THE SITUATION OF DOLLLARIZATION IN VIETNAM, IT IMPACTS ON ACCOUNTING SYSTEM AND ECONOMY OF VIETNAM AND ACTIONS TO FIGHT ITS DAO THI THU HUYEN E0700248 BACHELOR OF BUSINESS (ACCOUNTING) HONS HELP UNIVERSITY COLLEGE OCTOBER-2011 THE SITUATION OF DOLLLARIZATION IN VIETNAM, IT IMPACTS ON ACCOUNTING SYSTEM AND ECONOMY OF VIETNAM AND ACTIONS TO FIGHT ITS BY DAO THI THU HUYEN E0700248 Graduation Project Submitted to the Department of Business Studies, HELP University College, in Partial Fulfilment of the Requirements for the Degree of Bachelor of Business (Accounting) Hons OCTOBER- 2011 DECLARATION OF ORIGINALITY AND WORD COUNT I hereby declare that the graduation project is based on my original work except for quotations and citations which have been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other course/degree at HELP University College or other institutions The word count is _ words (Signed) _ DAO THI THU HUYEN Date: ACKNOWLEDGEMENT I have support, assistance and encourages of many people to complete my graduation project First of all, I would like to thank my teacher and also my supervisor Dr Le Van Lien, International School, Vietnam National University Hanoi He has kindly helped me and supported me by give so much useful advises and instructions Besides, I also would like to extend my special thanks to managers and accountants of my survey’s companies, my neighborhood and other people in Thanh Xuan District who have help me to carry out the survey I want to thank them for all their support, interest and valuable hints Moreover, I would like to delicate this project to my family who always loving, supporting and believing in me THE SITUATION OF DOLLLARIZATION IN VIETNAM, IT IMPACTS ON ACCOUNTING SYSTEM AND ECONOMY OF VIETNAM AND ACTIONS TO FIGHT ITS By DAO THI THU HUYEN OCTOBER- 2011 Supervisor: Dr Le Van Lien ABSTRACT In recent years, “Dollarization” becomes a familiar word in Vietnam Nowadays, Vietnam is amalgamating into the global economy, thus Vietnam has to use U.S dollar in trade and invest activities Additionally, the habit of use of U.S dollar in daily activities and trading activities of Vietnamese people and firms lead to the dollarization ratio of Vietnam higher than countries in the same area Therefore, dollarization is a hard situation in Vietnam now Dollarization has strong impacts on accounting system of Vietnam’s firms Furthermore, Dollarization also has both advantages and disadvantages impacts on Vietnam’s economy My graduation project aims to discover how dollarization impacts on Vietnam’s accounting system and economy, it also shows some explanation about dollarization and actions to fight its TABLE OF CONTENTS Declaration of Originality and Word Count Acknowledgement Abstract 6,7 Table of Content List of Figures List of Abbreviations CHAPTER INTRODUCTION 1.1 Overview 10-12 1.2 Dollarization in Bank Activities 12-14 1.3 Dollarization in Trade and Invest Activities 15-18 1.4 Motives for more investigation CHAPTER 18 LITERATURE REVIEW 2.1 Form of Dollarization 19-21 2.2 Types of Dollarization 21-24 2.3 The Origin of Dollarization 24-25 2.4 Causes of Dollarization in Vietnam 25-28 2.5 Accounting Dollarization 28-30 2.6 Accounting for Changes in Foreign Exchange Rates in Vietnam 30-32 CHAPTER METHODOLOGY 3.1 Research Objective 33 3.2 Research Methodology 33 3.3 Data Source 33-34 3.4 Research Method 34 3.5 Research Tool 3.5.1 Questionnaire 34-35 3.5.2 Personal Interview 35 3.5.3 Annual Report 35 3.6 Data Collection 35-36 3.7 Sampling 3.7.1 Sample Population 36 3.7.2 Sample Frame 36 3.7.3 Sample Size 36 3.7.4 Sample Techniques 37 3.8 Limitation CHAPTER 37 FINDING AND ANALYSIS 4.1 The Impacts of Dollarization on Accounting System and Economy of Vietnam 4.1.1 The Impacts of Dollarization on Accounting System 38-42 4.1.2 The Impacts of Dollarization on Vietnam Economy 42-45 4.2 Scheme of Actions to Fight Dollarization in Vietnam 45-47 4.3 Findings from Questionnaire Survey 4.3.1 Companies Survey 47-52 4.3.2 People Survey 53-56 CHAPTER 57-58 CONCLUSION REFERENCES/BIBLIOGRAPHY 59-61 APPENDICES 62-63 LIST OF FIGURES Figure 1.1: The Dollarization Ratios of Vietnam 11 Table 1.1: U.S dollar Outstanding