New Price Level Impacts on Vietnamese Economy

Price hike of goods in the world market and its impacts on the Vietnamese economy over the past two years with a high increase of the consumer price index (CPI) have resulted in a statement that a new price level has been formed in the market. This has produced a significant effect on the Vietnamese economy.

 

Prices of food and foodstuff, as well as services in some major cities in Vietnam have tended to increase since the third rise of oil and petrol prices in 2005. Accordingly, prices of many goods, especially products of industries which use a lot of petrol and oil, have risen. As a result, a new price level, higher than the same period last year, has formed in the domestic market. Those goods and services, which have seen their prices increase after oil and petrol, include transportation, food, production and consumption services. According to General Statistics Office, the September CPI increased by 0.8 per cent against that of August and by 6.8 per cent over last December. The figure has exceeded a targeted increase of 6.5 per cent, set by the National Assembly for 2005.

 

According to Dr Tran Nguyen Tuyen, director of the Ho Chi Minh Political Academy, a new price level would hamper the Vietnamese economy’s growth due to increased production costs, which would result in a poorer competitiveness of products and enterprises, as well as the economy as a whole. At the same time, it will result in a trade deficit. Despite an increase in export value, the import demand saw a faster rise as 70 per cent of the materials of the Vietnamese economy are imported. This proves that the economy depends much on subcontracts and assembly projects. As a result, the State budget risks deficit.

Since materials and fuel used by many industries are imported, the economy depends heavily on the developments of prices in the world market. In addition, many industries use end-products of other industries as their input materials. Consequently, a chain reaction will occur, leading to an increase in the production costs of many industries. Furthermore, many imported goods, apart from import taxes, are imposed with value added tax, while the refunding of value added tax is often slow.

 

Dr Tuyen stressed that at present, industries, which have large market shares such as coal, electricity and cement play an important role in the economy as the input of many other industries. In a context of complicated development of prices, if these industries operate well, saving costs, an increase in the prices of oil and petrol may not result in a corresponding increase of prices of products. The facts show that the increase adjustment of prices of oil and petrol on August 17 has resulted in a fall in the profits of major industries in Vietnam, but not losses. Since petrol and oil prices have increased three times, the coal industry has seen its after-tax profit down by VND 300 billion against its plan of VND 815 billion for 2005. The figure was put at VND 500 billion of a targeted VND 670 billion of the electricity industry, and VND 140 billion of a planned profit of VND 340 billion of the cement industry, respectively. However, in a context that the price level in Vietnam is directly impacted by the international price level, an escalation of prices will have a negative effect on the business activities of the industries, and the Vietnamese economy as a whole.

 

It is possible to affirm that the Vietnamese economy has faced many inflation pressures from the domestic and international markets. According to Dr Nguyen Van Lich, director of the Trade Research Institute, there are two groups of solutions for stabilising prices in the domestic market and controlling inflation. Accordingly, the Vietnamese economy will have to cope with price increase tendencies in the world market and to deal with its economic issues. In relation with the world market, the State should adjust foreign exchange policies carefully without using any financial measures. With the existing trade balance of Vietnam, it is necessary to mobilise more goods made locally for export, thus gradually gaining a balance between exports and imports. This is a priority of foreign exchange policies. At the same time, the State should be flexible in adjusting its foreign exchange mechanism, closely following the supply and demand of foreign currencies in the market, ensuring that the nominal rate should be close to the effective rate and avoiding any sudden developments in the foreign exchange rate. The State should combine the regulation of foreign exchange rates with the regulation of interest rates to ensure a reasonable relationship between the interest of Vietnam dong, and foreign exchange rates and the interest of foreign currencies, thus avoiding any negative effects from the foreign exchange market on economic development. At the same time, it is necessary to implement tight financial policies to reduce the budget deficit while combining it with trade liberation approaches.

