




































126 

 Volume 1. Issue 2. July 2019 

ISSN 2603-5324 

http://faba.bg 

 

Monetary Policy’s Instruments in Vietnam: Basis and Evolution in A Difficult 

International Financial Context 

 

Quang Nguyen 

 

University of Picardie, France 

 

Info Articles 

________________ 
History Articles: 

Submited 12 March 2019 

Revised 30 April 2019 

Accepted 1 July 2019 

________________ 
Keywords: 

Monetary policy; 

Reserves Requirements; 

Interest rate; Open-

market operations; 

Emerging market; 

Inflation targeting; 

Vietnam 

Abstract
 

___________________________________________________________________ 

This work provides an overview of the evolution of monetary policy in Vietnam in the 

years following the changes in the Vietnamese economy in 20 years, through two 

periods with two financial crises (1997 Asian financial crisis and 2008 financial crisis). 

This work also includes a synthesis of the theoretical and empirical research of 

Vietnamese authors on the subject of monetary policy analysis in Vietnam. In addition, 

this study aims to understand the change in monetary policy in Vietnam, the socialist-

oriented economy, lower middle-income emerging economy, through the adjustment of 

the instruments that have been developed by the Central Bank of Vietnam. In this 

period of study, analyses can show to what extent reforms can explain why monetary 

policy developments are intended not only to stabilize the macro-economy and ensure 

strong economic growth, but also to address one of the biggest problems in the 

Vietnamese economy, inflation. 
 Address Correspondence:  

   CS 52501 80025 Cedex, Chemin du Thil, 80025 Amiens, Prancis 
 



 

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019) 

127 

INTRODUCTION 

 

After 40 years of reunification (the victory 

over the United States in 1975) and 30 years 

after the reforms (the Doi Moi policy - 

Renovation in 1986), Vietnam is considered a 

success story in the development process, with 

great achievements made in recent years, as well 

as great development potential in the future. 

Major organizations such as the United Nations 

(UN), the World Bank (WB), the Asian 

Development Bank (ADB) and also the 

American Financial Group Bloomberg have 

addressed this development. The progress made 

in recent years has been driven mainly by 

sustained economic reforms, integration into the 

global economy and an environment of 

macroeconomic stability. 

After the period of hyperinflation (see 

Figure 1), since 1990, its GDP has been 

multiplied by about 3 times, the GDP growth 

rate per year has reached 5.7%. Since 2000, after 

learning from the experience of the slightly 

negative effects of the Asian financial crisis1, the 

economy has seemed to be recovering with 

stable economic growth averaging 8% per year, 

a level that was surpassed only by China in Asia 

and continued to grow until the global economic 

crisis of 20082. However, since 2007, and in 

particular the 2007-2008 Global Financial Crisis, 

Vietnam has been experiencing macroeconomic 

instability. The GDP growth rate has declined 

sharply while the inflation rate has reached 

double-digit values (Pham, 2016). 

Recent studies have provided evidence 

that a malfunctioning monetary policy may have 

contributed to the slowdown in economic 

growth. The Vietnamese government and the 

central bank appear to have maintained 

traditional approaches to monetary policy 

management, although Vietnam's economy has 

become more open and better integrated into the 

                                                             

1 See Hochraich D. (1998), "Financial crisis and 
competitiveness in Asian countries, beyond the 
monetary crisis” in CERI studies, Fondation 
nationales des sciences politiques, Paris 
2 Pham, T. A. (2016), pg. 3 

global economy with Vietnam's accession to the 

WTO in 2007. Conceptual developments and 

further theoretical analysis can provide insights 

into the effectiveness of monetary policy 

management in dealing with external shocks. 

 

 

Figure 1. GDP Growth and Inflation in 

Vietnam in the period of hyperinflation (1980-

1989) 

Source : Pham, T. A. (2016), p. 12 

 

In order to stabilize the macroeconomic 

situation and control inflation, the monetary 

policies of the Central Bank of Vietnam are 

adjusted, by instruments, according to the real 

financial situation on the market, in particular 

after the Asian crisis of 1997 and after the global 

financial crisis in 2008. In the context of 

developments in Vietnam's economic and 

financial sector, the results of the theoretical 

analyses presented in this paper are 

demonstrated on the basis of the reforms of the 

instruments based on the data in the two periods 

(1998 - 2007 and 2007 - 2018). 

The rest of the document is organized as 

follows. Section 2 presents the literature review 

on the subject. Section 3 provides a brief 

overview of monetary policy in Vietnam. 