Loans on Total Loan of Vietnam 13 Figure 1.2: Exchange rate of VND and USD from 1988 to 2010 16 Figure 1.3: FDI of Vietnam from 1990 to 2009 17 Table 2.1: Forms of Dollarization 20 Figure 2.1: Foreign Reserve Currencies 2006 21 Figure 2.2: International Visitors to Vietnam 27 Figure 2.3: Remittances of Vietnam 28 Figure 4.1: Company’s Respond Summary 48 Figure 4.2: Frequently level of using USD 49 Figure 4.3: Activities that use USD 50 Figure 4.4: Statement 51 Figure 4.5: Methods 52 Figure 4.6: People’s Respond Summary 53 Figure 4.7: Level use USD of Vietnamese 54 Figure 4.8: Activities that use USD 55 LIST OF ABBREVIATIONS FDI Foreign Direct Investment IMF International Monetary Fund USD U.S Dollar VND Vietnam Dong PITCO Petrolimex International Trading Joint Stock Company IAS International Accounting Standards VAS Vietnam Accounting Standards ODA Official Development Assistance WB World Bank ADB Asian Development Bank CHAPTER 1: INTRODUCTION 1.1 Overview In recent years, the term dollarization has been very used by Vietnamese people and firms especially since Vietnam economy “doi moi” Therefore, the first part of my graduation project aims to discuss the situation of Dollarization in Vietnam Dollarization may be a good solution for economic market And dollarization also has strong relationship with trade and financial situation It can say that Vietnam’s economy does not have good effect of dollarization because Vietnam’s economy is different to U.S’s economy such as wealth, economy structure, capital market and labor market Although Vietnam use U.S dollar in trade activities, Vietnam also has variety trade relationship with other countries all around the world such as Japan, Korea and European We can know about the situation of dollarization in Vietnam through figure 1 Figure 1.1 shows the dollarization ratios of Vietnam from 1998 to 2005 From that figure, we can see that dollarization ratios of Vietnam always high It was always more than 20 percent In 1998, the dollarization ratio of Vietnam was 21.9%, and it was increase to 30% in 2001 Then, it was reduce to 21.3% in 2003 This ratio in 2004 and 2005 was both 23.2% 10 Frequently use of USD Frequently use 20% Do not use 27% Rarely use 13% Sometimes use 40% Question 2: The question about how companies use USD for their activities was expressed as followed: What kinds of things that your company uses USD for The answer for this question can be multiple In this survey, I concentrate on survey several kinds of companies included manufacturer, import, trade Form this survey, I find that companies say that they use USD for imported goods- it is the largest amount Then, companies almost in manufacturer suggest that they use USD to buy raw materials to produce goods And companies answer they use USD to pay their debt Next, companies use USD for saving 49 Figure 4.3: Activities that use USD Activities that use USD Saving Paying debt Imported goods Buy raw material Question 3, 4, and 5: Those question aim to know the impact of dollarization on accounting system of a company There are five-points Likert scales to choose: 1- Strongly disagree, 2- disagree, 3neutral/no opinion, 4- agree, 5- strongly agree In the statement 1, I ask companies that whether company has difficult when record the situation of one dollar with two listed price And this is the result, on 15 companies in my survey, companies strongly disagree with this statement, companies disagree, companies give neutral/no opinion, companies total agree, and companies strongly agree with my statement 50 In the statement 2, I want to know that whether companies have to take a lot of time to record exchange difference And this is the result, on 15 companies in my survey, company strongly disagree that they take a lot of time to record exchange difference, companies disagree, companies give neutral/no opinion, companies which have the largest proportion agree with this statement, and companies strongly agree with my statement In the statement 3, I ask companies that accountants in your company have to more work because of U.S dollar transactions The result shows that in 15 companies have companies strongly disagree