending or an increase in tax revenues, on the other hand, has the effect of

contracting the economy if no compensatory action is taken.

Businesses are directly impacted by an economy's fiscal policy, whether it is

spending or taxes. The following four effects of fiscal policy on business are possible:

● Investment opportunities: Government spending as well as private investment will

create investment opportunities for companies. This is most prevalent during an

expansionary strategy, as more capital flows into the economy from the government

and other sources due to low taxation. Businesses will expect to prosper and expand

if they can strike a balance between price and demand.

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 ● Slower growth: When the equilibrium is broken and demand (and prices) fall, a

contractionary financial policy will be enforced to avoid inflation. Due to rising

taxes, businesses usually slow their growth and take steps to remain in the black

with less capital flowing into the economy.

● Taxation changes: Businesses are subject to a variety of taxes, including local, state,

and federal, depending on their position. Businesses must understand how their state

and local governments regulate them, as well as how this applies to federal fiscal

policy.

● Unemployment rates: Unemployment reduction is a major goal of fiscal policy. For

example, the government should reduce taxes and put more money in the hands of

customers. People will be able to spend more money as a result, and businesses will

face increased demand. With increased demand, businesses may have more

production tasks to complete, and they may respond by creating more jobs and

recruiting more employees.

b) Monetary policy:

The Fed has four instruments at its disposal to achieve its monetary policy
objectives:

● The discount rate: The interest rate that Reserve Banks charge commercial banks

for short-term loans is known as the discount rate. The Federal Reserve's discount

rate lending complements open market operations in achieving the goal of federal

funds rate and provides commercial banks with a backup source of liquidity. Since

the discount rate affects other interest rates, reducing it is expansionary.

11
 ● Reserve requirements: The portions of deposits that banks must retain in cash,

either in their vaults or on deposit at a Reserve Bank, are known as reserve

requirements. Reduced reserve ratios are expansionary because they maximize the

volume of liquidity available to lend to customers and firms in the financial

sector.Reserve demand changes are contractionary because they limit the amount of

capital available to lend to customers and companies in the banking system.

Changes to reserve conditions must be approved by the Board of Governors.

Reserve conditions are seldom changed by the Fed.

● Open market operations: The buying and sale of US government securities by

open market operations has proven to be a reliable mechanism. As previously

stated, the FOMC directs this instrument, which is carried out by the Federal

Reserve Bank of New York.

● Interest on Reserves: After the financial crisis of 2007-2009, Congress gave the

Fed the latest and most commonly used tool of interest on reserves. Excess funds

held at Reserve Banks are paying returns on reserves. Keep in mind that the Federal

Reserve mandates banks to keep a certain amount of their reserves on reserve.

Banks also keep additional funds on hand in addition to these deposits. The new

policy of remunerating interns is unsuccessful.The Fed will use interest as a

monetary policy instrument to manipulate bank lending under the current policy of

paying interest on reserves.

2.3. Financial sector reforms and financial structures:

2.3.1. Financial reforms:

At the beginning of Doi Moi, 1986, total credit supply increased by 1,897%

,compared with that of 1976, and by 326% of 1980. Before 1990, the absolute credit

12
balance in the economy was 4,361% of the 1986 sum (or, 63,789% of the 1980 sum). Most

counter-expansion estimates utilized at that point were "situational responses," not without

negative outcomes. Early appropriation of the alleged financial strategy estimates just

showed up in 1991, having taken in the market-based monetary instrument the most difficult

way possible: more slow velocity could minimize inflation, given certain monetary

conditions. A huge log jam in credit development at that point followed. During the 1990s,

this fundamentally significant undertaking was performed through a two-layered financial

framework, with the State Bank of Vietnam in the order, and SOCBs/JSCBs assuming the

role of market entertainers. Credit development went down to 70% in 1992, and afterward to

27.5% in 1999, assisting with lessening expansion level of practically 400% in 1988, down

to 67.5% (1991), at that point 17.5% (1992), and afterward 0.1% (1999) (Vuong, Q.H.

2019).

This table shows a changing institution composition over time:

Financial institutions (FI) in Vietnam

Prior to PCFs, in 1990, around 300 credit cooperatives existed and activated an

aggregate sum of stores worth US$100 million, offering high-loan fees to investors (De

Vylder and Fforde, 1996). With an immature lawful structure and a genuine absence of

hazard the board abilities/information, numerous just hit the dance floor with wild changes

of expansion and loan costs, lastly failed. Their chain fell and pushed many thousands into

monetary misery, causing a first cross country post-Doi Moi monetary emerge population's

certainty. PCFs look like the credit cooperatives in regards to social attributes, however with

13
market standards and joint-stock possession. PCFs are especially appropriate for conveying

provincial microfinance. As of now, the arrangement of PCFs on the whole has a complete

value of US$140 million, and all out resources US$3,545 million. NBFIs, comprehensive of

PCFs, represented 8% of the absolute resources of the monetary framework in 2011,

assessed at 200% of Gross domestic product. (De Vylder and Fforde, 1996).

Market and instrument:

The financial business has been overwhelmed by four SOCBs: Vietcombank,

BIDV, VietinBank, and Agribank. They are biggest with respect to add up to value and

resources (Fig. 7-8). The second 'family' comprises 31 JSCBs. Level 1 JSCBs were

established during 1992-1993 with so much names such as ACB, Eximbank, Sacombank,

VPBank, Techcombank... Additionally, during 1990-1996, SBV gave licenses for 20 rustic

zones business banks. In the following ten years, just four new firms were authorized.

Following Dec. 1557/QD-NHNN by SBV Lead representative on Aug 9, 2006, these

provincial banks, if fulfilling monetary and operational conditions set out by the national

bank, might be 'changed' to typical JSCBs, which would be permitted to direct business in

metropolitan regions. The vast majority of them framed the level 2, albeit some climbed the

worth chain and figured out how to extend and turn out to be more reliable and sizable, like

HDBank. In the last part of the 1990s, numerous business banks, both rustic and

metropolitan, performed ineffectively causing a lot of hazard for the economy and awful

obligations to soar. SBV needed to place various banks in "uncommon management", a true

condition of the ban so that rebuilding M&A–dissolving activities could be performed

without causing further harm to VFS. The quantity of business banks went down from 51 of

every 1997 to 39 out of 2001. After the US-Vietnam BTA in 2001, and increase to WTO in

2007, Vietnam's financial market has opened to both FDI and FPI, prompting a flood in

unfamiliar banks' activity in the homegrown market.