Section 4 describes the management of the 

financial instruments of the Central Bank of 

Vietnam over two different periods. Section 

5concludes the document. 

 

Review of the litterature 

Monetary theories often focus on different 

factors and relevant policies will reflect the 

platforms of theory. To decide how the different 

policy instruments are used, regular policy 

makers must evaluate the time and effectiveness 



 

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019) 

128 

of economic policies through experimentation. 

The problem of monetary theories in the 

economy is often controversial. For example, 

some assumptions about the effects of monetary 

problems are based on real economic growth, 

while others attempt to reject it and do the 

opposite. In addition, the effectiveness of 

monetary and fiscal policy is the subject of a 

long debate. The conceptual foundations of 

monetary policy are often mentioned by: (1) 

Quantitative money theory3, which shows that, 

in the long run, money supply does not depend 

on GDP, but on price changes or changes in the 

general price level. The arguments also show the 

importance of the speed of money supply 

growth. This theory can also be considered the 

first recognized theory of how monetary policies 

affect the general market price through changes 

in the money supply. (MV = PV); (2) Traditional 

Keynesian theory4, the main argument of the 

theory is that employment is mainly determined 

by consumer demand. This is completely 

different from the arguments of the neoclassical 

school of economics where the price of labour is 

the key factor determining employment. Hicks 

(1937) and Hansen (1953) explained the effect of 

monetary adjustment in macroeconomic theory 

of Keynesian theory by the IS-LM model. This 

model is based on the relationship between 

interest rates and real output, showing the 

balance of the market for goods and services. 

The model is also used in money markets, but 

only when the economy is closed; (3) Mundell 

(1963) and Fleming (1962)5 developed a model 

                                                             

3 See Fisher, I., & Brown, H. G. (1912), “The 
purchasingpower of money”, 2006 édition, Cosimo 
Classics. 
4 See Keynes, J. M. (1936), “The General Theory of 
Employment, Interest, and Money”, United 
Kingdom: Palgrave Macmillan. 

5 See Mundell, R. (1963), “Capital Mobility and 
Stabilization Policy under Fixed and Flexible 
Exchange Rates”, The Canadian Journal of 

Economies and Political Science /Revue 
canadienne d'Economique et de Science 

politique, 29(4), 475-485. 

that could be used in an open economy. This 

model is also known as the IS-LM- BoP model. 

It is often used to describe the short-term 

relationship between nominal exchange rates, 

interest rates and output in an open (developing) 

economy. The Mundell-Fleming model is often 

remembered for the argument that an economy 

cannot simultaneously maintain an independent 

monetary policy with fixed exchange rates and 

free capital flows (Mundell-Fleming Trilemma); 

(4) Phillips' Curve6, by British economic studies 

from 1861 to 1957, William Phillips (1958) 

found an inverse relationship between monetary 

wage changes and unemployment. Samuelson 

and Solow (1960) used Phillips' results to apply 

the relationship between the inflation rate and 

the unemployment rate to the United States. 

Samuelson and Solow argue that inflation and 

the unemployment rate are inversely related, 

constructing the famous Phillips curve, in order 

to argue that to consolidate employment, it is 

necessary to keep the inflation rate at its fair 

value. However, the recent Phillips curve is no 

longer very applicable because many studies 

have been conducted with data from different 

countries showing that there is no clear 

bidirectional impact between inflation and 

growth. In the 1990s, the Phillips curve also 

gave it an error through studies such as those by 

Barro (1995) and Fischer (1993), which show 

that inflation remains high while economic 

growth is low; (5) Monetarism7, represented by 

                                                                                          

See Fleming, M. (1962), “Domestic Financial 
Policies Under Fixed and Under Floating Exchange 
Rates” Staff Papers (Vol. 9, pp. 369-380), 
International Monetary Fund. 

6 Phillips, A. W. (1958), “The Relation between 
Unemployment and the Rate of Change of Money 
Wage Rates in the United Kingdom”, 1861-1957, 

Economica, 25(100), 283-299. 

7 Cf. Friedman, M. (1948), “A Monetary and 
Fiscal Framework for Economic Stability”, The 

American Economic Review, 38(3), 20. 

Friedman, M. (1963), “Inflation: Causes and 
Consequences”, Proquest/Csa Journal Division. 



 

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019) 

129 

Milton Friedman, who praised the importance 

of monetary policy for fiscal policy. The 

arguments put forward in this school often argue 

that changes in money supply have a major 

influence on national production in the short 

term and on the general price level in the long 

term. Since then, money economists have often 

stressed that, in order to conduct monetary 

policy properly, it is necessary to control the 

money supply in circulation (Friedman, 1948). 