with this statement, companies disagree that their accountants have to more work because of U.S dollar transactions, companies give neutral/no opinion, companies total agree, and companies strongly agree with my statement Statement Strongly agree Statement Agree Neutral Disagree Strongly disagree Statement 3 51 Question 6: The objective of this question is to know what methods that companies use to calculated exchange rate differences There are four methods included 1- Specific actual, 2- LIFO, 3- FIFO, 4- Average From this chart below, we can see that companies answer that they use Average method to calculate exchange rate differences- this is the highest result And the second higher result is both LIFO and FIFO method are chosen by companies Specific actual method is the choice of companies Figure 4.5: Methods Specific Actual, Average, LIFO, FIFO, 52 4.3.2 People Survey I did my survey with 100 people in Thanh Xuan District, Ha Noi Capital People survey focused on their age, and gender Here is the result of the survey There are 50 female and 50 male people participate to my survey They are citizens in Thanh Xuan District, Ha Noi Capital In my survey with male people, there are 17 people in age of 18-30 years old, 10 people in age of 30-40 years old, 11 people in age of 40-50 years old, and 12 people in age of 50- 60 years old And in my survey with female people, there are 18 people are 18-30 years old, people are of 30-40 years old, 10 people are 40-50 years old, and 13 people are 50- 60 years old They can be a students, employees, businessman, retires and households Almost of them are people who have fixed jobs or have fixed income The figure below shows the statistic of 100 male and female’s age 13 10 Female 18 12 11 Male 10 17 50-60 40-50 10 30-40 12 14 16 18 18-30 Here are the specific results of my specific questions for citizens in Thanh Xuan District, Ha Noi Capital 53 Question 1: The question aim to know the level use U.S dollar of Vietnamese people from 18 to 60 years old There are four options to answers: Do not use, rarely use, sometimes use, frequently use From the chart above, we can see that Vietnamese people in this case is people in Thanh Xuan District, Ha Noi capital usually use USD with 19 people frequently use and 36 people sometimes use Besides, 18 people in this survey answered that they not use USD and 27 people said that they rarely use USD Figure 4.7: Level use USD of Vietnamese 19% 18% Do not use Rarely use Sometimes use 27% 36% 54 Frequently use Question 2: The goal of this question is to see what kinds of things that Vietnamese people use USD to pay The answer for this question can be multiple When I survey people in Thanh Xuan District, Ha Noi capital, I find that 44 people answered that they use USD to saving (almost people are middle age from 40 to 60 years old), 30 people suggest that they use USD to purchased goods such as cars, house, and electronics goods Besides, 15 people use USD to pay their tuition and 11 people use USD when they go overseas Figure 4.8: Activities that use USD 44 Saving 11 Tourist 15 Tuition 30 Purchase 10 15 20 25 Activities that use USD 55 30 35 40 45 Question 3: This question aim to know whether Vietnamese people have USD in the banks The answer for this question included two choices yes or no Like the result from question 2, almost people are middle age from 40 to 60 years old have saving accounts in banks Moreover, people from 35 to 40 years old also have save USD in bank accounts Therefore, I find that more than 50% (54 people) say yes and 46 people say no when I ask them this question Question 4: The objective of this question is to find out what people thinks about USD and VND I ask them whether they think that USD is more stable than VND There are five-points Likert scales to choose: 1- Strongly disagree, 2- disagree, 3neutral/no opinion, 4- agree, 5- strongly agree The result shows that, from 100 people in my survey, have 36 people strongly disagree with this statement, 24 disagree that USD is more stable than VND, 15 people give neutral/no opinion, 13 people agree, and 12 strongly agree with my statement 56 CHAPTER 5: CONCLUSION Nowadays, the