GDP Grows, Inflation Accelerates - Maintaining Sustainable Growth a Tough Mission

2007 marked great achievements in the Vietnam economy, with the highest economic growth rate in the last seven years and the economy entering the global integration process with the first year of WTO membership. However, accompanying the impressive growth is the highest inflation level of the last ten years.  Is high inflation always present in a hot economy? And what short- and long-term influences does inflation have on Vietnam’s economy? VIB Forum magazine had a discussion with Prof. Dr. Nguyen Khac Minh, Director of Vietnam Netherlands Projects National Economics University on this issue.

 

In fact, inflation is a monetary matter. However there are many opinions on the short term relationship between inflation and unemployment. Pushing inflation to an appropriate level in the short term can create more jobs, however, in the long term, individuals realize that increasing demand is actually due to inflation. This does not mean increasing demand for the sector or with a certain commodity, this influence will disappear. In the long term, inflation is always a monetary matter. Too high inflation in a hot economy is acceptable at a relative level, however, given Vietnam’s economic situation, inefficiency in monetary management of State Bank of Vietnam (SBV) has been exposed. 

 

The negative impact of inflation which is easiest to recognize is on income distribution. Population groups with low incomes are often subject to negative influence of high inflation. This is because commodities with the highest price increases include consumer goods, food, petrol, gas and some construction materials, which figure heavily in the commodity basket used for CPI calculation. As such, while the income of this population group sees little increase, they are subject to direct influences from inflation. This results in their actual income decreasing and a wider rich – poor gap. This is the root of social insecurity to which we have to pay long – term attention.

 

Besides, inflation can lead to demand for raising labourer salary, which in turn leads to increased production cost, resulting in an even higher inflation. When inflation in Vietnam is higher than that of other countries, exporting fees can become higher as Vietnam has not full floated its currency exchange rate and this will lead to a deficit in balance of payment. Last but not least, high inflation can distort relative price index, negatively impacting the allocation of resources in the economy. 

 

Facing the pressure of a two – digit inflation rate, SBV has recently taken drastic measures under direct guidance from Prime Minister Nguyen Tan Dung in controlling inflation, especially during year – end period when goods and services prices tend to increase suddenly. SBV has used monetary policy tools actively, in conformity with market regulations, aiming to stabilize inflation and push economic growth.

 

To gain an active position in controlling general payment means in compliance with monetary policy goals, the Governor of SBV promulgated Decision No. 187/2008/QD-NHNN dated January 16^th 2008 on the adjustment of compulsory reserve rates for credit institutions. Under the decision, in order to reduce total payment and outstanding loans to suit macroeconomics growth objectives, SBV has expanded types of deposits that require compulsory reserve, including non-fixed term saving deposits and fixed-term saving deposits. At the same time, SBV raised by one percent every required reserve rate for every type of deposit.

SBV has implemented deeper measures such as improving the capacity to forecast and manage monetary policies in a scientific and appropriate manner, given Vietnam’s context. Supervision and inspections have been pushed, especially in credit organisations with outstanding loans exceeding 25 percent. For loans offered to securities investments, SBV will cooperate with Ministries and sectors, implementing indirect but strict supervising measures. For loans offered to real estate and consumption, inspection will be conducted and stricter supervising measures will be implemented. This will be done in Ho Chi Minh City in the short term. Measures pushing non-cash payment will be implemented, especially encouraging credit card payment. Management capacity and administrative reforms of SBV will also be pushed so that transparency and favourable conditions can be ensured for sustainable development and efficient operation of credit organisations.   

 

In my opinion, the measures mentioned above are correct both in short term and long term to control inflation. They promise success in SBV’s monetary management efforts to successfully conduct the task assigned by the government.

 

2008 will be a difficult year in the global economy as there has been no recovery sign in the U.S. economy. However, with Vietnam, this influence will not be too heavy since consumption power is witnessing a dramatic increase. With the strong flow of FDI and FII, if Vietnam effectively utilizes these sources as well as improving the application of hi-technology, the prospect of eight percent GDP growth is within reach.