Monetary policy and forex management amid rising inflation

Deputy Governor of the State Bank of Vietnam
Tuesday, March 12, 2024 09:21

Communist Review - Vietnam has marked outstanding achievements in macroeconomic management in recent years. In line with the Party and State's consistent policies on restructuring the economy towards modernization and rapid and sustainable development on the basis of  macroeconomic stability, the State Bank of Vietnam (SBV) has made encouraging progress in monetary policy management since 2011, contributing to enhanced economic resilience versus external economic and financial shocks. 

Politburo member and Prime Minister Pham Minh Chinh is introduced to digital transformation undertaken by some banks _Photo: VNA

Effective management of monetary policy to control inflation and support economic recovery and sustainable development

Vietnam’s notable achievements in macroeconomic management over the recent past include macroeconomic stability, controlled inflation, and stable financial and monetary markets. Economic growth averaged 6% per year in the 2016-2020 period, higher than the average 5.9% in the 2011-2015 period. Vietnam has experienced a high growth rate in the region and the world. Macroeconomic balances are maintained on the basis of solid state budget, effective control of public and foreign debt, record-high foreign exchange reserves, and the economy’s enhanced resilience against shocks from international markets. Thanks to an improved business environment and growth potential, Vietnam has emerged as a top alternative for global value chain shifts and its national credit rating has been upgraded by many international organizations. Foreign Direct Investment (FDI) in Vietnam has been on the  rise, focusing on production, processing, and manufacturing. As a result, the country has enjoyed a surplus in international trade and an improvement in labor productivity, growth quality, and national competitiveness.

The success of inflation control efforts was apparent  in the 2011-2015 period. Struck by the global economic and financial crisis, along with accumulated weaknesses over many years in the domestic economy, Vietnam faced significant and intertwined challenges right from the beginning of this period. These challenges included skyrocketing inflation (from 9.2% in 2010 to 18.6% in 2011, even 23% in August 2011). Disruption in major economic balances and high trade deficits put pressure on national reserves, affected the USD/VND exchange rate, and increased the risk of inflation. The monetary, foreign exchange, and gold markets fluctuated rigorously, with lending interest rates hiking to 20-25% per annum. The liquidity of the credit institution system was tense, foreign exchange reserves dropped, and the trend of dollarization and “goldization” increased amid growing inflation and macroeconomic instability.

In this context, the Government issued timely, comprehensive solutions, focusing on controlling inflation, stabilizing the macroeconomy, and ensuring social security and welfare for the poor. The solutions included reducing the money supply and credit growth rate (by ensuring a 15-16% growth rate in total payment instruments and keeping credit growth below 20%); prioritizing credit for production and business activities while tightly controlling credit in real estate, securities, and other sectors; and flexibly managing interest rates and foreign exchange rates in line with market developments. The Government also worked to reduce budget overspending to below 5% of the gross domestic product (GDP) by increasing budget revenue 7-8% and cutting regular expenditures 10%, as well as improving the efficiency of public investment. Other solutions were aimed at boosting production, business, and exports, controlling trade deficits, and promoting energy savings and efficiency. Adjustments in electricity and fuel prices went hand in hand with social security and support for poor households. Social security and welfare were enhanced and communication to raise public awareness was promoted.

Legal documents governing the management of monetary policies aimed at controlling inflation and ensuring macroeconomic stability were promptly reviewed and amended. In 2010, the National Assembly passed the Law on the State Bank of Vietnam, replacing the 1997 law. The new law, which took effect in 2011, clarifies the role and position of the SBV and the primary objective of its monetary policy, which is to stabilize the value of the currency, as reflected in the inflation target. This serves as a guiding principle for the SBV to effectively manage the monetary policy and make note of encouraging achievements in controlling inflation and securing macroeconomic stability, contributing to the rapid and sustainable development of the socialist-oriented economy.

Combating inflation and maintaining macroeconomic stability were integrated into an overarching and consistent framework on sustainable socio-economic development. Inflation control and macroeconomic stabilization were closely associated with the transformation of the growth model from breadth alone to both breadth and depth, restructuring the economy, and implementing strategic breakthroughs. A consensus on this approach was achieved in both thinking and actions at all levels.

While priority was given to restoring macroeconomic stability in the 2011-2015 period, the focus since 2016 has been on reinforcing macroeconomic fundamentals; promoting long-term growth drivers, especially boosting economic restructuring; enhancing international integration on the basis of ensuring economic independence and self-reliance; advancing administrative reform, improving the business environment, developing the private sector, increasing economic productivity and efficiency, and bolstering the digital and green economies. The success in controlling inflation, fostering socio-economic development, and attracting foreign investment has helped stabilize inflation expectations, boost public confidence in the VND, and resist the dollarization of the economy.