14
 . Bank’s capital aggregate by ownership

2.3.2. Financial structures:

a) Money markets:

Vietnam's money market was developed in the 1990s, along with a significant

change in the country's banking sector from a one-tier to a two-tier banking system. To date,

the Vietnam money market has steadily grown, from simple loan transactions between

banks to simple goods, a small number of members, the monetary market has grown both in

scale and sales, market infrastructure... increasingly better over the money market has truly

become channels of monetary policy transmission efficiency of the State Bank of Vietnam

(SBV) and where shorter capital is regulated between credit institutions.

In recent years, the Vietnamese money market has taken on a more uniform shape.

The market for financial instruments was relatively complete, with bills, government bonds,

Treasury bills, certificates of deposit, corporate bonds, and local government bonds being

15
the most common. Members of the increasingly crowded markets are increasing the number,

type, and diversity of professionalism.

As a member and market control agency, the State Bank of Vietnam (SBV)

participates in the money market. Via the issuance of Treasury bills and participation in

open market activities, it buys and sells valuable papers with credit institutions. SBV has

issued a legal structure for the operation of the money market and has tracked, monitored,

and regulated the operation of the money market to serve the intended operating national

monetary policy as an agency manager. The key characteristics of SBV operation in

executive positions, currency market management in recent years (Hoang, D. P., 2013),

namely:

- Creating a legal structure for the money market's activity:

The SBV has focused on the organization and administration of the money market

since its establishment, issuing a set of legal documents that specify each form of operation,

such as Directive 07/CT-NH1 dated 10/July 1992.

These are legal documents issued first by the SBV, the fundamental legal

framework for creating relationships between credit institutions. After less than 10 years of

operation, the market has grown rapidly in both the number of market participants and the

number of transactions of the business from the small number of members with no sales

activity.

The market information has become an important sign that clearly reflects the

relative liquidity of the inter-banking members, and sound policy decisions can be taken on

the basis of the central bank.

16
 In connection with Decision 1310/2001/QD-NHNN to replace the existing loan-to-

interbank market law, which aims at creating a legal framework for the interbank money

market, the SBV has issued a loan regulation between credit institutions.

The trading volume of interbank markets has been growing for many years,

bringing markets closer to international practices. When the interbank market first came into

being in 2000, the total loan transactions, deposits of around VND $280 billion between

credit institutions, reached up to 760 trillion in 2005, more than 2.7 billion times the newly

formed phase. Sales of loans, deposits, joint banks, and international bank branches totaled

5,354 trillion VND until 2012. This represents the interbank market's critical position in

meeting the banking system's liquidity and short-term capital requirements.

Open market operations have expanded in parallel with the interbank market, with

continued rises in both sales transactions and market participants. The amount of open

market operations trading has risen over time.

- Infrastructure development and operational support for the money market:

As a money market management agency, the SBV focuses on infrastructure

development, market activity support, and money market development. SBV has developed

software to implement monetary market transactions between SBVs and lending

institutions, including professional Treasury bill auctions, open market activities, discounts,

rediscount operations and the lending of valuable papers. SBV has developed software.

Electronic banking has been in operation since 2002 by the SBV. The electronic

payment system has proved to be inter-bank for many years of operation and development.

It is essential to promote its clearing operations between banks that over-promote monetary

market development.

17
 - Cash Market Tracking, Monitoring and Management:

The task of creating and developing a secure money market, as well as safe and

transparent information, was prioritized by the central bank. The SBV uses market

information, as well as information about each market participant, to make policy decisions

and plans for operating monetary policy that are appropriate for each date. SBV also

publishes daily and timely updates on the operations of the sales market and interest rate

futures trading on its website.

In management, market management, and to help the legal framework take effect,

the SBV has recently made flexible use of monetary policy tools to run and control the

money market.

Along with increasing the money supply through open market operations, the SBV

issued directives at this stage requiring commercial banks to strictly implement and

maintain mutual lending is concentrated in the head, the interest rate does not exceed 150%

of the State Bank's announced base rate.

- Orientation and solutions for Vietnam's money markets in 2020:

The decision 1910/QD-NHNN approved the money market development project in

Vietnam, outlining the objectives, orientations, and solutions roadmap for Vietnam currency

markets in 2020. As a result, the Vietnam currency market model is based on the principle

of "developing a money market security, synchronization, and high competitiveness in order

to create an important basis for planning and administering monetary policy, increasing the

ability to switch to Vietnam."

On that basis, the scheme has also taken measures to develop the money market in

the future, focusing on solutions such as market selection models, improving the regulatory

18
framework to improve market members, diversifying products, trading... and implementing

roadmaps specific solutions in the short and long term.

b) Financial markets:

In the report of the General Statistics Office, the state budget capital accounted for

299,4 billion VNDs in the first 11 months of 2019, up 5,5% from last year's same period.

Centrally managed capital stood at VND 43.7 trillion, representing 72.7% of the plan and

15.8% down year on year; locally-managed capital reached VND 255.7 trillion, representing

79.70% of the plan for 2018 and 10.3% up year on year. Up to November 20, 2019, total

foreign direct investment (FDI) in Viet Nam, including newly reported, modified capital,

capital contributed, and shares acquired by foreign investors, was nearly USD 31.8 billion,

up 3.1% from the same period in 2018. The processing and manufacturing businesses

attracted the most FDI with newly licensed money, accounting for 71.2% of the total; real

estate industry accounted for 10%; and other industries accounted for 18.8%.

The top 74 countries and territories with newly approved investment projects in

Vietnam are South Korea, China, Singapore, and Japan. The state budget revenue for the

year was VND 1,299.6 trillion as of November 15, 2019, accounting for 92.1% of the

annual forecast.

The macroeconomic of Vietnam is stable due to low inflation, stable exchange rates,

and increased foreign exchange reserves.

