CPI likely to be over 10% in 2010

November’s Consumer Price Index (CPI) reached nearly 1.9% in Hanoi and 1.7% in HCM City. Therefore, CPI of the whole year 2010 would not be seven% as per the initial goal of the National Assembly, and would not also be eight% as the adjusted target of the government, it would be approximately 10% or more.

Last year, the National Assembly set targets of 6.5% for 2010 GDP growth, 41% of GDP for social investment, and less than seven% for CPI. No need to use complex economic models, simply comparing with the results of 2009, those targets obviously lack reality.

In 2009, in the context of global economic crisis and economic recession in the country, GDP growth was only 5.3%, while inflation rate reached nearly seven%. Thus, the expectation that GDP growth this year would be higher, and inflation would be lower than 2009 is not feasible.

As can be seen in the results, although GDP growth target may be achieved, inflation rate has exceeded the target nearly two percentage points. That is not to mention the costs to achieve the growth targets, namely the double deficits (budget and trade deficits), sharp rises of interest rates, tensions of exchange rate, high inflation and uncertain business environment, etc.

Perhaps the National Assembly and the government have obtained experienced from 2009 and 2010 to set more rational targets for 2011, but unfortunately they have not.

For 2011, the National Assembly targets seven to 7.5% GDP growth, social investment of 40% of GDP, and CPI of less than seven%. Again, GDP growth target is set at significantly higher level and CPI target is set at much lower level than the results of the previous year.

It can be immediately seen that at least one of these two objects would not be achieved, unless in 2011, the effectiveness of resource use and allocation were considerably improved, it, however, cannot happen in a short time.

Conflicts exist not only in macro objectives, macroeconomic policies (including fiscal and monetary policies) also lack of effective coordination. Unlike those countries that have independent central banks (fiscal and monetary policies thus are relatively independent), in Vietnam, monetary policy usually has to follow fiscal policy.

This means that although monetary policy is seen the most visible cause, but the fundamental cause of inflation arises from the strategy to promote growth based on investment. Since investment is less efficient, investment activities should be very abundant, that has led fiscal policy to be expanded, monetary policy (in particular money supply and credit) thus must follow, consequently inflation occurs.

Therefore, the visible cause of inflation is the policy to loosen monetary policy, the intermediate cause is the expanded fiscal policy, and the fundamental cause is the inefficient growth model based on investment.

To avoid this downward spiral, the government should give priority to macro stability instead of following GDP growth, sustainable growth should be prioritised rather than temporary growth, effectiveness should be given priority instead of the number of investments. This means that the objectives on quality, namely stability, sustainability and effectiveness must be included in the government’s set of targets and prioritised than the objectives on quantity.

In strategic and socio-economic policy planning, setting macro objectives is necessary to provide a basis for the management of the government as well as giving signals to the market.
Nevertheless, to have effective management and reliable signals, the macro targets should be compatible with each other, in accordance with the domestic economic situation as well as the world economic context. If this cannot be done, the macro environment would be unstable, the trust in the management capacity of the government would decline, businesses and people would only act on the defensive and take advantages of the situation, their activities would not create added values, they even make the economy to face other difficulties. – TBKTSG

Tags: Vietnam CPI, Vietnam CPI 2010, Vietnam economic, Vietnam economy