Monetary in Vietnam: Alternatives to Inflation Targeting

Introduction

A major objective of the Vietnamese authorities in the coming five years is it to strengthen

the integration of the Vietnamese economy into the world economy. An important milestone

has been the Vietnam-US Bilateral Trade Agreement, BTA. A subsequent milestone will be

Vietnamese membership in the WTO, which is under preparation and expected for 2006. As

part of this process of internationalisation, Vietnam is also opening its financial sector to

foreign financial institutions. Currently, foreign banks have already started to provide banking

services in Vietnam.

Internationalisation will pose major challenges for financial sector polices, underlining the

importance of further progress with financial sector reforms and reforms of monetary policy.

This paper will present the current status of the reform of monetary policy in the context of

economic and financial sector developments in Vietnam and identify key reform issues with

respect to monetary policy.

Section 2 will give a brief overview of principal economic and financial developments to

situate monetary policy in the context of economic developments in Vietnam. Section 3

describes the monetary policy framework currently in use in Vietnam, and Section 4 presents

empirical results on the determinants of inflation and the role of monetary factors.

2. Background: macroeconomic developments

2.1 Economic growth and inflation

The Vietnamese economy has shown strong economic performance since the early 1990s

(Figure 1). Annual average growth per year was 7.4% for the period since the early 1990s,

and in recent years Vietnam had one of the highest growth rates in East Asia. During the

2001-2005 five-year plan, the annual average growth of 7.4% was only slightly below the

7.5% annual average target in the Socio-Economic Development Plan for 2001-05.

Equally impressive was the strong reduction of poverty in Vietnam. The percentage of the

population living below the poverty line has been reduced from well above 50% to below

30%