CPI increase in 2006 to be lower than GDP

 

There are objective and subjective reasons for a high CPI increase in 2005. Regarding objective reasons, the Vietnamese economy remained underdeveloped and poorly competitive. Also, export and import accounted for a large proportion, between 60 and 70 per cent of GDP. As a result, it was easy for prices of goods and services in the domestic market to fluctuate in accordance with ups and downs of prices in the world market.

 

Vietnam had to import many input materials in a large volume, such as oil and petrol (100 per cent), urea (70 per cent), medicine materials (90 per cent). With a price increase in the world market, prices in the domestic, correspondingly, increased. Some farm-produce, such as rice, coffee, rubber, black pepper, cashew nuts, tea and peanuts, saw their export prices increasing, leading to an increase in domestic prices. For example, export prices of rice increased by 14.34 per cent, resulting in a rise of between 10 and 15 per cent of domestic prices and an increase in CPI of food of 7.8 per cent.

 

Also, complicated developments of natural disasters and epidemics, such as bird flu, caused a drop in the supply of food and an increase in prices of substitute food. A long cold spell and drought, in particular storms, caused severe damage to industrial crops and seafood. As a result, the CPI of food increased by 12 per cent.

Furthermore, the Vietnamese economy continued to gain a high growth rate and incomes of people increased sharply: per capita GDP in 2005 reached US$640. The figure of 2004 was US$540. The State increased minimal wages twice in 2005. Also, Vietnam’s overseas remittances were estimated at US$4 billion in 2005, up by 20 per cent against 2004. This has resulted in a high purchasing power of the society.

 

Apart from these objective reasons, there were subjective reasons, including a poor market management and regulation and an overlapping distribution system of necessary goods, which resulted in high circulation costs. In addition, there were shortcomings in the forecast of prices in the world and domestic markets, so policies on regulating the supply and demand, as well as business methods, were not effective enough.

 

A high increase in the world market benefited Vietnam’s export with more income in foreign currencies. Leaving the increase of export volume aside, incomes from price increase were 35 per cent higher than 2004. With an increase in prices of food and foodstuff, incomes of farmers rose, thus helping them compensate the damage caused by natural disasters and epidemics. This helped adjust the industrial-agricultural price relationship, reducing disadvantages for farmers.

 

However, due to a price hike in the world market, Vietnam had to spend around 25 per cent more foreign currencies against 2004 importing important input materials, such as oil and petrol, steel ingots, urea and clinker. In increase in import price led to a rise in production costs of some products, resulting in a drop of enterprises’ profits. The electricity industry saw its profits falling by around 60 per cent. This figure was put at around 10 per cent for coal and around 30 per cent for cement. The State, at the same time, had to cut its revenues from corporate income tax and compensate losses. Accordingly, the State compensated losses of VND 11,000 billion for oil of all kinds, reduced import tax revenues by VND 7,300 billion and corporate income tax, VND 600 billion.

 

Gold prices in 2005 experienced ups and downs and tended to rocket in year-end months. The world price reached a 25-year high record of US$531.7 per ounce. This resulted from a fall in supplies and a high increase in demand. Also, due to high inflation, banks of some countries around the world, such as Russia, South Africa and some Asian countries, increased their gold reserves.

 

According to experts, the world gold price may fall slightly in 2006 due to the fact that funds and investors still consider gold as safe reserves in a context that inflation has yet to be rolled back and there are still risks of political instability.

 

Oil prices in 2005 continued to increase sharply against 2004, reaching the high record of US$70.85 per barrel. Vietnam, despite being an oil export country, had to import 100 per cent of finished oil and petrol. As a result, Vietnam had to increase prices of oil and petrol three times due to an increase in the world price.

 

In comparison with other countries, automobile prices in Vietnam are twice as expensive than in developed countries, and 1.5 times more expensive than in other countries in the region. There are three reasons for such a high increase of automobile prices. Firstly, the domestic market is controlled by foreign or joint venture manufacturing firms. Secondly, the production effectiveness of local manufacturing and assembly enterprises is poor. Thirdly, Vietnam imposes a high import tax rate for local production protection. It is necessary to address the three reasons for lowering automobile prices. Minister of Finance Nguyen Sinh Hung said that in the short term prices should be included profits and half an import tax rate but not a 100 per cent of import tax rate.

 

In 2006 we will have to consider adjustments of the electricity price to address problems relating to investment capital and the removal of State monopoly, thus forming and developing an electricity market with such sections as a generation market, wholesale and retail markets. Waste must be minimised, thus by 2010 any compensation between prices of electricity for production and household use will be removed.

 

Coal for export and households is sold at the market price. Only over 10 per cent of the volume is sold to large consumers in the paper, electricity, cement and fertiliser industries, at negotiable prices. Negotiable prices are often low. In the future, the prices will have to be adjusted. 

 

Economic forecasts show that there will not be sudden price hike in the world market in 2006. However, prices will stand high and prices of some commodities will increase further. This is because the world economy will continue to develop with an increased demand for fuel and materials, especially oil and oil-based products, leading to a possible risk of adding pressure on supplies. Also, Asia-Pacific faces a possible outbreak of bird flu, which produces a negative impact on the development of tourism and animal husbandry.

 

The above-mentioned situation will produce an impact on prices of input materials that Vietnam has to import and commodities that Vietnam exports. As a result, prices of other commodities will increase, producing price increase pressure on locally-made products.

 

However, in 2006, there will be factors to prevent a price increase. These include the promotion of administrative reform, the removal of non-tariff barriers, the tariff cut as committed, let alone a target of budget deficit of five per cent of GDP. Also, financial and monetary instruments will be used in a more flexible and effective manner. I think that it is realistic to control the CPI increase below the increase of GDP.