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TBKTSG - The downside of price control   2008-05-25 -

The downside of price control
 
Keeping gasoline prices low is producing a tremendous burden on the budget  
Le Dang Doanh, former head of the Central Institute for Economic Management, warns that the decision to peg the prices of basic commodities until June is breeding undesirable outcomes.

 

 

Despite its temporary effect of reining in inflation, fixing the prices of gasoline, electricity, air and train tickets and other commodities is increasing smuggling and speculation and posing an unnecessary burden on public finances.

The lower prices of oil products, fertilizers and coal in Vietnam mean smugglers are taking advantage.

In Quang Ninh Province, for instance, large quantities of coal have been smuggled to China partly because coal fetches much higher prices there.

Keeping gasoline prices low is creating a tremendous burden on the budget.

If global crude oil prices continue to rise, for how long can the government afford to subsidize domestic prices?

Since gas prices are allowed to float, thus increasing in step with surging global prices, many businesses have switched to electricity, whose price is pegged.

This extra demand has added fresh pressure on a commodity that is already in short-supply.

Hoarding and speculation by distributors have also caused rice, steel and cement “fevers.”

And as the day when the peg is to be removed (June 30) draws near, many distributors and even consumers have started to hoard goods to take advantage of – or avoid – higher prices in the future.

Many businesses, even state-owned ones, have also started hoarding rice and cement to sell later.

In 2007, speculation in real estate and securities gathered momentum due to lax enforcement of a legal framework that is still incomplete and inadequately understood.

In scale, speculation in the financial and monetary sectors was even more serious.

Billions of dollars have poured into Vietnam to take advantage of the high interest rates here.

Drafting an anti-speculation law does not seem feasible considering the general lack of information and lax legal enforcement.

In the meantime, it is uncertain how prices will move after June 30.

This is also the time when we have to make overseas payments, including for imports.

Many predict the country’s foreign currency reserves can only pay for 60 percent of our trade deficit.

If foreign financial investors, including hedge funds, withdraw from Vietnam, it will be a serious blow to the balance of payments.

The exchange rate will be affected, as will the entire economy.

If stocks and property continue to slump until the value of mortgaged properties are not enough to pay credit, the entire debt burden will shift to commercial banks.

All these problems must be carefully understood and analyzed, and tough solutions and reform are needed to tackle them.

But more importantly, any solution or policy must be made public and predictable – that is, it should not be carried out abruptly, leaving people unprepared.

WORSE INFLATION LIKELY

Dr. VU QUANG VIET, chief of National Accounts Section, United Nations Statistics Division

The trade deficit in terms of goods was $12.4 billion last year and will be much worse this year.

It was $11.1 billion in just the first four months, equivalent to an unprecedented 16.5 percent of gross domestic product.

At the current rate, the deficit could reach $30 billion this year.

How can we bridge this huge gap? Since the prospects for direct and portfolio investors are no longer rosy, investment commitments will be delayed.

Demand for foreign currencies will exceed supply.

As a result, the Vietnamese dong will depreciate against the US dollar and imports will become costlier, which will strengthen the inflationary pressure.

It’s impossible to cut inflation if the supplies of currency and credit are not reduced.

This goal can be achieved by interest-rate measures.

The prime minister, who is leading the fight against inflation, needs to closely oversee these factors to make appropriate decisions:

- Data concerning the inflation index, monetary and credit supplies. They must be updated weekly so interest rate management can be adjusted accordingly. The annual growth of money supply must be below 20 percent for the economy to stabilize.

- Cutting spending and investments by state-owned economic groups. The government should consider halting all new investment. The data must be updated every month.

- Improving budget management.

Prices must be decided by the market.

The government cannot control prices but it can prevent speculation.

Dr. TRAN NGOC THO, Economics University of Ho Chi Minh City

There has been confusion between economic “forecast” and “targets,” a possible vestige of the planned economy of the past.

The ultimate goal of forecasting is to help set up mechanisms to respond to any sudden market moves.

Forecasting is not for working out higher-this-year-than-last-year figures to earn praise.

For instance, the government forecast economic growth of 8.5 percent in a scenario in which the price of oil was $61 per barrel.

If oil prices were to go up to $126 per barrel – as they did recently – the forecast must also indicate which variables from among monetary supply, domestic and foreign investment and budget deficit have to be adjusted accordingly.

Responsible ministries must be able to act immediately in response to the situation.

The National Assembly should focus on this direction to overhaul the government’s forecast work instead of debating on whether the growth target should be revised.

Source: TBKTSG



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