MONEY AND BANKING ESSAY MONETARY POLICY IN RESPONSE TO EFFECTS OF COVID 19 IN VIETNAM

Expansionary monetary policy 14 2.1 The background of the Covid-19 pandemic in Vietnam.. 18 Chapter 3: Current status of monetary policy in Vietnam in responding to the impact 3.1 Overvi

 FOREIGN TRADE UNIVERSITY INSTITUTE OFECONOMICS AND INTERNATIONALBUSINESS

Ha Noi, December 2021

Thái Diệu Đan (Leader)

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Table of content

Chapter 1: The theoretical basis of monetary policy 8

1.1 Definition of monetary policy 8

1.4.2 Expansionary monetary policy 14

2.1 The background of the Covid-19 pandemic in Vietnam 16 2.2 The impact of the Covid-19 epidemic on the overall economy 18

Chapter 3: Current status of monetary policy in Vietnam in responding to the impact

3.1 Overview of Monetary policy in Vietnam in the period of 2020-2021 25

3.1.2 Debt term restructure, loan interest exemption policy 25 3.1.3 Credit support policy from banking industry 25 3.2 Current status of applying monetary policy tools in Vietnam 26 3.3 The effectiveness of monetary policy in Vietnam during the Covid-19 pandemic 28

3.3.2 Effectiveness of Interest Rate Policy 31 3.3.3 Effectiveness of Debt term restructure, loan interest exemption / reduction to

3.3.4 Effectiveness of Credit support policy from banking industry 33

with the Ministry of Finance from information provision and exchange, planning to

Figure 3 The development of inflation and core inflation in economy 20

Figure 6 Situation of the impact of COVID19 to the performance of businesses 23

Money and Banking is a course on the economics of money, banking andfinancial markets The direction aims to grant the students a preface to the function ofmoney, financial markets, financial institutions and monetary policy in the economy,therefore supplying a stable basis for further study or employment in the monetaryofferings industry As economics students, we understand the importance of studyingand researching Money and Banking

The Money and Banking course will look at some crucial issues in the idea andexercise of monetary policy and how it influences the world

Monetary policy is a central bank's actions and communications that manipulatethe money supply It increases liquidity to produce profitable growth as well as reducesliquidity to prevent inflation

The COVID-19 pandemic has spread fleetly across the world since December

2019 As of 26 October 2020, greater than 43.5 million COVID-19 confirmed caseshave been reported, with nearly 1.2 million associated deaths Furthermore, according

to WHO, Likewise, the number of verified cases is still increasing in numerouscountries

Despite COVID-19, Vietnam’s economy has remained flexible, increasing by2.9 percent in 2020, which was one of the top growth rates in the world, and growth isprojected to be 6.5 percent in 2021, thanks to robust profitable fundamentals, decisivecontainment measures and well-targeted authorities support, with accordance to theIMF’s latest annual evaluation of the country’s economy

Using thorough disease surveillance data, this paper gives an overview of theunfolding of the COVID-19 pandemic in Vietnam and estimates the effectiveness ofthe Vietnamese reaction to contain the pandemic

Therefore, our group has come to a decision of choosing this topic for our

report: “Monetary policy in response to the effects of Covid-19 in Vietnam”.

During the process of making this report, due to the limited amount of time aswell as some certain limits in understanding and data collecting, the report may hardlyavoid mistakes We are looking forward to your comments for the betterment of ourgroup’s performance.

Through this report, we sincerely appreciate and value the insights and guidance that

MS Fin Tran Thi Minh Tram provided us

1.1 Definition of monetary policy

Monetary policy is a set of actions that can be undertaken by a nation's centralbank to control the overall supply of money that is available to the nation's banks, itsconsumers, and its businesses and achieve sustainable economic growth

1.2 Position in the economy

In the system of macroeconomic policies of the State, monetary policy is one ofthe most important because it directly affects the field of monetary circulation

From the 1980s onwards, monetary policy has become more prominent because:

first, there is a view that fiscal policy is based on D Ricardo's theory of comparative

advantage is inefficient; second, monetary policy can maintain a stable and minimal gap between actual and potential output levels; Third, in developed countries, there is a

trend towards stabilization and a gradual decrease in the amount of governmentlending, while in developing countries, restrictions on foreign loans have reduced the

possibility of government implementing anti-crisis fiscal policy; fourth, time lag in the practice of formulating and implementing fiscal policy in cyclical conditions the

economic recession has become shorter and shorter, making the solutions of fiscal

policy unable to take effect in a timely manner; Finally, fiscal policy is increasingly

influenced by the interests of political forces more than monetary policy Moreover, inperiods of economic growth, people still tend to have a prudent fiscal policy, even inthe medium term, developing economies still prefer to use a system of self-adjustingtools without accepting unusual solutions

