Don't prop up dong, says World bank

The exchange rate offered by illicit traders in Hanoi fell to as low as 10 per cent below the rate allowed by the central bank last month on concerns that an overheating economy and the widening trade deficit would trigger a currency crisis, said Noritaka Akamatsu, a Hanoi-based economist for the World Bank. The central bank allows the dong to trade up to 2 per cent on either side of a reference rate it sets daily.

The State Bank of Vietnam should not exhaust its currency reserves of US$22 billion (Bt735 billion) by intervening in the market and selling dollars indiscriminately, said Akamatsu, who is the World Bank's regional adviser for capital market development for East Asia and the Pacific. Vietnamese people are seeking dollars to invest overseas and to hedge against inflation, he said.

"The black market and the official rates will never fully converge unless the dong is floated," he said. "The central bank has been supplying dollars but only to the targeted market of importers and exporters. It shouldn't go beyond that as it could result in a flight of dollars if they supply too much." The dong gained as much as 0.1 per cent to 16,824.50 per dollar before trading at 16,846.50 in Hanoi yesterday morning, versus 16,844.50 on Tuesday. It fell 1.35 per cent last week after the central bank widened the official trading band from 1 per cent on June 27.