Author: David Dapice, Harvard University

Vietnam recently devalued its currency to about 21,000 dong to the US dollar. At the end of 2008, the rate was 17,000 — a decline of 24 per cent in about two years. In fact, it is worse since the ‘free market’ rate is over 22,000, and many people wanting dollars need to pay that rate. That rate would make it nearly 30 per cent depreciation. Since interest rates on dong bank deposits are only about 15 per cent, it seems safer to keep dollars under the mattress than dong in the bank.

While most Asian nations are worrying about excessive capital inflows and currencies that will be too strong to support exports, Vietnam is in the unenviable position of having almost run out of foreign exchange reserves  — the exact amount is secret but probably worth six weeks of imports and half of reserves a year or so ago. Read more…