Not outside the general trend of the world, in Vietnam in recent years, monetarypolicy has been used as the main tool to adjust macroeconomics This can be clearlyseen in the monetary policy management process of the SBV But it also has a closerelationship with other macroeconomic policies such as fiscal policy, income policy,foreign economic policy… For the SBV, the planning and implementation of

Monetary policy is the most basic activity, all of its activities are aimed at making national monetary policy more effective.

1.3 Goals of monetary policy

According to D.C Rowan “The monetary policy is defined as discretionary action undertaken by the authorities designed to influence the supply of money, cost of money or rate of interest and the availability of money.”

There have been multiple objectives of monetary policy varied in different nations, in different periods of time and in different economic contexts However, different aims conflict with one another, making it difficult to choose the ultimate goalfor a country's monetary strategy The appropriate monetary policy objective should bechosen by the monetary authority in light of the economy's specific conditions and requirements

Despite significant background differences, the majority of countries considers

6 main goals of monetary policies, which include:

By implementing feasible monetary policies, the governments wield the power

to attain their end goals of success and prosperity

In this part, we will give a breakdown of each goal before shedding light on the conflicts among those aims

Reasonable price stability is deemed the most fundamental goal which can be achieved by utilizing monetary policy To define, price stability is when the general level of prices in the economy avoid significant fluctuations, meaning they don’t rise

or fall drastically in indexes of prices like the Consumer Price Index or the

Harmonised Index of Consumer Prices It is much needed to be maintained in order to lower and stabilize inflation The key explanation in favor of this sentiment is that inflation brings about uncertainty that possibly curb the growth of the economy and make the planning procedure harder to be carried out Additionally, social fabric is also affected by this phenomenon Therefore, high inflation rate should be eschewed inorder to avoid unwanted dire repercussions

In developing countries, the surge of investment activities comes in parallel with the dwindle in agriculture production which results in enormous pressure on prices The significantly high inflation in India has gone to show the importance of monetary policy in such an alarming scenario has contributed to the short-run stability

of money However, inflation to some certain degree is unavoidable due to several changes in the developing economy’s structure like India In fact, mild inflation or an increase in prices is required in order to incentivize producers and investors

According to P.A Samuelson, inflation at a negligible rate of 3 to 4 percent can

lubricate the wheels of trade and industry and boosts economic innovation

Price stability is additionally critical for a country's balance of payments toimprove Considering the opinion of C Rangarajan, the increasing openness of theeconomy, the requirement to service external debt and therefore the necessity to boostthe share of our exports in an exceedingly highly competitive external environmentrequire that the domestic index number isn't allowed to rise unduly

High Employment

The highest level of employment or lowest level of unemployment that theeconomy can tolerate while maintaining a stable inflation rate is known as highemployment.

Experience over the last few decades has proven that it is possible to keepunemployment low and the labor market strong without causing inflation to riseunnecessarily The jobs market, for example, proved extremely adaptive during theeconomic growth following the Great Recession, as unemployment fell belowpredictions of what was assumed to be sustainable This provided numerous benefitsand chances to families and communities who had been left behind far too frequently

In addition, in the absence of other hazards, a low level of unemployment will not because for concern

Therefore, monetary policy encourages long-term economic growth by

preserving a balance between total money demand and total production capacity, as well as fostering favorable conditions for saving and investment Flexible monetary policy is the best way to bring demand and supply into balance

Monetary policy can also encourage faster economic growth by making

borrowing more affordable and accessible Short-term loans to satisfy working capital needs and long-term credit to meet fixed capital needs are both required in industry and agriculture Commercial banks and development banks can meet the need for these two forms of credit Easy access to credit at low rates of interest encourages

investment or rises in society’s production capacity As a result, the economy mightgrow at a quicker rate than before.

