Political Independence

The Law on the State Bank stipulates that the SBV is responsible for managing instruments of monetary policy such as refinancing, interest rates, and foreign exchange rates (Article 15 of Law on state bank, 1998). This is to take place through the use of indirect monetary instruments like the interest rate on the inter-bank market and refinancing conditions and terms. The effect and efficiency of these instruments are, however, low due to the following reasons:

• The development of a market economy is still in its early stages resulting in shallow financial markets characterized by infrequent and low levels of trading and a small number of different financial commodities.

• Although the mechanisms for managing interest rates have improved with the shift from a ceiling-managed mechanism to a basic rate system for VND lending,²⁴ market forces have not been allowed to prevail due to government interference. As a consequence, the SBV has had to implement lending policies with preferential interest rates for some projects or provide loans under specific instructions, despite the fact that state loans are not allowed to be different from those of commercial loans.

As for the SBV management of the inter-bank markets, the prevailing policies of the SBV have not encouraged and attracted private credit institutions to enter the market. The most active participants in the market are still state commercial banks and big joint-stock commercial bank. Accordingly, adjusting interest rates throughout the market has not yet become the intended instrument to control the overall market for credit, thereby essentially restricting SBV independence.

Following the approach introduced by Cukierman, political central bank independence can be approximated by the average turnover rate of the central bank governors, i.e. the average number of changes of central bank governors per year. Although this indicator is clearly not without problems²⁵, it is an operational measure, which in addition can be measured and compared across countries. As a consequence, the average turnover rate (TOR) of central bank governors has become one of the most widely used and cited indicators of actual (political) central bank independence. Table 5.2 compares the TOR of central bank governors in Vietnam with that of other countries in the region:

Table 5.2: Turnover of central bank governors (annual average in units) 1980 - 1989 1990 - 1998

Indonesia 0.20 0.25

Korea 0.40 0.50

Malaysia 0.20 0.25

Singapore 0.30 0.25

Thailand 0.10 0.75

Vietnama 0.33 0.50

Sources: Sturm and de Haan (2001) and CIEM

aThe list of Vietnamese central bank governors since 1980 is: Tran Doung (1980-1982);

Nguyen Duygia (1982-1986); Lu Minh Chau (1986-1989); Cao Sy Kien (1989-1997); Do Que Luong (1997-1998); Nguyen Tan Dung (1998-2000); and Le Duc Thuy (2000-present).

25 On the one hand, a change of central bank governor might be caused by a multitude of reasons not related to unduly and excessive central government interference. On the other hand, a central bank governor may remain in office for a long time because he/she is acquiescing towards government wishes and priorities.

Accepting the TOR of central bank governors as a proxy for central bank independence, Table 5.2 would seem to indicate that the Vietnamese central bank compared to its regional counterparts enjoys a relatively high level of political independence. In addition, the level of SBV independence would seem to increase in both absolute and relative terms across the two periods considered, which corresponds well with the development and changes outlined in Section 5.1. It should, however, be noted that an inclusion of the most recent period from 1998-2002 is likely to change this relatively good standing of the SBV, as it has experienced no fewer than two shifts of governors over this relatively short period.

Turning to the SBV role as a supervisor of the financial sector, the Law on the State Bank and Decree 88/1998/ND-CP of the Vietnamese Government states that the department of banking supervision is to be headquartered at the State Bank of Vietnam. The department is to advise the SBV Governor on implementing state management and functions of the central bank. The SBV supervision is to be directed by the guidelines of the State Inspector in co-ordination with the Banking Operation Centre of the SBV. However, unlike the directors of departments in the SBV headquarters, who are appointed by the SBV Governor, the Chief of Banking Supervision is appointed by the Prime Minister according to recommendations from the SBV Governor and General Chief of the State Inspector.²⁶ As a consequence, banking supervision has higher status and enjoys a greater degree of independence than other departments of the state bank. For example, if the Chief of Banking Supervision is in disagreement with the conclusions of the SBV Governor regarding banking supervision, the Chief of Banking Supervision will be able to execute plans, although he must report related matters to the General Chief of the State Inspector. This is the case although the Chief of Banking Supervision is also responsible to the SBV Governor for assigned tasks.

The overall assessment of the level of political independence of the SBV is that the SBV has not, in some cases, made decisions on issues that were within its power but has instead relied on guidance from or the consent of the government. This reflects that in the political system of Vietnam, the SBV as a non-governmental organisation still does not have the status or positioning needed to independently and effectively execute national monetary policies. One should, however, make note of the progress seen within the supervisory activities. This is a positive recent development, which hopefully will result in more accurate, timely, and autonomous supervision and control (see Chapter 4).

26 Note, most chiefs of banking supervision are officials from the state bank and that none of them are