Managing foreign exchange rate vietnam,graduation thesis

From that fact, I choose the study “MANAGINGFOREIGN EXCHANGE RATE IN VIET NAM” in order to assess the situation of applying the current exchange rate regime, the exchange rate management

BANKING ACADEMY Foreign Language Faculty

GRADUATION THESIS

MANAGING FOREIGN EXCHANGE RATE VIET NAM

Student name : Le Thi Hai Yen

Class : ATCA-K11

Lecturers : Nguyen Hong Thang,

Nguyen Thi Minh Hang

June, 6th 2012

TABLE OF CONTENTS

ACKNOWLEDGEMENT

ABSTRACT

List of tables

List of figures

List of abbreviations

CHAPTER I: INTRODUCTION 1

1.1 Rationale of the research 1

1.2 Objectives of the research 2

1.3 Scope of the research 2

1.4 Research Methodology 2

1.5 Structure of the research 2

CHAPTER 2: THEORETICAL FRAMEWORK 3

2.1 Overview of exchange rate 3

2.1.1 Definition of ER 4

2.1.2 Classification of ER 4

2.2 Determinants of exchange rate 5

2.2.1 Monetary policy 5

2.2.2 Supply and demand for foreign currency 5

2.2.3 Differentials in inflation 5

2.2.4 Differentials in interest rates 6

2.2.5 Political stability and economic performance 6

2.3 Foreign exchange rate policy 6

2.3.1 Definition and goals of ER policy 6

2.3.2 Foreign exchange rate management regimes 7

2.3.2.1 Fixed exchange rate: 7

2.3.2.2 Floating exchange rate: 7

2.4 Tools for the exchange rate management: 8

2.4.1 Tools directly affect ER: 8

2.4.2 Tools indirectly affect ER: 8

2.5 Experiences of some countries in the exchange rate management and lessons for Viet Nam 9

2.5.1 Experience of China 10

2.5.2 Experience of Thai Land 11

2.5.3 Lessons for Viet Nam 14

CHAPTER 3: THE EXCHANGE MANAGEMENT IN VIET NAM 15

3.1 The exchange management in Viet Nam 15

3.1.1 From 1992 to 1997 (Before Asia Financial Crisis) 15

3.1.2 From 1997 to 1999 (Asia Financial crisis period) 17

3.1.3 From 1999 to 2006 (After Asian financial crisis and before joining WTO) 18 3.1.4 From 2007 to present (After joining WTO) 21

3.2 Assessment of the ER management in Vietnam 30

3.2.1 Achievements 30

3.2.1.1 The ER management mechanism was more flexible 30

3.2.1.2 International balance of payment was improved 31

3.2.1.3 The forex was pushed up to develop 31

3.2.2 Drawbacks 31

3.2.3 The causes 32

3.2.3.1 Objective causes 32

3.2.3.2 Subjective causes 33

CHAPTER 4: RECOMMENDATIONS AND CONCLUSION 34 CONCLUSION

References

ACKNOWLEDGEMENT

I would like to acknowledge my heartfelt thanks to PhD Nguyen Hong Thang, Faculty of Banking and MBA Nguyen Thi Minh Hang, Faculty of Foreign languages, Baking Academyfor their guidance during the entire period of preparationof this thesis

I would like to send my thanks to The Board of Director of Bank for development of Viet Nam, ThanhHoa branch, who allowed me to consult the company’s materials, always encouraged me as well as gave me much of time to domyresearch

I would like to also express my special thanks to all lecturers in Faculty of Foreign Languages and Faculty of Banking, Banking Academy for their invaluable advices and their kind support to complete this thesis Without their support it is believed that this thesis is hardly to be finished

ABSTRACT

For an open economy like Viet Nam, issues surrounding ER are often very important The determination of ER rate and the ER management policy have with components of aggregate demand, aggregate supply, as well as its impact on capital flows, on the independence of monetary policy, and on the effectiveness of macroeconomic policies are significant concern of policy-makers Therefore, it is necessary to study the ER management and find out some solutions to improve the ER management in Viet Nam in the coming time

The research in this study attempts to give an overall picture of the ER and the

ER management in Viet Nam and associated policies as well as to examine the ER’s impact on the main macroeconomic variables especially in the context of economic integration in Viet Nam before and after joining WTO (from 1992 to present) The focus of the research is as follows:

- To find out the information content of ER and the ER management as well as tools affect ER

- To identify the changes of ER and the impacts of these changes on the economy

- To assess the capability of the SBV in managing ER during the period before and after joining WTO

