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Vietnam’s inflation in focus
The Government’s solutions to curb the runaway inflation have begun to pay off, with the consumer price index and trade deficit going down, the bank’s liquidity improved and the stock market bouncing back. However, Vietnam is strongly affected by the unexpected complications from the global market.
Vu Dinh Anh, Deputy Director of the Market and Price Research Institute under the Ministry of Finance gave an insight into some scenarios for Vietnam’s inflation .
What are the solutions to control inflation in Vietnam?
The most important thing is to identify the underlying cause for inflation. However, among the many domestic and international causes, we have not yet identified the primary cause. In my opinion, we have opened up the credit and investment markets with high hopes for a high economic growth in too short a period of time. Now we have to pay a high price for the instability of the macro economy, at least in the medium term.
Among the solutions adopted by the Government, tightening monetary and financial policies is considered the most effective one. The Government has introduced a tight monetary policy and increased deposit interest rates to attract depositors. Higher interest rates will be considered if the situation gets worse.
In addition, once we accept a lower economic growth, we will have to tighten the financial policy, in other words to cut down on public spending. I also think that stopping a number of projects to mobilise additional capital for key ones is not an entirely effective solution. In fact, it is not easy to identify which project is effective or not, particularly projects using the State budget. Therefore, to reduce public spending we have no choice but to cut the total budget spending set for 2008 and even 2009 by 20-30 percent.
What are the prospects for the national economy in the near future? What needs to be done?
The worst scenario is that inflation would continue to go up till the end of the year. In addition, the economic growth would go down, because the State bank’s decision to increase the interest rates has not yet made an immediate impact on businesses. In this context, with a higher amount of investment poured into production, businesses, especially those working in the financial and banking areas, would face heavy losses or even bankruptcy.
For foreign investors, they have been holding a large amount of our assets in the form of valuable papers and domestic cash (the Vietnamese Dong). If they lose their trust, they will withdraw their capital as they did in Thailand more than 10 years ago.
However, this will not happen thanks to the Government’s strong commitments, adopted solutions, appropriate adjustments to the exchange rate and provision of transparent information.
It is said that we are still confused about management methods. What do you think about this?
We have introduced many policies, which seem to be correct. But when they are put together, they may prove inefficient. Normally, macro-economic policies have both advantages and disadvantages. One policy may be efficient in this area, but not coherent when it goes with another. Therefore, I think we should choose one or two key policies supported by others. We will then continue to tighten the monetary policy and control public spending more efficiently.
Do you think that our forecasts remain weak?
It is difficult to make any forecasts about the macro economy given the strong global market fluctuations at present. With a higher level of information technology development and modern facilities, international forecasts prove more correct than ours, but they are often adjusted to keep up with development trends.
For policy makers, forecasting is a channel for reference. However, I do not pin much hope on the forecasting work. The economic crisis in Thailand in 1997-98, which later spread throughout Southeast Asia, is a case in point. Half a year earlier, international organisations were optimistic about the regional economic development model. Eventually it fell and several experts and organisations even forecast that the situation would get worse. However, not all regional countries suffered the same losses, only some had to pay a high price for it. I think we all know the stark fact but still hope that such things will not happen in the immediate future.
VOV
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