Interest Rate Stability

The exchange-rate system is also a key component of monetary policy in an 'open economy,' or one with open borders for commodities, services, and financial movements Under the current floating exchange rate regime, the central bank must take appropriate monetary measures to prevent excessive depreciation or appreciation

of the rupee in terms of the US dollar and other foreign currencies

Exchange Stability

The traditional goal of monetary authorities has been to maintain exchange stability This was the primary goal of the Gold Standard across various countries When there was an imbalance in the country's balance of payments, it was

automatically adjusted by movements "Expand currency and credit when gold comes in; contract currency and credit when gold leaves," as the saying goes The

disequilibrium in the balance of payments will be corrected, and exchange stability will be maintained

It should be emphasized that if exchange rates are unstable, gold will be

outflowed or inflowed, resulting in an adverse balance of payments As a result, stable currency rates are critical in international trade By and large, it is evident that the primary goal of monetary policy is to ensure stability in the country's external balance

In other words, they should aim to eliminate the negative forces that cause exchange rate instability

Conflicts among goals

The first two aims, namely price stability and economic growth, do not conflict

in the long run Price stability, in reality, is a technique of achieving quicker economic growth "It is price stability that provides the necessary atmosphere in which growth may occur and social justice can be ensured," writes C Rangarajan However, there is

a trade-off between price stability and economic growth in the short run Increased loan availability at a lower rate of interest leads to faster economic growth This entails

an expansion of the money supply

Nevertheless, an increase in the money supply and, as a result, a rise in

consumer demand usually results in a high rate of inflation This begs the question of what is the lowest acceptable rate of inflation that does not stifle economic growth The question has yet to be answered

There is also a tension between economic growth and exchange rate stability For instance, if a currency depreciates against another one, the central bank of that nation will have to tighten its monetary screws, raising interest rates and reducing bankexcess liquidity (from which loans are made) In order to foster greater economic growth, the central bank must cut interest rates and increase credit availability to encourage private investment As a result, that bank finds itself in a dilemma

To conclude, all goals of monetary policy are important and have their own merits and drawbacks However, there is no goal that is undesirable or should be

abandoned Governments should set those that are compatible with each other to

successfully achieve their goals

1.4.1 Tight monetary policy

Implementing tight monetary policy, the central bank acts to reduce the money supply in the economy, causing interest rates on the market to increase Thereby, it narrows aggregate demand, causing the general price level to fall To implement this policy, the central bank uses measures to reduce the money supply by: selling on the stock market, increasing the reserve requirement, or increasing the discount rate, and severely controlling the money supply with credit activities Usually, tight monetary policy is applied when the economy has too high a growth rate, that economy is in the state of "overheating", causing inflation and risk of explosion

1.4.2 Expansionary monetary policy

In essence, the central bank expands the money supply in the economy, causing interest rates to fall, thereby increasing aggregate demand, thereby expanding the size

of the economy, increasing income and unemployment rate reduction industry To expand the money supply, implement an expansionary monetary policy, the central bank can do one of three ways: buy in the stock market, lower the reserve requirement

ratio, and lower the reserve requirement discount rate, or do both or three ways at thesame time Expansionary monetary policy is applied when the economy is in recession

or growth is too low

1.5 Tools

1.5.1 Reserve Requirements

Reserve requirements have played a central role in the implementation ofmonetary policy The Central Bank uses reserve requirements to limit the number offunds that domestic banks can use to make loans to their customers Domestic banksare required to hold a proportion of customers’ deposits in approved liquid assets Anincrease in the reserve ratios should reduce domestic banks’ lending and, therefore, thedemand for hard currency, while a decrease should yield the opposite effect

1.5.2 Open Market Operations

Open market operations are when central banks buy or sell securities These arebought from or sold to the country's private banks When the Bank sells securities, itreduces domestic banks’ reserves (monetary base), and when it buys securities, itincreases banks’ reserves A central bank buys securities when it wants anexpansionary monetary policy It sells them when it executes contractionary monetarypolicy

1.5.3 The Discount Rate

The discount rate is the interest rate a Reserve Bank charges eligible financialinstitutions to borrow funds on a short-term basis The Bank has the power to announcethe minimum and maximum rates of interest and other charges that domestic banksmay impose for specific types of loans, advances or other credits and pay on deposits.Currently, the Bank does not set any interest rate levied by domestic banks except forthe minimum interest rate payable on savings deposits The Bank has opted not to usethis as a tool of monetary policy but to let market forces determine interest rates

Chapter 2: The impact of Covid-19 on Vietnam's economy 2.1 The background of the Covid-19 pandemic in Vietnam.