The ratio of stock market capitalization to GDP has risen from 32% in 2015 to 75%

now, exceeding the goal. The ratio of corporate bonds to GDP has nearly doubled (from

3.4% in 2015 up to 6.7%). In addition, the government bond sector to GDP ratio has risen

19
from 16.1% to 27.4%. Non-bank financial institutions now hold 53% of state bonds (up

from 52.2 percent at the end of 2018), while banks only own 47%.

From 2014 to 2019, the banking system's liquidity was always stable. The National

Assembly of Vietnam has issued many new resolutions that have helped to basically settle

bad debts, and the bad debt ratio has decreased. The State Bank of Vietnam continues to be

proactive, flexible and prudent with the monetary policy, in coordination with the fiscal

policy and other macroeconomic policies to control inflation, support economic growth, and

stabilize money and foreign exchange markets.

2.4. Foreign exchange rate policy and capital control:

Since the late 1980s, the VND/USD rate has risen and fallen as shown in Figure 2.4.

The heavy depreciation of the dong until 1991, which was part of the stabilization campaign

in the late 1980s and early 1990s, and a 20% depreciation of the dong in 1997 and 1998 are

the key features of the evolution. After this depreciation, the dong has depreciated at a rate

of about 2% per year. So far in 2004, and 2005, the dong's depreciation has been less than

1%. In reality, the Governor of the SBV declared in early 2005 that the dong's depreciation

would be limited to 1% for the year. The dong had depreciated by 0.7% as of October.

20
 Figure 2.4

While Vietnam has a controlled floating exchange rate system, the exchange rate

system actually operates like a fixed exchange rate system. The Vietnamese exchange rate

has been de facto pegged since mid-2004, when the SBV Governor declared that the dong's

depreciation would be restricted to 1% in 2004, despite the fact that the dong depreciated by

close to 1% that year. In terms of exchange rate strategy, it's unclear whether the

Vietnamese authorities tried to stabilize only the VND/USD exchange rate or the effective

exchange rate, allowing for some exchange rate volatility against the US dollar. Daily

changes in the VND/USD rate were regressed on daily changes in the JPY/USD and

EUR/USD exchange rates to answer this issue. For estimation periods beginning after July

21, 2005, the regular change in the RMB/USD was included in the regression. Insignificant

coefficients were found in the regressions for different sample periods, suggesting that

fluctuations in the VND/USD exchange rate were not routinely linked to other dollar

exchange rates and that the Vietnamese authorities did not stabilize the effective exchange

rate.

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 With effect from October 18, 2005, Vietnam has acknowledged the IMF's Article

VIII obligations. By signing the agreement, the Vietnamese government agreed not to place

limits on making payments and transfers for current international transactions, and not to

participate in any discriminatory currency agreements or multiple currency practice unless

the IMF approved it.

Apart from official transactions, capital controls remain in place in Vietnam, and the

only significant inflows are foreign direct investments and remittances from Vietnamese

living abroad. 13 capital inflows in the short and medium term have been effectively

limited.

III. Monetary policy framework

3.1. Legal framework

According to the law, the State Bank of Vietnam is a body of the Vietnamese

government (Article 1) and its governor is a member of the government (Article 11). The

SBV Law explicitly makes a distinction between the functions of the SBV and functions

related to the national monetary policy, which is “a component of economic-financial

policies of the State” (Article 2). Decisions regarding monetary policy and its supervision

are principal functions of the National Assembly and the government. The government has

the specific 13 functions to prepare a plan for monetary policy, including a projection of the

annual inflation rate, and to submit it to the National Assembly (Article 3(3)), which then

needs to approve the plan (Article 3 (1)). ( Bui Van Hai; Tran Thi Minh Trang, 2015).

In 2021, based on the “ Nhân Dân Online ”, a new with the title “Renovating and

improving the efficiency of monetary policy management and banking operations” appeared

which attracted readers' attention to the domestic political economy.

22
 “ NDO – Nhan Dan Newspaper introduces an excerpt from a speech delivered by

Nguyen Thi Hong, member of the 13th Party Central Committee and Governor of the State

Bank of Vietnam (SBV), at the ongoing 13th National Party Congress.”

In the 2016-2020 periods, monetary policy management and banking operations

achieved many exceptional achievements as a result.

Thanks to the SBV, it effectively managed monetary policies thanks to consistency,

proactivity, prudence, and flexibility, thereby contributing to controlling inflation below 4%

under the target set by the National Assembly, maintaining macroeconomic stability,

supporting economic growth, and stabilizing the monetary and foreign exchange markets.

Besides that the SBV completed the legal framework on money and banking

operations, according to perfecting the socialist-oriented market economy institutions.

During the 2016-2020 term, the SBV developed and issued/submitted a large number of

legal normative documents governing all aspects of banking activities to competent

authorities, creating a legal corridor that is increasingly transparent and closer to global

practices and standards.

Now, many banks are facing many challenges. Although monetary policy and

banking activities achieved many important results in 2020, creating a premise for

development in the coming years, there are still many challenges in 2021, requiring the

whole banking sector to focus on addressing the same. trends of new payment services and

models. ( Nhan Dan Online, 2021).

Now, they are the ongoing developments of the COVID-19 pandemic, the weak

recovery possibilities of the world economy, the unpredictable developments of the global

financial and monetary market, the movement of global investment capital flows, the

23
imposition of tariff and non-tariff measures on Vietnamese goods, and others affecting the

supply of and demand for foreign currencies and the domestic foreign exchange market.

These uncertainties make analysis and forecasting more difficult, posing great challenges for

the management of monetary policy and exchange rates of the SBV. ( Nhan Dan Online,

2021)

“International organizations have forecast that Vietnam’s economic growth rate in

2021 will be 4.5 – 8.1%, among the countries with the highest growth rates in the world.” -

Nhan Dan Online.

Also, the strong development of information technology and the industrial

revolution 4.0 is posing challenges for payment operations and technology in the banking

sector, especially in terms of the protection of personal data and the security and safety of

information technology systems.

So that is a reason why it requires a further improvement of the legal framework

and mechanisms on non-cash payments to meet the development trends of new payment

services and models.

