Inflation identification helps economy develop

Experts have said too much concern about inflation leading to tightening monetary policy cannot help control inflation. Moreover, it will cause a capital shortage and weaken businesses.

The negative impact of inflation is the economy cannot reach the expected growth rate. It is, therefore, necessary to identify the reality about it to work out measures for helping the economy develop.

Inflation identification

According to Dr. Nguyen Duc Thanh, Director of the Centre for Economy and Policy of the College of Economics, Hanoi National University, inflation is abuse of the monetary issue, which did not occur in the first five months of 2010. Similarly, the slackening CPI increase in April and May shows a positive sign for short-term stability of the economy.

However, the index of the last five months still saw an increase of 4.55 percent compared to last December and is attributed to the late issuance of the loose monetary policy in 2009 by offering 4 percent preferential loans.

In addition, the decision to adjust the exchange rate between Vietnamese dong and US dollar at the end of 2009 also affected the prices of input material that led to the rise of prices. In 2010, especially, many goods saw prices increases due to the simultaneous increase in prices of petrol, coal, electricity, and water.

Economic expert Bui Kien Thanh, who is also the CEO of the V Capital Fund, said since much of domestic production depends on imported materials, the decision to adjust the exchange rate did not encourage export. It even increased the prices of imported materials making domestic products more expensive.

Experts also believes the State Bank of Vietnam did not fully consider the characteristics of the economy, of which consumer credit accounts for only 10 percent, while applying tightening monetary policy by raising interest rate for bank loans in Vietnamese dong.

As a result of this, commercial banks have to face the shortage of capital and are all in a competition to raise deposit interest rates to mobilize more money for businesses’ demand for capital. The loan interest rates, therefore, are put at 18-19 percent per year.

However, while interest rates for accumulation of capital increase, merchant banks go thirsty for capital because citizens are pouring investments into the channels of stocks and real estate – which currently bring back higher profits. As a consequence, many small- and medium-sized enterprises have had no option but to borrow from the black market at the cutthroat interest rates of 3-4 percent per month to attempt to avoid bankruptcy.

It’s the acceptance of the too high interest-rate of these loans that pushes commodity prices up on the market, exerting a great pressure on the CPI, said economist Le Xuan Nghia from the State Bank of Vietnam.

Expert Bui Kien Thanh warned that Vietnam is ‘suffering from deflation’ in monetary terms while the CPI surges. However, he cautioned it would be dangerous for the prime interest rate and the banking credit interest rate to be raised immediately due to the rising CPI. “In an analogy, such would be similar to a doctor having his patient take antibiotics right after he takes his temperature,” he said.

Handling bank’s liquidity

Most economic experts have addressed the liquidity of banks as a key to the current situation. Of course, they said, this must be done in parallel to stabilizing the supplies of essential goods such as foodstuff, petrol and oil, which account for the majority of the CPI structure.

The State Bank of Vietnam has been tasked with ‘measuring’ the daily circulations of money in the economy to apply solutions such as withdrawing loans from commercial banks if they have ‘redundant’ money that could cause inflation, introducing open markets, and discount interest rates to help these banks have sufficient liquidity in lending business. This methodology would not affect the central bank because it only lends and does not provide non-refundable capital.

Regarding merchant banks, expert say, they need to improve their capacity to appraise projects for lending, sorting projects with high efficiency and a high prospect of creating more jobs and products.

Dr Nguyen Duc Thanh shared this opinion, saying the State Bank should pump money into merchant banks while beefing up its supervision in order to protect the system from risks and ensure a sound regulation of money circulation.

VOV

Tags: Vietnam economic, Vietnam economy, Vietnam inflation