- To search for some solutions for the SBV to have smooth shift a more flexible and rational ER management

Besides a description of ER management in Viet Nam from 1992 to present, and

a review of the changes in the ER policy, the quantitative and econometric research methods are used in the analyses In discussing the ER management and the ER policy, reference is made to relevant theories and historical lessons of the other countries

List of tables

Table 2.1: Exchange rate, trade balance and foreign reserve of China in the period

2002-2007 10

Table 2.2: Exchange rate and trade balance of Thai Land from 2003 to 2008: 11

List of figures Figure 2.1: Fluctuation of the Baht/USD rate in the period 1994-2008 12

Figure 2.2: Thai Land trade balance in the period 1994-2008 13

Figure 3.1: Official ER fluctuation and free market ER in the1992- period 1996 16

Figure 3.2.: Official ER fluctuation and market ER in the 1999-2003 period 19

Figure 3.3: Daily VND/USD ER and bands, 2008-2011 23

Figure 3.4: Daily Official and Parallel Market ER, VND/USD, 2009-2011 24

List of abbreviations

CHAPTER I: INTRODUCTION

1.1 Rationale of the research

The young economy of Viet Nam is assessed to have many investment potentials

and opportunities, therefore the globalization and regionalization are the inevitable

trends That is the process with both opportunities and challenges for Viet Nam How

to integrate in the international economic efficiently and reduce risks of integration is

at the top concern of the developing countries like Viet Nam

In an open economy, the exchange rate becomes a tool for the government to

reduce impacts of shocks in the process of integration; therefore the country can

integrate more actively

The exchange rate is one of the complex matters, refer to many issues like

inflation, interest rate, trade deficit, employment, foreign debts, budget deficit, etc and

implementation of macroeconomic goals The exchange rate has impacted on the

economy of each country in particular, and international economic relationships in

general, especially the trade relations among countries, therefore it is always

concerned

Defining the suitable exchange rate policy will make the country more active in

unexpected changes so as to keep balance and prevent many shocks from the economy

As a result, it helps to stabilize the price and currency, attract investments, control

inflation, curb unemployment and increase the confidence of the residents in the

domestic currency and the economic policy In Viet Nam, although the management of

exchange rate in recent years has showed a certain role, there are still many limitations

that need to be overcome Additionally, in the new situation, the management of

exchange rate must be more flexible and efficient From that fact, I choose the study

“MANAGINGFOREIGN EXCHANGE RATE IN VIET NAM” in order to assess the

situation of applying the current exchange rate regime, the exchange rate management

policy especially in the period of after joining WTO and give some recommendations

to improve the exchange rate policy in Viet Nam in the coming time

1.2 Objectives of the research

The thesis aims at studying the exchange rate management in Viet Nam from

1992 to present and bringing out some solutions to improve the exchange rate

management in the coming time

The thesis is designed to answer the following questions:

- What is the exchange rate and how to manage it?

- What are lessons for Viet Nam in managing the exchange rate policy?

- How does the exchange rate in Viet Nam change?

- What does the CB do to deal with these changes?

1.3 Scope of the research

The research is placed in the context of Viet Nam on the process of joining

WTO, from which the changes of ER and the ER management before and after WTO

are given to analyze and find out the solutions to improve the ER management in Viet

Nam in the coming time

1.4 Research Methodology

The methods used herein mainly include quantitative research method, sample

selection, data analysis and descriptive statistic.The research is also used the secondary

data such as websites, annual reports, financial statement and newspapers Meanwhile, the

methods are combined with the modern economic theories and experiences of some

countries in the exchange rate management, from which the orientation of improving the

exchange rate management mechanism will be given to Viet Nam

1.5 Structure of the research

The rest of this thesis is divided into three chapters accompanying with detailed

discussion in each

 Chapter 2 presents an overview of existing literature on the exchange rate that

helps to provide a solid foundation for the thesis

 Chapter3 discusses about the situation of Viet Nam in managing the exchange

rate from 1992 to present

 Chapter 4 gives some suggestions and recommendations for Viet Nam in

managing the exchange rate basing on all previous researches and analyses

CHAPTER 2: THEORETICAL FRAMEWORK

2.1 Overview of exchange rate

2.1.1 Definition of ER

An exchange rate (also known as the foreign-exchange rate, forex rate or FX

rate) between two currencies is the rate at which one currency will be exchanged for

another It is also regarded as the value of one country’s currency in terms of another

currency

An exchange rate is usually quoted in terms of the number of units of one

currency that can be exchanged for one unit of another currency - e.g., in the form:

