Price in 2007 - Up or Down?

 

As a common rule, the quick economic growth rate goes in parallel with high inflation rates. With its current development orientation, Vietnam needs to boost its high economic growth rate to over 8.5 per cent a year on the one hand and keep the inflation rate under the two-digit level in order to stabilise its macroeconomics.

 

The statistics from the General Statistics Office (GSO) showed that the inflation rate was some 6.6 per cent in 2006, much lower than the 8.4 per cent rate in 2005. Among the 10 groups of commodities, five had lower price rise rates than in 2005, including food and foodstuff, transport, post, housing and construction material, education and health. According to Master Nguyen Thi Vu of the Monetary Policy Department under the State Bank of Vietnam, the factors leading to the low inflation rate in 2006 were the lower price rise of many commodities on the world and domestic markets, 15 per cent versus 29 per cent. This helped reduce the pressure on the price of imported products as well as consumer price index (CPI).

 

Particularly, the Government applied several policies to control the price and speed down the price rise of input material of key production sectors. For example, Vietnam stopped exporting rice when the export volume reached five million tonnes and temporarily stopped exporting rice as the price of domestic food rose suddenly. The country also reduced import taxes for material commodities like petroleum products, electronic components, auto parts and sugar. It also controlled the distribution of medicine to get rid of speculation and monopoly.

 

Besides, the prudent and tight monetary policy continues bringing in benefits. The regulatory interest rate and compulsory reserves were more stable than the previous year. The forex rate was regulated slightly (0.95 per cent) to encourage export and control the inflation as well. The State Bank also introduced measures to help reduce risks in operation of credit organisations.

“The year 2007 is the first year Vietnam joined the World Trade Organisation (WTO); consequently, the non-tariff barriers will be gradually removed and import tax will be gradually lowered to the committed rate. The publicity and transparency of all management policies and mechanisms are prerequisites to set up a competitive market while the price and transaction cost reduction for enterprises and citizens are prerequisites to guarantee the effective growth and lower the consumer price index (CPI),” Ms Le Thi Kim Ngan, Deputy Director of Domestic Market Policy Department under the Ministry of Trade said.

 

The Institute for Market and Price Science Research forecast that the consumer price index in 2007 will stay at the rate between 7 per cent and 7.5 per cent, lower than the GDP growth in 2007 but higher than the inflation rate in 2006. This forecast is built on the policy of the Government to gradually lessen subsidies for the sales of fuel products, which have a huge impact on the entire economy. The electricity price will be increased by 7.6 per cent on average from January 1, 2007. The Vietnam Coal and Mineral Industries has proposed plans to raise selling prices of coal by 20 per cent to four industries of electricity, cement, fertiliser and paper. The Government will also remove financial compensations to loss from sales of petroleum products too. Furthermore, the roadmap for salary reform and expenditure rise will also put pressure on the inflation. Last but not least, the economy will have to encounter Acts of God, disease epidemics and especially the return of current avian flu while the competitiveness of the economy and enterprises is still low.

 

According to Dr Nguyen Huu Tu, Director of General Department of the Party Central Committee, there are two key factors to control the inflation rate at a suitable level, namely the food and foodstuff policy and liquid monetary policy. In fact, the repeated avian influenzas led to the price rise of 14.5 per cent in food and foodstuff in 2004, 10.8 per cent in 2005 and 7.2 per cent in the first 11 months of 2006. A successful inflation rate control depends on policies to guarantee the sustainable agricultural development. Currently, Vietnam only has food security strategy but lacks policies to protect agriculture from the sequence of natural calamities and disease epidemics.

 

Particularly, the weakness and shortcomings of the financial and banking systems have huge impacts on the quality growth and inflation. Many people said Vietnam has to accept a liquid monetary policy and high inflation rate if it wants a high economic growth. According to Dr Tu, the liquid monetary policy has little impact on the economic growth because it is possibly controlled by other factors such as the foreign investment situation and the increasing investment readiness of the public and society.

A full integration into the world market means Vietnam has more supply sources of commodities from various countries if the domestic market experiences big changes. This means that there is little possibility of big price changes in the coming years if the State does not intervene too deeply into the market activities.

 

In 2007, the inflation rate may stand at over 10 per cent, the highest level in more than 10 years to date. The high rate results from the reduction of the State subsidies for the sales of several key commodities and services such as electricity, coal, cement, steel and petroleum products. And, the domestic price will suffer more influences from the global market. In addition, the salary rise in October 2006 is also a factor of the high price in 2007. Furthermore, the forecasted high inflation in 2007 is also resulted from the possible recovery of the housing and land market when the Government allows more foreigners, including overseas Vietnamese, to invest in this market.
Lan Anh