3.2. Monetary policy strategy

In Vietnam, the monetary policy approach is extracted from the five-year plan on

Social and Economic Growth Strategy, which is developed once every five years by the

Communist Party Conference. The government is then in charge of designing an action plan

to carry out the five-year plan. The SBV, as part of the government, is in charge of creating

a banking sector action plan. Targets for the infusion of liquidity into the economy, M2,

deposits and credits, and other financial sector-related initiatives will be introduced as part

of the government's action plan, according to this action plan (Ulrich Camen, 2006).

24
 The SBV's Annual Reports and the Governor's Directives both provide information

on the current monetary policy. The Governor's directives include, in general, more

technical information on monetary policy implementation and, in particular, the instruments

used. The SBV's primary publications include annual reports, Governor's Directives, and

SBV Statements. The Bank also has a Vietnamese-language website, and an English-

language site is currently being developed. The following summary of the SBV's monetary

policy approach is focused primarily on its current monetary and exchange rate policy

(Ulrich Camen, 2006).

The SBV's monetary policy plan has two major components: an annual target for

the depreciation of the dong, as well as goals for total liquidity (M2) and credit to the

economy.

The SBV Governor declared exchange rate targets in 2004 and 2005, implying that

the SBV uses the exchange rate as a nominal anchor. The goal for both years was to keep

the depreciation of the Vietnamese dong against the US dollar below 1%. The goal was met

in 2004 and is projected to be met again in 2005. For the time being, targets are set as

annual goals, and the SBV does not seem to have committed to keeping the peg in place in

the future. In reality, the SBV emphasizes the versatility of its exchange rate policy in its

2004 Annual Report (Ulrich Camen, 2006).

In addition to exchange rate goals, the SBV sets annual targets for overall liquidity

and credit to the economy, which are based on the government's macroeconomic and

monetary priorities in its action plan. The latter goal is important because the IMF monitors

it during Article IV consultations. In 2004 and 2005, the credit target was set at 25%. In

2004, real credit growth was 42 percent, and forecasts for 2005 indicate that the credit target

for this year would also be surpassed. The fact that SBV did not meet the target may mean

25
that the SBV only gives the credit target a low priority, which is consistent with the view

that the government's ultimate aim is to achieve economic growth (Ulrich Camen, 2006).

There are reports that, at least in 2005, the SBV used implicit interest rate targets

applied by commercial banks. The SBV listed interest rate stability as a goal in its 2004

Annual Report, and in 2005, the SBV injected liquidity through open market operations to

stabilize interest rates, avoiding the negative effects of raising interest rates on economic

growth. These actions were taken because the SBV believes that tighter monetary policy

would not be successful in lowering inflation. Taken together, this means that, despite

having set exchange rate targets, the SBV seeks to conduct monetary policy independently.

The SBV does not appear to use the distinction between final, intermediate, and operational

objectives.

Countries can only follow two of the three options: fixed exchange rates, domestic

monetary control, and capital mobility, as is well known (Jay.C Shambaugh, 2004). Since

capital account constraints remain in place in Vietnam, even with a fixed exchange rate,

authorities are likely to have some space for independent monetary policy. The scope for

independent monetary policy is likely to be reduced as a result of dollarization. The SBV

has participated in the foreign exchange market in recent years to achieve the exchange rate

goal. The interventions were important for many years, resulting in rises in net foreign

assets greater than the shift in the monetary base, meaning that the SBV partly sterilised the

liquidity impact of foreign market interventions (Andreas Hauskrecht & Nhan Le, 2005).

Pegging the exchange rate has a range of benefits and drawbacks, two of which tend

to be especially important to Vietnam (Jeffrey Frankel, 2004). Economic agents in a country

with a pegged exchange rate prefer to overlook exchange risks because they do not seem to

be essential in the short term. In a dollarized economy like Vietnam, this means that

26
economic agents can borrow in foreign currency more easily even though their revenue is in

local currency, potentially leading to a systemic currency mismatch. As Latin American

experience has shown, such a currency mismat In such a scenario, the risk to financial

stability in Vietnam is likely to be important, as many banks have yet to adopt modern risk

management and effective bank supervision is still in the works.ch will lead to significant

financial instabilities if the domestic currency is devalued.

Recent events in Vietnam indicate that the expectation of a stable exchange rate has

led to a substantial increase in foreign currency borrowing in the region. In 2004, foreign

currency lending rose by 60%, compared to just 38% for domestic currency loans. Lower

interest rates on foreign currency loans account for some of the rise in foreign currency

lending, but the SBV's policy of pegging the exchange rate is also likely to have contributed

(Ulrich Camen, 2006).

With a flexible rather than a set exchange rate, the economy is more able to adapt to

external shocks and avoid expensive adjustment processes. This buffer feature of flexible

exchange rates will be a significant benefit for Vietnam, which is vulnerable to external

shocks and rising external competition as a small open economy.

Instead of pegging the exchange rate, one alternative for SBV will be to use

inflation targeting. In the late 1990s, a number of transition countries in Central and Eastern

Europe switched from exchange rate to inflation targeting. These countries' experiences are

currently being evaluated.

The Vietnamese government currently sets annual inflation targets with the National

Assembly's approval. The Governor declared this inflation target for 2005 in January 2005.

Camen and Genberg (2005) analyze whether inflation targeting is a viable choice for

Vietnam and conclude that the conditions are not currently in place for strict inflation

27
targeting to be enforced. An announcement of and institutional commitments to a medium-

term inflation target, a deeper understanding of the inflation mechanism as well as

procedures to forecast the inflation rate, and improved exchange rate stability are all moves

toward inflation targeting.

3.3. Monetary policy instruments:

The economic context is more broadly and deeply integrated into the global

economy, resulting in faster trade development and a more rapid and intense inflow of

international capital. As a result, the design and implementation of monetary policy become

more complex and difficult (Nguyen, Q., 2019).

In the annual reports of the Central Bank of Vietnam from 2007 to 2018, the

creation of a flexible monetary policy is implemented by adjusting the tool:

Interest rate: From May 2007 to June 2008, the central bank raised the key interest

rate to absorb excess liquidity caused by large inflows of foreign capital. When inflationary

pressures eased in late 2008 and early 2009, the central bank also reduced the policy rate to

support economic growth.

Between 2009 and the first quarter of 2010, the central bank implemented the base

rate mechanism, which allowed banks to set deposit and lending rates in VND. It could not

be more than 150 percent of the base rate. In order to implement a restrictive and prudent

monetary policy, but also to combat inflation, the central bank gradually increased the

operator in 2011.

