Hanoi - March 8 2011 - The pervasive foreign exchange black market in Hanoi has ground to a halt amid fears that the government will clamp down on the illicit trade in dollars as it struggles to support the ailing Vietnamese currency, the dong.
Soaring inflation, at one of the highest rates in Asia, has hit confidence in the dong.
Late on Tuesday the central bank increased interest rates for the third time in three weeks in an effort to keep prices under control.
The gold shops on Ha Trung and Tran Nhan Tong streets in central Hanoi have developed a lucrative if illegal trade in US dollars over the last few years, as Vietnamese consumers and companies worried about rising prices and the depreciating dong have hoarded greenbacks and gold.
A number of Hanoi gold traders told the Financial Times that they stopped buying and selling dollars on Monday because of worries that the government may finally start to enforce the raft of circulars it has issued proscribing the trade and vowing to punish “hoarders and speculators”.
After months of talk and little action, the government unveiled a number of measures last month to tackle the instability that is threatening to undermine Vietnam’s impressive record of economic growth.
The government devalued the dong to bring the official exchange rate closer to the black market rate and said it would tighten loose monetary and fiscal policy, which have fuelled inflationary expectations and raised concerns about the scale of public debt.
On Ha Trung street, the gold shops, which typically trade tens of thousands of dollars a day, were mostly empty and motorbike parking attendants turned away customers. The FT observed a number of police officers inspecting the gold shops.
“We’re not allowed to trade dollars so get out,” said one nervous gold shop employee.
At a gold shop on Tran Nhan Tong street, another trader was more helpful. “We can’t buy and sell at the moment but come back next week and the situation might have changed.”
Despite the sudden shutdown of the Hanoi black market, the unofficial trade in dollars appeared to be continuing as normal in Ho Chi Minh City, Vietnam’s commercial capital.
One analyst said that any curbs on the black market would be “ineffective” unless the government resolves the difficulties in the banking system to ensure a steady supply of dollars at the official exchange rate.
“When everyone can fulfil their foreign exchange needs through the official market, the unofficial market will shrink and be used predominantly for tax evasion,” he said.
The Communist government last attempted to close down the foreign currency black market in 2008, when inflation hit 28 percent as the economy overheated amid inflows of hot money. But the trade resumed shortly afterwards.
The central bank sets the official dong-dollar exchange rate and banks can trade the currency within a band of +/- 1 percent. However, people are only allowed to buy dollars for specified purposes such as paying for imports and remitting money overseas so many turn to the black market, where the dong has often traded well below the official exchange rate in recent years.
This has made life difficult for those who want to buy dollars but has allowed those holding greenbacks to make tidy arbitrage profits.
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