Flexibly regulating liquidity within the credit institution system, stabilizing the monetary market, and proactively controlling currency to rein in inflation.

The SBV operates a set of monetary policy tools in a coordinated and flexible manner and in close coordination with fiscal policies to regulate liquidity, stabilize the monetary market, and ensure a timely and adequate money supply to meet payment needs while accomplishing the objective of controlling inflation. Specific measures include two-way flexible trading of valuable papers through daily open market operations with reasonable interest rates and terms. This is based on closely monitoring market developments and the movement of State Treasury deposits in the banking system to regulate currency, stabilize interbank markets, and control inflation. This tool has effectively compensated for the shortage of liquidity, thus ensuring timely provision of available capital to credit institutions, especially during periods of high liquidity demand. Simultaneously, it withdraws funds when the available capital of the credit institution system is in excess, in order to control currency.  The  SBV has retained a stable compulsory reserve ratio to facilitate conditions for credit institutions to maintain liquidity and stabilize the monetary market(1). It has also refinanced credit institutions upon request to support liquidity in order to ensure a stable monetary market and assist in bad debt resolution. Refinancing and rediscounting interest rates were gradually reduced in the 2011 - 2020 period and kept stable in 2021 in line with  economic developments.

From 2020 to 2022, to help the economy cope with the impact of  COVID-19 and to implement resolutions of the National Assembly and the Government, the SBV refinanced the Vietnam Bank for Social Policies to provide loans for paying suspended workers and restoring production (two interest-free, unsecured programs worth 16 trillion VND and 7.5 trillion VND respectively); and provided interest-free refinancing of 4 trillion VND to credit institutions to support the Vietnam Airlines Corporation. As a result, hundreds of thousands of suspended workers affected by the pandemic were paid, contributing to  ensuring social security and helping businesses retain their workforce for production and business recovery post pandemic.

Managing interest rates in line with developments of the macroeconomy  and financial market and the objectives of monetary policy management

In the 2011 - 2015 period, to curb soaring inflation (which climbed as high as 18.6% in 2011), the SBV raised regulatory interest rates five times(2) and directly controlled interest rates (by applying a cap on deposit and lending interest rates) for both VND and USD to stabilize rates and gradually ease liquidity tensions for credit institutions. However, due to inflationary pressures and liquidity constraints, most credit institutions, through various means (such as promotions and commissions), offered deposit interest rates higher than the State Bank's prescribed caps(3). This created a challenge for businesses to repay loans, leading to an increase in banks’ non-performing loans and posing risks to credit institutions. To restore market order, the SBV’s Governor issued Directive 02/CT-NHNN on September 7, 2011, requiring credit institutions to strictly hold to the SBV's prescribed interest rate cap and specifying measures to handle violations. As a result, violations were addressed, and tensions in the money market were alleviated. From mid-2012, interest rates and the overall monetary market stabilized, and administrative measures in interest rate management were gradually lifted. The SBV relaxed regulations in an orderly manner, allowing credit institutions to determine interest rates for deposits of 12 month or more, followed by deposits of 6 month or more.

In the 2016 - 2019 period, the global financial and monetary markets became more uncertain as the US Federal Reserve (Fed) and many central banks around the world raised interest rates. In this context, the SBV flexibly managed monetary policies to stabilize and even reduce interest rates when conditions were favorable to support production and business activities. Regulatory interest rates, which remained unchanged in 2016, were reduced 0.5% per annum in the 2017-2019 period. It also lowered the ceiling interest rate for deposits of under 6 months 0.2-0.5% per annum and the ceiling interest rate for short-term loans in priority sectors 1% per annum. The SBV made an effort to meet credit institutions’ liquidity demand, and maintain an appropriate interbank interest rate. It requested that credit institutions review and balance their financial capacity to apply reasonable lending interest rates to enhance the accessibility of capital for individuals and businesses. The resolution of bad debt was facilitated to enable further reduction of lending rates.

