Vietnam Gets Tough on Black-Market Currency Trade

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Mar 11, 2011.  From The Wall Street Journal.

HANOI—Vietnam is cracking down on unauthorized trading in U.S. dollars in an effort to bolster the country’s dwindling foreign reserves and restore confidence in the local currency, the latest attempt to bring some stability to the Southeast Asian economy.

Authorities in Hanoi said they will enforce long-standing but frequently flouted laws banning the use of the dollar to pay for goods and services, while the central bank said it would sharply increase fines for those violating the regulations, which also prohibit exchanging Vietnamese dong for dollars and other currencies on the black market.

The campaign began with the arrest this week of four people in the capital who were accused of trading nearly $400,000 outside the official foreign-exchange system. Analysts said the arrests were a clear indication the government is serious about following through with its threats to curb the black market.

Since mid-2008, the Vietnamese dong has lost around a fifth of its value through a series of devaluations, the latest of which came last month. Many ordinary Vietnamese have responded by selling dong for dollars or gold, which has added to the pressure on the local currency.

“The government’s move is necessary because it helps the state bank to buy more dollars for state reserves, while it also boosts dong deposits in banks, which will help lower lending interest rates in the long term,” said economist Le Dang Doanh, a former adviser to Prime Minister Nguyen Tan Dung.

Vietnamese residents and local institutions currently have $22.5 billion in dollar deposits with local commercial banks, senior government economist Tran Hoang Ngan was quoted as saying in the Thoi Bao Ngan Hang newspaper, which is published by the central bank.

Such dollar deposits are legal.

Meanwhile, Moody’s Investors Service recently said Vietnam’s foreign reserves could be anywhere between $10 billion and $14 billion, which economists say is too low.

The decision to crack down on illegal dollar trading follows an announcement from the State Bank of Vietnam this month that it will eliminate the trade of gold bullion in the free market and will ask the government to issue a decree ton the management of gold trading that would limit trade in gold bars. Thursday, it said on its website that it plans to raise the maximum fine for violating currency regulations to 500 million dong ($23,958) from 70 million dong, a figure in place since 2004.

“After years of mismanaged policies, individuals and institutions had little confidence in the dong, so they tended to keep gold or dollars as their major form of savings, which could be bigger than the state’s official reserves, and now, if those funds are mobilized and converted into dong, it will benefit many businesses,” said an analyst in Ho Chi Minh City who declined to be named.

The moves are the latest in a series of measures that the government has announced in recent weeks as it struggles to stabilize the economy. Authorities said in recent weeks that they will cut loans to non-productive activities to help trim credit growth to less than 20% this year, from 37% in 2010, part of a series of measures unveiled in recent weeks by a government struggling to steer the economy toward more stability.

Vietnam has one of the region’s highest inflation rates, at 12.31% in February from a year earlier, which analysts argue is the result of poor economic policies, unrestrained credit and other factors. The dong also has been undermined by a persistent trade deficit and was devalued by 8.5% against the dollar on Feb. 11, its fourth devaluation in 14 months.

The central bank this week raised two key interest rates to help battle inflation, while the government has vowed to cut public investment and the budget deficit, increase domestic production and rebalance trade.

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