Tiếng Việt
中文 (中国)
One of the primary reasons for restricting foreign exchange transactions is to protect and maintain stability for the domestic economy. Controlling exchange rates can help prevent significant and sudden fluctuations in currency values, keeping the economy more stable and minimizing inherent risks.
Article 3 of Circular 32/2013/TT-NHNN stipulates, “Within the territory of Vietnam, except for cases using foreign exchange as regulated in Article 4 of this Circular, all transactions, payments, quotations, advertisements, price listings, pricing, pricing in contracts, agreements, and other similar forms (including conversion or adjustment of prices of goods, services, contract values, agreements) by residents, non-residents shall not be conducted in foreign exchange.”
Restricting foreign exchange transactions on Vietnamese territory has several impacts, most notably reflected in the phenomenon known as Dollarization when compared to the United States.
For instance, when the US Dollar is extensively used within Vietnamese territory, often replacing the Vietnamese Dong, it leads to the potential substitution of one or more functions of the domestic currency, a situation termed as economic dollarization.
Dollarization has various positive impacts, notably promoting international trade as the US Dollar is recognized as the strongest and most widely used currency in international commerce. Countries using the US Dollar find it easier to conduct commercial transactions compared to those using their domestic currencies.
The use of the US Dollar eliminates exchange rate regimes, enabling manufacturers to grasp business efficiency and aiding governments in better controlling trade situations and relationships with partner countries. Considering Vietnam is a developing country while the US is a global economic powerhouse, depending on the US Dollar also helps reduce risks that Vietnam has endured for many years, such as inflation.
Drawbacks of Not Restricting Foreign Exchange Transactions
Despite numerous benefits, using foreign exchange, such as the US Dollar, within Vietnamese territory could bring about more drawbacks. For instance, without restrictions on foreign exchange transactions, domestic individual and organizational investors might engage in currency speculation, significantly devaluing the Vietnamese Dong and contributing to the appreciation of the US Dollar (though perhaps insignificantly).
Currency speculation has resulted in many negative consequences for countries without effective monetary control policies. For example, Asian countries previously endured the 1997 Asian financial crisis, starting from Thailand and spreading to many other countries in Asia.
Indonesia, South Korea, and Thailand were among the countries most affected by this crisis. Hong Kong, Malaysia, Laos, and the Philippines also suffered significant impacts due to sudden currency devaluations. Mainland China, Taiwan, Singapore, and Vietnam were affected to a lesser extent.
One of the main causes of this crisis was that Thailand and some Southeast Asian countries attempted what economists called the “impossible trinity” policy trio simultaneously. They tried to peg their currency values to the US Dollar while allowing free capital flows (capital account liberalization).
When macroeconomic vulnerabilities were detected in the Asian economies, some macro hedge funds proceeded to attack Asian currencies. In economics, a speculative attack involves quickly selling unreliable assets of speculators who were not previously active and acquiring equivalent valuable assets (currencies or gold). Here, speculators sold the US Dollar in the Asian markets, leading to a sharp depreciation of local currencies. People gradually lost confidence in the government’s ability to protect the currency value, leading to transactions in Thailand and other Southeast Asian countries primarily relying on the US Dollar.
To ensure a stable exchange rate regime, central banks may repurchase their own currencies at a fixed exchange rate, using foreign exchange reserves. However, this method is only effective if the currency attack is not on a large scale or if the government’s foreign exchange reserves are substantial enough to withstand attacks.
Foreign exchange reserves include foreign currencies, gold, foreign currency deposits, treasury bills, and other government securities. According to IMF reports, Vietnam’s foreign exchange reserves are currently around $100 billion. However, this figure is uncertain due to the lack of statistics. Accurate statistics halted at $92 billion in August 2022.
When foreign exchange reserves are depleted, insufficient to cope with continuous attacks by international speculators, the value of the country’s domestic currency will sharply decline, and the government will be completely powerless, unable to control the economy. In these cases, international organizations or governments of other countries may provide assistance to stabilize the situation, such as through zero-interest loans or providing technical assistance.
In addition to external factors, the weak crisis management capabilities of the affected countries also contributed significantly to the 1997 Asian financial crisis. Many economists argue that when under currency attack, Asian countries should have immediately floated their currencies instead of trying to defend exchange rates, leading to depletion of state foreign exchange reserves and prolonging the speculative attacks.
Speculative attacks tend to target small developing countries with smaller “war chests” (a reserve of foreign exchange held in case of contingencies) compared to major powers with massive reserves.
Impact of Restricting Foreign Exchange Transactions on Vietnamese Territory
After economic crises, Asian governments have implemented numerous new policies to protect their domestic currencies. Besides reducing the power of central banks to print money, restricting foreign exchange transactions makes Vietnam’s financial market dependent and passive in accordance with the policies of the central bank owning foreign currency (such as the US Federal Reserve).
Currently, although Vietnam, like most other countries, pays attention to the policies of the Federal Reserve due to its comprehensive international market influence, Vietnam is not entirely dependent on these policies compared to countries using the US Dollar. Because dollarization creates more disadvantages than benefits, restricting foreign exchange transactions is especially necessary to ensure a stable financial market.
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