Firms will have tobuy foreign currencies instead of borrowing from banks (Photo: cafef.vn)

According to the State Bank of Vietnam (SBV), the move aims to implement theSBV’s policy to shift the foreign currency-related transactions from borrowingand lending to buying and selling to minimise dollarisation in the economy.

Earlier, banks also stopped providing short-term foreign currency loans forthis purpose from March 31 this year, forcing firms to buy foreign currencies.

Previously, the foreign currency lending policy was designed to assist localimporters and producers by cutting borrowing costs, thereby enhancing theircompetitiveness in international trade, especially amid rising protectionism.

Importers prefer to take out loans in dollars as the interest rate for dollarloans is lower than those in VND. Banks currently list interest rates at2.8-4.7 percent per year for short-term dollar loans and 4.5-6.0 percent formedium- and long-term dollar loans. Meanwhile, interest rates are 6-9 percentper year for short-term VND loans, and 9-11 percent for medium- and long-term VNDloans.

With the new regulations, local importers will have to take loans in VND andbuy dollars to serve their offshore payment demand.

According to experts, the gradual narrowing of demand for foreign currencyloans by the SBV is necessary and consistent with the Government'santi-dollarisation roadmap.

Ending foreign currency lending will minimise distortion in the foreignexchange market when a series of free trade agreements are implemented.

Banking expert Phan Minh Ngoc said dollar lending makes dollarisation of theeconomy more serious. As more local people use the dollar in dailytransactions, the effect of the central bank’s policies would be reduced.

Ngoc took inflation as an example. When inflation is high, the central bankwants to increase interest rates to control it. However, due to dollarisation,local people will prefer borrowing in dollars rather than in VND, which willmean the central bank’s interest rate hike will have little effect. This hasbeen seen in some countries with hyper-inflation, where the dollar replaces thelocal currency while the countries’ central banks are unable to do anything. –VNS/VNA