Communist Review - Vietnam's economy in 202l faces unprecedented difficulties due to the serious impact of the COVID-19 pandemic on people's lives and production, business, and circulation of goods and services. In that context, the Party and State have made a prompt policy response to support the economy and ensure social security. The State Bank of Vietnam that is responsible for undertaking monetary policy management, controlling inflation, stabilizing the macro-economy, and supporting economic growth has directed the entire banking system to implement radical solutions to remove obstacles for businesses and people, maintain capital for production, thus contributing to well implementing social security policies.

Monetary policy and banking activities support businesses and people to overcome challenges during the pandemic

Two years after the outbreak and spread of the coronavirus disease, the world economy remains highly volatile and strongly divergent. Developed countries with high vaccination rates can open up and rapidly recover their economies while emerging and developing countries with lower vaccination rates and ongoing epidemic continue to deal with economic difficulties. Global trade was recovered due to increased demand from major countries while supply chains were still disrupted, causing stagnation in circulation and inflation, increasing global production costs. Consequently, prices of commodity and raw materials in the world such as petroleum, food, foodstuffs, iron and steel, freight rates soared to their highest since many years. Policy makers tend to gradually reduce the scale of easing monetary or raise policy interest rates to deal with inflation. In 2021, central banks in countries such as the UK, Canada, the US, and the European region reduced quantitative easing. The world has witnessed 74 increases in policy interest rates in total.

For Vietnam, 2021 is a year filled with challenges posed by the Delta variant, which is considered the most dangerous since the outbreak of pandemic. In that situation when the country faces great challenges, the success of the 13th National Party Congress has created a solid premise, leading the whole political system to be united, determined to tackle the pandemic, promote tradition of national solidarity and mutual love in difficulties and epidemics. The protection of people's health is set as the Party and State's top priority. Due consideration is given to ensuring safe production, social security, and supporting businesses and inhabitants to handle epidemics. Under difficult circumstances, compared with the same period in 2020, gross domestic product (GDP) in the first 9 months of 2021 only grew by 1.42%, but the macroeconomy was stable, inflation was low with an average rate of 1.81% during 10 months; the financial and foreign exchange markets continued to operate smoothly and stably.

Under the leadership of the Party, the National Assembly, the Government and the Prime Minister, right from the beginning of the year, the State Bank has been proactive and drastic in directing credit institutions to put synchronously and effectively solutions into practice in order to manage monetary policy, closely combine with fiscal policy and other macro policies to control inflation, stabilize macroeconomy and at the same time implement a series of solutions to support businesses and people. The State Bank's monetary policy management is in line with current trends of many central banks in the world. However, it has its own characteristics suitable to the features and the urgent domestic situation. The following solutions have been put into practice:

Firstly, ensure liquidity in the money market, create conditions for credit institutions to reduce lending interest rates, and provide available capital to support credit institutions to boost credit. The COVID-19 pandemic has disrupted multiple activities, production and circulation as well as cash flow, restricted people's movement.  Liquidity solutions are deployed by most central banks to operate markets smoothly, maintain cash flow, and support banks and businesses to avoid insolvency. Similarly, liquidity is maintained abundantly at the system of credit institutions on the basis that the State Bank purchases a substantial quantity of currency, puts the Vietnamese Dong (VND) on the market, and offers to buy securities on the open market to declare their readiness to provide liquidity support and stabilize the money market. As a result, the interbank rate - the rate of interest charged on short-term loans between banks, has fallen to a very low level in history, from 0.5%/year to 0. 9%/year at the end of September, thereby reducing the cost of input capital for credit institutions, creating favorable conditions for banks to cut lending interest rates.

Secondly, remain operating interest rates at low levels, creating an environment conducive to reduce the lending and deposit interest rates of credit institutions. With the characteristics of a developing economy that need large capital and depend on the banking system, it is not easy to reduce lending interest rates in Vietnam. In order to promptly remove difficulties for businesses and people, even in 2020 when the epidemic emerged, the State Bank reduced the operating interest rate 3 times from 1.5%/year to 2%/year. This is one of the Central Banks with the lowest ever interest rate in the region; In 2021, it remained this rate and also maintained ample liquidity in the money market. As a result, by the end of September 2021, the average deposit and lending interest rates in VND of credit institutions decreased by about 0.46%/year and 0.72%/year respectively compared to the end of 2020 after decreasing by about 1%/year in 2020. The average lending interest rate for priority sectors adopted by the Government (including agriculture and rural sectors; supporting industries; small and medium enterprises, export; high-tech application) was 4.4%/year.

