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Economists debate need for ‘second stimulus package’
Dr. Le Duc Thuy, the Chairman of Vietnam’s Finance and Monetary Policy Oversight Committee, advocates continued but more narrowly focused demand stimulus for some time into 2010. Meanwhile, the Vietnam representative of the ADB, Ayumi Konishi, said that if the Government opts for a ‘second stimulus package,’ it should be reduced in scope and more selective in its targets.
Thuy, a former head of the State Bank, spoke to reporters from the online paper VNExpress, and Konishi to staff of Vietnam Economic Times.
VNExpress: Worried about the returning of the high inflation, many experts have called for curbs on new credit, warning that the national economy cannot absorb the huge volumes of capital being pumped into the system by commercial banks. What’s your view?
Chairman Le Duc Thuy: The State Bank of Vietnam has set the credit growth rate target for the whole year 2009 at 25-27 percent. This means that we will have ‘room’ of less than five percent expansion for the next five months. I think that meeting that goal is impossible, and we should not strive to achieve it. The national economy now needs capital to recover. I think that the outstanding loans target should be for 30 percent growth in all of 2009. It would be still safe if the figure is a little higher than 30 percent, if other indications are good.
VNExpress: What would you say about the inflation rate in 2009?
Mr. Thuy: A lot of money has been pumped into the national economy by the banking sector lately. This has made people worry that the high inflation will return. However, I don’t think this way. I have to remind you that the banking sector is not the only source of money to the national economy. The other sources include government spending, household balances and the foreign investment channel.
Private domestic investment has been decreasing, while foreign portfolio investment has been facing difficulties; both these factors have affected the money supply. Cost-push inflation is not likely this year, because the price of goods and services in the world market are forecast to stay low this year and in 2010 as well.
I strongly believe that keeping the inflation rate of below seven percent in 2009 is completely feasible. We should watch out for inflation, but we should not be too worried.
VNExpress: Do you agree with experts who urge that the Government provide a second demand stimulus package when the four percent interest rate subsidy programme ends on 31 December?
Mr. Thuy: The first demand stimulus package has proved its necessity and efficiency. However, the crisis is not over; I still think that we need a buffer to help our economy make a ‘soft landing’.
Businesses may get shocked if they suddenly lose the 4 percent interest rate subsidization after December 31, 2009.
The fact that commercial banks can only mobilize short term capital shows a lack of investor confidence in the market. Another demand stimulus package, one which helps the national economy gradually go back to the normal track and shows the stability of macroeconomic policies, will help restore the confidence.
VNExpress: If the Government decides to launch a new demand stimulus package, how should we carry it out? Should we continue interest rate subsidization or giving direct support to people the way Japanese are doing?
Mr. Thuy: The methods of stimulating demand are different for different countries, because every country has its own conditions. Japan has achieved a positive growth rate of 0.9 percent in the second quarter of 2009. Meanwhile, Vietnam has unbroken positive growth: 3.1 percent in the first quarter and 4.5 percent in the second.
In fact, Vietnam has also been giving support to people, for example, we give allowances to help poor people enjoy Tet and we increased pensions and the minimum wage.
VNExpress: Some experts think that the loan subsidy programme is unselective, i.e., that businesses receive the same support though they have different circumstances . . . .
Mr. Thuy: Well, this sort of ‘leveling’ policy can also be seen in other countries. The US has lowered the federal reserve bank lending rate to 0.05 percent. However, in our country, it’s not feasible to push down interest rates so soon after a period of inflation. The four percent interest rate subsidy is a reasonable solution for now. I think that we need to give bigger support to export enterprises, since this is an important impetus for the national economy.
Ayumi Konishi, Vietnam Country Director of the Asian Development Bank, also addressed the pros and cons of a second stimulus package in an interview given to Thoi bao kinh te Vietnam (Vietnam Economic Times). Konishi said that Vietnam has escaped the worst impacts of the global recession. The first demand stimulus package has been effective. However, any medicine has side effects, and in this case, demand stimulus measures will bolster the risks to Vietnam’s economy.
Konishi said that the State Bank of Vietnam is right when it expresses worry about the return of high inflation. The world economy is recovering, and that recovery will lift up Vietnam’s exports and increase flows of foreign investment to Vietnam, putting upward pressure on prices.
Konishi recommended that the Government continue existing stimulus measures while keeping a close eye on the world economy as it considers whether to carry out a second demand stimulus package. In case the Government judges it necessary to carry out the second package, it should launch a package with narrower scope and more selectivity, he said. Vietnam should focus especially on supporting small and medium enterprises.
vietnamnet, vnexpress, vneconomy
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