Fiscal policy

Essay by anna_horiUniversity, Master'sA-, August 2009

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From the second quarter of 2008, the local economy was going down due to getting the impact from the global recession. To deal with the situation, the State Bank of Vietnam (SBV) has issue series of monetary policies to control and adjust critical ratio and stimulate the economy.

1.The massive policy stimulus has been to support growth as inflation took a back seat. After many decisions issued, SBV has slashed base rates to 7%, lending rates cap down to 10.5% from peak of 21% (1.5 times base rate). Cap removed for high risk loans like consumer and credit cards.

In second and third quarter of 2008, there was a great demand of local and foreign currency. SBV increased the rate to attract more money from othe sources. After the peak of 14% of base interest in third quarter, SBV continually reduced the rate in forth quarter and stopped at the bottom of 7% from the beginning of 2009.

The same rate has remained during last 2 quarters. This was to facilitate and give support to the business, help them to approach the loan to deal with debts, keep on manufacturing and employment. Anyhow, it was supposed that this might not be very effective as the government would have a big loss due to this stimulus. Giving support and injecting money by reducing interest rate will not help the government to get the return and thus increase the burden. Moreover, some business will get use of this by taking loans although it is not necessary as the interest rate is quite low.

2.SBV increased measures to boost bank liquidity such as cut reserve requirements to 3% and paying off compulsory Tbills worth VND 20.3 trillion. By this, SBV want to inject more money to the market. Banks will have...