Hanoi  - Experts said Friday that the Vietnamese economy is suffering from too much of a good thing: dollars.

Vietnam must reduce the informal "dollarization" of its economy, in which businesses and individuals use greenbacks rather than the local currency, or it risks losing control over macroeconomic policy, the experts said.

"The State Bank of Vietnam is in a difficult situation," said senior Vietnamese economist Le Dang Doanh. "If [dollarization] becomes severe, the tools it uses to manage currency policy will become ineffective."

Many Vietnamese keep dollar-denominated bank accounts as a hedge against inflation or volatility in the local currency, the dong. Vietnam's 23-per-cent inflation rate in
2008 exacerbated the trend, and dollars are also widely used in retail transactions.

The main concern at the moment, Doanh said, was that export businesses, flush with dollars, were choosing to keep them rather than exchange them for dong. That decision leaves commercial banks short of dollars and has pushed the black-market exchange rate up.

The government has set its official reference rate at 16,937 dong to the dollar. Trades are allowed within a band of 5 per cent on either side of the reference rate, but current black-market rates of 18,000 and over exceed the legal trading band.

Informal dollarization tends to make exchange rates more volatile, said Alex Warren-Rodriguez, senior economist at the UN Development Programme's Hanoi office. When individuals can easily exchange currencies, shifts in interest rates in Vietnam or the United States quickly create pressure on exchange rates, he said.

Dollarization also tends to pass exchange rate shifts through into inflation. When dong exchange rates fall, those holding dollars effectively have more dong, which drives up prices.

Those who do not hold dollars, particularly the poor, bear the brunt of such inflation.

At a conference of business and government leaders from the Asia-Europe Meeting dialogue group held in Ho Chi Minh City last week, calls for reducing dollarization were widespread.

Ashok Sud - Standard Chartered Bank's chief executive for Vietnam, Laos and Cambodia - recommended Vietnam require that all domestic transactions be paid in dong rather than dollars.

But Tran Duc Nguyen, an economist who once headed the prime minister's Research Commission, said Vietnam had been attempting to reduce dollarization for a long time, without success.

"The government can't just use administrative orders," Nguyen said. "It has to create more trust in the Vietnam dong."

Nguyen said one way to do that would be to let the dong be freely exchanged with other currencies rather than the current mandate that exchanges must ultimately go through Vietnam's Central Bank.

Doanh said the State Bank's preferred solution was to lower the interest rate allowed on dollar-denominated accounts at Vietnamese banks to induce account holders to shift their savings into higher-interest dong accounts.

The question is ultimately one of economic independence, said Dao Trong Khanh, chief executive of Tien Phong Commercial Joint Stock Bank.

"Currency is like the bloodstream in the body," Khanh said. "Each body should have its own bloodstream."(dpa)