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Exchange Rate Management of Vietnam Re-examination of Policy Goals and Modality (Kenichi Ohno)

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<Issue Paper for Possible Future Research>

Exchange Rate Management of Vietnam
Re-examination of Policy Goals and Modality
December 25, 2003
Kenichi Ohno
Vietnam Development Forum
This paper presents various ideas which may be relevant to the evaluation and reform of
Vietnam’s exchange rate management. While many theoretical and empirical studies on
exchange rates exist, they do not directly address the questions that Vietnam currently faces.
Based on such existing studies, this paper analyzes Vietnam’s exchange rate problems
concretely and realistically. The list of issues below are not meant to be complete or final; our
purpose is to stimulate preliminary discussions. If sufficient interest is aroused, the VDF may
launch a research project to deepen the analyses.

I. Overview
Brief history
In the late 1980s, Vietnam had triple-digit inflation, multiple exchange rates, and a rapidly
depreciating currency in the parallel market. In the early 1990s, however, Vietnam began to
overcome these problems by containing inflation and stabilizing its currency. International
integration with the West began in earnest around 1993. Since then, Vietnam’s exchange rate
management has evolved significantly as capital liberalization proceeded and new external
circumstances arose.
Inflation was brought down to a single digit by 1993. But price stability was fragile and
domestic inflation still remained high relative to the international level. In the final stage of
disinflation, the State Bank of Vietnam (SBV) kept the VND/USD exchange rate at around
11,000 for more than five years, from late 1991 to early 1997 (moreover, the rate was virtually
fixed at that level from early 1994 to late 1996). This “11,000 VND policy” can be interpreted
as an attempt to secure lasting price stability by the discipline of a dollar peg. This nominal

anchor use of the exchange rate finally succeeded in reducing inflation to a very low level.
However, the side effect of this policy was gradual overvaluation. From the summer of 1996,
the SBV began to effectively depreciate VND by broadening the bandwidth around the official
1

central rate. The actual rate always stayed near the highest (most depreciated) end of the
band.
From 1997 to 1998, Vietnam had to cope with the impact of the Asian financial crisis. While
Vietnam was not directly attacked by speculators, VND became overvalued relative to the
regional currencies which fell sharply. The exchange rate band was further broadened to ±5%
in...
<Issue Paper for Possible Future Research>
Exchange Rate Management of Vietnam
Re-examination of Policy Goals and Modality
December 25, 2003
Kenichi Ohno
Vietnam Development Forum
This paper presents various ideas which may be relevant to the evaluation and reform of
Vietnam’s exchange rate management. While many theoretical and empirical studies on
exchange rates exist, they do not directly address the questions that Vietnam currently faces.
Based on such existing studies, this paper analyzes Vietnam’s exchange rate problems
concretely and realistically. The list of issues below are not meant to be complete or final; our
purpose is to stimulate preliminary discussions. If sufficient interest is aroused, the VDF may
launch a research project to deepen the analyses.
I. Overview
Brief history
In the late 1980s, Vietnam had triple-digit inflation, multiple exchange rates, and a rapidly
depreciating currency in the parallel market. In the early 1990s, however, Vietnam began to
overcome these problems by containing inflation and stabilizing its currency. International
integration with the West began in earnest around 1993. Since then, Vietnam’s exchange rate
management has evolved significantly as capital liberalization proceeded and new external
circumstances arose.
Inflation was brought down to a single digit by 1993. But price stability was fragile and
domestic inflation still remained high relative to the international level. In the final stage of
disinflation, the State Bank of Vietnam (SBV) kept the VND/USD exchange rate at around
11,000 for more than five years, from late 1991 to early 1997 (moreover, the rate was virtually
fixed at that level from early 1994 to late 1996). This “11,000 VND policy” can be interpreted
as an attempt to secure lasting price stability by the discipline of a dollar peg. This
nominal
anchor
use of the exchange rate finally succeeded in reducing inflation to a very low level.
However, the side effect of this policy was gradual overvaluation. From the summer of 1996,
the SBV began to effectively depreciate VND by broadening the bandwidth around the official
1
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