1.2290 USD/EUR In this example, the US$ is referred to as the "quote currency"

(price currency, payment currency) and the Euro is the "base currency" (unit currency,

transaction currency)

2.1.2 Classification of ER

 Nominal exchange rate: The nominal exchange rate ε is defined as the number

of units of the domestic currency that can purchase a unit of a given foreign

currency A decrease in this variable is termed nominal appreciation of the

currency (Under the fixed exchange rate regime, a downward adjustment of the

rate ε is termed revaluation.) An increase in this variable is termed nominal

depreciation of the currency (Under the fixed exchange rate regime, an upward

adjustment of the rate ε is called devaluation.)

 Real exchange rate: The real exchange rate Q is defined as the ratio of the

domestic price level and the price level abroad, where the latter is converted

into the domestic currency units via the current nominal exchange rate

Formally, Q = P d/( ε*P f), where the domestic price level is denoted as P d and

the foreign price level as P f This rate tells us how many times more goods and

services can be purchased abroad (after conversion into a foreign currency) than

in the domestic market for a given amount In practice, changes of the real

exchange rate rather than its absolute level are important An increase in the real

exchange rate Q is termed appreciation of the real exchange rate, a decrease is

termed depreciation In contrast to the nominal exchange rate, the real exchange

rate is always 'floating", since even in the regime of a fixed nominal exchange

rate ε, Q can move via price-level changes

Note: Real appreciation means an increase in the real exchange rate Q, whereas

nominal appreciation means a decrease in the nominal exchange rate ε

2.2 Determinants of exchange rate

Numerous factors determine exchange rates, and all are related to the trading

relationship between the two countries The exchange rates are relative, and are

expressed as a comparison of the currencies of two countries The following are some

of the principal determinants of the exchange rate between two countries

2.2.1 Monetary policy

When a CB believes that intervention in the forex market is effective and the

results would be consistent with the government’s monetary policy, it will participate

in forex trading and influence on the exchange rates TheCB generally participates by

buying or selling the domestic currency so as to stabilize it at a level that it is realistic

and ideal Judgment on the possible impact of government’s monetary policy and

prediction on future policy by other market players will affect the exchange rates as

well

2.2.2 Supply and demand for foreign currency

Exchange rate is the price of the foreign currency calculated by the domestic

currency Therefore, the demand-supply relationship of foreign currency affects

directly the change of the exchange rate When the supply for foreign currency

increases (or the demand for foreign currency decrease), the exchange rate decreases

and vice versa The supply and demand for foreign currency, in turn, are influenced by

many factors such as balanced of payment (BOP), unusual demands foreign currency

2.2.3.Differentials in inflation

As a general rule, a country with a consistently lower inflation rate exhibits a

rising currency value, as its purchasing power increases relatively comparedto other

currencies During the last half of the twentieth century, the countries with low

inflation included Japan, Germany and Switzerland, while the U.S and Canada

achieved low inflation only later Those countries with higher inflation typically see

depreciation in their currency in relation to the currencies of their trading partners

This is also usually accompanied by higher interest rates

2.2.4 Differentials in interest rates

Interest rates, inflation and exchange rates are all highly correlated By

manipulating interest rates, CBs exert influence over both inflation and exchange rates,

and changing interest rates impact inflation and currency values Higher interest rates

offer lenders in an economy a higher return relative to other countries Therefore,

higher interest rates attract foreign capital and cause the exchange rate to rise The

impact of higher interest rates is mitigated, however, if inflation in the country is much

higher than in others, or if additional factors serve to drive the currency down The

opposite relationship exists for decreasing interest rates – that is, lower interest rates

tend to decrease ER

2.2.5 Political stability and economic performance

Foreign investors inevitably seek out stable countries with strong economic

performance to invest their capital A country with such positive attributes will draw

investment funds away from other countries perceived to have more political and

economic risk Political turmoil, for example, can cause a loss of confidence in a

currency and a movement of capital to the currencies of more stable countries

2.3 Foreign exchange rate policy

2.3.1 Definition and goals of ER policy

 Definition of ER policy:

Exchange rate policy is Government’s act (often the Central Bank) through a

certain exchange rate regime (or the mechanism to manage the exchange rate) and a

set of intervention tools so as to maintain a fixed exchange rate at a level, or to make

the exchange rate fluctuate to a necessary level in line with the national economic

policy goal

 Goals of ER policy:

