Controlling Inflation An Uphill Task: economist
OCTOBER 28, 2012 BY THANHNIENNEWS
Vietnam’s inflation rate accelerated to the highest level in 22 months, rising to 11.75 percent last month, compared with 11.09 percent the previous month, according to the General Statistics Office.
Fuel prices shown on a display at a gas station in Ho Chi Minh City. Vietnam is trying to keep retail petroleum prices stable until at least the end of March.
Considering that prices of strategic commodities are likely to rise, it will be difficult for Vietnam to reach its target of keeping inflation below 7 percent in 2011, Le Dang Doanh, an independent economist and former government adviser, told Thanh Nien Weekly in an interview.
To do so would require extraordinary effort, said Doanh. Vietnam should make macroeconomic stabilization and budget deficit reduction its top priority, he said.
Thanh Nien Weekly: What is the main reason for the recent inflation?
Le Dang Doanh: Consumer inflation has far exceeded GDP growth. GDP growth was estimated at 6.7-6.8 percent in 2010, while consumer price index (CPI) increased by 11.75 percent (last December).
The inflation is the result of our monetary and credit policy. Despite having been affected by the price growth of many items in the world market, such as oil, steel and cement, some other economies such as Singapore, Taiwan, and mainland China have had much lower inflation than that in our country. Some of them see inflation of only 3 percent; inflation in China was only about 5 percent (last year).
So to control the price growth, we have to adjust our financial and monetary policy, because prices rise only when the volume of money in circulation increases. If the volume of money in circulation does not change and the volume of goods increases, prices will be stable, or will even go down.
Administrative measures to stabilize prices will only be effective in the short term, and with limited results.
To cope with the current situation, our top priority should be stabilizing macroeconomic development and strengthening investment in strategic projects which will produce products and services that ensure the balance between supply and demand
Why do prices continue to rise even though we have already tightened monetary policy?
Some policies have not yet been tightened, as money continues to be pumped into the interbank market. In 2008, credit growth was estimated at 43 percent, but it was reported at nearly 53 percent after being reviewed.
In 2009, the credit growth was 35 percent. In 2010, the target was set at 25 percent, but the real growth was higher (27 percent).
The basket of commodities which are used in calculating the CPI does not include the property market. Real estate prices have sharply increased, so if real estate was calculated, our CPI would be much higher.
Poor people, who spend a greater portion of their income on food, will be hurt most by the higher prices.
How do the current high interest rates affect inflation?
The deposit interest rate should be the inflation rate plus 2.5 percent. So with our current inflation situation, the deposit interest rate will be 14.5 percent, and the lending interest rate will be 17 percent. The interest rates can only be cut when inflation slows down.
At a press briefing last Friday, Deputy Prime Minister Nguyen Sinh Hung said higher prices of oil in the world market have pushed up the prices of many other materials and products.
In other countries, food and oil are not calculated in CPI. If these two commodities are excluded when calculating CPI, then Vietnam saw inflation of 7.5 percent in 2010.
In 2011, the government will make macroeconomic stabilization and inflation reduction its first priority, he said. To this end, the government will strengthen controls over state budget spending and restructuring businesses, especially those that are state-owned.
Considering the adjustment of electricity prices proposed by the ministries of finance, and industry and trade, what is the forecast for the CPI in 2011?
The government’s plan is to stabilize the prices of electricity and gasoline as well as the currency exchange rate (between Vietnamese dong and the US dollar) by Tet. After the Tet holiday, prices of commodities may increase, and the exchange rate will be even wider than it is now.
At that time, consumer prices will fluctuate and higher prices of electricity and gasoline will push up prices of other commodities. Companies will continue to face challenges in 2011. 2010 has left a big macroeconomic imbalance on 2011.
So, how do you assess the feasibility of the government’s target of keeping inflation below 7 percent in 2011?
With the plans to raise the prices of many commodities, it will be difficult for Vietnam to keep inflation below 7 percent in 2011. To do so will require extraordinary effort.
We have to make macroeconomic stabilization and deficit reduction our top priorities. Reducing the deficit and wasteful spending will lead to lower investment costs.