If the exchange rate is not flexible enough, it will be difficult for imports and exports to compete

The SBV has applied many measures to stabilize the exchange rate. Source: Internet.

The exchange rate has increased by 7% since the beginning of the year

On October 17, the SBV decided to adjust the exchange rate band to ±5%, thereby widening the gap between the floor exchange rate and the ceiling rate listed at commercial banks.

This movement has led to a sharp increase in buying and selling rates at commercial banks compared to the last session of last week.

Accordingly, the central exchange rate announced by the SBV on October 18 was at 23,637 VND/USD, up to 51 VND compared to October 17. With a margin of ±5% being applied, the ceiling rate applied by banks is 24,818 VND/USD and the floor rate is 22,455 VND/USD.

At commercial banks, the exchange rate is listed around 24,130-24,230 VND/USD on the buying side, 24,190-24,500 VND/USD on the selling side. This price has increased by about 200-300 VND per USD in both buying and selling directions compared to the 14/10 session.

Thus, the exchange rate at commercial banks has exceeded 24,000 VND/USD, the exchange rate on the free market has also exceeded 24,500 VND/USD, resulting in the USD exchange rate at commercial banks increasing by 6-7%.

However, before the SBV decided to increase the exchange rate band, the exchange rate between VND and USD was under a lot of pressure when the SBV implemented liquidity injection measures at a ceiling rate of 3% compared to the central rate. According to the money market report, bonds of SSI Securities Company, the interbank exchange rate increased beyond 24,000 VND/USD, much higher than the selling rate at the SBV's Exchange and the State Bank had to continue intervention through the sale of foreign currency from the foreign exchange reserve, but to a relatively limited extent.

Therefore, experts all said that it is necessary for the SBV to widen the spot exchange rate band between USD and VND to 5% for the first time in nearly 10 years, in order to accommodate strong and continuously increasing fluctuations of the USD/VND exchange rate.

Increase competitiveness for import and export

Economic expert Assoc.Prof.Dr. Dinh Trong Thinh (Academy of Finance) said that high inflation has caused many central banks around the world to raise interest rates and raise the value of currencies to fight inflation.

In particular, the US Federal Reserve (Fed) has raised interest rates 5 times since the beginning of the year with a total increase of 3%, causing the USD index to reach the peak of more than 20 years, sometimes surpassing the level of 114 points in recent times. However, in the context of many currencies depreciating strongly, the pressure on VND is very great, but thanks to the stabilization of the macroeconomy and inflation, the VND depreciates relatively little against the USD and remains the most stable compared to the USD.

According to Mr. Thinh, in order to stabilize the foreign exchange market, the SBV used many measures such as selling USD interventions and raising the operating interest rate but at a slight margin of only 1%. Therefore, the expansion of the exchange rate band by the State Bank to keep the exchange rate stable and create conditions for commercial banks to buy and sell USD at a new price range, reducing the difference with the free market, thereby reducing the demand for USD.

Similarly, economist Dr. Le Xuan Nghia also said that it is difficult for the State Bank to adjust the value of the currency. In order to limit the sale of foreign currencies to the market, it is necessary to balance supply and demand. Moreover, under pressure from the current account, although our country's trade balance is still in relative surplus, the balance of services has a large deficit, so the State Bank is forced to apply the central exchange rate adjustment.

“Managing the financial and monetary markets is a matter of controlling interest rates and exchange rates. Increasing interest rates or widening the exchange rate band must consider the reality from the market, to adjust accordingly,” Assoc.Prof.Dr. Dinh Trong Thinh said.

However, with the sharp increase of the exchange rate as above, there will be some impact on import and export activities. In theory, an increase in the exchange rate will benefit exporters and negatively affect importers. Moreover, businesses that borrow capital in foreign currencies will also be affected when interest expenses and exchange rate losses may increase.

But according to businesses, compared to many countries, the exchange rate in Vietnam has low volatility in the region, the whole country still maintains a trade surplus, so the expansion of the exchange rate band and exchange rate movements is not too big of an impact right now.

According to Dr. Vo Tri Thanh, Director of the Institute for Brand Strategy and Competition, the devaluation of the dong will have certain effects on the economy, especially inflation and interest rates. With exports, if the exchange rate is not flexible enough, it is also difficult to compete, Vietnam's exports rely heavily on imports, so if the VND depreciates a lot, exports will not necessarily benefit.

Therefore, the current monetary policy management is based on calculations that affect many aspects of inflation, interest rates, import and export, etc., insofar as the relative macro stability is maintained, supporting exports without having too negative an impact on imports and inflation.

With the above issues, the SBV has also repeatedly affirmed that it will continue to closely monitor market developments, coordinate monetary policy tools, and be ready to sell foreign currency interventions to stabilize the market.