Exchange rate policy plays an important role in foreign- economic activities

through the application of exchange rate policy to gain some certain goals as follows:

- Stabilize the price:

In case of other factors remain unchanged, when the domestic currency

devaluates, the price of import goods calculated by the domestic currency will

increase, making the average price of the economy increase or cause inflation The

more the exchange rate increases and the bigger the goods proportion andthe higher

the inflation rate, and vice versa Thereby, the exchange rate policy is the efficient tool

to reach the goal of stabilizing price

- Improve the economy growth and create more jobs:

When other factors remain unchanged, the domestic currency devaluation policy

can stimulate to increase export and curb import, then directly increase the national

income and increase jobs through the formula:

Y=C+I+G+X-M

On the contrary, when other factors remain unchanged, the domestic currency

appreciation will affect to decrease the economy growth rate and increase

unemployment rate

2.3.2 Foreign exchange rate management regimes

The exchange rate plays an important role in the growth and stability of the

economy Therefore, the exchange rate policy of any countries is considered an

insufficient part of the national monetary policy Maintaining the macroeconomic

stability is necessary for economic growth and of the top goals of the national

economic policies A country establishes its exchange rate policy based on the

conditions and time

2.3.2.1 Fixed exchange rate:

A fixed exchange rate, sometimes called a pegged exchange rate, is also referred

to as the Tag of particular Rate, which is a type of ER regime wherein currency's value

is matched to the value of another single currency or to a basket of other currencies, or

to another measure of value, such as gold

2.3.2.2 Floating exchange rate:

A floating exchange rate or fluctuating exchange rate is a type of exchange rate

wherein a currency's value is allowed to fluctuate according to the foreign exchange

market A currency that uses a floating exchange rate is known as a floating currency

- Free-Floating exchange rate:

The rate is defined by the demand- supply relationship in the forex market

without the Government’s intervention

- Managed floating exchange rate:

The rate is also formed on the basic of market according to the demand-supply

rule The units who manage the monetary policy, just impact on the exchange rate by

market tools to affect the forex market

2.4 Tools for the exchange rate management:

2.4.1 Toolsdirectly affectER:

Normally, the CB acts in the forex through trading the domestic currency in

order to maintain a fix ER or affect ER to change at a level on purpose When the CB

intervene on the forex, the money supply can be changed and cause unexpected

inflation or deflation for the economy Therefore, when the CB intervenes directly on

the forex, it often uses addition the open market operations to absorb supply surplus or

supplement the currency shortage in the monetary circulation The trading of

oversea-domestic currency assets coincides with trading of stock The combination of those

operations only changes foreign reserve of a country but not change the monetary

supply, and therefore it doesn’t change ER and currencies value

Besides, connecting method is also used to adjust ER:

The Government requires the legal individuals and corporations who have foreign

currency to sell a certain amount of foreign currency at a certain time to the units

which are allowed to trade foreign currency The main purpose of this method is

increasing foreign currency to adapt the foreign currency in the market, restrict

stipulation, and lower the pressure of the domestic currency devaluation

2.4.2 Toolsindirectly affect ER:

 Rediscount interest rate:

In the condition that other factors remain unchanged, when the CB increases the

rediscount rate, the average rate in the market will increase Specifically, when the

basic interest rate increases, the loan rate and the deposit rate also increase The

increase of interest rate will attract many foreign currency capitals into the country

That makes foreign currency supply increase While the demand is unchanged, the

domestic currency will appreciate relatively compared to foreign currency This means

that the exchange rate decreases The contrary situation is like that

 Tax:

High tax can contribute to curb import When the import decreases, the foreign

currency will decrease too, then the domestic currency will appreciate Low tax has

opposite influence

 Quota:

Like the case of high tax, low quota can help to curb import, making the

domestic currency increase However, when the quota is omitted, the domestic

currency will decrease

 Price:

Through the price system, the Government can give the price support to the

strategic export goods or goods in the initial production The price support makes up

the volume of export, increases supply for foreign currency, and then the domestic

currency appreciates The Government can also compensate the price for some

primary import goods to serve the requirements of national development, increase

demands for foreign currency, therefore the domestic currency depreciates

Beside the popular tools which affect indirectly ER, in each period the

government of developing countries can apply some other methods such as: Adjust the

reserve requirement in foreign currency at commercial banks; regulate the unattractive

ceiling interest rate for foreign currency deposits; regulate the foreign currency

situation for commercial banks

2.5 Experiences of some countries in the exchange rate management and lessons

for Viet Nam

2.5.1 Experience of China

 From 1997 to 21/7/2005: CNY was fixed with USD at the rate of 8.28

CNY/USD According to the analysts, evidence which showed that CNY was

being pressed down was the sudden increase in the national budget China

which was successful in exporting became “a magnet” attracting the big amount

of foreign currency (Table 2.1) The United States industrial experts believed

that the reason why China gained that achievement was their advantage in

currency and CNY was maintained in an artificially cheap regime against USD

Therefore, the export goods became cheaper In this situation, the United States

and other commercial partners of China put pressure to increase the price of

CNY Finally, China had to adjust the exchange rate in 2005

Table 2.1: Exchange rate, trade balance and foreign reserve of China in the

In 2005, the CB of China announced to change the exchange rate regime The

exchange rate was defined basing on a basket of currencies and along with anchoring

the exchange rate; China’s CB allowed the fluctuation band of the bilateral exchange

rate to be 0.3 %

However, based on the real figure of the CNY nominated bilateral exchange rate,

Guonan % McClaukey believed that this exchange rate fluctuated with the band of 2

%/ year (B-band) and the daily fluctuation was 0.06 % (C-Crawl)

It can be seen that, China exchange rate regime was a kind of BBC exchange rate

regime (Basket, Band and Crawl/Regime)-the regime base on currency basket with

periodically adjusted large band Compared to theory, the fluctuation band of exchange

rate (B-band) was quite small with 2 %/year Although the bilateral exchange rate

CNY/USD decreased, the nominated multilateral exchange rate of CNY experienced

the gradual upward trend Thereby, China still maintained the competitiveness

advantage in the international trade compared to other nations That contributed

positively to economic growth and surplus of trade balance of China

2.5.2 Experience of Thai Land

Before financial crisis in 1997, due to the manufacturing industry, Thai Land’s

economy had grown rapidly at 9.4 % in a decade till 1996 Factors contributed to that

success of Thai Land included: making use of natural resources, cheap and numerous

employees, financial conservative materialism, the open foreign investment policy and

the encouragement in private field, the open-door policy to develop export

Export quota of Thai Land has mainly been shown in table 2.2:

Table 2.2: Exchange rate and trade balance of Thai Land from 2003 to 2008:

(Source: Statistics from ADB)

To gain those results, Thai Land government had made effort to improve trade

balance such as: improve the economic environment, improve trade policy mechanism

and devaluate Bath and affect international balance of payment of Thai Land

Because of financial difficulty i.e serious lack of foreign currency, in the period before

the crisis, Asian countries kept the fixed exchange rate compared to USD With Thai

Land, implementing fixed exchange rate policy compared to USD was the

overestimation of Baht value while USD, JPY and other currencies increased rapidly

Although the official exchange rate between Baht and USD increased, according to

PPP doctrine, Baht depreciated about 20% compared to USD but it just be adjusted a

little (about 6%)

Therefore, that Baht was floated was the necessary phenomenon to repay its

real value Since 1996, Thai Land’s economic growth decreased considerably and the

export limit growth also decreased remarkably

Reasons for export decrease in this period included: global trade growth decline, the

real ERappreciation of East Asia countries Current account surplus of Thai Land was

up to 7.9 % in 1996 This rate continued to be financed by short-term capitals from

oversea Since capital account was free and the debit control was weak, the foreign

funds flew more and more in Thai Land

Only in 10 years from 1987 to 1996, 100 billion USD was flown into Thai Land, in

which short-term capitals that was loaned by domestic financial corporations,

accounted for a big proportion Moreover, the fixed ER at 25 Baht/USD in a long time

and the continuous trade deficit created greater Baht depreciation pressure

Figure2.1: Fluctuation of the Baht/USD rate in the period 1994-2008

(Source: Authors, Asian Development Bank-ADB)

Under the pressure of due debts and continuous trade deficit, although Thai

Land sold nearly 15 billion USD out of nearly 40 billion foreign currency reserves, it

could not keep the temporary rate Thai Land had to endure Baht devaluation and the

crisis with serious consequences for the economy

Only a day after the Government had informed the devaluation, Baht lost more than

20% of its value, and then continued decreasing Baht/USD increased from 25.61 to

47.25 This rate increased the export competitiveness of Thai Land in general,

maritime-agriculture products in particular, and also curbed import Consequently,