The interest rate tool was actively used in 2012, assuming that inflation forecasts

were on the decline. Online, the downward trend had to be followed by lowering inflation

and inflation expectations. To avoid further inflationary pressures, it was necessary to

maintain a positive real interest rate.

28
 Reserve requirements: As a result of monetary policy, the refinancing rate has been

better controlled, in accordance with the objectives and monetary developments of each

period. In order to neutralize excess liquidity in the banking system, the central bank

increased the percentage of the reserve requirement ratio for commercial banks in mid-2007

and early 2008. The RRC was reduced by the central bank at the end of 2008 to relieve

liquidity pressures on banks, which reduced funding costs and encouraged banks to raise

capital and loans.

Open-market operations: Since July 2000, open-market operations have been

evolving at a rapid pace. They have evolved into a tool for currency regulation, primarily

via SBV. Since 2007, there has been an increase in the tendency of foreign currency to

circulate in Vietnam, which can cause the currency to devalue. In order to stabilize the

exchange rate, the central bank increased its foreign exchange reserves. If from 2008 to

2009, the deadline for long-term securities was primarily between 7 and 14 days. The 4

percent interest rate subsidy for short-term loans expires during the first three quarters of

2010, so the central bank extended the purchase term by 28 days to support banks' liquidity,

allowing them to lower market interest rates and continue to support economic growth.

The exchange rate: as a basis for improving market regulation, the exchange rate

tool has been significantly adjusted to reflect as closely as possible the pace of supply and

demand in the exchange market. The exchange rate was still under pressure prior to 2011,

and the foreign exchange market was volatile in January 2011 (Vo, T. et al, 2002).

Furthermore, the central bank's target for 2012-2013 is to hold exchange rate

increases to a maximum of 2 to 3 percent per year, restricting the risk of a devaluation of the

Vietnamese currency.

29
The central bank reduced the exchange rate to 1% in September 2014, and it will remain at

that level until the end of the year. The volatility of exchange rate pressure in Vietnam was

very high in 2015, owing to the global economy's volatility, China's adjustment of the

renminbi (yuan) exchange rate, and the US Federal Reserve's (FED) interest rate adjustment

at the end of the year. The SBV devalued the VND three times in 2015 (in January, May,

and August), each time by one percent. Due to the heavy pressure from the devaluation of

the yuan, on 12/8, the State Bank of Vietnam increased the rate from 1% to 2%, and on

19/8, it increased from 3% to 4%.

Other tools: after a long period of floating interest rates, the central bank

reintroduced the wear rate as a means of limiting the cap's effect on money market liquidity.

In May 2008, the central bank set the ceiling at 12 percent per year, and in March 2008, it

was raised to 14 percent per year. As the risk of inflation was reduced, the central bank

lowered the cap.

The central bank asked commercial banks to monitor credit growth and align it with

credit quality during the 2014 period in order to help control credit growth and contain

inflation. Furthermore, the central bank's monetary policy has worked closely with fiscal

policy to attract capital by shifting VND 50 trillion from central bank cash deposits.

Furthermore, since 2009, expansionary monetary policy has kept the danger of

recession at bay. The central bank has implemented programs to maintain the interest rate at

4%, as stipulated by the government for all loans, assisting businesses in overcoming

difficulties. In 2011, the central bank used other steps to strictly regulate the currency,

which increased the tightening impact for the 20% lower credit growth rate, due to

increasing inflationary pressures and the tightening of conventional instruments.

3.4. Monetary policy on aggregate demand:

30
 We have to look at the definition of aggregate demand: The aggregate-demand

shows the total quantity of goods and services demanded in the economy for any price level.

Below are three reasons why the aggregate-demand curve slopes downward:

a) Wealth effect

The decrease in level of price can raise the value of money holdings, or people can

feel wealthier. With the same amount of money, the price decreases, people tend to consume

more so the quantity of goods and services increases.

b) Interest rate

The decrease in the level of price reduces the amount of money holdings so people

want to consume more.Moreover, when the price level falls, the interest rate falls too, so it

stimulates the investment and increases the quantity of goods and services demanded.

c) Exchange rate

When the price level decreases , it leads to the fall in the interest rate so Investors

tend to move their funds in searching for other “ high interest rate” countries. As a result,

the value in domestic currency falls. Exactly, domestic goods are usually cheaper than

foreign goods, in case of the fall in interest rate, Vietnam can witness the increase in

quantity of goods and services, because the value of exports is higher than the value of

imports. These three effects occur samely to increase the quantity of goods and services

demanded when the price level falls and to decrease it when the price level rises These three

factors contribute to the increase in quantity of goods and services demanded but it is not

true in some countries.

For example, In addition, because exports and imports represent only a small

fraction of U.S. GDP, the exchange-rate effect is not large for the U.S. economy. (This

effect is more important for smaller countries, which typically export and import a higher

31
fraction of their GDP.) For the U.S. economy, the most important reason for the downward

slope of the aggregate-demand curve is the interest-rate effect.

However, Vietnam is an exception because Vietnam is considered as a small

country so the exchange rate plays an important role. Simply because when the Vietnamese

currency appreciates the US currency, the exports will bring Vietnam benefits and in return.

The Vietnamese dong's genuine powerful conversion scale (REER) is exchanging

12% over its 10-year normal, which proposes money overvaluation. While all things

considered, a portion of the strength in the REER could be credited to profitability gains, an

exaggerated cash would overall actually burden send out intensity, delaying trade income

and the strength of the dong (Vietnaminsider, 2020).

3.4.1. Channels of monetary transmission mechanism

The financial transmission system is an interaction wherein money related

arrangement choices are sent to genuine GDP and expansion (Taylor, 1995). There are

essentially two strategies for doing explore on financial transmission:

32
 (i) Identification of the impacts of money related strategy stuns: attempt to

distinguish the exogenous money related stuns and their after impacts on macroeconomic

factors.

(ii) Identification of directs through which changes in money related strategy

positions influence the economy: research which channels of financial approach

transmission are functional.

