A large part of the financial credits goes to state enterprises. The private sector has little access to financial loans. Farmers generally have accessibility. To improve the accessibility of the private sector to financial credits, the Bank for Private Enterprises was established in 1994.

It should be noted that financial sector reform is only one side of the coin: it must be accompanied by the reform of enterprises, or the receiver of credits. Without improvement of the profitability of enterprises, there would be little room for capital mobilization.

## 2 -2-3 Monetary Policy

To stabilize inflation -- which once marked over 400 percent $ ^{5} $ -- the Vietnamese government raised interest rates up to the level at which the real interest rate became positive in 1989. As a result, the inflation rate sharply declined (to 36.4 percent) in 1990 (see Appendix 3). It was also effective in increasing bank deposits (see Chart 2-V-4). The real interest rate had been negative since 1990 but again turned positive in 1993. The inflation rate in 1993 seems to have quieted down to one digit.

The undeveloped financial system in Vietnam on the other hand brought about the effectiveness of monetary policy. Since there is little created money in the economy, change in the amount of real currency directly affects the rate of inflation. You can see a high degree of correlation between the money supply and the inflation rate (see Chart 2-V-4).

## 2 -3 Price Liberalization

In Vietnam a dual-price system consisting of “official prices” and “free market prices” was in effect in the past. The official prices guided production under the plan and the free market prices were applied to production outside the plan, e.g. most of private sector production, excess production of state enterprises over the plan target, and other “minor goods”. $ ^{6} $ Mark-up principle was applied on inefficient and distorted production costs to determine the official prices. The official prices were settled in favor of industrial products relative to agricultural products, reflecting the government’s intention of heavy industry-led development.

In 1981 and 1985, Price Adjustment Policy took place. In 1986 the government introduced a new system of “official business price” with the intention of relating the official price structure to market forces. After several adjustments of official business price towards market price in 1987 and 1988, the distinction between “official business” and “free market” prices was formally abolished. $ ^{7} $ Thus an almost complete price liberalization was achieved, with a few exceptions such as electricity, oil products, public transportation fares, etc. Despite the abolition of price regulation -- as a consequence of the prior price adjustments and the simultaneous monetary restraint -- inflation conversely calmed down in 1989. The relative price between industrial and agricultural products moved in favor of the agricultural products.

Direct control over production of state enterprises through quantitative plans, which was the other side of the coin of price control, was also abolished. Thus all economic transactions came to be made on a market basis. However, it is questionable whether the proper market mechanism, which brings efficiency to the economy, is working or not. On the demand side,