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.