State Bank governor Le Duc Thuy said the increases in foreign currency reserves had tripled those of 2006 in the first five months of this year.

“The central bank of Vietnam will continue to invest in foreign currencies in the next few months to meet the target level equal to 20 weeks of imports,” said Thuy.

According to the IMF, Vietnam’s total foreign currency reserves were equal to 12 weeks of imports at the end of last year, reaching the minimum international standard for foreign currency reserves.

The reserve increase helps stabilise the exchange rate between the Vietnamese dong and the US dollar with a fluctuation rate of around one per cent by the end of this year. While the Vietnamese dong fell against the US dollar at the end of 2006 and in the beginning of this year, the interbank nominal effective exchange rate was higher than the real exchange rate for the first time in Vietnam’s history due to the surplus of foreign currency supply.

“Recently, the increase in the national forex reserve has stabilised the exchange rate, narrowing the gap between the interbank nominal effective exchange rate and the rate on the market,” Thuy added.

In January, the State Bank doubled the trading band for the dong-dollar rate. In the first two months of this year, the dong appreciated by about 0.3 per cent against the dollar after declining around 0.9 per cent in 2006.

“One reason for the surplus stems from indirect foreign investment capital which is expected to keep increasing in the last half of this year,” said Thuy.

According to the World Bank’s assessment of Vietnam’s economic development released in June, rising capital inflows complicated the implementation of monetary policy. Vietnam was confronted with what is called an ‘impossible trinity’: simultaneously maintaining a fixed or nearly fixed exchange rate, independent monetary policy and an open capital account. In addition, increasing capital inflows have put pressure on the exchange rate to appreciate. However, the authorities have been unwilling to allow a greater appreciation as it may harm the competitiveness of exports and slow down growth.

Officials have thus intervened in the market by purchasing foreign currency. The dong has, as a result, returned to a slow depreciation. This type of intervention in the foreign exchange market has resulted in a build-up of reserves.

(Van Anh-Vietnam Investement Reveiw )