Price Rise: Partly Driven by Psychology

The recent price rise of essential commodities like electricity and gasoline is unavoidable. Escalating inflation in the past months is partially driven by sentimental factors. Mr Nguyen Tien Thoa, Director of the Pricing Department under the Ministry of Finance, made these remarks in an interview with reporters Huong Ly and Anh Phuong.

The Government recently allowed raising prices of some essential commodities. The rise of petroleum prices contributed some 0.4 percent to overall CPI in 2010. This rate of 0.4 percent was the impact calculated after the first round of the currency, not after-effects of the rise. With the exchange rate and electricity price adjustments together, CPI added 2.5 percent but the real impact was 3 percent. Perhaps, the remaining 0.5 percent is not necessarily caused by psychological factors. It is very difficult to quantify sentimental factors that affect CPI because they are hidden in every commodity.

 

If gasoline price had been governed by market mechanism, people would have reacted properly. It is worse to apply a mixed status of market mechanism and government regulation as it will destabilise consumer psychology. The market mechanism ensures normal operations of companies and the State does not have to subsidise (losses of companies).

 

Actually, the latest rate of price adjustment is equivalent to only 40 - 50 percent of the limit provided in the Government’s Decree 84 on petroleum business management. I don’t agree with some opinions that collections from petroleum trading are too much. Currently, total collections from petroleum business in Vietnam are equal to 22 percent of selling prices, while the rate in Laos is 38 percent; Thailand, 48 percent; and Cambodia, 35 percent. Our prices are also VND2,300 - 5,000 per litre lower than in regional countries.

 

This price hike was based on zero import tariffs, minimum business costs of companies, and no interest of VND300 per litre at the time of pricing. Thus, the principle applied maintains the fact that the State does not collect taxes and companies do not make profit. It is impossible to continue subsidies for high purchase price and low sale price for a long time.

 

In the coming time, if world oil prices continue to rise, forcing domestic oil traders to suffer from losses, the Ministry of Finance will have to apply a proper market mechanism to petroleum trading. Or, in other words, the ministry will flexibly regulate fee and tax collections, price stabilisation funds, and even specific price rates.

To keep prices of petroleum products stable in the past time, the State Budget had to spend some VND11,000 billion, of which VND7,500 billion were tax reductions and some VND3,500 billion came from price stabilisation fund.

 

Another primary cause of inflation is money in excess of goods. Total outstanding credits are 1.2 times greater than GDP. This means that money is more than goods and prices must climb. To a farther extent, ineffective investment (high ICOR ratio) will lead to a leap in production costs - a primary component of price.

 

Fortunately, solutions of Resolution 11 of the Government pinpoint this primary factor, i.e. reducing credit growth, budget deficit and public investment, which will lead to a fall in aggregate money supply. If we bring down credit growth by 3 percent, the amount of money in circulation will decrease 7 percent accordingly, restoring balance between money and goods.

 

To my knowledge, the price stabilising programme has been effectively implemented by localities. Financing and soft loans help ease price escalation. This programme not only affects marketplaces but also input supply sources. As a result, prices on both ends are stabilised. However, the programme is mainly organised along streets in populous areas, not traditional marketplaces where essential goods are sold. This is the lesson for this year.

 

Many provinces and cities fail to apply the programme on time. For instance, the programme runs throughout the year in Ho Chi Minh City, while other localities start it when the Lunar New Year is near. Besides, pricing mechanism also has problems. When companies borrow soft loans, they must pledge to keep prices at certain rates while prices are obviously driven by the market and other factors. We must thoroughly comprehend that we are stabilising prices, not pegging them. For instance, they recommend a price rate in March but exchange rates were revised up between the time of recommending and the time of selling, so they should be allowed to adjust prices then. They must feel confident when they join the State-backed programme.