The State Bank of Vietnam on Nov. 25 dramatically adjusted the exchange rate for the Vietnam dong, by about 3.44 percent from 17,034 VND to 17,961 per US dollar.

The daily forex trading band was also narrowed from plus-or-minus 5 percent to plus-or-minus 3 percent, meaning the exchange rate would creep within a band of 17,422-18,500 VND.

“The State Bank has adjusted the rate in order to balance economic targets, and has not devalued the VND,” said State Bank Governor Nguyen Van Giau.

A weakened VND would add further burden to Vietnam ’s foreign debt payments and interest costs on loans made in USD, Giau said. However, a stronger USD would benefit exports, essential for an export-oriented economy like Vietnam ’s, and help stem the trade deficit, boosting public confidence.

In a parallel move on the same day aimed at defusing a growing threat of inflation, the State Bank also raised the prime interest rate by a percentage point to 8 percent, effective December 1.

The refinance rate was also increased a point to 8 percent, as was the discount rate, which would move to 6 percent.

The central bank expected that a higher prime rate would help control credit growth and improve credit quality, helping support the economic recovery.

As of November 25, credit growth for the year had reached 34.5 percent. Although the monthly average growth from July to November was lowered to 2.2 percent, from a more rapid 4 percent during March to June, Giau said current credit growth was still unacceptably high and would carry Vietnam well beyond its target for the year of credit growth of just 30 percent.

Meanwhile, the Prime Minister will order businesses with abundant USD supplies to sell the green-back to commercial banks. Giau added that several groups which export natural resources would be targeted.

Estimates are that up to 10.3 billion USD is currently held in bank accounts by enterprises.

The Prime Minister’s intervention would make dollar sources flow more readily into the economy, said Giau, and the higher prime rate would help commercial banks absorb more idle capital as well as charge interest on loans of up to 12 percent per year, instead of the current maximum of 10.5 percent.

With average borrowing costs at 10.55 percent in 2005, 11.5 percent in 2006, and 11.89 percent in 2007, the new 12-percent maximum represented a considerable increase.

Higher lending interest rates also signal a likely end to the stimulus package’s subsidised-interest loan programme, as it would seem counterproductive for the Government to subsidise ever higher levels of interest. Accelerated economic growth, finally, has stirred new inflation concerns, forcing the Government and the central bank to November 25’s tighter policy. Growth accelerated to 5.8 percent year-on0year in the third quarter from just 4.4 percent in the second./.