Nguyen Van Binh, Governor of the State Bank of Vietnam (SBV), has been heavily criticized over a recent statement which contradicts what he said one year ago.

A year ago, Binh said it was acceptable for the local gold price to be VND400,000 a tael more expensive than its world counterpart at a National Assembly (NA) meeting which was televised live by the national broadcaster Vietnam Television.

"If the price differentiation surges over the VND400,000 mark, it is a sign of gold speculation, and needs to be curbed," Binh said.

But at the Tuesday televised meeting of the NA, Binh said that the prolonged price gap of about VND1.5-2 million a tael, a gap that has at times even hit VND3-4 million recently, between local and international gold prices has helped stabilize the local macroeconomic situation.

"The price gap has no impact of the macroeconomic situation, and it is a goal previously set by the central bank," he said. "As is not an essential good, which is subject to price stabilization, there is no reason the central bank has to stabilize gold prices."

Binh’s statement drew criticism from many NA delegates, including economist Tran Du Lich who said that "what is underlying in Binh statement is the elimination of the gold market."

Others wondered if there is group interest in the gold market under SBV management in the form of a state monopoly, and what the responsibility of SBV and the government is in the case.

Replying to NA delegate Nguyen Van Tuyet’s question of whether the SBV has disobeyed NA Resolution No.21 of 2011 asking SBV to strive to close down the price difference between local and world gold, Binh said SBV had followed the resolution by allowing the import of approximately 15 tons of gold in the 4th quarter of 2011 to narrow the price gap.

“In that period we have discussed and almost finished the building of Decree No.24 and since taking effect on May 2012, we are determined not to allow the import of any gold, as our legal environment has changed. Since then, we don’t have to stabilize the local gold price any more."

NA delagate delegate Nguyen Van Tuyet made a question in the televised NA meeting. Photo: Tuoi Tre

Worthy sacrifice

“We have to sacrifice the gold price gap for macroeconomic stability via the stability of the foreign exchange rate,” Binh said in a letter sent to NA delegates late last week.

Previously, when the domestic gold price increased differently from world prices, it caused many changes in the macroeconomic situation through foreign exchange rates, he said.

Whenever the local gold price is at least VND400,000 higher than the world’s, gold speculators and traders will hoard US dollars from official and unofficial markets for cross-border smuggling on a large scale.

Before the release of Decree No.20 on foreign currency management, there were about 10 - 30 tons of gold smuggled annually. This is a huge destabilization factor for foreign exchange between the Vietnam dong and the greenback.

As the greenback appreciated against the local currency, it caused the price of imported goods to rise [in an open economy like Vietnam], widening the chronic trade deficit and impacting the consumer price index (CPI) and inflation.

Thus, the price of gold has a major influence on macroeconomics and drains the country’s foreign exchange reserve.

Therefore, even though gold is not an essential commodity, due to the nature of such effects on the macroeconomic situation, the central bank and the government should allow the import of gold to stabilize the domestic price of gold.

However, since the implementation of Decree 24 on gold market management in May, gold smuggling has largely been halted, stabilizing the forex rate.

Through the state monopoly over gold bullion production legalized by Decree No.95 in late 2011, plus Decree No.20 on forex market management, the SBV has realized its initial goals in preventing gold smuggling and stabilizing the forex rate.

"It is a real initial success," said Binh.

The de-dollarization initiative of the SBV has also generated money for the economy, he said.

Binh said that in the five months leading up to October 25, approximately 60 tons of gold, equivalent to US$ 30 billion, was converted into money for social and economic development. This sum of gold was sold by local people to local commercial banks.

The gold reserve held by the public is now estimated at 250-300 tons, worth around $15 billion. The SBV is expecting to buy a total 80 tons of gold in 2012.

Binh said the SBV will enact more measures to mobilize the gold reserve to serve socioeconomic development, as it is a real waste leaving such an idle, huge fund untouched.

"If constrained liquidity does not become a problem in the fourth quarter due to increased demand, local credit institutions have already finished buying all the gold from the people to settle the debt by the end of November. With that, there is sufficient basis to affirm that local banks can buy a total of about 80 tons of gold or more in 2012," Binh said.