In the 2020 - 2022 period, interest rate management not only responded promptly to the impact of the pandemic in order to facilitate economic recovery, but was also adjusted flexibly in line with domestic and international inflation developments to help control inflation and ensure macroeconomic stability. When COVID-19 broke out in 2020, the SBV cut regulatory interest rates three times within that year with a total reduction of 1.5-2% (among the largest reductions in the region) to provide credit institutions easier access to capital from the State Bank and create conditions for them to lower lending  rates. It also asked credit institutions to minimize operating costs to reduce lending rates. In 2021 and the first 8 months of 2022, despite  increasing interest rates globally, the SBV managed to keep regulatory interest rates unchanged to help people and businesses overcome difficulties. As a result, the average lending rates of the credit institution system fell 1% per annum in 2020 and an additional 0.8% per annum in 2021.

However, amid rising global inflation, the Fed increased its federal funds target rate six times to 3.75-4% per annum, which is forecast to go up further  in 2023. Consequently, the strengthening of the USD increased pressure on domestic interest rates and exchange rates, fanning inflationary pressure. To continue concerted measures to control inflation and ensure macroeconomic stability and the safety of the banking system, the SBV   raised regulatory interest rates given rising global interest rates and growing domestic inflationary pressure.

Managing credit growth safely, efficiently, and in line with the goal of controlling inflation, ensuring an adequate and timely supply of capital to the economy

After a period of high credit growth before 2010, from 2011 the SBV  defined a reasonable relationship between credit growth and GDP growth to calculate the credit growth rate with the aim of improving the quality of credit and guaranteeing that credit institutions fulfill their function of providing short-term capital to the economy. On this basis, the SBV set the annual credit growth target right at the beginning of the year and strictly controlled credit growth by giving a fixed credit growth target to each credit institution based on their credit expansion capacity, their performance, and their risk management capability. The SBV flexibly adjusted its policies in line with the real situation. As a result, interest rates dropped to around 40% of the level at the end of 2011 while credit was appropriately controlled and efficiently channeled to priority sectors, contributing to sustainable economic growth.

The SBV also rolled out several measures to improve credit quality and accessibility, such as the close monitoring of credit provision in potentially risky areas to ensure safe banking operations. Loans in foreign currencies were strictly controlled in response to the Government's policy of minimizing the dollarization of the economy, contributing to stabilizing the monetary and forex markets. The SBV collaborated closely with local authorities to connect banks and businesses in an effort to promptly iron out difficulties and create favorable conditions for people and businesses, particularly SMEs, to access bank loans. The central bank proactively worked with ministries and sectors to build and improve mechanisms and policies and effectively implement credit programs in line with the Government's direction.

In the 2020 - 2022 period, to address the impact of COVID-19, the SBV adopted several policies (Circular 01/2020/TT-NHNN, which was amended and supplemented by Circular 03/2021/TT-NHNN and Circular 14/2021/TT-NHNN) and asked credit institutions to reschedule debt payment, maintain debt groups, and waive or reduce interest and fees to support businesses and borrowers affected by the pandemic. This timely policy was applauded by businesses, individuals, the National Assembly, the Government, and international organizations. As of June 2022 (when the policy ended), the credit institution system rescheduled debt payment and maintained debt groups for nearly 1.1 million customers with accumulated debt of over 722 trillion VND. Credit institutions also waived or reduced interest and fees, and maintained debt groups for nearly 562,000 customers with debt value exceeding 92 trillion VND.

Proactively and flexibly managing the exchange rate in line with macroeconomic and market conditions to consolidate the value of the VND, maintain confidence, and contribute to stabilizing inflation

In the 2011 - 2015 period, the SBV managed the exchange rate in a way to ensure flexibility when the market was tense and strengthen confidence in the VND when pressures on the market eased. At the beginning of 2011, to stabilize the foreign exchange market, the central bank increased the average interbank exchange rate 9.3% and reduced the exchange rate band from ±3% to ±1%. As the foreign exchange market began to stabilize in 2012, the SBV announced the average interbank exchange rate between the VND and the USD on a daily basis. It also announced the maximum annual exchange rate adjustment band (about 1-2%) and applied consistent, flexible measures to achieve the set goals. These measures included regulating VND liquidity; maintaining the VND/USD interest rate differential that favors the VND; applying a ceiling interest rate for USD deposits from 2010, which gradually fell to 0% per annum from the second half of 2015; intensifying communication to stabilize market sentiment; intervening in foreign exchange when necessary; limiting foreign currency credit; and tightening foreign exchange management. The SBV increased the exchange rate band back to ±3% at the end of 2015 amid growing pressure on the foreign exchange market as the Fed raised its key interest rate. The exchange rate management mechanism in this period was in line with with macroeconomic and market conditions, given expectations for high inflation, a volatile foreign exchange market, eroding confidence in the VND in the preceding period, and the depreciating USD in the world market as the Fed implemented economic stimulus (QE) and kept interest rates close to 0% for most of this period. As a result, the exchange rate and the foreign exchange markets quickly stabilized from 2012, confidence in the VND recovered, and the SBV acquired foreign currencies, helping to increase the State’s foreign exchange reserves.

