The regulation, passed last December, will take effect Tuesday and apply to both domestic banks and branches of foreign banks in Vietnam lending to anyone who is a Vietnamese resident.

Previously, importers were allowed to take out medium and long-term loans in foreign currency to pay for imports if they could prove they can generate enough foreign currency from their production and trading revenues to repay these loans.

Short-term lending in foreign currency to pay for imports has been prohibited by the central bank (SBV) since March 31 this year.

Producers who import goods for the purpose of export may still take out foreign loans, but only in very limited circumstances; for instance, when the law requires that foreign currency must be used to pay for imports.

The ban on foreign currency lending is in line with the government’s policy to prevent dollarization of the economy, help move the SBV’s relationship with foreign currency from mobilizing-lending towards buying-selling, and help raise the competitiveness of domestic goods and enterprises, said Nguyen Hoang Minh, deputy director of the SBV’s Ho Chi Minh City branch.

This will also help restrict the import of luxury goods, one of the main factors causing trade deficit and macro-instability, especially towards the end of the year when demand for import of consumer goods puts pressure on liquidity in the forex market, an SBV expert had said earlier.

Economist Nguyen Tri Hieu said the new regulation would level the playing field between enterprises producing for domestic consumption and those importing for export production. Earlier, only the latter was privy to USD loans that generally have lower interest rates than VND loans. Therefore, the ban would encourage production with domestic materials, he said.

Although costs of finance may rise for some businesses, exchange rate risks are eliminated upon repayment of loans, something that could prove costly for businesses if they do not have enough foreign currency for repayment once the loan is due, said Le Quang Trung, deputy general director of private bank VIB.

The SBV aims to reduce the proportion of foreign currency in total outstanding to debt below 7.5 percent in 2020, below 5 percent in 2030, and to stop lending in foreign currency altogether by 2030. The ratio currently stands at 8.73 percent, which the central bank estimates at around VND176.47 trillion ($7.59 billion).