Thai Land decreased trade deficit from 9.5 billion USD in 1991 to 4.624 billion USD

in 1997, and the surplus got 11.973 billion USD in 2007

On July 2nd, 1997, Thai Land ran out of foreign currency reserves in effort to

protect Baht from being affected by a big stipulation and had to float Baht This

currency depreciated rapidly at once Chain reaction spread out when investors drew

their capitals from countries with the same symptom as Indonesia, Malaysia and

Korea

Figure2.2: Thai Land trade balance in the period 1994-2008

Export Import Trade balance

(Source: Authors, Asian Development Bank-ADB)

From the end of 1998 to 2004, Baht/USD sometimes decreased and then

increased slightly but generally kept at the fixed level The rate increased slightly from

39.06 in 2004 to 41.03 in 2005 but up to now, the rate has decreased due to USD

depreciation Although Thai Land always set special priority to export, it had to accept

for domestic rate to increase more than 20% compared to USD and maintained the

inflation rate at 3% on average from 1996 to now because Thai Land government saw

that in the current world condition, the domestic currency increase compared to USD

is the advantageous policy

2.5.3 Lessons for Viet Nam

After studying the experiences of China and Thai Land in the ER management,

some lessons are drawn for Viet Nam as follows:

- It is necessary to have flexible ER policy in particular situations, and the

Government also has to orient clearly about ER in the long-term so as to make

foundation for short-term adjustment Therefore, the Government needs to have the

close monitoring mechanism about the fluctuation of ER both in domestic and

oversea market to realize the movement trend of ER especially among currencies

on behalf of big and global economic centers such as USD, EUR, etc

- Macroeconomic policies need to be combined closely in the reform, inER

policy, ER adjustment impacts on price in the country and in the world

Changing ER is also the first condition of changing trade policy, especially in

the open period However, without changing trade policy, the change of ER will

operate inefficiently In terms of combing with other fields in the economy,

changingERshouldn’tbe strict andmust be in line with different development

periods of the economy

- The government needs to maintain an ER policy in line with the national

economic development strategy in each period An ER policy is considered the

suitable policy which includes:

+ Choosing the suitable time for the domestic currency devaluation

+ MaintainingER in line with the development goal of improving the

competitiveness capacity of the economy

+ Avoiding holding a domestic currency and a strong foreign currency for a

long time

CHAPTER 3: THE EXCHANGE MANAGEMENT IN VIET NAM

3.1 The exchange management in Viet Nam

3.1.1 From 1992 to 1997 (Before Asia Financial Crisis)

During the period from 1989 to 1991, Viet Nam applied free – floating ER

which was still insensible because of lacking the close control of the State about

foreign currency input Therefore, the foreign currency reserve of the countryincreases

slowly Then the forex market faced with some periodic fevers, (i) financial deficit, (ii)

the increase in foreign debts, (iii)high inflation rate, and (iv) thesmall foreign currency

reserve Therefore, from 1992 to the period of Asian financial crisis (7/1997), Viet

Nam policy makers changed to manage ER with the aim of controlling inflation

through the fixedER policy

From that, the CB directly impacted on ER by applying requirements in

transactions in the forex market, announcing official ER every day and defining the

band of ER fluctuation compared to official ER CB seemingly played the role as the

final trader each day whereas other members in banking system were only allowed to

trade at the stipulated band of 0.5% compared to official ER At that time, the

socioeconomic situation faced with some difficulties even though the inflation rate

already decreased sharply compared to that of the 1986-1988 periods By the end of

1991, the VND/USD rate had soared to 13,000 VND/USD and then dropped suddenly

to 11,000 VND/USD till 1992, followed by stabilizing at a very low level from 10,500

to 11,150 VND/USD during 4 years from 1992 However, in 1996, trade deficit

increased to 16% GDP and balance of trade deficit was up to 4 billion USD, which

putting pressure on VND depreciation Meanwhile USD appreciated in relation to

other strong currencies Therefore, the State decided to widen ER band from 0, 5 % to

1 % on 11/1996 and till 2/1997 was 5%

Figure 3.1: Official ER fluctuation and free market ER in the1992- period 1996

(Source: The State Bank of Viet Nam)

In addition, the government improved the information control, declared

economic index such as official ER, market ER, ER index, etc in order to curb

stipulation Moreover, the government controlled closely foreign currency input and

output and enhanced more measures to manage foreign currency under decision No

396/TTg of Prime Minister issued on 4/8/1994

However, the management of ER of Viet Nam in the period from 1992 to 1997

was still inflexible and passive The maintenance of nominal ER at almost fixed level