Since 2016, the global financial market has constantly experienced turbulence due to the Fed’s interest rate hikes, the stronger USD, the depreciation of the Chinese yuan, Brexit, US-China trade tensions, the COVID-19 pandemic, the Russia-Ukraine conflict, and other factors. As pressure on the domestic foreign exchange market subsequently rose, the existing management method was no longer appropriate. The SBV ceased providing annual exchange rate fluctuation directions and shifted to a more flexible exchange rate management approach to enhance the ability to absorb external shocks while ensuring the stability and smooth operation of the forex market.

The SBV announced a daily flexible central exchange rate based on market developments at home and abroad, macroeconomic and currency balances, and monetary policy objectives. From the third quarter of 2015, the exchange rate band was widened from ±1% to ±3%. The SBV intervened in the foreign exchange market by trading foreign currencies at a flexible rate and with various methods (spot, forward) to stabilize the market and increase the State’s foreign exchange reserves. Exchange rate management measures were closely associated with communication activities, other monetary policy instruments, and forex management measures to secure a stable and smooth foreign exchange market, eliminate negative market sentiment, minimize dollarization, consolidate confidence, and make the VND more profitable. As a result, the foreign exchange market stabilized, liquidity was ensured, and legitimate foreign exchange demands were fully and promptly met. Between 2016 and 2021, the central exchange rate rose by an average of about 0.9% per annum and the State's foreign exchange reserves increased significantly.

In the first 10 months of 2022, amidst global pressures, the SBV managed the exchange rate in a way that enabled it to develop flexibly and absorb external shocks, while supplying foreign currencies to the market to limit excessive exchange rate fluctuations. These actions helped to stabilize the foreign exchange market and the macroeconomy and control inflation. On October 17, 2022, the SBV decided to widen the USD/VND spot exchange rate band from ±3% to ±5% in response to unpredictable developments in the international markets. As a result, the exchange rate became flexible, liquidity was guaranteed, and the legitimate demands for foreign currency were fully met. While the currencies of many countries in the region depreciated significantly against the USD, the VND depreciated only about 9% thanks to the SBV's efforts and flexible, proactive solutions.

Proactive communication to stabilize market expectations

Since 2011, the SBV’s communication has undergone comprehensive innovations in both thinking and action to effectively disseminate banking and monetary management mechanisms, policies, and solutions. The SBV regularly and proactively provides timely information on its management solutions and performance to shape public opinion. Some solutions have been carried out with positive results. 

First, the SBV's orientations, policies, and management solutions have been delivered to the public in a timely fashion through various channels including regular press conferences, the SBV's official website, seminars,  and discussions. This has helped minimize the negative impact of conflicting, misleading, and inaccurate information on the public.

Second, long-term and annual communication plans and orientations have been developed and consistently implemented throughout the entire system, with close coordination between units within and outside the SBV. Information is promptly provided to National Assembly deputies, economists, and  financial experts.

Third, communication methods are regularly renewed, diversified, and made more accessible to the public. Since 2017, in addition to press conferences, the SBV has collaborated with Vietnam Television and other media agencies to produce communication and education programs to raise public awareness of monetary and financial issues, contributing to meeting the goals of financial inclusion, non-cash payments, and improved access to banking services.

Fourth, the SBV regularly organizes training courses and workshops on communication for leaders of departments, units, and branches. Training courses on the banking sector have also been held for journalists. 

Fifth, the SBV proactively informs the public before, during, and after issuing legal documents to ensure transparency and create consensus on new policies. It closely coordinates with relevant agencies to promptly handle incidents that may affect the credibility of the banking sector,  depositors’ confidence, and the safety and the security of banking activities.

Sixth, the SBV works with international financial institutions to enhance external information services, improve Vietnam's reputation and image in international forums, and facilitate the country's integration into the global financial and banking community.

Experience in managing foreign exchange and minimizing dollarization and “goldization”

In recent years, to minimize dollarization and “goldization,” the Government and the SBV have pursued the goal of controlling inflation, stabilizing the macroeconomy, supporting economic growth, and gradually transforming the deposit-lending relationship into the foreign currency and gold trading relationship by:

Restricting dollarization

Controlling inflation and maintaining macroeconomic stability serve as the most important foundation to strengthen the confidence of the people and businesses in the value of the domestic currency and prevent dollarization and “goldization.” The central bank has combined monetary policy measures and instruments, especially interest rate and exchange rate policies, to sustain the attractiveness of the VND against the USD. It put an interest rate cap on deposits in USD (which was reduced to 0% per annum at the end of 2015) and adopted measures to restrict demands for loans in foreign currencies. The SBV has promoted communication and has worked closely with various ministries, sectors, and localities to enhance the supervision and inspection of compliance with regulations on foreign currency use in Vietnam and the movement of foreign currencies out of the country.