The COVID-19 pandemic has become one of the most serious health crises in human history, spreading rapidly across the globe from January 2020 to the present This epidemic originated from China, the neighboring country in the North of

Vietnam Due to the geographical proximity and the vibrant activities of travelling and trade between the two countries, Vietnam was not able to avoid the impacts of the spread of the virus The first two cases reported was recorded in Vietnam on January

23, 2020 However, thanks to prompt and drastic measures, Vietnam is one of the few countries that has largely succeeded in gaining early control of the outbreak As a result, Vietnam significantly reduced the damage of the virus from both the health and economic perspective, especially when compared with the neighboring countries facing the same circumstances Nevertheless, recently, the fourth outbreak of Covid-19with the risk of the emergence of new strain Omicron led the epidemic situation in Vietnam to be alarming

Figure 1 Total number of cases of COVID-19 in Vietnam

Source: ourworldindata.comThe development of the COVID-19 pandemic in Vietnam in 2020:

The first stage of the first wave began when the first case was declared and lasted until 6th March This stage reflects patients who were epidemiologically linked

to Wuhan, China (16/16 cases), of which 50% were imported cases

The second stage of the outbreak was from 7th March to 22nd April, after the 17th case was registered A total of 252 cases over 22 provinces and cities were

reported, of which 154 were imported cases (61.1%) This time, the pandemic had spread all over the world, infection sources then included multiple countries from Europe and America Simultaneously, the state deployed even stricter responses

including border shutdown, an international travel ban to all countries, domestic travel restrictions, compulsory facemask use and national social distancing at work and public places The Prime Minister declared the nationwide COVID-19 pandemic on 1stApril

The third stage of the outbreak was since the 416th case was registered in Da Nang, marking the end of the 100-day period without an infection case in the

community In this phase, Vietnam recorded the first deaths caused by COVID-19,

which mainly included patients with serious underlying diseases in the Da Nang

Hospital cluster

The development of the COVID-19 pandemic in Vietnam in 2021: the 4th outbreak of the Covid-19 epidemic, starting from April 27, 2021, attacked the northern key economic zone (Ha Noi, Bac Ninh, …), the southern key economic regions (Ho Chi Minh City, Binh Duong, …) and spread to provinces across the country with the appearance of the Delta variant The vaccination rate has been boosted by the Ministry

of Health of Vietnam with the number of 114.7 million doses of COVID-19 vaccine have been administered The blockade and social distancing measures seem to be no longer effective and are being gradually eased, but the daily infection rate is increasing

continuously revise the growth forecast for 2020 and 2021 during the past few

months According to the General Statistics Office (GSO), Vietnam’s real GDP

increased by 2.91% in 2020 (in which the first quarter growth was 3.68%; the second quarter growth was 0.39%; the third quarter was 2.62% and the fourth quarter was 4.48%) which was the lowest growth rate during the past decade (2011-2020)

In contrast, There was a significant increase in the price of food, while the price

of gasoline decreased due to the low price of fuels in the world markets Freights ratesand the prices of goods and services in the cultural, entertainment and tourism groupsalso decreased

Figure 3

Source: General statistic office

2.2.2 Government budget

2.2.2.1 Government budget revenue

Between 2014 and 2018, the government budget revenue had increased steadily

at about 10%, from 782.700 million VND to 1.512.300 million VND However,

according to the Ministry of Finance, the COVID-19 pandemic seriously affected production and consumption over the whole economy, which then led to lower revenue for the State budget in 2020 Throughout 2020, the State budget revenue was estimated

to be 1,323.1 trillion VND, down by 189.2 trillion VND compared to the planned budget That is, the central budget revenue was down by about 126.5 trillion and the provincial budget revenue was down by about 62.7 trillion VND compared to

the planned budget (Ministry of Finance, 2020) It could be observed that after several years of exceeding planned budget revenue, the State budget could potentially be down by 12.5% in 2020.

Figure 0.1

2.2.2.2 Government budget expenditure

Regarding Government budget expenditure, the estimated expenditure from the State budget balance in 2020 was 1,747.1 trillion VND For the first 9 months of the year, the total State budget expenditure was estimated at 1,113.7 trillion VND, which equaled 63.7% of the planned budget As of September 23, 2020, the State budget had expended 17.49 trillion VND on pandemic prevention and control, as well as

assistance to people impacted by the COVID-19 pandemic, of which: 4.92 trillion VND was for the implementation of the special measures in preventing the pandemic according to Government’s Resolution No 37/NQ-CP and Decision No 437/QDTTg

of the Prime Minister (the central budget expended 3.92 trillion to support the Ministry

of Health, the Ministry of Defense and the Ministry of Public Security as well as 27 provinces; while the provincial government expended 1 trillion VND)