Most investigations center around one of the two strategies. A couple of studies

examine the money related arrangement transmission instrument by consolidating the two

methodologies. Much consideration is paid to the channels of the financial transmission

system. Notwithstanding, there isn't a lot of spotlight on distinguishing the family member

qualities of each channel.

There are two stages in the money related transmission component:

To begin with, the financial initiated changes in costs and the amount of cash in the

monetary business sectors coursing through the accompanying significant channels, for

model, loan cost channel, conversion standard channel, resource value channel, and credit

channel.

Second, the financial instigated changes in the parts of aggregate demand in the

merchandise market. The money related transmission has numerous channels through which

money related strategy works. This period of the transmission instrument communicates the

reactions of every segment of total interest at the point when total interest varies. A fixing

money related arrangement causes stuns, diminishes venture and utilization just as total

interest, what's more, the value level of the economy.

33
 3.4.2. Interest rate channel:

In the conventional Keynesian reading material IS-LM shows, the intrigued rate

channel is the key component within the money related transmission component. It

highlights the part of cash showcase harmony when intrigued rates alter. A monetary policy

later influences cash supply and intrigued rates. Within the brief term, price and wage are

sticky and not flexible to money related changes, causing a change in total request and

output. Ramey (1993) analyzes the working of the intrigued rate channel based on two

assumptions. To begin with, he argues there are two sorts of resources within the economy,

for example, cash and all other resources within the shape of bonds. He prohibits non money

resources. In this way, the intrigued rate channel is called a “money view” of the

transmission instrument. His moment of presumption is that cash in the transition

component isn't substituted by any other implies of payment. Some angles of his to begin

with presumption have been criticized. Hypothetically, this view overlooks the relationship

between yield behavior and between yield conduct and the presence of the credit market.

Additionally, the "monetary limit" of the economy is too stressed by Gurley and Shaw

(1960) who contend that borrowers' capacity to ingest obligations can be estimated without

requiring current or future spending to be decreased. Consequently, the transmission

instruments incorporate the more extensive credit market and banking framework, not just

cash or securities. Moreover, Bernanke and Blinder (1988) show unequivocally the

connections among banking and macroeconomic practices through demonstrating the

monetary record and income consequences for speculation and yield changes.

In addition, the impact level and timing of the genuine impact of the financial

strategy instigated loan fees on the macroeconomy can't be clarified thoroughly inside the

extent of the loan fee channel theory (Bernanke and Gertler, 1995). This recommends the

presence of different channels.

34
The impact level of financial approach incited loan fee changes on macroeconomic factors

is more extensive than the assessed impacts of loan fee versatility on utilization and venture.

There is likewise meager proof to demonstrate the circumstance reliance between the

adjustments in financing costs and in a few segments of expenditure.

3.4.3. Exchange rate chanel

In open economies, financial approach impacts net fares and total yield through the

swapping scale channel. The job of this channel can't be denied in the developing

internationalization of economies when more consideration is being paid to what financial

arrangement means for trade rates and how this causes vacillations in net fares and total

yield.

In an adaptable conversion standard framework, a fixing money related strategy at

first builds loan costs and homegrown resource interest, making the homegrown Money is

appreciated. The interest for homegrown products has changed in the contrary way. It is

diminished by the general cost impact and expanded by the accounting report impact. Be

that as it may, which impact is more prevailing is hazy. The relative cost impact happens

when the expansion in return rates decreases interest for homegrown products and builds

interest for unfamiliar merchandise while the monetary record impact happens when an

increment in return rates prompts an advanced monetary record position.

In a fixed swapping scale framework, with a serious level of capital portability, the

tasks of financial approach are forcefully controlled (Taylor, 1995). Nonetheless, a money

related approach can influence the genuine swapping scale by impacting the cost level even

for the situation that the ostensible conversion standard is fixed. The effect of financial

arrangement on net fares is ineffectual notwithstanding of longer slacks and more modest

expansion. In addition, the conversion scale channel is likewise meant through the buying

35
power equality (PPP). As per Rogoff (1996), in the long run, a country with deteriorating

money should encounter a corresponding expansion in costs and the other way around. The

conversion scale changes and the money related strategy prompted change in the conversion

standard are completely sent to CPI (Bui, H. and Tran, T., 2015).

3.5. Determinants of inflation:

As previously stated, the SBV continues to base its monetary policy on the premise

that inflation in Vietnam is primarily the product of supply shocks rather than a monetary

phenomenon. The results discussed in this section show that, in addition to commodity

prices and the exchange rate, credit to the economy plays an important role in determining

the inflation rate.

An exploratory study of the role of external variables such as US money supply and

commodity prices, as well as domestic factors, in determining the inflation rate in Vietnam

is conducted using a vector auto regression (VAR) model. It also considers whether

monetary aggregates, credit to the economy, and domestic interest rates all play a role in

determining inflation in a given country.

In a research study by Peiris (2003) and Camen and Genberg (2005) estimated the

Vietnam VAR system. The VND/USD exchange rate, the consumer price index (CPI), the

money supply (M2), total credit to the economy (CTE) or lending rates (LR), commodity

price indices (petrol price and rice price), and the US money supply (M2) are the key

domestic variables in the basic VAR scheme (M3US). Except for interest rates, all variables

are in log levels.

Since Vietnam lacks a long time series, Bayesian priors are used to estimate the

system. The VAR system is calculated using monthly data from February 1996 to April

36
2005, as well as selected sub-periods to ensure that the results are stable. Every variable has

13 lags in each equation.

The credit to the economy is a key variable in describing the CPI after 24 months,

according to the variance decomposition. In two of the three sample periods, credit accounts

for around a quarter of the volatility in the CPI, exceeding the portion of the forecast error

variance accounted for by commodity price indices or the exchange rate.

In the sample period February 1996 to April 2005, credit to the economy was the

most important variable explaining CPI at the 24-month horizon, and it was the most

important variable, along with US money supply, in the sample period February 1996 to

April 2004. However, this finding does not hold true for all sample periods. Credit to the

economy explains just a small portion of the forecast error variance of inflation in Vietnam

when the mechanism is measured over the period February 1996 to April 2003.

