A severe shortage of dong, Vietnam's local currency, has been causing headaches for foreign businesses in the country as the government tries to control inflation

by reining in the supply

of notes.

In one sign of the currency crisis, Hanoi was last week forced to give special permission to Morgan Stanley to pay $217m in dollars for a

10 per cent stake in Petro-Vietnam Finance Corp, instead of making the payment in dong, as is normally required by law.

Elsewhere in the capital, an accountant for a foreign company tried to convert $30,000 into local currency to pay staff salaries and office rent but was turned away when the bank said it did not have enough dong to cover the conversion.

"It's outrageous," said a foreign executive, spurned in a recent attempt to convert dollars to dong. "We are going to have to go to the ATM machine and draw money out to pay salaries by hand."

A number of foreign businesses have been affected in recent weeks, as the State Bank of Vietnam, the central bank, tries to drain liquidity from the financial system to control inflation and hold down the value of the dong against the dollar.

For the past four months, international bankers and economists told the Financial Times, the central bank has curbed its purchases of dollars, refusing to accommodate commercial banks seeking to offload dollars and acquire dong.

Overnight interbank rates for Vietnam's currency have reached as high as 40 per cent recently, though rates dropped last week to 9-10 per cent as the central bank injected some additional liquidity into the system.

"The State Bank of Vietnam understands that inflation is partly caused by the rapid growth of the money supply," said Jonathan Pincus, chief economist at the United Nations Development Program.

"One way to squeeze on the money supply of Vietnam dong would be stop buying dollars."

Commercial banks in Vietnam will soon have to take another hit from the central bank, which has announced that it will require large banks to buy Treasury bills at interest rates below inflation, in another move intended to drain liquidity from the system.

The bank says that 41 large banks and credit organisations will have to buy a total of $1.27bn worth of one-year Treasury bills with an interest rate of

7.8 per cent.

Banks have formally protested, sending the Ho Chi Minh stock market index down 16 per cent last week.