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Monday December 11th, 2023

Vietnam monetary policy for stability not trade PM tells Trump after false US charges of Dong ‘manipulation’

ECONOMYNEXT – Vietnam Prime Minister Nguyen Xuan Phuc has explained State Bank of Vietnam (central bank) monetary policy in a telephone conversation with US President after the country was falsely labeled a ‘currency manipulator’ by US mercantilists.

PM Phuc had pointed out that a strong, independent and prosperous Viet Nam with increasingly important role in the region that was in line with line with the U.S. interests.

PM Phuc had explained that Viet Nam “as a developing country with limited economic capacity, has pursued the monetary policy in favor of inflation control and macro-economic stabilization.”

For Domestic Stability

“The monetary policy has not been designed to gain advantages in international trade,” the Prime Minister had explained.

The Vietnam dong collapsed from around 16,000 to 22,000 to the dollar after trying ‘stimulus’ when a US housing and economic bubble burst around 2008/2009.

Since then State Bank of Vietnam had kept the Dong around 23,000 to the US dollar with a wide policy corridor, which allow overnight rates to move and liquidity to tighten.

The US Treasury has a history of claiming that East Asian countries are manipulating currencies when they simply maintain a peg in the style of the Bretton Woods system which was initiated by the US itself and broke when the Fed printed money to target an output gap.

Because Vietnam had not been trying ‘stimulus’ with liquidity injections for many years, the currency had been stable.

The US Treasury had so far not labeled currency boards (Hong Kong) or dollarized nations (such as Cambodia) as ‘currency manipulator which critics say would make it a laughingstock.

A strong soft-peg, or a hard peg or dollarization allows the pegged nation to have inflation close the anchor currency nation.

US Mercantilism

But Mercantilists believe that US trade deficits are caused by ‘undervalued’ currencies and not government deficit spending. Pegged central banks in East Asia typically buy US Treasury bills with foreign reserves, giving more income to US residents to spend on imports.

The phenomenon is driven by a US savings investment gap, due to budget deficits finances from abroad or foreign investments not the exchange rate.

The US had in the past tried the same failed Mercantilist remedy on Japan and China, Steve Hanke, a classical economist explains.

The Yen rose from 360 to the US dollar from the Bretton Woods system collapsed to 80 in 1995 until then US Secretary of Treasury Robert Rubin had changed tack.

“In consequence, the U.S. stopped arm-twisting the Japanese government about the value of the yen and Secretary Rubin began to evoke his now-famous strong-dollar mantra,” Hanke said.

“But, while this policy switch was welcomed, it was too late.”

Misled by US mercantilist claims that East Asia was ‘undervaluing’ currencies Sri Lanka embarked on a disastrous Real Effective Exchange Rate (REER) targeting exercise destroying the rupee, economic stability and triggering capital flights and output shocks.

Whipping Boy

The Vietnam dong has become the latest whipping boy of US Mercantilists, but other countries had been targeted by the Treasury in the past.

When Chinese imports to the US picked up, its currency replaced the Japanese yen “as the mercantilists’ whipping boy,” Hanke explained at the time.

But the relative strength of exchange rates fails to explain the US trade deficit. In China’s case the trade deficit rose while the Yuan appreciated.

While the Japan-US trade deficit declined over the last twenty years, the relationship between Yen’s strength and the Japanese contribution to the total US trade deficit was weak says.

“After all, this exchange-rate argument (read: competitive advantage) is what the mercantilists use to wage war,” Hanke says.

“And as for China, the relationship between the strength of the Yuan and China’s contribution to the U.S. trade deficit contradicts the mercantilist conjecture.

In the US Mercantilist arguments about trade deficits are not just peddled by politicians but also by economists like C. Fred Bergsten of the Peterson Institute for International Economics and supply side guru Arthur B Laffer, Hanke says.

“The United States has recorded a trade deficit in each year since 1975. This is not surprising because savings in the U.S. have been less than investment,” Hanke explains.

“The trade deficit can be reduced by some combination of lower government consumption, lower private consumption or lower private domestic investment. But, you wouldn’t know it from listening to the rhetoric coming out of Washington.

