Is it time to devalue the Vietnamese dong to boost exports?

Last update: 14:00 | 10/03/2015
VietNamNet Bridge – Economists from Hanoi National University have urged the government to adjust the dong/dollar exchange rate, while the National Finance Supervision Council said stabilizing the exchange rate is a top priority.

The Vietnam Center for Economic and Policy Research (VEPR), an arm of Hanoi National University, in its Q4 2014 report, suggested devaluing the local currency.

VEPR’s experts said Vietnam’s dong-pegged-to-dollar exchange rate policy led to over-valuation of the dong over many years when inflation rates were relatively high.

This put domestically made and export goods at a disadvantage compared with imports.

The disadvantage became even more serious in the second half of 2014, when the US dollar appreciated against many other hard currencies.

The stronger dollar then led to appreciation of the dong, and made imports cheaper.

Some financial institutions suggested devaluing the local currency to protect the competitiveness of Vietnamese goods in both domestic and international markets.

They pointed out that hesitant moves by the State Bank to devalue the dong only slightly in recent years have weakened the competitiveness of Vietnam’s economy.

VEPR has urged the government to devalue the dong to “give competitiveness back to domestically made goods”, saying that the dong should be devalued y 3-4 percent in the next two to three years.

Meanwhile, Dr. Truong Van Phuoc, deputy chair of the National Finance Supervision Council, thinks the exchange rates should be stabilized now, when Vietnam has regained a stable monetary market after many years of macroeconomic uncertainties.

The dong/dollar exchange rate stability could help boost exports.

“In principle, the currency devaluation would support exports. However, stabilizing the dong/dollar exchange rate is the top priority for now,” Phuoc commented.

However, Phuoc said “a stabilized exchange rate” does not mean “fixed”. The dong may lose 1-2 percent of its value, depending on market conditions, inflation, direct and portfolio capital flows and bank loan interest rates.

Cao Sy Kiem, a member of the National Advisory Council for Monetary Policy, agrees that it would be reasonable to devalue the dong if Vietnam wants to boost exports.

However, he said policymakers need to consider the current conditions of Vietnam before making decisions.

Vietnam now has high public debt, and it has to import input materials and equipment to serve domestic production. Therefore, a weak dong would increase production costs.

Nguyen Tri Hieu, a respected economist, said there is no need to devalue the dong.

“It would be better to allow market supply and demand adjust the dong price,” Hieu said.