term “dollarization” has become similar term to Vietnam’s firms and people The dollarization ratio of Vietnam is quite high, always more than 20% U.S dollar is used widely in Vietnam market Vietnamese people use USD to buy house, cars, houses and other information technology products, clothing and other luxury products Besides, Vietnam’s firms such as the joint venture, 100% foreign capital, some employees were paid in dollars In Vietnam’s open market economy, dollarization are see clearly in two important sectors include dollarization in bank sector and dollarization in trade and invest sector Vietnamese people now concern more about the impact of dollarization so I concentrate on analysis the impact of dollarization on Vietnam’s accounting system and economy Dollarization of the economy can be understand as in an economy when the foreign currencies are widely used to alternative all or some functional of domestic currency, then the economy were considered as whole or part of dollarization According to the criteria of the International Monetary Fund (IMF), an economy is considered to be high dollarization situation when the proportion of foreign currency deposits (FCD) accounted for 30% or more in the broad money (M2) included cash in circulation, cash deposits, term deposits and foreign currency deposits Dollarization represents into three forms included payment dollarization, financial dollarization and real dollarization Unofficial dollarization, semi-official dollarization, and official dollarization are three types of dollarization There are five factors to cause dollarization in Vietnam Accounting dollarization refers to an accounting model which is similar to Constant Purchasing Power Accounting as defined in IAS 29 The purpose of IAS 29 is 57 to provide specific standard for reporting entities during hyperinflation period, so financial information of companies is meaningful Accounting dollarization is not similar to U.S GAAP and also opposite to functional currency Accounting Standards VAS 10 - Effect of changes in exchange rate which is same as IAS 21 It was issued to guide the accounting of exchange differences arise for almost all types of enterprises operating in the national economy and has kept pace with the provisions of International Accounting Standards According to the VAS 10, exchange differences arising are classified into two types: complete and uncompleted exchange difference Dollarization is a hard situation in Vietnam In this project, readers can see the impact of dollarization on accounting system of PITCO and also know advantages and disadvantages of dollarization on Vietnam’s economy To know more about the impact of dollarization on on Vietnam’s accounting system and economy, the survey with Vietnam’s companies and people was done The result from this survey shows that dollarization has strong impact on Vietnam’s accounting system and economy However, my project still has some limited The scope of my survey is too narrow I only concentrate on survey with people in Thanh Xuan District, Ha Noi and also on companies which use USD in their transactions Ha Noi is a large city with many districts and residents, so the different areas have different characteristics Additionally, the quantities of my survey is too small so it difficult to evaluate Besides, the honest of people involved in this survey, the information that companies and people provided, and the change of monetary policies related to U.S dollar Therefore, in order to have a broader, more accurate and complete view on this issue in Vietnam several studies need to be carried out 58 REFERENCES: Monetary policy in dollarized economies by Tomás J T Baliño, Adam Bennett, Eduardo Borensztein Economic policy in a highly dollarized economy by Mario de Zamaróczy, SopanhaSa, International Monetary Fund The Princeton Encyclopedia of the World Economy, by Kenneth A Reinert, Ramkishen S Rajan, Amy Jocelyn Glass, Lewis S Davis, Princeton University Press, 2009 Contemporary Vietnam, A guide to economic and political developments, by Ian Jeffries, First publish in 2011 by Routledge Barajas, A., Morales, R.A., 2003, “Dollarization of Liabilities: Beyond the Usual Suspects,” IMF Working Paper 03/11 Cayazzo, J et al., 2006, “Toward and Effective Supervision of Partially Dollarized Banking Systems,” IMF Working Paper 06/32 Galindo, A and L Leiderman, 2005, “Living with Dollarization and the Route to Dedollarization,” IDB Working Paper No 526 (Washington DC: Inter-American Development Bank) Nicolo, G.D “Dollarization of bank deposits: Causes and consequences”, Journal of Banking and Finance, 200507 The State Bank of Viet Nam [Online] 59 Available from: http://www.sbv.gov.vn/wps/portal/vn 10 General Statistics Office [Online] Available from: http://www.gso.gov.vn/ 11 What does Dollarization mean? [Online] Available from: http://www.investopedia.com/terms/d/dollarization.asp 12 Vietnam needs to reduce dollar’s use in economy, ADB aide says [Online] Available from: http://www.saigon-gpdaily.com.vn/Business/2011/4/91267/ 13 Dollarization and dollarization in Viet Nam [Online] Available from: http://www.docstoc.com/docs/67819296/ 14 IMF Annual Report 1998 [Online] Available from: http://www.imf.org/external/pubs/ft/ar/98/pdf/file03.pdf 15 Monetary Policies in Dollarized Economies [Online] Available from: http://www.imf.org/external/pubs/nft/op/171/index.htm 16 Vietnam tightens dollar holdings, caps interest rate [Online] Available from: http://arabnews.com/economy/article351595.ece 17 Schuler, Kurt “Dollarization, Basic understanding”, published 2001 [Online] Available from: http://www.stern.nyu.edu/globalmacro/ 60 18 The U.S Dollar's Unofficial Status as World Currency [Online] Available from: http://www.investopedia.com/articles/07/unofficial_dollarization.asp Available from: http://www.bsc.com.vn/News/2010/12/30/128019.aspx 19 Accounting Dollarization [Online] Available from: http://realvalueaccounting.blogspot.com/2011/04/accounting- dollarization.html 20 IAS 29 Financial Reporting In Hyperinflationary Economies [Online] Available from: http://www.iasplus.com/standard/ias29.htm 21 Petrolimex International Trading Joint Stock Company (PITCO) [Online] Available from: http://www.pitco.com.vn 22 IAS 21[Online] Available from: http://www.iasplus.com/standard/ias21.htm 23 Accounting Standards No 10 - Effect of changes in exchange rate [Online] Available from: http://www.ketoantruong.com.vn 61 APPENDIX A: QUESTIONNAIRE Companies Survey Company Information Name: Size: Sector: Questionnaire 1) The frequently use of USD in your company 1- Do not use 2- Rarely use 3- Sometimes use 4- Frequently use 2) What kinds of things that your company uses USD for _ 3) Your company has difficult when record the situation of one dollar with two listed price 1- Strongly disagree, 2- disagree, 3- neutral/no opinion, 4- agree, 5- strongly agree 4) Your company has to take a lot of time to record exchange difference 1- Strongly disagree, 2- disagree, 3- neutral/no opinion, 4- agree, 5- strongly agree 5) Accountants in your company have to more work because of U.S dollar transactions 62 1- Strongly disagree, 2- disagree, 3- neutral/no opinion, 4- agree, 5- strongly agree 6) Your company calculated exchange rate differences by which methods 1- Specific actual, 2- LIFO, 3- FIFO, 4- Average People Survey People Information Name: Age: Gender: 1- Male 2-Female Job: Questionnaire 1) Do you usually use U.S dollar 1- Do not use 2- Rarely use 3- Sometimes use 4- Frequently use 2) What kinds of things that you use USD to pay 3) Do you save U.S dollar in the banks 1- Yes 2- No 4) You think that USD is more stable than VND 1- Strongly disagree, 2- disagree, 3- neutral/no opinion, 4- agree, 5- strongly agree 63 ... project to my family who always loving, supporting and believing in me THE SITUATION OF DOLLLARIZATION IN VIETNAM, IT IMPACTS ON ACCOUNTING SYSTEM AND ECONOMY OF VIETNAM AND ACTIONS TO FIGHT ITS. . .THE SITUATION OF DOLLLARIZATION IN VIETNAM, IT IMPACTS ON ACCOUNTING SYSTEM AND ECONOMY OF VIETNAM AND ACTIONS TO FIGHT ITS BY DAO THI THU HUYEN E0700248 Graduation Project Submitted to the. .. Limitation CHAPTER 37 FINDING AND ANALYSIS 4.1 The Impacts of Dollarization on Accounting System and Economy of Vietnam 4.1.1 The Impacts of Dollarization on Accounting System 38-42 4.1.2 The Impacts