“Deflation, Not Inflation”, Says Economist

The Vietnamese economy is being regulated by monetary and banking policies. For the banking system, Vietnam has not involved in adventurous games of the US banking system but Vietnamese banks participated in risky operations of real estate and financial investment. It is time for Vietnamese banks to review their business activities and tune up their risk management policies.

The economy of Vietnam started to have optimistic signs but it immediately dealt with a policy that drove lending rate from 10.5 %, or 6.5 % if interest subsidy is included, to 18-19 %, or 250-300 % higher. The rate may further increase on the back of negotiation-based lending.

On the other hand, according to the General Statistics Office (GSO), the consumer price index (CPI) rose 4.12 % in the first quarter of 2009, including 0.75 % in March, much higher than expected. This signals possible sudden hikes in consumer price in following quarters.

Normally, in a fast-growing economy, the demand for raw materials and consumption expands, leading to soaring price rises and then escalating inflation. Thus, based on this theory, the Government needs to control inflation by an interest-oriented monetary policy. However, this theory may be correct for developed economies, not developing ones like Vietnam. Another consequence is the high interest rate will lead to a weaker Vietnamese dong, higher prices of imported materials and of course higher production costs. It is typical of an outsource-based economy.

More dangerously, Vietnam confusedly equates CPI with inflation and immediately presses the “interest rate rise” button to deal with the so-called inflation.

Inflation is the excess flow of money in the economy and constitutes price rising pressure on goods and services. But, Vietnam's CPI is rising while the economy falls short of credit and the banking system fails to provide credits for businesses at a reasonable interest rate. In fact, the economy really is in the state of “deflation”, not “inflation” although CPI tends to escalate. If CPI climbs, it is unwise to immediately hike the base rate and lending rates while we lack information. This is as if we only measure the temperature of an ill person and instantaneously conclude the disease and prescribe medicine.

In dealing with inflation, developed countries do not confine tightened monetary and credit policies to tame inflation but other methods. In fact, the government cannot control inflation through bank credits because the financial market has hundreds of short, medium and long term financial instruments that the government cannot control.

The solution to sufficient liquidity of the Vietnamese commercial bank without mobilising unemployed capital is to borrow from the central bank.

In the current context, the reasonable interest rate for businesses is 7 % or 8 % and the central bank can lend commercial banks at an interest rate of 3-4 %. Commercial banks need to keep an open eye on projects and only lend feasible projects. Loans should not be channelled into real estate, financial investment, speculation and non-production activities.

Of course, apart from loans from the central bank to fund businesses at interest rate, commercial banks will mobilise unemployed capital from the public for consumer lending or other activities with negotiation-based interest rate, without leaving any impact on capital inputs for business and production activities.

With the determination of the authorities and people, Vietnam is expected to achieve GDP growth of 6.5 % set by the National Assembly.