Why does the black market still exist?

VietNamNet Bridge – In Vietnam, people go to foreign currency exchange shops instead of going to banks when they want to purchase or sell foreign currencies. The foreign currency black market still exists despite bans by the State Bank of Vietnam (SBV).

People go to exchange shops instead of banks because all their demands can be easily satisfied. They can easily purchase dollars at the shops while commercial banks refuse to sell dollars.

Sometimes, the exchange rate on the black market guides the exchange rate applied by commercial banks. People can see that sometimes, after a dollar price fever attacks the black market, commercial banks also raise exchange rates.

What the black market can provide?

A car stopped in front of a gold shop on Le Thanh Ton Road in HCM City. A girl got out of the car with a big bag. She came in the shop and asked to purchase $50,000. The shop’s owner told her that the dollar price 19,680 dong. The girl paid her money and got the dollars she wanted. Meanwhile, the shop’s owner received money and gave dollars to the girl, without asking for an identity card or any other documents.

Several minutes later, another client came to sell Singaporean dollars. The shop’s owner calculated money and paid dong to the client. Everything was very smooth.

These are the regular transactions seen at the shop.

Meanwhile, at a bank branch adjacent to the shop, a woman asked to purchase a few hundred dollars for her trip abroad and was refused. A bank’s officer told the woman that it did not have dollars to sell. Some minutes later, a client came and wanted to make deposits in UK pounds. However, the bank’s officer said the bank did not accept deposits in pounds. “If you want, the bank will keep the money for you, but you will not get interest for the deposit,” the officer stated.

Save for popular foreign currencies in Vietnam, such as dollars, euros and Australian dollars, many commercial banks do not accept other less common hard currencies, such as Japanese yen, Chinese yuan or Singaporean dollar.

However, the woman above and others have another choice: they can go to foreign currency exchange shops. The foreign currency supplies on the black market are so big that, according to Le Xuan Nghia, Deputy Chair of the National Finance Supervision Council, a business can buy up to several million dollars.

The 2005 Foreign Exchange Ordinance prohibits individuals to make transactions in foreign currencies, but it allows individuals to keep foreign currencies, make deposits and withdraw money in foreign currencies. When people have foreign currencies, they have demand to sell or purchase more.

Difficulties in commercial bank transactions have been cited as one of the main reasons allowing the black market to develop.

According to Dr. Le Tham Duong, a well known economist, when inflation occurs, the local currency depreciates and people tend to keep hard foreign currencies. In cash economies such as Vietnam, people like keeping dollars that has led to the so-called “dollarization” phenomenon. 

According to Duong, the free market has gradually become part of national economies and can offset foreign currency shortages for banks to some degree.

“All states want to eliminate the free market, but it is still exists because there is actual demand and supply,” Duong noted