How to keep a rein on inflation?

Policy makers realize that high inflation is the biggest threat to the national economy, especially after the adjusted exchange rate. Therefore, keeping a rein on inflation rate becomes the priority.

Reducing interest rates to fight inflation?

According to Deputy Chair of the National Assembly’s Economics Committee Vu Viet Ngoan, in the second half of 2010, even though the exchange rate was stable, the consumer price index (CPI) for the whole 2010 still reached 11.75 percent. Therefore, the latest exchange rate increase of 9.3 percent will certainly have a big impact on the national economy. Therefore, Ngoan has urged policy makers to introduce price control measures to prevent sharp increases.

“If we can learn from price control performance of the previous years, keep the financial and monetary markets stable, the seven percent inflation rate in 2011 will be possible, though this will be a very complicated task,” Ngoan says.

Bui Kien Thanh, a well known economist, believes that in the current context, the interest rate reductions will have positive impacts on the consumer price index (CPI). At first, this sounds illogical, because the interest rate reductions will lead to the increase of money supply, leading to high inflation. However, Thanh is sure this will be the best solution for Vietnam for now.

The key problem is that in Vietnam, 90 percent of bank credit goes to businesses. Therefore, if the interest rates are reduced, the production costs will decrease, which will help the sales and raise the products’ competitiveness. too interest rates will halt production. And once there is no domestically made products, foreign imports will flock to Vietnam and make the prices escalate.

According to Thanh, in developed countries, when the economy overheats, interest rates are raised to restrict consumption and force prices down. However, this measure can be applied only when the consumer credit accounts for 70 percent of the total credit. Meanwhile, in Vietnam, 90 percent of credit goes to businesses.

“Enterprises are now like the rice fields which are thirsty for water. If the interest rates are reduced, it means if we let water flow to the fields, rice will grow better,” he says.

He goes on to say that only if enterprises can keep normal production, will the national economy be able to boost exports and restrict imports. If so, the foreign currency reserves will be improved, and only with profuse foreign currency reserves, will the State be able to stabilize the foreign currency market

Comprehensive measures needed

Dr Cao Sy Kiem, former Governor of the State Bank of Vietnam, is more cautious about the measures to curb inflation.

Kien thinks it will be very difficult to slash interest rates because of the capital supply-demand imbalance. Besides, as people fear high inflation and the dong depreciation, they have been keeping capital instead of putting the money into production and business. Therefore, Kiem says that in the immediate time, take drastic measures are needed to curb the consumer price index. In order to do that, it is necessary to restructure the expenses to reduce the budget overspending.

“Reducing the budget overspending will help ease the pressure on the inflation rate and foster growth,” he says.

He goes on to say that the trade deficit, though reduced, remains at a high level and is pushing the import products’ prices up, which is a directly cause of inflation. Therefore, he says that Vietnam should focus on boosting exports and restricting imports. In the long term, Vietnamese enterprises need to improve their competitiveness by reducing the expenses and restructuring the production.

Kiem emphasizes that not single, but comprehensive measures should be applied in order to obtain the desired effects. Above all, all the policies need to be transparent so that businesses can calculate their expenses ahead and set up their business plans. – Vietnamnet

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