Challenges await new State Bank governor

A lot of works and challenges are awaiting Mr Nguyen Van Giau, who has taken office as the new State Bank of Vietnam governor.

Vietnam’s banking system is welcoming the new leader, who is expected to carry out reform so that the banking system, the heart of the national economy, can have a stable and healthy rhythm. Mr Giau will have to deal with a lot of problems in his term as governor of the central bank.

The first task is to curb the inflation. Prices are escalating again after a long time of being restrained, partially because of the cost push and demand pull.

In the first seven months of the year, the inflation rate climbed to 6.19%, which foreshadows that the inflation rate for 2007 will not be less than 8%, threatening to push the CPI growth rate in 2007 to a record height in the last five years.

The most noteworthy thing is that the inflation rate keeps high when the excess of imports over exports remains high ($5.45bil, or 21% of total export turnover in the first 7 months of the year), which shows that the price imbalance cannot be settled by the excess of imports.

The exchange rate of the local currency, VND, against the greenback and other hard foreign currencies also needs to be set based on a suitable policy which aims to encourage exports, while it must not become a factor leading to high inflation.

In the current situation, when foreign portfolio investment is increasing sharply, the plan to make the local currency into a convertible currency needs thorough consideration. A convertible VND which revaluates precariously is not a good sign. This may foretell possible financial fluctuations (on the stock market), or monetary fluctuations (reduction in national foreign currency reserve), and foreign trade (reduction in exports) as well.

However, the short-term problems can be settled if suitable solutions can be found, and the existing problems can be tackled fundamentally. First of all, Vietnam needs a central bank which operates in the true sense of the word.

In fact, international institutions including the International Monetary Fund (IMF) and the World Bank (WB) all have suggested a more active role of the State Bank of Vietnam in building up and regulating the monetary policy, and taking responsibility for the implementation of the monetary policy, aiming to fulfill the economic targets set by the National Assembly and the government.

A healthy competitive business environment, an equal playing field is the thing commercial banks need, because this is the core factor for the development of the domestic banking system. It is necessary to have a new model for the central bank, and it is necessary to have a new legal framework for the new model. Amending the State Bank Law and Credit Institution Law should be the priority works in the action programme of the new governor.

Supervision and inspection over companies operating in the fields of securities, banking and insurance will be a big problem to deal with. To date, this work has been undertaken by three state management bodies. Experts have asked for the establishment of an organ which can gather the strength and power of the three bodies and take responsibility for the supervision and inspection work.

If the proposal is accepted, the central bank will escape from this work, thus having more time to focus on the monetary policy. This may be an important decision that the governor will consider in his term.

Returning to monetary issues, the new governor will have to deal with the so-called “cash economy”. It has taken a lot of money and time to deal with the problem, but no considerable improvement has been made.

Commercial banks nowadays are trying to expand their ATM networks, but the network only can show its effectiveness in a non-cash economy. In fact, Vietnamese people even use dollars and gold to make payments for their big transactions. The payment in cash makes the expenses of the national economy increasingly high. An economist said that Vietnam’s cash economy had created a barrier to the absorbability of foreign investment flows.

Credit quality will also be one of the pressing issues for the coming time. This will depend on the professionalism of banks, good risk management process, good operation of enterprises and suitable policies.

Source: VNE