Vietnam central bank needs clearer mandate not independence

State Bank of Vietnam, Hanoi

The State Bank of Vietnam needs to be given the right operating conditions to allow it to focus far more of its attention on price stability to ensure the Vietnamese economy runs smoothly in the medium term, according to a new article published in the Central Banking journal.

The authors of the report, State Bank of Vietnam needs a single mandate not independence, believe the central bank does not necessarily need more de jure independence, as advocated by the IMF, to better reach its policy objectives. Instead, the government should consider revising the central bank's mandate so it can focus more on price stability and less on other matters, such as facilitating credit for state-owned institutions.

"The State Bank of Vietnam has many responsibilities as defined by the State Bank Law," said authors Thomas Cargill, professor of economics at the University of Nevada, and Tuan Nguyen, an associate director at Standard Chartered. "Fewer responsibilities and more focus on price stability needs to be considered."

The authors believe the institutional design of a central bank in terms of whether it is de jure independent or dependent on the sovereign government is less important than if the central bank operates with a clear rule to focus on price stability. "Rather than make the SBV de jure independent as recommended by the IMF, it would be better to have the SBV operate with an inflation target," the authors said.

The paper also stated there is a "meaningful nonperforming loan problem" in the financial system that "cannot be solved by monetary policy", but instead "requires structural changes". "Relying on central banks to support non-performing loans postpones meaningful reform and makes it less likely price stability will be achieved," the authors said.

However, the article – which points to lessons Vietnam could learn from both South Korea and Japan – stated the issues facing Vietnam are far from unique and not limited to the developing world. They highlighted the US, where the Federal Reserve has a dual mandate to achieve both price stability and maximum employment, as a case in point.

"The Fed is not de facto independent despite its high level of de jure independence," the authors said. "The Fed continues to support the mortgage market by holding $1 trillion in mortgage-backed bonds; the financial system is permeated with large numbers of troubled mortgages that continue to be supported by government policy; and the Fed continues to support the large fiscal imbalances of the government by keeping interest rates at artificially low levels."

The authors said central banks more generally are increasingly asked by their governments to assume new responsibilities to simulate the economy, support fiscal imbalances, support troubled financial institutions and support government industrial policies.

The paper observed that Vietnam recognises some of the issues it faces and is willing to listen to outside recommendations. It also said the country was in the process of moving to address some of its main economic problems.

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