As a result, confidence in the VND has been strengthened and dollarization has shrunk significantly. People continue to convert foreign currencies into VND to deposit in the banking system, which in turn aids production and business activities and socio-economic development. The ratio of foreign currency deposits to total payment instruments dropped from 15.84% at the end of 2011 to 10.98% at the end of 2015 and around 7% currently. Credit institutions have shifted from net selling to net buying foreign currencies.

Restricting “goldization” 

Adhering to Party and Government directives on tightly managing gold business activities and preventing speculation and illegal trading of gold, the SBV advised the Government to issue Decree 24/2012/ND-CP (Decree 24), dated April 3, 2012, on the management of gold business activities. The decree aimed to fundamentally reorganize the gold bar market and prevent the impact of gold price fluctuations on the exchange rate, inflation, and macroeconomic stability. It was also intended to improve  state management of the gold market, prevent “goldization” in the economy, and gradually mobilize gold resources to serve socio-economic development.

The SBV’s guidance on the implementation of Decree 24 stipulated that credit institutions should maintain neither a gold position of more than 2% of their own capital nor a negative gold position at the end of the working day. The move was intended to prevent the risk of gold price fluctuations and to ensure the safety of credit institutions in gold bar transactions. The SBV also  required credit institutions to cease borrowing and extending loans in gold (Circular 11/2011/TT-NHNN). Credit institutions were allowed to issue only short-term gold-denominated certificates in order to make gold repayment at the request of customers, in the event the amount of gold loans collected and gold inventory were insufficient to meet the repayment (Circular 12/2012/TT-NHNN). The SBV strengthened inspection to expedite the process of termination of the borrowing and lending of loans in gold. These coordinated measures have helped eliminate the risks associated with the borrowing and lending of loans in gold, to end  “goldization” in the credit institution system, and to facilitate the conversion of gold resources into VND, which are then channeled into production and business activities and into deposits in credit institutions.

Monetary policy management direction in the coming time

The monetary policy should be managed in a proactive and flexible manner in close collaboration with fiscal policy and other macro-economic policies in order to control inflation, contribute to maintaining macro-economic stability, and support sustainable economic growth. The SBV should focus on:

First, appropriately managing interest rates in line with market developments and monetary policy objectives as well as encouraging credit institutions to reduce costs and improve their performance to lower lending rates.

Second, flexibly managing the exchange rate and coordinating measures and monetary policy instruments to stabilize the forex market, contributing to ensuring macroeconomic stability, controlling inflation, and increasing the State's foreign exchange reserves when market conditions are favorable.

Third, ensuring safe credit growth and easier access to credit for the economy. The SBV will direct credit institutions to ensure safe and effective credit growth, focusing on production and business activities, particularly priority sectors as defined by the Government. The central bank will work to guarantee that the credit structure is consistent with  economic restructuring, contributing to promoting sustainable growth and development. It is crucial to continue the strict control of credit in sectors with potential risks and to control foreign currency credit in line with the roadmap to reduce the dollarization of the economy as per the Government’s direction.

Fourth, working closely with ministries and sectors to share information on macroeconomic management and banking activities to ensure consistency and coordination in implementing the Government’s macroeconomic policies. It is necessary to continue to promote policy communication and transparency in monetary and banking information.


(1) The compulsory reserve in VND is 3% for deposits under 12 months and 1% for deposits of 12 months or more. The compulsory reserve in foreign currencies is 8% for deposits under 12 months, 6% for deposits of 12 months or more, and 1% for deposits from foreign credit institutions
(2) The refinancing interest rate climbed from 9% per annum to 15% per annum; the rediscounting interest rate rose from 7% to 13% per annum; and the overnight lending rate in interbank electronic payments increased from 9% to 16% per annum
(3) The VND deposit interest rates offered by many banks hiked to 17% per annum and the interest rates for non-term VND deposits went up to 14% per annum, the ceiling set by the State Bank of Vietnam. As a result, the lending rates skyrocketed to 25% per annum in some cases

This article was published in the Communist Review No. 1009 (March 2023)