Returning to the case study of monetary 

policies in the Vietnamese market, we can see 

that before the 2000s, there was a lot of 

theoretical and empirical research. However, 

these studies are more descriptive arguments by 

comparing past and current data and analyzing 

proposed economic objectives and prospects for 

Vietnam's future (Tran & Vuong, 2009). The 

study of monetary policy during this period is 

usually conducted by foreign economists such as 

Fforde et De Vylder (1996), Oudin (1999) or 

Riedel and Turley (1999). However, these 

studies do not deal in depth with the objectives 

of monetary policy, but most of them deal with 

issues related to Vietnam's macro economy. In 

particular, during this period, the Vietnamese 

economy was gradually moving from a 

subsidized to a market-oriented economy. 

Research analyses are often focused and 

developed on policy of Doi Moi (Renovation) 

and trade balance recommendations. 

In the period following the 2000s, in 

particular Vietnam's accession to the WTO in 

2007, in addition to the great benefits of 

economic openness and integration into the 

world economy, Vietnam also faced significant 

challenges and difficulties due to the global 

economic crisis. Vietnamese economic experts 

and policy makers have become considerably 

aware of the direct link between financial crises 

and monetary policy. As a result, more and 

more studies are focusing on central monetary 

                                                                                          

Friedman, M. (2001), “One World, One Currency 
Options Politiques”, Institute for Research on Public 

Policy. 

 

policy issues, using not only theoretical 

arguments but also empirical models. However, 

the above studies have focused on specific 

monetary policy issues, but do not cover the 

overall objectives constructed in financial 

markets. In addition to the relationship between 

macroeconomic factors (such as economic 

growth), issues such as inflation rates, exchange 

rates or credit management are often the most 

important. There have been many analytical 

studies on the exchange rate problem. In Vuong 

and Ngo's study (2002), which focused on the 

period during and after the 1997 Asian financial 

crisis, the VAR model demonstrated that 

Vietnam's monetary value can be maintained by 

adopting a parallel exchange rate regime. 

Following the May study (2007), in the context 

of macroeconomics in times of global economic 

crisis, the author argued that Vietnam applies a 

flexible exchange rate regime instead of a fixed 

exchange rate regime. The author made the 

above argument after conducting a 

comprehensive study of the exchange rate 

regime using an optimal monetary theory. In 

addition, Nguyen, T. P. & Nguyen, D. T. (2009) 

also concluded that mismanagement of the 

exchange rate regime can lead to a decline in the 

efficiency of the exchange market in the 

economy. The problem of real exchange rate 

adjustment has also been the subject of empirical 

studies. Nguyen and Kalirajan (2006), exports 

can be stimulated and the balance of payments 

current account can be improved if the dong is 

devalued. Through his research, the author also 

shows that dong devaluation can reduce the real 

exchange rate in the short term. Maintaining the 

stability and competitiveness of real exchange 

rates is also central to the results of the study 

conducted by Le (2007). 

In addition, many studies have been 

conducted on inflation as part of the analysis of 

monetary transmission channels in Vietnam. 

These analyses often focus on the causes and 

consequences of inflation on the economy. 

Studies often show that the cause of inflation is 

often explained by credit, studies also show that 

the money supply does not significantly affect 

inflation. Given the empirical results of the 



 

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019) 

130 

IMF's research with a six-quarter delay8, money 

supply growth explains only about 10% of the 

inflation rate and the effect will decrease over 

time. By researching Bhattacharya (2013), the 

results show that credit growth has a positive 

effect on inflation for the economy with a lag of 

more than a year (using data from 19992013), 

the study does not, however, show the 

relationship between inflation and money supply 

in Vietnam. Similarly, using quarterly data from 

1996-2005, Le & Pfau (2009) showed that the 

cause of inflation does not come from M2 after 

the econometric model was applied. In addition, 

the results of the analysis during this period also 

showed that counterpart credit had a significant 

impact on the CPI. This study also shows that 

the government and the State Bank manage the 

injection of liquidity into the market through 

credit channels (analysis of variance with an 

eight-quarter lag), credit accounted for 23.08% 

of output’s shocks, while the money supply 

represented only 9.51%9. Camen (2006) also 

gave the same results. Thanks to the VAR model 

and the analysis of variance forecasts for the 

period 1996-2005, credit explains 18% of 

inflation, while the key rate plays no role10. In 

addition, Camen concluded that Vietnam's 

inflation rate was explained by both commodity 

prices and exchange rates. Similarly, the role of 

exchange rates on inflation is also important for 

Goujon, he explained in his research by 

analyzing the effects on the macro economy in 

the 1990s. The results of this study show that the 

inflation rate will increase by 1% when the 

exchange rate is depreciated by 2%. This 

suggests that, in order to control the inflation 

rate in Vietnam or to increase the money supply, 

the author proposed to control the exchange rate 

as well as money market prices. In their study, 

however, Vo et al. (2002) showed the opposite 

                                                             

