CPI Targeted Not to Rise over 6.5 Per Cent in 2005

Vietnam will encounter many challenges in 2005 including a possible high consumer price index (CPI) rise. This is an important macroeconomic indicator requiring the close control of the government. On the occasion of Lunar New Year festivals, which will fall on February 8-11, reporter Kim Phuong of Vietnam Business Forum magazine interviewed Deputy Head of the Ministry of Finance (MoF)’s Institute for Research of Price and Market Ngo Tri Long on consumer price issue and related problems in 2005.

What do you think about CPI in 2004 and consumer prices during the forthcoming Lunar New Year?

In 2004, Vietnam witnessed CPI rising by 9.5 per cent, the highest increase over the past 10 years. The 2004 consumer price rise exceeded targets set by the National Assembly of 5 per cent for the whole of last year. The government conducted relevant state bodies, especially the Finance Ministry, which is tasked with managing consumer prices, to bring out many measures to curb price increases in 2004.

The sharp CPI rise in the first eight months last year (of 8.3 per cent) proceeded mainly from objective factors including high world prices of input materials for local production such as oil, steel and fertiliser and the outbreak of the bird flu epidemic early last year. Besides, some subjective factors contributing to the high CPI rise were slowness in applying macroeconomic policies, inappropriate distribution systems of strategic goods such as steel and ineffective punitive sanctions. 

From August to the end of 2004, the CPI rise was considerably restrained thanks to the fact that the government drastically carried out some strong measures. Moreover, world material prices stopped soaring, even sometimes decreasing and the bird flu epidemic was controlled.

According to the forecast of researchers, consumer demand during the Lunar New Year festivals will increase by from 20-30 per cent, particularly food and foodstuff. However, local companies have already prepared a considerably huge volume of goods and they will bring out for sale when necessary to balance supply and demand in order to stabilise consumer prices.

How will the State control consumer prices at a time when the country is undergoing integration into the world economy?

Vietnam is preparing to join the WTO and it will have to conform itself to the regulations of the organisation. Therefore, the State will not control prices of most goods in a direct manner. To stabilise goods prices and the market, the State will use indirect tools such as financial, monetary and trade policies to balance supply and demand. The State will limit subsidisation for local firms so the economy will operate under market-based regulations.

According to a researcher, the National Assembly should readjust the 2002 Price Ordinance and guiding documents in order to make it more effective in market management. In the Price Ordinance, some regulations are not suitable with the operation of the market. For example, anti-dumping regulations are completely contrary to international practices and market-based rules. Unfair competition actions and macro management measures are not defined clearly in the ordinance.

According to you, what are effective measures for stabilising goods prices in 2005 and which orientation should price management be adjusted towards?

With the high CPI rise in 2004, some experts thought that new levels of prices of goods had been formed. In the view of a researcher, I absolutely don’t agree with this opinion because sharp increases in consumer prices in 2004 were mainly caused by objective factors. Besides, only some countries including Vietnam saw CPI rising sharply last year. Moreover, if new levels of prices are formed, the National Assembly would never target a 6.5 per cent CPI rise in 2005.

In my point of view, to meet the target set by NA, we must pay attention to the following measures. Firstly, in boosting economic growth, we must focus on efficiency because it will help reduce costs and production prices. If enterprises operate ineffectively, they will encounter high production costs, pushing up goods prices. Secondly, prices of goods in Vietnam bear the effects of world prices, especially prices of input materials for production such as petrol, steel and fertiliser, which the country must import around 90-95 per cent for local consumption. Hence, the State has to follow up world price movements in order to bring out appropriate policies such as taxes and goods distribution management.

One of the most urgent matters now is corruption. To stabilise goods prices, we must effectively fight against corruption. Besides, we need to apply flexible financial and monetary policies and fight against waste and misspending of State budget, especially in infrastructure construction.

In 2005, prices of commodities including electricity, electronics and rice will fluctuate considerably. How will they affect the local economy?

For goods imported from the US and EU, their selling prices domestically depend on not only demand-supply relation in the local market but also foreign exchange rates between Vietnamese dong and other currencies. Therefore, local firms need to keep an eye on movement of forex rates when signing import-export contracts.

The government’s move of raising salaries for civil servants from October 1 last year was not due to soaring consumer prices previously. It is part of salary hike roadmap with total payment of around VND20,000 billion (US$1.28 billion), which will boost local demand. However, if the State orients consumers to use new services, prices of goods will bear fewer impacts.

In 2005, Vietnam will carry out its commitments as it integrates into the world economy and the State will follow market rules to control consumer prices. It won’t further subsidise local firms. Consumer prices always fluctuate in complicated ways and depend on many factors including psychology. To restrain a CPI rise below 6.5 per cent this year is a difficult task. We have to watch for many relating factors in order to put forth effective and timely measures.