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Policies aim to slow growth, control inflation
Policy measures to restore economic stability and maintain social security were introduced two months ago. The Viet Nam Country Director of the Asian Development Bank (ADB), Ayumi Konishi, spoke to Viet Nam News reporter Ha Phuong about the impact of the measures so far.
The Government and the State Bank of Viet Nam have issued a series of measures to tighten monetary policy, stabilise the foreign exchange market and tame inflation. How would you assess the potential of these measures and their effectiveness so far?
We believe Resolution No.11 is important. If it can be effectively implemented and the progress of its implementation better communicated to the market and the public through the improved availability of data and information, it should be able to stabilise the economic situation. It is not because Resolution No.11 contains unique or new measures, but it is significant that the Government has made it clear through a "resolution" – a higher level legal instrument – that controlling inflation and stabilising the economy is of higher priority than growth at this stage.
In the past, it appeared that the Government's intention or policy priority remained trying to achieve a high rate of economic growth even while it claimed on the other hand that the priority was to ensure stability. But any policy is only as good as its implementation and what it really matters will be implementation.
While the actions being taken on the monetary policy side are very visible, it is very difficult for the market or people to see the actual implementation of Resolution 11 on the fiscal side. So, good implementation can bring about positive outcomes only with effective communication and demonstration of what is being achieved. Effective policy communication will hold the key.
In a recent report, Standard & Poor's said that it was too early to conclude that the economic situation was stabilising or improving. Do you agree?
That's absolutely right. Economic policies are not really meant to have an immediate impact from the start, and if there is an expectation for immediate improvement in the situation, that is overly optimistic, or even an illusion.
Policy implementation does take time, particularly on the fiscal side, and it is certainly true that it is too early to be complacent. It is true that there are improvements in the pressures on the Vietnamese dong as we can see the gap between the black market exchange rate and the official exchange rate has narrowed. but, given that the fundamental cause of economic instability has been the loss of investor confidence in the currency resulting from high rate of inflation, and that the inflation rate, measured on a year-on-year basis, will take some time to come down, we will only be able to see the real impact over 12 to 24 months.
Since the month-on-month inflation rate last year between April and August was low, that means that, even if Resolution No.11 can reduce month-on-month inflation to nearly zero from April of this year forward, statistically we will not be able to see the year-on-year inflation rate, now almost 14 per cent, level out for another four or five months. Year-on-year inflation will only start coming down in September. Viet Nam can bring the year-on-year inflation rate down to the single-digit level by the end of year but, even with that, the year's average inflation rate will remain in the double digits.
The public assumes that all the measures being taken at this time are not much different than they were three years ago when the annual consumer price index hit 22.97 per cent. How can we improve the effectiveness of these measures and restore public confidence?
Structurally, the economy can face instability resulting from rapid inflation. Every time the Government tries to achieve a high growth rate, it always results in a revival of inflation. This is because there is currently a limitation in Viet Nam's aggregate supply capacity and any policy move to stimulate the economy, either through monetary or fiscal means, will cause aggregate supply and demand imbalances which result in inflation.
Aggregate supply capacity can be increased only by making Viet Nam's economy more efficient, particularly by eliminating inefficiencies in State-owned enterprises and the State sector in general, as well as through improved infrastructure and human resources development.
In the area of State sector reform, the Government needs to make the financial data of State-owned enterprises public and improve corporate governance. It is also necessary to demonstrate effective implementation of fiscal tightening through improved disclosure of fiscal data, including the Government's "off-budget" expenditures for State-owned enterprises.
If State-owned companies can produce goods and services more efficiently than the private sector without any subsidies, we have no problems. But the subsidies to those companies are also part of the costs which consumers are paying indirectly. The key to improving the efficiency of State-owned companies is to expose them to competition with the private sector, both domestic and foreign, in accordance with Viet Nam's WTO commitments.
When the country faces inflationary pressures, the Government attempts to cut the State budget, but spending actually is cut by only about half-a-percentage point. Do you think that, instead of cutting spending, the country should raise taxes?
These are two separate issues. As a policy measure to slow inflation, it is essential for the Government to reduce its expenditures because excessive demand in relation to supply capacity drives up price levels. At the same time, of course, the reduction in public spending also reduces the budget deficit, which is important to ensure the country's economic stability over the medium term. It is true that deficit can be reduced either by cutting spending or increasing revenue, or with a combination of both, but then the question would be the effectiveness or quality of public expenditures. Unless public expenditure is more efficient than private investment or consumption, why should we transfer private funds to the Government to spend through the budget?
Prices of essential goods like petrol, which the country needs to import, are increasing, but the process of changing from a price subsidy system to market-based prices is still just beginning. How is this hindering the implementation of economic policy?
Policies to artificially lower fuel prices through subsidies distort the effective functioning of the market and are unsustainable. Huge Government expenditures on subsidies also raise concerns, and large differences between domestic and international prices have resulted in smuggling.
A system that reflects the actual costs of fuel would support more efficient functioning of the market and reduce the undesirable fiscal burdens of providing inefficient subsidies.
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