8 See International Monetary Fund (2003) ‘What 
drives inflation in Vietnam? A regional approach”, 
IMF Country Report N° 06/422. In Vietnam: 
Selected Issues. Washington, DC, USA: 
International Monetary Fund 
9 See Le V. H., & Pfau, W. D. (2009), p. 175  
10 See Camen, U. (2006), p. 247 

when they assumed that exchange rates and 

money supply changes had only a very small 

effect on inflation rates. The arguments in this 

study were then rejected in 2010 by the results of 

Nguyen, T. T. T. H. & Nguyen, D. T. The two 

authors showed the important impact of 

exchange rate depreciation on inflation rates, 

although they consider inflation to be a problem 

originating in the national economy. 

In addition, studies on the analysis of the 

monetary policy framework were also conducted 

for the Vietnamese economy. Tran (2005), using 

the VAR model, presented the results and the 

relationship between the world price of gold and 

the price of gold in Vietnam by analyzing the 

growth of the money supply adjusted by the 

central bank in response to price and exchange 

rate changes in the money markets; this study 

also shows that, by controlling interest rates, the 

central bank can hardly control public demand 

for gold. In the study of the monetary policy 

transmission mechanism by V. H. Le and Pfau 

(2009), the role of credit channels and exchange 

rates is increasingly reinforced rather than the 

role of interest rates in Vietnam. A. T. P. Le 

(2007) showed that strict inflation targeting in 

the Vietnamese market is not necessary, as it 

places inflation targeting above other monetary 

policy targets. 

After all, when analyzing the monetary 

framework, studies focus almost exclusively on a 

specific objective using econometric methods 

such as VAR or VECM models, but there is no 

generalized aggregation for all targets. 

 

Overview of monetary policy in Vietnam 

State Bank of Vietnam (SBV) 

“The State Bank of Vietnam (below referred to 

as the State Bank) is a ministerial-level agency of the 

Government and the central bank of the Socialist 

Republic of Vietnam”11 

After the Sixth Congress of the 

Communist Party of Vietnam, the economy 

                                                             

11 Article 2. Position and functions of the State 
Bank of Vietnam, Law on the state bank of 
Vietnam, the national assembly, n° 46/2010/QH12 



 

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019) 

131 

moved from a planned to a state-regulated 

market economy. We must resume the first step, 

the construction and reform of the operational 

organization of the banking system, which 

focused on monetary policy. 

Since 1990, two banking ordinances have 

been adopted (SBV’s Ordinance / Commercial 

Bank, Credit Union and Financial Corporation 

Ordinance), the country has followed the East 

Asian "developmental state" model with the 

transition of Vietnam's banking system from one 

level to two levels12. The objective is to promote 

and ensure sustainable economic development 

through structural changes in the production 

system and a high rate of economic growth (Le, 

2007). It clearly defines the functions of 

government management for the SBV and the 

functional currency of credit institutions' activity 

(acclimatized to the market economy banking 

system). 

In October 1998, two banking laws were 

replaced by two new ones: the Law on State 

Banking and the Law on Legal Credit 

Institutions. These two laws have contributed to 

the proper functioning of the banking system, 

which has become freer, more open and more 

compatible with major changes in the banking 

sector13.In terms of many aspects of the 

organization and implementation of monetary 

policy in Vietnam, the power of the State Bank 

is quite limited. In general, important monetary 

decisions are governed by the National 

Assembly, the government and the National 

Monetary Policy Advisory Council. On the 

other hand, the State Bank must prepare an 

annual report on the activities to be carried out 

in the context of the implementation of 

monetary policy in the past, as well as 

suggestions for future economic development. 

