Vietnam Sees Inflation Remaining Below 6.5 per cent in 2005

Vietnam Sees Inflation Remaining Below 6.5 per cent in 2005

Vietnam is quite ambitious in its plans for economic growth and macroeconomic stabilisation in 2005, according to expert's estimations. It aims to attain gross domestic product (GDP) growth at 8.5 per cent, the consumption price index (CPI) at 6.5 per cent and the total social investment equal 36.5 per cent of the GDP.

Vietnam has also determined that 2005 will be a year of boosting the efficiency of State investment and strongly fighting against corruption. Doctor Vo Tri Thanh from the Central Institute for Economic Management said that there are two ways to reach high growth rates in 2005 even if the global economic and trade growth is forecast to be lower than in 2004. One is to increase investment capital (but this has been proven to produce macroeconomic imbalance and instability) and another is to boost investment efficiency, and therefore a shift should be made to attract private investment and foreign direct investment (FDI).

In the meantime, the pressure to pull up prices is still very strong because global prices are still high and liable to fluctuation. The application of the new salary mechanism for workers in the State-run organisations based on the price increase of several commodities and services that are under State control has made the public think about the new price rise. Furthermore, if the Vietnamese currency (VND) is “forced” to devalue because of a rise in the USD or to guarantee exchange rate competitiveness, the price possibly increases. According to estimated figures, the inflation rate in 2005 will be higher than the set 6.5 per cent.

What’s more, the application and coordination of monetary and fiscal policies may face more difficulties. The increase in State investment (which now accounts for 55 per cent of the total social investment) in order to attain high growth rate targets implicates numerous threats toward macroeconomic disorder and will probably annul the efficiency of State investment and efforts to fight against corruption.  The monetary policies are based on a controlled exchange rate and fixed interest rates, which need certain adjustments.

According to initial estimations by the Central Institute for Economic Management, Vietnam has hardly reached a growth rate of 8.5 per cent this year although a lots of risks were removed. Many international organisations forecast the growth of Vietnam this year at 7.3-8 per cent.

In general, Vietnam has to fulfil three ambitious targets in 2005, namely higher economic growth rate than previous years, investment efficient enhancement, especially State investment, and macroeconomic stability. And the realisation of the targeted CPI of less than 6.5 per cent depends very much on ordered preferential policies.

According to Doctor Vo Tri Thanh, Vietnam can realise all above targets if it can effectively stabilise macroeconomics, efficient State investment enhancement and investment attraction from private and foreign sectors. However, these rely largely on administrative structure reform, international integration, and the investment and business environment.

It’s Difficult to Control Prices and Inflation

Mr Tran Van Sinh Quan, Institute for Scientific Research of Market and Price

According to the the Resolution issued by the National Assembly, in 2005, Vietnam has to control its inflation rate under 6.5 per cent, which needs a great effort from all economic sectors here. According to estimates, prices of both imports and exports such as petroleum products may be unpredictable, or may either stay high or increase like rice, steel, chemicals, coal and cement. The prices of several inputs for local production rose from 2004 but producers are not allowed to raise the selling price to control inflation. We have had a similar situation in the first months of 2005. On the other hand, the State Budget has to spend an additional VND27,000 billion (US$1.69 billion) on the salary rise for workers in the State-run sectors. This will also cause prices to rise.

Exports should be prioritised

Vu Dinh Anh, Financial Science Institute 

It cannot be denied that it is very difficult to forecast prices, especially in the long term, but in our opinion, prices in 2005 have tended to be much higher than those of 2003, and may equal those of 2004.  This mainly comes from long-term price management abilities and applications of fiscal and monetary policies.

The hardest issue now is how to control inflation and at the same time achieve high economic growth. In common economic laws, high economic growth normally goes in parallel with increased inflation. Inflation only impedes economic growth when it is at a two-digit rate. Therefore, there should be reviews on economic growth and inflation targets. The economic targets should be prioritised. In our opinion, the best measures to incorporate now are to put the entire macroeconomic policy system of Vietnam in the “system of reference” of the market, integration and open economy.

Market will fluctuate more

Nguyen Huu Tu, head of General Department of the Party Central Committee

According to us, banks should further tighten monetary policies, especially reviewing the rates used to set up risk prevention funds with both Vietnamese and international conditions. According to auditing statistics of commercial banks, the rate for risk preventive funds is quite low in comparison with other countries. Therefore, if inflation occurs, credit risks will become much higher and the health of these banks will be weakened. They will face hardships in claiming back bad debts.

Besides, currently nearly all the influencing corporations are proposing an increase in retail prices while their incomes, salaries, intermediary costs and profits are very high. If lacking control over salaries, incomes and intermediary costs, inflation will be uncontrolled because it results from the “cost-push” channel. This is another difficulty we face.

Price rise may hit 5.5-6 per cent in 2005

Mr Ly Minh Khai, General Statistics Office

According to analysts, global prices will continue to be unstable, and will tend to rise, especially prices of crude oil, steel ingot and fertilisers. Vietnam has to import major materials for local production like fertilisers and steel ingot (over 70 per cent). The recurrence of avian flu and long-lasting drought in central and southern regions will seriously affect Vietnam’s agriculture and push up prices of food in the coming months.

The rise in prices is estimated to stand at from 5.5 per cent to 6 per cent. It will stand at from 0.4 per cent to 0.6 per cent per month in the second and third quarters and 1 per cent in the whole fourth quarter.

• Lan Anh