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High interest rates increasing further, businesses perishing
Although they believe that the State Bank made the right move in raising the basic VND interest rate from 12% to 14%, experts have warned that the government needs to apply suitable policies to support businesses, who are dying of overly high interest rates.
Dr Le Dang Doanh, a senior economist, former Head of the Central Institute for Economic Management (CIEM), praises the decision by the central bank to raise the basic interest rate as a necessary move in the context of high inflation.
With the consumer price index surging to nearly 16% in the first five months of the year, the inflation rate may reach 25-30% in 2008, Doanh said.
He added that if Vietnam cannot get control of oil, gold, fertiliser and ingot steel prices, it will be difficult for it to reign in the inflation rate.
Currently, the government is trying to implement eight packages of measures to curb inflation. However, according to Doanh, a ‘strong commitment to implement the measures’ is precisely that – just a commitment.
“The government needs to be more determined to cut down public expenditures, especially the state’s spending on cars and state officials’ trips abroad,” Doanh said.
When asked to comment about the policies on regulating the prices of key products (petroleum, rice), Doanh said: “I advocate the government’s moves in regulating prices. We should reduce the excessive subsidisation of commodity prices; however, this should be carried out step by step in order to avoid shocks to the market.”
Doanh stressed the need to make public information about the government’s policies. For example, the Ministry of Industry and Trade announced that it would ‘gradually adjust the prices of commodities’, but it needs to clarify how it will adjust prices.
He said that the government is now trying to subsidise petroleum prices, and as a result, petrol is bleeding through the border gates into Cambodia. Meanwhile, domestic businesses now cannot access bank loans to maintain production and business due to the overly high interest rates.
“The state should find measures to assist businesses, like cutting back taxes or helping them access low interest rate bank loans.
A lot of businesses are nearly dying because they cannot bear the input material price increases. Some other businesses are dead, but they have not declared bankruptcy. Others have accepted borrowing money at high interest rates in order to maintain production. However, these businesses are facing very high risks.
Right after the State Bank of Vietnam decided on June 10 to raise the basic interest rate from 12% to 14%, the US investment bank Goldman Sachs released a report, applauding the move.
The bank thinks that Vietnam is on the right track to limit credit growth rate and ease the pressure on inflation. It is clear that raising interest rates can bring higher efficiency in fighting inflation than other administrative measures as the measure will bring less negative impacts, while bringing longer-term benefits to the national economy.
This is the second time in the last four weeks the State Bank of Vietnam has raised the interest rate.
The central bank has also set the inter-bank exchange rate at VND16,461/US$1, effective today: a dramatic 2% depreciation of the domestic currency against the dollar. Goldman Sachs said that the move was made sooner than the bank predicted; however, the bank has applauded the quick reactions of Vietnamese policy makers to the currency uncertainties.
VNN
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