The government, after receiving the report, may 

make changes and amendments in consultation 

with the National Monetary Policy Advisory 

                                                             

12 Further analyses are mentioned in the article 
Lich sử Ngân hàng Nhà nước Viêt Nam (History of 
the Central Bank of Vietnam) on the official SBV 
website (see Bibliography) 
13 Law on the State Bank of Vietnam (1997) 

Council, which is then transmitted to the 

National Assembly for final approval. The 

Congress will normally approve the forecasts 

according to different objectives, such as the 

State budget or the economic growth objective. 

After receiving final approval, the State Bank 

may conduct monetary policy activities related 

to the development of the financial market and 

may adapt accordingly; however, the Bank may 

report periodically to the govemment and the 

National Assembly (Camen, 2006; National 

Assembly of Vietnam, 1997). Consequently, 

from a legal point of view, the role of the State 

Bank is quite limited, while the government's 

intervention is quite strong in the 

implementation of monetary policy in Vietnam. 

Before the real volatility of inflation, 

economic growth became difficult. To improve 

the operational effectiveness of macroeconomic 

policies, the Ministry of Finance and the State 

Bank of Vietnam (SBV) signed the Coordination 

and Information Exchange Regulation 

(29/2/2013). Subsequently, four government 

agencies, such as the Ministry of Planning and 

Investment and the State Bank, the Ministry of 

Finance and the Ministry of Industry and Trade 

also signed the Regulation on Coordination in 

Macroeconomic Management and Direction 

(12/01/2014). 

Coordination between fiscal policy and 

monetary policy only arises when both policies 

are implemented by two independent 

organizations. In the case where one 

organization depends on the action of the other 

organization, or under the direction of another 

organization, it has the natural consequence that 

mutual coordination of organizations is 

necessary in the implementation of policies. In 

practice, in Vietnam, monetary policy was 

carried out by the central bank, which gradually 

became independent of the functioning of fiscal 

policy. 

 

Monetary policy objectives in Vietnam 

Monetary policy has been identified 

through the construction of a specific policy, 

price stability. On the other hand, they are credit 

policy (tools for mobilizing capital and 



 

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019) 

132 

extending loans to all economic sectors); central 

bank independence to overcome the "inflation 

bias" (Bordes, 2007), implementation of positive 

real interest rate policy, interest rate adjustments 

in line with inflation volatility; exchange rate 

policy and a number of other support tools. 

In Vietnam, three monetary policy 

objectives are commonly set: inflation, economic 

growth and a balanced state budget. The process 

generally proceeds in the following order: (1) the 

government determines, implements and directs 

monetary policy and determines the amount of 

liquidity injected into the economic market; (2) 

the National Assembly oversees the 

implementation of monetary policy; and (3) the 

government has an obligation to report 

periodically on the progress of monetary policy. 

In addition, other monetary policy 

objectives are also pursued by law. According to 

the 1998 Law on the State Bank of Vietnam, the 

SBV’s mission is to stabilize the value of the 

currency, ensure the security of the banking 

system and facilitate socio-economic 

development (Kovsted et al. 2002). Moreover, 

the relationship between nominal exchange rates 

and domestic prices is still closely linked (Le, 

2007). The importance of this link is evident in 

the difficult period before the implementation of 

the Doi Moi policy in 1986. It was at this time 

that Vietnam faced hyperinflation and a sharp 

drop in the exchange rate on the financial 

market. Compared to many developing 

countries, Vietnam has always focused on the 

objective of curbing inflation through its 

experience with hyperinflation and public 

sensitivity to market price fluctuations. 

Subsequently, the Central Bank of Vietnam 

carries out more efficient operations, 

demonstrating the role of management through 

the promulgation and finalization of 

mechanisms, policies and administration of 

policies that work effectively. The innovative 

organization of the banking system has made a 

pact with science. The strengthening of the state 

commercial banking system, the development of 

international relations and construction 

regulations make it possible to set up and 

manage the credit institutions' system. Monetary 

policy construction and operation then becomes 

more comprehensive and efficient, helps to curb 

inflation, and gradually stabilizes the value of 

the dong. 

In the early 2000s, Vietnam's economic 

growth increased significantly thanks to the 

implementation of an accommodative monetary 

policy and fiscal stimulus, but the Vietnamese 

government seems to have failed to achieve the 

economic growth target in this period. The 

average economic growth from 2001 to 2007 

reached 6.94%. This ratio fell by 1.06 percentage 

points in the period 2008-2015. Meanwhile, the 

average inflation rate from 2008 to 2015 was 

4.32 percentage points higher than the period 

from 2001 to 2007. 