 

Regarding domestic economic issues, a promotion of investment and credit should be a top priority. However, with a promotion of investment and credit, an increase in prices is unavoidable. Therefore, one of the measures to control inflation and stabilise prices in the domestic market is to run monetary policies carefully and flexibly according to the development of the monetary market to stabilise interest for a target of credit growth and promote economic growth. In the case of many factors resulting in an increase of the CPI beyond the State’s control, it is necessary to tighten money supply, using monetary instruments, including increased required reserve rates and open market tools as a main instrument in regulating the money supply by the State Bank of Vietnam. Accordingly, interest in the open market should be adjusted on a basis of respecting market rules to signal a cautious regulation of monetary policies, encouraging credit organisations to mobilise capital from economic organisations and the public. Also, to maintain a reasonable price increase, the Government should concentrate on stabilising prices of food and foodstuff, which occupy around 48 per cent of the CPI’s structure, petrol and oil, and important materials, which are imported in large volumes to avoid a future shortage. In addition, import tax should be cut and measures should be taken to fight smuggling and speculation. The Government should reorganise the business network, issue and implement regulations on the trading of some important materials and goods, including cement, steel, fertiliser, electricity, coal and medicines to avoid any speculation and market rigging.

 

The price rise tendencies in the world market have clear effects on the Vietnamese economy, resulting in inflation. In addition, issues with the local economy have added pressure, worsening the situation. Therefore, according to economic experts, it is necessary to carefully study the solutions to control inflation and stabilise prices in the domestic market in both the short and long terms.        

One of the reasons of the distortion of price policies in Vietnam is payroll. A slow settlement of unreasonable wages due to a lack of separation of the administrative sector and others, ineffective and unprofessional personnel in the administrative sector has resulted in a low wage for the people who work in the sector. Consequently, it has created an unreasonable comparison whenever prices of goods are adjusted according the regional or world level. Therefore, the State should reform its macro-economic policies, including wages, on a basis that prices develop according to the market rules. It is necessary to work out strategies to replace petrol and oil with other fuels and regain a balance of the national energy to reduce energy consumption. At the same time, enterprises should save energy consumption by investing in technology and equipment, which use less oil and petrol.

 

 

Petrol and oil occupy a high percentage in input costs of many economic sectors. Their prices are managed by the State. At present, Vietnam has to import 100 per cent of its petrol and oil for the economy. As a developing country, Vietnam’s demand for petrol and oil often has a higher growth rate than that of its gross domestic product (GDP). As a result, the impact of the world price on the price level in the domestic market and the whole economy is often huge. After five years, prices of crude oil in the world market have almost doubled. With adjustments of prices of petrol and oil in recent years, apart from a fall in budget revenues with a regular import tax rate of 0 per cent, the State has compensated around VND 15,000 billion in 2005 for petrol and oil trading enterprises. This figure is too great in comparison with an estimated budget of VND 183,000 billion for 2005, thereby causing a budget deficit. Furthermore, due to a large gap between prices of petrol and oil in Vietnam and prices in other countries in the region, including China and Cambodia, smuggling of petrol and oil in border provinces or on sea routes has developed widely and caused complications.

 

From a long-term point of view, the solution has a short-term effect but it is not active as it will result in a compression of the whole economy as many sectors operate according to unreal costs and prices. Therefore, to create a new price level for the domestic market should be based on a precise identification of production costs, including management costs, for a target of increasing revenues and decreasing expenditure of the State budget. This is one of the basic solutions to control inflation while still maintaining a stable growth rate of the whole economy in a context that a new price level has been formed in the world market.

 

 

We should bring the extraordinary inflation to a predictable level without compressing it in a non-market manner. Loosening forecasts for inflation control is the most effective solution at present. Concretely, an inflation of ten per cent should be taken into account to balance prices. This means a reduction of price pressure to avoid an uncontrollable price boom. Inflation should be included into a forecast framework for controlling inflation. Price increase itself has benefits in combination with technology upgrading and renewal for increased effectiveness. The advantages of inflation should be taken for the promotion of socio-economic development.