Case Overview (International business) - Essay Example

To fight this inflationary fire, the central bank of Vietnam, the State bank of Vietnam has raised the key interest rates to 14%. This was the latest in a flurry of interest rate increases since February 2011. This interest rate increase is to be accompanied by usual anti-inflationary measures like tighter monetary policy and tighter control on credit. The government of Vietnam has also pledged to cut the burgeoning budget deficit and check the bleeding public sector enterprises of the country.

The package introduced by the government to counter this inflation is known as Resolution 11. The Resolution 11 clearly states that the government seems determined to control inflation even at the cost of economic growth. At the meeting of the Asian Development Bank in Hanoi, Vietnam’s Minister for Planning and Investment conceded that because of the priority of the government to control inflation, the Vietnamese economy will fall short of its targeted growth rate of 7% to 7.5%. The private credit of Vietnam is a massive 120% of the GDP.

This means that Vietnam is a sort of global record holder in credit creation. However, the saving grace is that bank deposits have kept pace with this record credit growth. Because of this high inflation, the dollarization and ‘goldisation’ of the economy have increased. Ordinary Vietnamese citizens are resorting to hedging against the inflation by keeping their reserves in dollars and gold instead of dong. What has helped this dollarization is the easy availability of dollars because of the large stock of it.

In spite of the capital controls, the stock of dollars in Vietnam is high, because of the remittances sent by the large army of Vietnamese migrant workers working abroad .The banks of Vietnam also offer dollar deposits to the customers. To check the move to dollar deposits, the government has capped interests on dollar deposits to 3% against the very high interest rates of 14% on dong deposits. The country also has