VietNamNet Bridge - To make up the budget deficit, the government needs to issue bonds to raise funds from the public rather than borrow money directly from the central bank, economists say.

Economists have voiced their concern about the government’s plan to borrow money from the national foreign exchange reserves being controlled by the State Bank. The borrowing is unheard of in Vietnam.

Most of the central banks in the world are independent of government. The independence allows central banks to pursue reasonable policies for steady economic growth and long term sustainable development.  

If central banks are not independent of governments, they may excessively loosen the monetary policies as requested by governments, which may lead to high inflation.

In general, governments only borrow money for very short time. For example, they borrow money when the tax collection revenue is low and then will pay the money back when the tax collection improves. 

In general, the disbursement and the debt payment finish within just one fiscal year. And the restriction in lending to governments is animportant factor to ensure the central banks’ prestige, which is necessary to create efficient monetary policies.

As such, it would not be in accordance with international practice if the State Bank of Vietnam lends money to the government for several years. The lending may cause bad consequences, including a decrease in the State Bank’s independence and the lower prestige of the State Bank.

And it is obvious that the sudden increase in the money supply will cause high inflation. The overly high lending could exhaust foreign exchange reserves, thus leading to the risk of a international balance crisis and affecting exchange rate policy.

In most countries, the total amount of money to be lent must not be higher than 10 percent of the total state budget revenue of the year before, or 10 percent of the average revenue of the three latest fiscal years.

In market economies, governments and central banks only make indirect transactions via the bond, foreign exchange and open markets. This means that the state cannot borrow money directly from the central bank. 

The borrowing can only be implemented when the government issues bonds and the central bank buys the bonds with money from the foreign exchange reserves.

At what interest rates should the government issue bonds? The market interest rates should ensure bond high liquidity. If so, the government would get no benefit from borrowing from the central bank.

Some economists have suggested issuing bonds at an interest rate lower than the market rate, for example 2 percent, instead of the current 4.8 percent.

Tran Thang Long