Dollarization in Vietnam

Topics: Currency, United States dollar, Monetary policy Pages: 8 (2734 words) Published: May 10, 2013
Executive Summary

This report is written to analyze the dollarization in Vietnam, including the causes, current situation, its effects in the domestic economy and some proposed solution to minimize the dollarization. According to the standard set up by IMF, Vietnam is considered as one of countries that have underwent the dollarization. Also, in IMF’s judgment, among three types of the dollarization, our country’s current situation is on the way of unofficial dollarization. About the reasons of this phenomenon, Vietnamese people still have not had the confidence in the government’s monetary policies, resulting in their concern for the dong depreciation. Besides, a massive increase of the foreign currency, say USD, in the daily trading market also makes the dollarization more popular in the domestic economy. The dollarization has exerted both positive and negative impacts on the economy. In particular, the latter draws more attraction from the government and the central bank due to its interference with the economic growth. That is the dollarization has led to the instability of foreign exchange market and the difficulty in monetary policy determination. To reduce the dollarization, the government has implemented some strategies related to the monetary and investment policy. It aims at increasing the dong value by adopting interest rate reform and also collecting the amount of dollars in the market through some big investment projects as well as financial instruments issue of commercial banks.

Table of Contents
Executive summaryi
List of figuresiii
1. Introduction1
2. Overview about dollarization1
2.1. Definition1
2.2. Types1
2.3. Causes2
3. Current situation of dollarization in Vietnam2
4. Effects to the economy4
4.1. Negative effects4
4.2. Positive effects5
5. Government’s proposed solutions6
6. Conclusion7

List of figures
Figure 1. The fluctuation of the exchange rate USD/VND4
Figure 2. FCD/M2 – Savings in dollar/Total savings5
Figure 3. The number of deposit in USD in the bank6

1. Introduction
Vietnam economy is in the process of the deep integration with the world. This provides Vietnam with chances as well as challenges for the economy, especially macroeconomic policies of the government to stabilize it. One of the major challenges we are dealing with is dollarization which attracted many public opinions about the unusual problem in the field of banking activities. This issue takes place in almost of the developing countries having the transition economy. Although this phenomenon is not new, it happens complexly in recent times and extremely impacts on the economy. 2. Overview about dollarization

2.1. Definition
Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency as a store of value, unit of account, and/or medium of exchange within the domestic economy. The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency. There are two common indicators of dollarization. The first one is the share of foreign currency deposits (FCD) in the domestic banking system in the broad money including of FCD. The second measure is the share of all foreign currency deposits held by domestic residents at home and abroad in their total monetary assets. 2.2. Types

Depending on the degree in using dollar in the economic and the nation’s attitude about recognizing or not, the dollarization is divided in to three types: Unofficial Dollarization; Official Dollarization; Semiofficially Dollarization  * Unofficial Dollarization: Is the most popular type of dollarization. Unofficial dollarization happens when residents of a country choose to hold a significant share of their financial assets denominated in foreign currency although the foreign currency lacks the legers tender. They hold deposits in the foreign currency because...
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