Thirdly, ensure sufficient cash to satisfy production and business needs of the economy, flexibly adjust the credit growth targets under the principle that credit growth goes hand in hand with higher quality growth. As the financial market is heavily dependent on the banking system, credit management always needs to be harmonious and reasonable. A too high credit growth causes inflation risks. On the contrary, a too low credit growth can influence sources of capital for economic growth. On the basis of the economic growth goal of 6.5% and inflation around 4% set by the National Assembly and the Government, the State Bank has set a target of 12% oriented credit growth in 2021. This rate has been adjusted to adapt to the actual situation.

Moreover, the State Bank continued to direct credit institutions to ensure an effective and safe credit growth, focus credit on production and priority fields; tightly control loans to potentially risky sectors such as real estate, securities, Build - Operate - Transfer (BOT) projects, Build - Transfer (BT) projects; mitigate consumer credit risk; create favorable conditions for businesses and people to access loans and avoid usury. On that basis, credit grew at the beginning of the year and was higher than the same period in 2020, promptly meeting the needs of the economy. By the end of October 2021, credit grew by 8.72% compared to the end of 2020, an increase of 14.29% compared to the same period in 2020 (in the same period in 2020 it increased by 6.71% compared to the end of 2019 and increased by 10.24% over the same period in 2019). Credit structure has been positively shifted by prioritizing capital for production and business. All 5 priority areas had a higher credit growth than that of the same period in 2020, thus effectively supporting agricultural restructuring, developing fisheries, supporting industries, small and medium-sized enterprises, exporting enterprises, and high-tech enterprises. Credit growth in potentially risky sectors such as real estate, securities, and consumption remains under the control of the State Bank.

Fourthly, stabilize the foreign currency market. Vietnam  has high economic openness (total import and export turnover at the end of 2020 accounted for about 200% of GDP), the exchange rate management of Vietnam always faces external challenges as big countries are gradually narrowing monetary loosening packages, the dollar appreciates... Even for the domestic market, psychological factors are always present when the world financial market fluctuates. In that situation, exchange rate management continued to ensure flexibility to meet market demand, macro balances, currency and monetary policy goals. While the trend of capital withdrawal from emerging and developing countries caused considerable currency depreciation of many regional countries against the USD (USD up 4.65%, Thai Baht down 11.2%, Malaysian Ringgit down 2.68%, Singapore dollar decreased by 1.95%), the VND/USD exchange rate remained stable and by the end of October, the central exchange rate was equivalent to the end of last year. Market liquidity is smooth, legal foreign currency needs are fully and promptly met.

Fifthly, implement several solutions to remove difficulties and support customers affected by the COVID-19 pandemic. The State Bank of Vietnam directed credit institutions to stand with businesses and people through implementing a series of solutions to support customers affected by the pandemic. It continued to rectify policies to meet real-life demands such as:

Firstly, promulgate a circular allowing credit institutions to restructure debt repayment terms, exempt and reduce interest and fees, and keep debt classifications for customers affected by the COVID-19 pandemic. With 2 amendments and supplements, a wider range of support measures has been used and the support period has also been extended to June 2022. By the end of October, 330,000 customers with outstanding loans of VND 540,000 billion have been kept debt classification and restructured debt repayments; 1.8 million customers with outstanding loans of VND 3.5 million billion have been exempted, reduced interest rates; Since January 23, 2020, new loans with lower interest rates than before the epidemic with cumulative sales revenue of over VND 7 million billion have been granted to more than 1 million customers.

Secondly, support employers to pay work stoppage wages to employees. The State Bank of Vietnam has implemented a refinancing loan with 0% interest rate and did not require collateral for the Vietnam Bank for Social Policies to allow employers to borrow loans to pay work stoppage and restoration wages. Thousands of employees have been paid work stoppage wages from these loan packages, of which during the first support phase (ending on January 31, 2021), 245 employers have been granted loans to pay work stoppage wages for 11,276 workers; during the second  phase launched since July 2021, by October 25, 2021, 1,244 employers have  get bank loan to pay salaries for 177,845 workers (this policy will be expired March 31, 2022 or when VND 7,500 billion will be all disbursed).

Thirdly, remove difficulties for Vietnam Airlines Corporation (VNA) through the State Bank's refinancing of VND 4,000 billion so that banks could lend VNA to overcome the challenging time.

