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Expert sees risk of stagflation for Vietnam
The risk of high inflation is evident. If Vietnam has a low economic growth rate together with high inflation (stagflation), this will lead to economic crisis, says Associate Professor Ngo Tri Long from the Market and Price Research Institute.
Why did the consumer price index (CPI) in May 2009 increase sharply over the previous month?
The CPI increased by 0.44 percent in May, considerably above the rate for the two previous months and the highest increase since the end of 2008. This shows the impact of the Government’s demand stimulus package.
Vietnam’s demand stimulus initiatives aim to loosen monetary policy and encourage investments. It’s worth remembering that the high inflation we faced in 2008 was the result of monetary policy loosening implemented in 2004-2007.
The CPI is expected to continue rising towards the end of the year. While focusing on fighting the economic downturn, we need to be wary of the return of high inflation.
Other economies forecast negative growth in 2009, while Vietnam is forecast to gain five percent only. Why do you think the CPI will keep rising?
Our 17 trillion dong demand stimulus package has shown effects. Other packages, including the interest rate subsidy programme for medium and long term loans, have been launched. Public investments will be pushed up in the next months. As policies only show effects after some certain time, you can see that the cash to be pumped into the national economy in the upcoming months will be bigger.
Besides, the world oil price has been rising again, with knock-on effects on a lot of other commodities.
In Vietnam, several factors threaten a return of inflation. The new minimum wage scheme takes effect in May, while the prices of some essential goods have been raised. The petrol price has been increasing continuously, and the prices of other commodities, especially consumer goods and food, have also been escalating.
Possibly the CPI will be lower than 10 percent by the end of the year as targeted by the National Assembly, but high inflation may nonetheless occur early the next year. If we cannot control the situation well, the CPI rate may reach double digits.
You said that the demand stimulus programmes may trigger high inflation. Can we see signs of inflation now?
There are five Government measures to fight the economic downturn. Of particular importance, it has loosened monetary policy, aiming to stimulate investment and consumption. A big volume of money is being pumped into circulation.
High inflation always occurs when the cash volume in circulation is too big and the monetary policy is overly loose. We should learn a lesson from the loose monetary policy Vietnam applied in 2004-2007
The threat of high inflation isn’t evident only in the CPI figures for May, but also in credit growth, which shows signs of increasing. The credit growth rate may accelerate when we provide more loans under the interest rate subsidy programme. Several dozen trillion dong now waiting for disbursement [as loans] will also make the volume of cash in circulation higher.
The national budget deficit will surely increase. In other countries, a five percent budget deficit would be considered as a red alert, while the Government of Vietnam has suggested eight percent. This is really a very high level.
With the state budget deficit and loosened monetary policy, the risk of high inflation is visible.
What will happen if high inflation occurs when we still have not escaped from economic downturn?
A crisis will occur if prices rise while economic growth decreases. It would be more dangerous than what we faced in 2008. In that year, we experienced high inflation, but our economic growth rate was still satisfactory at over six percent.
Phuoc Ha
vietnamnet
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