 

 

Figure 2. GDP Growth and Inflation in Vietnam (1997-2018) 

Source: GSO, private calculations 

 

-5

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10

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Inflation, consumer prices (annual %) GDP growth (annual %)



 

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019) 

133 

Through the analysis of economic policies 

in Vietnam, the fact is that economic growth is 

the government's main objective (To et al., 

2012). Normally, the State Bank is responsible 

for developing the monetary policies necessary 

to achieve the objectives set. In addition, the role 

of the State bank is to control nominal exchange 

rates, monitor liquidity pumping and provide 

credit to the economy. The State Bank's 

objectives are generally published each year at 

the same time as the government's economic 

objectives. For example, in 2017, the 

government set an economic growth target of 

6.7% and an inflation target of less than 4%. At 

the same time, the State Bank has also set a 

target that the exchange rate should not increase 

by more than 2% and that the M2 should 

increase by only 3.9%. It can be seen that the 

role and objectives of the government and the 

Bank are often controversial, they can be 

discussed and analysed by Vietnamese 

economists to reflect conflicts and make 

recommendations for the future in terms of 

economic benefits (Pham, 2011). 

In 2015, Vietnam's economy grew at a 

higher rate. The inflation plan has been kept at 

very low levels (in 2015, average annual 

inflation growth was 0.63% to 6.68%). This is 

the result of the economic governance efforts of 

government agencies. They have been working 

to repel the effects of the "shock" both inside and 

outside the economy over time, especially since 

the global financial crisis of 2007-2009. 

According to GSO reports, Vietnam's 

GDP growth in 2018 was 7.08%, its highest level 

since 2008, while inflation remained below 4%. 

This result shows that the Vietnamese 

government has learned lessons, it partly reflects 

the synchronization achieved between the SBV 

and the Vietnamese government14. 

 

Management of monetary policy’s instruments 

Period from 1998 to 2007 

                                                             

14 GSO Annual Report (2018) 

 

In this phase, the objective of monetary 

policy was to stabilize the macro-economy and 

ensure strong economic growth. Increasing the 

pace of development was the main objective of 

this phase. Macroeconomic objectives imply in a 

broader sense that the control of the target, 

economic stability, uneven growth over the year, 

and the inflation fluctuation ratio are not too 

high. The aim was to achieve the balance of 

payments from shortage to equilibrium and 

eventually to surplus. In particular, it was 

necessary to ensure a balanced budget, in 

particular, to increase revenues and reduce 

operating expenses in order to concentrate 

public investment. 

 The interest rate: this period is marked by 

a fundamental change in the management of 

interest rates, so that they can be adapted to the 

pace of Vietnam's economic reform. SBV 

managed the interest rate policy through a 

maximum interest rate cap under the loan term. 

Interest rate caps and the interest rate differential 

have been announced. Commercial banks 

applied some flexibility to adjust interest rates 

for loans and deposits that corresponded to the 

characteristics of capital and trade in particular. 

The interest rate mechanism made fundamental 

changes starting in May 2000. 

 Reserves requirements: under the reserve 

requirement for regulations issued under SBV 

Decisions No. 1991/1999 / QD-NHNN1 1997, 

the reserve requirement ratio for credit 

institutions has been decided (6% for short-term 

and demand deposits; 6% for medium and long-

term deposits). Interest must also be paid for 

excess reserves, as well as penalties if credit 

institutions do not have the mandatory reserve 

account. These rules encourage credit 

institutions actively operating in the company's 

capital. They implement the stipulated required 

reserve, a consistent operational target for 

monetary policy. 

 Refinancing: through mortgage 

documents and mortgages in commercial banks' 

foreign currency deposits, the central bank 

carried out the short-term refinancing to 

compensate for the temporary payment 

difficulties of commercial banks. In 1998, the 



 

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019) 

134 

refinancing interest rate can be adjusted from 1% 

to 1.1% per month. In 1999, when there was the 

interest rate reduction, the refinancing ceiling 

was lowered to 0.85% each month. 

 Open-market operations: these are carried 

out on 12 July 2000. The market opening date, 

chaired and inaugurated by the central bank on 

the occasion of the first session. Market tools are 

now functional, they are considered the most 

important tools of monetary policy, because they 

have more advantages than other tools. They 

allow the central bank to actively operate a 

flexible monetary policy. Consequently, the 

application of open-market has marked an 

important development in the management of 

the central bank's monetary policy, moving from 

the use of rigid administrative tools to flexible 

and more efficient tools. 

 The credit limit: giving the credit line will 

generate difficult factors for commercial banks. 