Fourthly, continue exempting and cutting service fees for people and businesses with the total value estimated to VND 1,557 billion granted by the State Bank of Vietnam and National Payment Corporation of Vietnam (Napas) in attempt to combat the coronavirus disease in 2021. Consequently, credit institutions can continue to reduce or exempt services fees for customers; use technology to develop non-cash payment, whereby besides payment via POS, ATM, banking transfer, internet, QR code, since 2021, the State Bank of Vietnam allowed banks open eKYC online account, submited to the Prime Minister for permission to pilot telecom payment (Mobile Money)...

The above figures have shown the great efforts of the banking industry in supporting the economy to handle the pandemic even when the banking system itself also faces risks caused by the pandemic. The deterioration in debt repayment capacity of businesses, individuals and households may increase bad debts and provisions for risks. As the lifeblood of the economy, safe banking operations during and after the pandemic are crucial to ensure the supply and circulation of capital for economic recovery.

Coordinated policy-making in 2022 to control inflation control, stabilize the macroeconomy, and support economic recovery

If vaccination coverage continues to be accelerated and brought about in countries, a global economic recovery can be expected in 2022. October 2021, the International Monetary Fund (IMF) cuts 2022 world economic-growth forecast to 4.9%. However,  there is a risk that inflation and the prices of basic commodities in the world will remain persistently high, banks tend to use easing measures, raising interest rates, tightening monetary policies amid changing global financial and monetary markets.

The global economic recovery creates favorable conditions for the domestic economic recovery. However, it is necessary to pay attention to the inflation risk due to the supply and demand pressure. Unpredictable global commodity prices as well as the process of opening the economy promote consumption and investment demand, putting pressure on prices; Meanwhile, the roadmap to adjust service prices managed by the State is being implemented... The IMF warned that after the COVID-19 pandemic, many economies may consider raising taxes to offset budget deficit and restructuring the economy (reshaping supply chains, global production, changing demographics, developing digital economy,...). This may lead to a higher inflation. As a large open economy, Vietnam may be significantly affected by common trends. Therefore, maintaining policy solutions for economic recovery is necessary. Nevertheless, we should not be negligent with inflationary pressure. Due consideration should be given to a good coordinated policy-making  and policy implementation, especially monetary policy and fiscal policy.

According to the assessment of the IMF and the World Bank (WB), currently, Vietnam's monetary policy management is quite suitable and in line with the general trend of the world. We must take into account financial risks and run safely credit institutions. Excessive use of financial packages increases the risk of bad debt. In the coming time, the banking industry will continue to give a helping hand to businesses and people to overcome challenges; operate monetary policy proactively, flexibly and cautiously, closely coordinate with fiscal policy and other macro policies in order to control inflation, stabilize macroeconomy and recover post-pandemic economy. Specific solutions are as follow:

First of all, the State Bank of Vietnam undertakes the management of monetary and banking activities to ensure liquidity and support credit institutions to provide adequate and timely capital for the economic recovery process; operates interest rates policy in line with the macro balance, inflation, market fluctuations and monetary policy objectives, reduces capital costs for people, businesses, and the economy; directs credit institutions to continue implementing synchronously solutions to restructure debt repayment terms, exempts and cuts interest rates and remove difficulties for customers affected by the pandemic; balances supporting the economy with controlling inflation, ensures the safety of the banking system, closely coordinates with ministries and sectors to develop policy solutions for post - pandemic economic recovery.

Secondly, the epidemic may be prolonged, requiring proactive adaptation through digital transformation and application of science - technology, which is the key to economic growth in the “new normal”. The banking sector has taken diverse measures to accelerate digital transformation, modernize the payment system and banking operations, and promote largely “contactless” payments. This will also be  the goal the banking industry pursue in 2022 and in the future.

Thirdly, in terms of safety in banking transactions and handling bad debts, in the coming time, the State Bank of Vietnam will accelerate restructuring and handling bad debts, especially after the approval of the project on restructuring the system of credit institutions and dealing with bad debts from 2021 to 2025 by competent authorities. A top priority will be given to rectifying and restructuring inefficient credit institutions to improve their financial capacity in terms of scale and quality, efficiency, ensuring system safety, rapidly dealing with bad debt in a bid to run smoothly credit institutions, improving credit quality, financial capacity and ensuring the safety of banking system./.

This article was published in the Communist Review No. 979 (December 2021)