Vietnam devalued the beleaguered dong by 8.5 percent on Friday in a widely anticipated move to realign official and black market exchange rates amid high inflation and a persistent trade deficit.
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| Photo: chinhphu.vn |
The State Bank of Vietnam also said on its website (www.sbv.gov.vn) it had narrowed the band in which the dong is allowed to trade with the dollar to 1 percent from 3 percent on either side of a midpoint it sets each day.
The changes represent the first major steps in months to address snowballing economic problems that critics say have been brushed aside in the pursuit of growth ahead of a leadership reshuffle in mid-January and further delayed by the lunar new year festival last week.
The devaluation was the sixth in nearly three years, a turbulent period in which authorities have grappled with volatile inflation, wide trade and fiscal deficits, rising global gold prices and sinking confidence in the local currency.
The new reference rate was 20,693 dong per dollar , down from 18,932 in place since Aug. 18, 2010.
The dong has been devalued by more than 20 percent since June 2008 and foreign exchange reserves have fallen sharply, making it increasingly difficult for the government to break a cycle of devaluation expectations. Most other currencies in the region gained ground against the weak dollar during that period.
Friday\'s decision is likely to exacerbate inflationary pressures that pushed consumer price index inflation to a near two-year high of more than 12 percent in January, but economists say it is necessary to return the forex market to normal.
The dong has languished outside its band for more than four months on unofficial markets , hovering in recent weeks about 6-7 percent beyond the weak limit.
On Friday morning the dong was quoted at 21,300/21,400 per dollar on the unofficial market in Hanoi, according to two major gold shops that double as a foreign exchange dealers.
With the new rate and band the dong was officially only allowed to trade as weak as 20,900 per dollar.
Traders and economists had widely expected the State Bank to make a move around this time after a senior official in early November ruled out a devaluation before Tet, the lunar new year festival, saying that the authorities would instead tap foreign exchange reserves to try to meet dollar demand.
The Tet holiday ended on Monday and market activity resumed on Tuesday.
The authorities have talked about bringing down inflation and raised the main policy rate by 100 basis points in early November, but critics say they have not gone far enough.
While the benchmark base rate has stayed flat at 9 percent, the State Bank of Vietnam quietly raised the reverse repo rate used in open market operations by 400 basis points between Nov. 4, 2010, and Jan. 10, 2011. It now stands at 11 percent. (Reporting by John Ruwitch and Ngo Thi Ngoc Chau, editing by Andrew Marshall)
