Dollarization

DOLLARIZATION IN VIETNAM: HELP OR HURT?

Dollarization is not a new concept; it owes its origin to the Bretton Woods system back in the late 1950s by which countries fixed (referred to as “peg” in economic term) their exchange rate to some strong and internationally convertible currency, mainly the US dollar. This system helps to minimize exchange rate fluctuations and thereby, maintain economic stability of pegging countries. In Vietnam, according to Goujon’s (2006) observation, dollarization started in response to the hyperinflation of 1986 to 1988 (the annual inflation rate was above 300%) with commercial banks’ accepting deposits denominated in USD. This shift in the Vietnamese government’s monetary policies proved to be beneficial during that period and did help to avoid currency crises as well as reduce the volatility of interest rates. However, now that Vietnam has grown out of a small and closed command economy, it is high time to curb the steady increase of dollarization. In fact, its adverse impacts have been increasingly obvious, namely financial instability and loss of government control over an independent monetary policy.

The most generally accepted definition of dollarization is when the inhabitants of a country use foreign currency, typically USD, instead of or in parallel with their local currency. Recent estimates show that between one-half and two-thirds of the value of U.S. currency in circulation is held abroad th(The Federal Reserve Board, 2011). Dollarization is classified into three categories: official dollarization (the dollar is the only official currency), semi-dollarization (both local currency and the dollar are used interchangeably) and unofficial dollarization (the dollar is used extensively in parallel with the local currency but not accepted as the legal tender by the government). On the basis of this definition, Vietnam is therefore an unofficially-dollarized country but at a relatively high rate of over 20% for the past few...