Single Digit Inflation Rate Expected

It is said that inflation blurs the meaning of growth. In 2011, with economic growth of 5.8 percent, the inflation rate hit 18 percent. As the prices of commodities constantly increased but real income diminished, inhabitants could feel the bigger difficulties each day.

 

In 2012, it is expected that Gross Domestic Product (GDP) would turn back to grow due to impact of policies in 2011. After Resolution 11, monetary policy has been squeezed with the reduction of credit growth, divestment in unproductive sectors, such as securities market, real estate market; fiscal policy has been tightened by decreasing public investments, 10 percent cuts in out-of-salary expenditures, extension of un-necessary projects, it is estimated that expenditures would decrease about VND 80,000 billion, equivalent to 3 percent of GDP. This year, the Government has aimed to reduce inflation to a single digit number and maintain the proposed growth of 6.5 percent.

 

Practically, it is shown that inflation growth has been squeezed by the austerity policies of the Government and the State Bank of Vietnam (SBV). However, inflation still sped up and reached 23 percent in August 2011, compared to the average inflation rate of 11.7 percent at the end of 2010. There are many reasons for this, including: strong increase of food prices, fiscal - monetary policy in the period of 2009 - 2010, price adjustment of major input materials (energy and fuel) and the depreciation in foreign exchange; thus inflation soared. In the last months of 2011, the growth of consumption products prices was under-controlled, the monthly inflation rate slowed when some solutions for stability started to show their effects.

 

Nonetheless, the World Bank report shows that inflation might not decrease in the near future, depending on some different factors such as: high commodity prices, minimum salary norm adjustment, increase of electricity price and the expectation of the market about credit policy in the last quarter of 2011.

 

Specifically, in 2012, the macro-economy faces a lot of challenges, and the comprehensive restructuring of the economy, which mainly focuses on the banking system as well as State owned enterprises, will surely impact many existing problems. In February 2011, all commercial banks were in the competition of interest on deposit, and pushed the interest on deposit rate up to 18 percent per year, after that, when they must reduce the interest on deposit to 14 percent as ordered by the SBV, several small banks had immense difficulty in liquidity. This year will be the time of restructuring and mergers, and even when SBV keeps affirming that it will not let any commercial bank go bankrupt and it will assure the interests of depositors, restructuring remains a concern of the entire economy in 2012 and the following years. The World Bank estimates that strong adjustment on financial mergers and restructuring in Resolution 11, which includes state owned enterprises and the financial sector, will help Vietnam return to a more sustainable macro-economic environment.

 

However when GDP growth is targeted higher, concern about increasing inflation becomes more serious. According to recommendations of international organisations, Vietnam should not lessen the monetary policy to fight against returning inflation growth. Furthermore, the achievements of Vietnam toward economic stability are fragile, and any hurried activity to loosen policy could cause instability.

 

Regarding the World Bank, in the context of slowing global economic growth, US financial instability and the European public debt crisis, economic growth in East Asia area is remains high. Moreover, the World Bank stated that economic growth in East Asia, including Vietnam, still reaches high, but growth will be slower because of decreasing foreign demand.

 

The Prime Minister Nguyen Tan Dung declared that inflation control is still the first priority of the Government, and Vietnam will not pursue high economic growth targets.