Curb inflation for national interest

Amidst different viewpoints on whether to lower the interest rate or not and how to lend a helping hand to enterprises grappling with difficulties, some high-profile experts still warn against inflation rearing its head again. The World Bank’s Lead Economist Deepak Mishra talked about challenges facing the country’s fight against macroeconomic instabilities. Excerpts follow.

How do you think the new government goes ahead with the fight to gain macroeconomic stability?

Vietnam’s Government remains committed to achieving “macroeconomic stability,” as evident in the Prime Minister’s inaugural speech. This means continued implementation of Resolution 11, including staying within the target for credit and liquidity growth and the announced level of fiscal deficit. However, there is a need to gradually phase out price controls and quantitative restrictions (such as interest rate caps) and replace them with more market-based instruments. Better disclosure of data and information and improved communication with the market will also help. Finally, Vietnam’s macroeconomic instabilities are rooted in deep, structural constraints – inefficiency in public investment, weak governance of state-owned enterprises, health of the banking sector and so on – problems that need to be addressed in the medium-term.

Resolution 11 has been in effect for six months. What needs to be adjusted to adapt to current situations, in your opinion?

- Implementation of Resolution 11 has not been uniform across policy instruments. There is undue reliance on monetary and exchange rate policies to achieve macroeconomic stability, and while fiscal policy has been under-utilized, correcting this imbalance is important. A credible, medium-term fiscal outlook for the Government that recognizes the build-up of contingent liabilities in the system will help to boost investors’ confidence.

An increasing number of interest groups have been calling on the Government for help, challenging Resolution 11. How do you think about the situation, and what should the Government do?

- The only interest the Government should protect is the national interest. Unfortunately, in the absence of reliable data and information, different groups are claiming different things to be true. For example, national statistics show that the economy registered 5.6% growth during the first half of 2011 and exports grew at 33.7% during the first eight months of 2011. Yet, there is widespread complaining that credit is not available and firms are closing down. It is hard to reconcile the two observations. Some of these problems can be addressed by better disclosure of economic data and improved communication of policy changes to the market participants.

Business associations claim one-third of their members would go bankrupt. How could the Government keep the balance between inflation and growth?

- Restoring macroeconomic stability may be an obstacle for achieving rapid economic growth in the short run, but they complement each other in the medium to long run. No country can grow at 7-8% for a significant period of time without double-digit inflation and/or volatile foreign exchange rates. So what the Government is currently doing is in the long-run interest of the country, including that of the businesses. If Vietnam aspires to be a modern, industrialized nation by 2020, it will have to find a lasting solution to its periodic bouts of macroeconomic instability. And it is therefore important for everyone to support the Government in its effort to reduce macroeconomic turbulence.

Some economists claim high interest rate now has adverse impacts on inflation in Vietnam. How do you think?

- There are many factors that have contributed to higher inflation in Vietnam, ranging from external shocks to domestic policy mistakes. The urgent question before policymakers is not what is causing inflation (which the economists love to debate), but how to bring it down quickly. And from that perspective, we need to ask, should the Government be raising (real) interest rate or bring it down? If real interest rate is reduced, credit will become cheaper, and so firms and households will take out more credits. This will increase aggregate demand almost instantaneously. Raising aggregate supply takes time – so increased demand will be met either through higher imports or through increased prices. Hence, reducing interest rate now will either contribute to more depreciation of dong or even higher level of inflation.

What is your assessment about the macro situation, looking at updated figures of foreign reserves, exchange rates, and interest rates and others?

- Our assessment is dependent on a number of factors – health of the global economy, effective implementation of Resolution 11, depth and breadth of the Government’s structural reform agenda and so on. If the global economy does not go into a double-dip recession and the Government steadfastly implements all the measures announced in Resolution 11, we expect better days ahead. Growth in 2011 can be as high as 6%, though inflation may still remain high given the announced increase in minimum wages in October. Our projections are, however, biased upward, given the numerous risks facing the global and the Vietnamese economy.

Do you think new movements in the world like the gold price and public debts would affect the economy?

- The global economy is passing through a period of unprecedented uncertainty and therefore there is a ‘flight to quality’ trend among investors. This has boosted the price of relatively safer assets such as gold and government bonds (in selected countries), and lowered the price of emerging market as an asset class. This would mean higher borrowing cost and lower demand for debt products from countries such as Vietnam. So yes, Vietnam will not be able to insulate its economy completely from the effect of higher gold prices and debt crisis is advanced countries.

Source: SGT

Tags: Vietnam economic, Vietnam economic growth, Vietnam economy, Vietnam economy 2011, Vietnam inflation, Vietnam inflation 2011