The State Bank of Vietnam (SBV) said it will sell foreign currency to stabilize the exchange rate between the dong and the U.S. dollar days after local banks revised up the rate almost to the permissible ceiling.

SBV deputy governor Nguyen Thi Hong said on the SBV’s website on May 27 that the central bank will stick to its exchange rate stability policy with the dong devalued no more than 2% against the dollar this year.

The central bank message came out just before Minister and Chairman of the Government Office Nguyen Van Nen told a media conference in Hanoi on May 27 afternoon that the Government would adopt both fiscal and monetary policies to keep the exchange rate and foreign currency market stable to realize the targets set for this year.

Nen was quoted by Vietnam News Agency as saying that earlier this year the central bank announced its policy to devalue the local currency by no more than 2% against the greenback this year based on macro-economic forecasts and analyses for Vietnam and the world.

The central bank devalued the dong by 1% against the U.S. dollar in January and another 1% earlier this month. “After two adjustments, the foreign currency market has stabilized and efforts are being made to avoid abrupt changes, particularly in interest and exchange rates,” Nen said.

Hong explained on the central bank’s website that a strong devaluation of the domestic currency may benefit exporters but will hurt companies dependent on material imports.

Vietnam’s export goods have low prices but their competitiveness remain low on the world market. Therefore, a weaker local currency can help improve the competitiveness of Vietnamese export products but the improvement is not significant.

In addition, the Government’s debts would soar if the SBV devalues the dong more than expected. The nation’s public debts is approaching the upper limit of 65% of gross domestic product (GDP) approved by the National Assembly. The dong devaluation will also cause the foreign loans taken out by local enterprises to swell.

Regarding inflation, Hong said inflation has been put under control but it is necessary to keep a close watch on the global oil price that has bounced back to over US$60 per barrel, much higher than US$47 a barrel in January.

Moreover, inflation would also be impacted by the forex policy adopted to prop up economic growth in recent times while credit for the economy has gone up again.

In fact, the central bank has repeatedly revised up the exchange rate over the years. The SBV announced the strongest dong devaluation by 9.3% in 2011 before raising the rate by 1-2% on an annual basis.

Therefore, the dong is no longer overvalued as before. A group of researchers at the International Monetary Fund (IMF) said the current exchange rate is within appropriate levels.

Credit institutions have net bought foreign currencies from economic organizations and individuals since early this year. Current policies continue to encourage organizations and individuals to hold on to Vietnam dong and sell foreign currencies to banks.

After approaching the upper limit, the exchange rate at banks dropped to around VND21,830 a dollar on May 27, down VND25-40 from Tuesday. Some foreign currency trading points in HCMC quoted the dollar at VND21,860 for buying and VND21,890 for selling.