Although this tool has been applied since 1994, 

its impact on performance was only observed in 

the second quarter of 1998, but the central bank 

did not apply this tool as a routine tool in 

monetary policy management. 

 

Period from 2007 to 2018 

The economic context is more broadly 

and deeply integrated into the global economy, 

leading to faster trade development and the 

inflow of international capital more rapidly and 

intensely. Thus, the construction and operation 

of monetary policy becomes more complex and 

difficult. A flexible monetary policy is 

implemented through the adjustment of the tool. 

More precisely15: 

 Interest rate: from May 2007 to June 

2008, the central bank raised the key interest rate 

in order to absorb the excess liquidity caused by 

strong foreign capital inflows. In late 2008 and 

early 2009, when inflationary pressure eased, the 

central bank also reduced the policy rate to 

support economic growth. 

                                                             

15 The data and number in the analyzes are taken 
from the annual reports of the Central Bank of 
Vietnam 

Between 2009 and the first quarter of 

2010, the central bank carried out the base rate 

mechanism under which banks set the deposit 

and lending rates to VND. It was not to exceed 

150% of the base rate. In 2011, to adjust interest 

rates, the central bank gradually increased the 

operator in order to implement a restrictive and 

prudent monetary policy, but also to fight 

inflation. 

In 2012, on the condition that inflation 

forecasts were on a downward trend, the interest 

rate tool was actively used. The downward trend 

had to be followed online by reducing inflation 

and inflation expectations. It was necessary to 

ensure that the real interest rate was positive, in 

order to prevent a further increase in inflation. 

Recently, due to the excess liquidity of 

commercial banks, from March 2014 to today, 

the refinancing rate is 6.5%, which is much 

lower compared to the 15% at the end of 2011 

and the rediscount rate of 4.5%. 

 Reserves requirements: thanks to monetary 

policy, the refinancing rate has been better 

controlled, in line with the objectives and 

monetary developments of each period. In 2007, 

in order to neutralize excess liquidity in the 

banking system, alongside open market 

operations tools, the central bank raised the 

percentage of the reserve requirement ratio for 

commercial banks in mid-2007 and early 2008. 

At the end of 2008, the central bank lowered the 

RRC to reduce liquidity pressures for banks, 

which reduced funding costs and encouraged 

banks to raise capital and loans. In particular, 

the reserve requirement ratio for VND deposits 

declined rapidly from 11% in mid-2008 to 3% in 

the first quarter of 2009. It is still at 3% at the 

moment. The reserve requirement ratio for 

foreign currency deposits declined more slowly, 

from 11% between 2008 and 4% in 2010. Since 

September 2011 until today, it has been 

maintained at 6%. 

 Open-market operations: since July 2000, 

open-market operations have been constantly 

being developed. They have become a tool for 

currency regulation, mainly through SBV. Since 

2007, the tendency of the foreign currency to 

circulate in Vietnam has increased, which can 



 

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019) 

135 

cause the currency to devalue. The central bank 

increased foreign exchange reserves in order to 

stabilize the exchange rate. If in the period from 

2008 to 2009, the deadline for long-term 

securities mainly offer 7 and 14 days. During the 

first 3 quarters of 2010, the 4% interest rate 

subsidy for short-term loans expires, so the 

central bank increased the purchase term by an 

additional 28 days to support banks' liquidity, 

allowing them to reduce market interest rates 

and continue to support economic growth. 

 The exchange rate: the exchange rate tool 

has been significantly adjusted to reflect as 

closely as possible the pace of supply and 

demand in the exchange market, as a basis for 

improving market regulation. In the period 

before 2011, the exchange rate was still under 

pressure and the foreign exchange market was 

unstable in January 2011. The central bank had 

revised the marginal rate to 9.3%, while there 

was a narrow negotiating margin between +3% 

and +1%. After that, the central bank 

implemented flexible market intervention to 

stabilize the exchange rate, which helped to 

reduce dollarization. 

In 2012 - 2013, the central bank aims to 

control the increase in exchange rates within the 

limit of 2 to 3% per year with the aim of 

controlling the possibilities of a devaluation of 

the Vietnamese currency. Moreover, it has also 

created favorable conditions for companies 

active in the preparation and implementation of 

a business plan. In June 2013, thanks to SBV's 

operating practices, the exchange rate was only 

adjusted by 1%. 