Other significant results include the importance of the petrol and rice price indices,

as well as the VND/USD exchange rate, in describing CPI variations. This result backs up

the theory that commodity prices, as well as the exchange rate, have played a role in

deciding Vietnam's inflation rate. After a year, gas and rice prices account for 21% and 11%

of the inflation rate forecast volatility, respectively, and the exchange rate accounts for 19%.

The rice price index is the variable that explains the most of the CPI in the first six months,

accounting for 16 percent. Although the proportion of the CPI explained by these variables

varies over the time span over which the VAR systems were estimated, the qualitative

findings remain constant as the sample period shifts (table 3.5.1).

In two of the three sample periods of the system including the domestic loan

variable, the US money supply, as a measure of the international liquidity conditions, also

plays an important role in explaining the CPI.

37
 Table 3.5.1: CPI forecast error variance decomposition: System with CTE
(In percent)

Fung, B (2002) mentioned: The price puzzle that has been reported in similar

research using the VAR approach is the strong negative contemporaneous correlation that

exists between forecast errors of the CPI and CTE equation. In order to check that some

inflation may be attributed to these variables, total liquidity and a credit rate is also

estimated instead of credit. These variables essentially only explain very little inflation.

Total liquidity or the lending rate was not estimated for more than 5 percent of inflation in

Vietnam in any system that was estimated for different sample periods.

After 24 months in the system (estimated from 1996:2 to 2005:4), the US money

supply explains 18%, and also 25% after 24 months in the system (estimated from 1996:2 to

2004:4). However, from 1996:2 to 2003:4, the money supply in the United States makes a

marginal contribution to explaining CPI. This is also valid for the lending rate system (table

3.5.3) and the domestic money system when measured over the period 1996:2 to 2005:4

(table 3.5.2).

Although this analysis of the decomposition of variances has produced some

interesting findings on how loans play a role in determining the inflation rate, only an

38
exploratory analysis can be considered. It would be highly appropriate, particularly in

relation to the role of the financial structure for the monetary transmission mechanism, for

further analysis of the monetary transmission process. Then the use of a structural VAR

system should be used to study the monetary transmission mechanism using the VAR

methodology.

Table 3.5.2: CPI forecast error variance decomposition: System with M2

(In percent)

Table 3.5.3: CPI forecast error variance decomposition: System with LR

(In percent)

The loan and loan rates were included in one system (table 3.5.4). Whereas the

credit to the economy accounts for 18% of the inflation rate's forecast error variance, the

39
loan rate does not explain the inflation rate. In conjunction with these results, the bank

lending is a major channel in Viet Nam's currency transmission mechanism.

Table 3.5.4: CPI forecast error variance decomposition: Systems with either CTE or CTE
and LR
(In percent)

IV. Recommendation in monetary policy in

Vietnam
A brief overview of the macroeconomic, operating monetary policy in Vietnam for

the period 2016 - 2020 before giving new directions for the period 2021-2025.

Macroeconomic for the period 2016 – 2020:

In the 2016-2020 period, the economy across the world experienced complicated

fluctuations. The escalating protectionism, which led to fierce tensions and trade divisions

between major countries (US - China, Korea - Japan, Australia - China, US - EU), adversely

affected confidence, trade, investment, and restraining the fragile recovery momentum of

the global economy. The consequences were more serious when it came to the outbreak of

Covid-19 and the pandemic spread all over the world from the beginning of 2020, the global

economy had a deep recession - 4.4% (according to IMF, 10/2020). The international

financial and monetary market is full of instability, the monetary policies of major countries

have reversed from "normalization", raised interest rates to sharply reduced interest rates

40
and loosened a "unprecedented" way. Capital flows into emerging and developing markets

fluctuated complicatedly because of risk concerns among investors and in the context of

domestic currencies devaluation against USD.

The strong and rapid change of the world economy had brought Vietnam into

interleaving opportunities and challenges. Protectionism is a major barrier with regards to

countries having export-based growth like Vietnam, but offers opportunities when

investment flows move towards reducing dependence on one country too much. The Fourth

Industrial Revolution (Industry 4.0) is an opportunity to increase productivity, accelerate

economic modernization. However, it also caused the risk of constraining the economy if

the speed of digitizing the economy is not fast enough, putting pressure on the labor market,

and for the finance and banking industry is a challenge for financial stability and protection

of consumer benefits in the face of the rapid development of finance and technology. The

Covid-19 pandemic caused a deep recession in the world economy, but it was a test of the

resilience of the economy in general and the health of the banking sector in particular.

In that context, we have actively strengthened internal strength in the country, took

advantage of opportunities and overcame challenges. It is difficult for the economy to resist

the effects of the Covid-19 pandemic if it did not depend on the positive achievements of the

entire political system in the process of economic restructuring, including accelerating the

restructuring of the system credit institutions, associated with bad debt handling, promoting

creative growth of the private economic sector and start-ups on the basis of the spirit of

"Government to create", to maintain macroeconomic stability, proactive integration with the

signing of a series of bilateral and multilateral trade and investment agreements (KVFTA,

CPTPP, EVFTA, EVIPA, RCEP, ...).

41
 In the 2016-2019 period, before the pandemic broke out, Vietnam's economy

demonstrated dynamism with an average GDP growth rate of 6.8%/year, and improved

growth quality thanks to enhancing productivity. Inflation is controlled below 4%, 2.

creating a stable macro environment, attracting FDI, thereby boosting exports and export

surplus continuously in the context of international trade decline. The IMF estimates that by

2020, the scale of Vietnam's GDP can rank 4th in ASEAN; the national credit rating has

continuously increased. 3. In 2020, in the context of a pandemic, with the right policies of

the Government, Vietnam's economic growth will still reach 2.91% - belonged to the group

of countries with the highest growth in the world and topped the ASEAN countries; while

the macro environment continues to be stable, in which the average core inflation in 2020

was 2.31%, contributing to control the average inflation rate at 3.23%.

Contributions from operating monetary policy of the State Bank:

Firstly, synchronously and smoothly coordinating monetary policy tools to control

money and implement set inflation targets.

Monetary policy instruments are managed actively, flexibly and smoothly in

monetary control. The monetary policy is closely coordinated with other macro policies to

regulate liquidity and adjust prices managed by the State in order to achieve inflation

targets. The results show that, the total means of payment (M2) in this period was properly

controlled, the annual increase was only about 12.21 - 15%, thereby stabilizing the basic

inflation in the range of 1.41 - 2,31%, creates fiscal space for the Government to adjust the

prices of goods and services managed by the State but still within the inflation control target

set by the National Assembly.

