While the government’s stimulus package is being implemented strongly, many economic experts are concerned about the risk of high inflation in the last months of 2009. Inflation is also an issue of interest on the agenda table of the National Assembly session which is taking place in Hanoi.
State budget deficit and loosened monetary policy to stimulate demand can possibly create a risk of inflation. This is a warning to government’s management since this risk can possibly come true.
Demand stimulation and inflation risk
Dr. Le Dang Doanh, Institute of Development Studies (IDS), believes that, “the current monetary policy is very noticeable. The State still continues to pump money and increase credit. It is, therefore, necessary to be vigilant. If the global price of oil keeps going up and leads to price increase of some domestic goods, inflation will return.”
At the NA, representative Nguyen Dang Trung (Ho Chi Minh City) raises the issue of the possibility of inflation to come back. He is concerned about the trend in which SOEs are entitled to lots of preference from the government’s stimulus package. “If the US$8 billion stimulus package continues to be poured into SOEs, inflation will result. It is necessary that the NA keep an eye on this. Otherwise, inflation will make its way back, and then recession follows, and finally, a coronary.”
Concerns about the risk of inflation stem from high increases in price and a sudden growth of credit. CPI in May is up by 0.44 percent against April. As such, compared to the same period last year, CPI has increased by 5.58 percent. But in comparison with 2008, CPI in the first five months of this year has witnessed an increase of 11.59 percent.
Latest figures from the GSO reveal the mentioned above result.
CPI in May 2009 is up by 0.44 percent. This increase is high compared to that of the previous two months and this is also the month which has highest CPI since the end of 2008. This shows that the government’s efforts to stimulate demand have worked.
Earlier, the government put forward five solutions against economic recession. One of the most important solutions is the monetary policy to encourage demand for investment and consumption. Vietnam’s demand stimulation mainly focuses on broadening the monetary policy and accelerating investment. That is one of very important factors causing inflation to return.
Dr. Nguyen Dai Lai, State Bank of Vietnam, believes that one important cause for inflation is the too large amount of money in circulation and the monetary policy being loosened too much. This is a lesson of 2004-2007 period. Consequences we suffered in 2008 are practical warnings for the year of 2010.
It is not only the high increase in CPI of May 2009 that makes people concerned about the risk of inflation, credit growth also shows signals of increasing. The credit growth can get higher when more and more support is offered through lending interest in coming time. The banking system is also in the process of adjusting the mobilizing interest rate in order to attract deposit.
Besides, tens of thousands of billion dong of public investment waiting for disbursement is another large amount poured into circulation. State budget deficit continues to be at high level. In other countries, a budget deficit of over five percent can be listed as red alert. However, our government proposes this rate to be eight percent.
Dr. Le Dang Doanh broadcasts that, “this year, the movement of Vietnam’s economy will possibly follow letter U.” Meanwhile, the risk of high inflation is getting more visible. If the economic growth rate is low and inflation high, an economic crisis is sure to happen. Associate Professor Ngo Tri Long (Institute for scientific research market price) warns. ) warns.
Supervising money spent out
Solutions to stimulate demand which initially aim at short-term implementation are now moving closer to long-term implementation. This possibility makes many economics experts worried about the coming back of inflation and the economy’s falling into a circle of inflation, recession, demand being stimulated, and inflation again, etc.
At the NA forum, Head of the Finance – Budget Commission of the NA, Mr Phung Quoc Hien clarifies about this short term and long term border via the following example: about the budget deficit amounting to eight percent, the Ministry of Finance states that this is a short-term and urgent solution for this year only since balancing effort is useless. However, the government’s report mentions that this solution must prolong in five years.
Dr. Lai believes that the risk of inflation in Vietnam is real with the monetary policy being loosened and stimulus solutions being accelerated. Increases in state budget deficit, salary, and some goods monopolized by the state (electricity, coal, etc.) will exert certain influence on price.
Therefore, if investment demand gets stimulated via loosening credit for corporations and SOEs without cautious assessment and supervision, it is highly likely that the national economy will continue to be stagnant while inflation gets activated again.
Dr Lai proposes that an important measure now is to well examine and supervise the source of money spent. It is necessary to assess effects of specific stimulus packages right from now.
He also proposes that demand should not be simply stimulated. It is also necessary to enhance the power of the supply side, keep a close watch on the stimulus packages and macro indices of the national economy and global economy as well. When signals of inflation appear, the stimulus policy needs to be stopped in time in order to avoid inflation which does harm to the economy.
Minh Chau
Vietnamese
