Bui Thi Minh Tam, 2012. "Who Gains and Who Loses from the Exchange Rate System in Vietnam?"
|As in many other developing countries, the imposition of foreign exchange controls to
stabilize the nominal exchange rate and a long-lasting dollarisation phenomenon in Vietnam have
caused an unofficial exchange market to emerge. A de facto system of multiple exchange rates
operates in practice, where official exchange rates coexist with a free market exchange rate.
Literature on multiple exchange rate (MER) regimes suggests that MERs can serve for
the balance of payments purpose as well as a method of raising implicit taxes on exporters who
are required to surrender foreign exchange earnings to the central bank through the exchange
system. This paper attempts to identify the benefits and costs of the government and economic
sectors under a MER system in Vietnam.
Using a static partial equilibrium framework modified from Rosenberg and De Zeeuw
(2001) and Hori and Wong (2008), this study estimates the equilibrium exchange rate that would
prevail in a unified exchange market. This rate is more depreciated than the current official rate
by about 5-8 percent in the period 2007-09. Using the estimated equilibrium rates, the net
efficiency losses in the export market are calculated at 6.3 percent, 5.2 percent and 8.5 percent in
2007, 2008 and 2009 respectively while importer market has net efficiency gains. Public
importers often enjoy higher gains than their private counterparts do. In total, public firms gain
05-0.6 percent of GDP in 2009 from international trade under this exchange rate system while the
private sector bears a cost of 0.2 percent of GDP. Unification of these segmented exchange
markets would lead to an expansion of trade openness by 27 percent of GDP while narrow trade
deficit by 0.7 percent of GDP in 2009. Exchange rate reform towards a convertible currency
would eliminate exchange profits for the government. Therefore, such reform should be gradually
implemented and coordinated by fiscal adjustment.