In September 2014, the central bank 

adjusts the exchange rate to only 1% and it will 

remain so until the end of the year. In 2015, due 

to the volatility of the global economy, the 

adjustment of the renminbi (yuan) exchange rate 

by China and the interest rate adjustment by the 

US Federal Reserve (FED) at the end of 2015, 

the volatility of exchange rate pressure in 

Vietnam was quite high. The SBV devalued the 

value of the VND three times in 2015 (January, 

May and August) with an adjustment of 1%. 

With the devaluation of the local currency in 

May 2015, due to the strong pressure due to the 

devaluation of the yuan, the State Bank of 

Vietnam adjusted the rate from +- 1% to +- 2% 

on 12/8 and from +- 3% on 19/8. 

Other tools: after a long period of floating 

interest rates, the central bank reused the wear 

rate to limit its cap that could cause fluctuations 

in money market liquidity. The central bank set 

the cap at 12%/year in May 2008 and adjusted 

the cap to 14%/year from March 2008. This cap 

was lowered by the central bank when the 

inflation risk came under control. On 29 October 

2014, in accordance with Decision No. 2173 / 

QD-NHNNN dated 28/10/2014, the SBV set 

out the provisions mobilizing the ceiling on 

demand deposits (from 1 to 6 months) at 5.5% 

and 1% for deposits of less than 1 month. 

In addition, during this period, in order to 

help control credit growth and to contain 

inflation, the central bank asked commercial 

banks to control credit growth and associate it 

with credit quality. In addition, the central 

bank's monetary policy has actively collaborated 

with fiscal policy to attract capital by 

transferring about VND 50 trillion from central 

bank cash deposits. Since 2009, expansionary 

monetary policy measures have prevented the 

risk of recession. The central bank has put in 

place programs to support the interest rate at 

4%, as indicated by the government for all loans, 

which has helped to eliminate difficulties for 

companies. In 2011, due to rising inflationary 

pressures, coupled with the tightening of 

traditional instruments, the central bank also 

used other measures to strictly control the 

currency, it increased the tightening effects for 

the 20% lower credit growth rate. 

In 2012 and 2013, the central bank 

continued to monitor credit growth, but at a 

higher level of control than in the previous year. 

This shows that even if the central bank pursues 

an expansionary monetary policy, there is still 

some caution about the risk of excessive credit 

expansion. In 2014, the target set is the M2 have 

increased by about 16-18% and the annual rate 

of credit growth by 12-14%. In short, this was 

the last time that the central bank and the 

Ministry of Finance had to intervene through 

flexible policy tools and efforts to implement the 



 

Quang Nguyen / Finance, Accounting and Business Analysis 1 (2) (2019) 

136 

government's macroeconomic objectives. 

However, macroeconomic objectives, including 

the objective of economic growth, are not 

always possible for many objective and 

subjective reasons. 

 

CONCLUSION 

 

After having applied changes in laws and 

principles by monetary authorities, monetary 

policy has become an indispensable tool in the 

macroeconomic operator, its role for the 

economy is becoming clearer and stronger. 

Previously, monetary policy was not 

really a policy, now its content, tasks and 

objectives are clearly defined as successive stages 

of socio-economic reforms in Vietnam's 

economy progress. Although the Vietnamese 

economy is not yet fully a market economy, an 

appropriate monetary policy has been found to 

adapt to the country's conditions. This is 

reflected in the favorable macroeconomic 

indicators that Vietnam has achieved over 20 

years and through creative adaptation to real 

situations. 

It has been built a favorable regulatory 

environment, realized the role and motivation, 

premises of the legal environment in the 

innovation of monetary policy, currency system 

- credit - bank. With experiences, exploitations, 

capturing the reality signal, it was first set up the 

basic elements of the abandoned legal 

environment, from the birth of the two banking 

ordinances with the first law to regulate legal 

relations and commercial banks, the central 

bank has evolved its laws. A first law on credit 

institutions was adopted by Congress and 

became effective on 1/10/1998. In recent years, 

the introduction of the second law into banking 

practices has focused on a new legal framework. 

Money and banking transactions have 

many remarkable achievements. A two-tier 

banking system is now in place, the central bank 

uses lenders of last resort, commercial banks 

control borrowing and carry out banking 

activities under the direction of the central bank. 

The autonomy of the company and the 

elimination of subsidies to banks are increasingly 

reducing operating costs, in order to enable 

companies to be more efficient. The bank has 

updated a large number of innovations, bringing 

new technology into operational management as 

well as the construction of a payment system 

through modern computer networks. This is 

considered a positive step towards transforming 

the quality of money and banking operations in 

Vietnam. 

 

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