“This is unfortunate. A reduction of the trade deficit should not even be a primary objective of federal policy. Never mind. Washington seems to thrive on counter-productive trade and currency wars that damage both the U.S. and its trading partners.”

“In short, the U.S. trade deficit is the result of a U.S. savings deficiency, not exchange rates.” (Colombo/Dec24/2020)

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Sri Lanka rupee opens at 327.00/50 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee opened at 327.00/50 to the US dollar on Monday, from 327.00/30 Friday, dealers said.

On the Colombo Stock Exchange, both indices opened up: The All Share Price Index 0.28 percent at 10,823, and the S&P SL20 0.35 percent at 3,113.85.

Bond yields were up.

A bond maturing on 01.08.2026 was quoted at 14.05/20 percent from 14.05/15 percent.

A bond maturing on 15.01.2027 was quoted at 14.05/20 percent from 14.10/25 percent.

A bond maturing on 01.07.2028 was quoted at 14.20/50 percent from 14.20/35 percent.

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Sri Lanka promoting Buddhist tourism from Vietnam, ASEAN

ECONOMYNEXT – Sri Lanka is planning to boost Buddhist tourism by linking temples in the country with those in East Asia, Foreign Minister Ali Sabry said after to welcoming a delegation of monks from Vietnam.

President Ranil Wickremesinghe, and Minister Sabry have initiated a temple-to-temple program where 100 Sri Lanka temples will be linked with counterparts in the Association of South East Asian Nations region.

“Tourism development will get a lot of growth with the temple-to-temple program,” Minister Ali Sabry said.

Along with the delegation of monks, five travel agents from Vietnam were also invited.

Under the first phase of the Temple-to-temple programs, several monks from Sri Lanka had received invitations from Indonesia, Malaysia, South Korea and Vietnam the Foreign Ministry said.

The Temple-to-Temple diplomacy program will be extended to Singapore, Japan, Thailand and Cambodia during the second phrase of the program.

Sri Lanka is targeting 2.3 million tourists in 2023, after getting about 1.5 million this year. (Colombo/Dec10/2023)

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ADB $200mn loan for Sri Lanka economic stabilization efforts

ECONOMYNEXT – The Asian Development Bank (ADB) has approved a US 200 million dollar concessional loan to Sri Lanka to help stabilize the country’s finance sector.

The Financial Sector Stability and Reforms Program comprises two subprograms of IS 200 million dollars each, according to a statement by the ADB.

“The program’s overarching development objective is fully aligned with the country’s strategy of maintaining finance sector stability, while ensuring that banks are well-positioned for eventual recovery,” ADB Country Director for Sri Lanka Takafumi Kadono was quoted as saying in the statement.

“The expected development outcome is a stable financial system providing access to affordable finance for businesses in various sectors of the economy.”

The ADB statement continues:

“Subprogram 1 targets short-term stabilization and crisis management measures that were implemented in 2023, while subprogram 2 is planned to be implemented in 2024 and focuses on structural reforms and long-term actions to restore growth in the banking sector.

The program will help strengthen the stability and governance of the country’s banking sector; improve the banking sector’s asset quality; and deepen sustainable and inclusive finance, particularly for women-led micro, small, and medium-sized enterprises.

According to the International Monetary Fund’s (IMF) latest review, Sri Lanka’s economy is showing tentative signs of stabilization, although a full economic recovery is not yet assured.

The program is a follow-on assistance from ADB’s crisis response under the special policy-based loan that was approved for Sri Lanka in May 2023.

It is aligned with the fourth pillar of the IMF’s Extended Fund Facility provided to Sri Lanka to help the country regain financial stability.

It is also in line with the government’s reform agenda, including strengthening the operational independence of the Central Bank of Sri Lanka (CBSL) and its designation as the country’s macroprudential authority.

In designing this subprogram 1 loan, ADB has maintained close coordination and collaboration with the IMF to design targeted regulatory reforms for the banking sector—including the asset quality review—and with the World Bank on strengthening the deposit insurance scheme.

“The loan is accompanied by a $1 million grant from ADB’s Technical Assistance Special Fund to provide advisory, knowledge, and institutional capacity building for Sri Lanka’s Ministry of Finance and CBSL.”

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