Balancing Growth and Inflation Targets

The most important of six measures that the Government has recently issued is to control inflation. The State Bank of Vietnam (SBV) will apply a flexible and prudent policy to maintain credit interest rate at around 25 percent and total payment around 20 percent. The central bank will flexibly regulate monetary instruments on the basis of market rules, in consistence with development objectives and practical conditions of financial and monetary markets and the economy. The State Bank will elastically use interest rate tools to gradually bring down the market interest rate.

 

After that, a big amount of money is pumped into the market, on April 7, 2010, the Governor of the State Bank of Vietnam (SBV) issued the Direction No. 02/CT-NHNN on implementing monetary policies and ensuring safe and sound banking operations in 2010. Specifically, the central bank will inject capital to lower the lending interest rate, increase liquidity of commercial banks and widen credit access for businesses. It has injected nearly VND11,000 billion (US$595 million) for 28-day and 7-day terms at an interest rate of 7.5 percent - 8 percent per year to raise capital for commercial banks.

 

The Direction 02 also aims at maintaining credit interest rate at around 25 percent and total payment around 20 percent. With the credit growth was 3.57 percent in the first quarter of 2010, the target is achievable.

 

These monetary policies also help reduce trade deficit, increase foreign exchange reserve, facilitate capital for domestic production development, expand credit, and improve credit quality and efficiency in couple with strong credit restructure.

 

In the coming time, commercial banks must adopt proper measures to channel capital for local economic development, especially ensuring the capital demand in agricultural and rural production and business, export-oriented production and small and medium enterprises. The borrowing of foreign currencies will be tightened, aiming to use foreign currencies for essential items for production that Vietnam cannot produce.

“The monetary tightening may lead to higher costs for the economy in the short term,” said experts at an annual Vietnamese economic reporting conference themed “macro stability for sustainable development” held April 8.

 

Dr Nguyen Duc Thanh, Director of Centre for Economic and Policy Research under the College of Economics, Vietnam National University of Hanoi, pitched that inflation control must be associated with exchange rate stability. “If inflation stays at high rate, people and businesses will certainly hold foreign currencies, causing the scarcity of US dollars on the market.”

 

The Government should not tighten monetary policy rigidly but flexibly to sustain the liquidity for the economy and make market-based adjustments. If monetary policy is tightened, interest rates will be pushed up and businesses will have to bear very high costs, failing to offset the interest rate subsidy in the previous year, Mr Thanh analysed.

 

One of difficulties in adopting monetary policy in Vietnam is the solution to budget deficit. Mr Vu Viet Ngoan, Vice Chairman of the National Assembly Economic Commission, said the budget deficit was always kept at 5 percent of GDP but it soared to about 7 percent in 2009 and the rate is predicted higher this year.

 

There are two plans for healing the budget deficit, namely tax rise and borrowing from bond issues. The tax rise option is turned down because it causes higher input costs for businesses, hindering the improvement of business environment, causing higher pressure on total consumption and retail. In case of increasing personal income tax, the collection from this group of payers is not significant, with some VND8,000 to VND10,000 billion a year. The government bond issue or domestic borrowing is ineffective because it will push up interest rates.

 

The Asian Development Bank (ADB) forecast Vietnam’s economic growth at 6.5 percent this year, also the target of the Vietnamese Government. In 2010, the country’s GDP is estimated to expand 6.8 percent. ADB also recommended the Government of Vietnam continue tightening monetary policy, given that recent tightening moves by the State Bank are insufficient and Vietnam will have to raise interest rates on local currency.