42
 Secondly, ensuring safe and effective credit provision for economic growth but not

subjective to inflation, promptly taking measures to remove difficulties for borrowers

affected by the Covid- 19.

Every year, based on the growth and inflation targets set by the National Assembly,

the State Bank shall formulate a target of oriented credit growth, adjusted in accordance

with developments and the actual situation; announce credit growth targets for each credit

institution and flexibly review and adjust assigned targets on the basis of financial situation,

healthy credit expansion; directing credit institutions to strictly control the granting of credit

in potentially risky areas such as real estate and securities. As a result, credit growth has met

the needs of economic growth and is in line with the target of controlling inflation and

improving credit efficiency.

In the 2016-2019 period, credit growth slowed down from 18.25% to 13.65%, while

economic growth was accelerated from 6.21% to over 7% in 2018 and 2019, respectively.

credit programs and policies for sectors and fields continued to achieve good results,

including priority areas under the Government's policies such as agriculture, rural areas,

export, ...; credit in areas with potential risks is controlled appropriately, actively

contributing to sustainable economic development.

Thirdly, managing interest rates in line with macro developments, inflation, and

harmonizing the interests of businesses and depositors

In the period 2016 - 2018, the world interest rate trend increased strongly, led by the

Fed with the cycle of "normalizing the monetary policy", continuously increasing interest

rates (Chart 2), but the interest rate level in the country is still relatively stable. This is

because the macroeconomic foundation has been kept stable, the State Bank has steadfastly

43
implemented the target of controlling inflation through controlling M2, appropriate credit,

and stabilizing the operating interest rates.

From the second half of 2019 and 2020, trade tensions between major countries had

a negative impact on the global economic prospects and under the impact of the Covid-19

pandemic, the SBV proactively and promptly reduced continuously operating interest rates

by 4 times, the total reduction of 1.75 - 2.25% / year to share difficulties with borrowers.

The interest rate management solution is implemented in parallel with ensuring liquidity for

credit institutions and stabilizing the money market; orienting credit institutions to review

and balance their financial capacity to apply reasonable lending interest rates to ensure

operational safety, speed up the handling of bad debts to reduce costs.

Chart 2

Fourth, operating the exchange rate and the foreign exchange market to stabilize

the confidence of investors and the people, fight against dollarization, and improve national

reputation.

Since 2016, the State Bank has started to implement a new way of managing the

exchange rate according to the daily fluctuating central rate mechanism, closely following

the market movements and the monetary policy goal is to ensure macroeconomic stability,

reinforce confidence in VND, and implements the Government's policy to against the

44
dollarization of the economy. Flexible management of the central rate combined with

purchase and sale of foreign currency intervention in accordance with market conditions;

proactively communicate in many forms to orient and stabilize market sentiment when there

is adverse pressure; closely coordinated with other monetary policy instruments (VND

liquidity, interest rates, credit ...).

Economic prospects for the period 2021 - 2025

Our country is facing great opportunities and prospects in economic development.

However, the Covid-19 pandemic, complicated and unpredictable changes of the economy,

international politics, the trend of Industrial Revolution 4.0, climate change ... require us to

be wise and flexible to take advantage of opportunities and overcoming challenges, striving

to achieve the above objectives. This also means that it is necessary to continue to overcome

the shortcomings and limitations in the period 2016-2020 in terms of enterprise

competitiveness and the autonomy of the economy, and complete the socialist-oriented

market economy institutions, infrastructure, human resources, and the process of economic

restructuring, science and technology application, innovation.

Targets and orientations for operating monetary policy for the period 2021 - 2025

On the management point of view, continue to actively and flexibly manage the

monetary policy and coordinate closely with other macro policies to control inflation,

stabilize the macro-economy, and promote sustainable growth. In particular, in the first

period of the 5-year period 2021 - 2025 when the economy is still negatively affected by the

Covid-19 pandemic, continue to implement solutions to overcome difficulties for production

and business, support economic activities as well as minimizing the impact of the epidemic.

The groups of executive solutions:

45
 First of all, coordinating with monetary policy tools in money control; managing

interest rates in line with macroeconomic developments, inflation and the money market;

manage exchange rates flexibly, in line with market developments, macroeconomic

balances, monetary and monetary policy targets.

Secondly, reforming the monetary policy framework step by step, gradually shifting

from operating by the volume of money to mainly price management, in which the open

market operation continues to be the main tool to regulate the available capital of credit

institutions. Improve the capacity of analysis and forecasting to effectively serve the

direction and administration.

Thirdly, credit management towards credit growth associated with credit quality,

ensuring capital supply for the economy; remove difficulties for customers to borrow

capital; direct credit institutions to focus their capital on production sectors, prioritizing

under the Government's guidelines; strictly controlling credit for potentially risky areas; to

limit foreign currency credit, proceed to stop foreign currency lending in order to contribute

to repel the dollarization of the economy.

Fourthly, developing a stable money market, enhancing transparency in information

disclosure in order to promote the efficiency of monetary policy transmission mechanism;

building an information system to manage interbank money market operations to support

the SBV's management and the needs of credit institutions.

Fifthly, promoting the coordination between the monetary policy and other macro

policies of the Government in operating the macro-economy in a synchronous and

consistent direction in order to achieve the common goals of rapid and sustainable socio-

economic development.

46
V. Conclusion:
As this audit has appeared, Vietnamese specialists have gained great headway in the

implementation of monetary area changes and the presentation of roundabout money related

policy instruments throughout the most recent 10 years. Yet, particularly taking into account

the internationalization of the Vietnamese monetary area, further monetary area changes and

changes of money related policy are required, and Vietnamese specialists have perceived the

significance of proceeding with the change process. Important segments of the monetary

area changes would be the equalization of the SOCS and the further improvement of

monetary business sectors. These changes will ease important constraints on the monetary

framework for financial approach and comprise a significant condition for progress with the

execution of aberrant money related instruments. Specifically, they will probably help to

fortify the loan cost and bank credit channels of the monetary transmission component.

(Camen, U., n.d).

47
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