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Economist: “I hope the inflation scenario will be different this year”   2011-03-29 - Thoi Bao Kinh Te Vietnam

With the a 2.17 percent increase in the consumer price index (CPI) in March, the CPI increase in the first quarter of the year has reached 6.12 percent, coming closer to the threshold of seven percent in inflation rate set for the whole year 2011. Deputy Chair of the National Finance Supervision Council Dr Le Xuan Nghia said that the target of curbing the inflation rate at seven percent was set by the National Assembly in 2010, when the prices were at low levels. However, since then the situation has changed significantly with the input material prices increasing sharply. The domestic prices have also increased, especially since the government adjusted the electricity and petrol prices.

 

“However, I think, the government is still determined to curb the inflation rate at 7 percent with different measures, or curb the inflation rate at a little higher than seven percent, and it won’t let the inflation rate reach a double digit level,” Nghia said.

 

However, in 2010, the government also applied several measures to force the prices down, but the inflation rate is not as low as expected?

 

I hope that things will be different this year, because the government’s resolution No. 11 appears to be more concentrated; we can learn lessons from last year. In fact, I think that in 2010, if we had been persistent, we would have been able to curb CPI at the targeted level. Meanwhile, the government’s determination is stronger this year.

 

The strong determination is evident by the fact that the government has decided to lower the money supply to 16 percent, the lowest level ever been seen in Vietnam’s history. The government has also decided to curb the credit growth rate at no more than 20 percent, which is also the lowest ever level in Vietnam’s history.

 

Though the measures have been suggested by the International Monetary Fund IMF for a long time, it is for the first time Vietnam has set up measures in accordance with the suggestion.

 

Do you mean that with the drastic measures stipulated in the resolution No 11, we will be able to restrain the inflation rate at seven percent this year?

 

Of course, when the inflation rate is too high, it will be very difficult to force it down immediately. However, we will strive to force the inflation rate down step by step before reaching the targeted level of seven percent.

 

As you have said, the government has decided to curb the money supply and the credit growth rate at the lowest ever levels. Can we understand that the monetary policies will serve as the key solution to restrain  inflation?

 

Yes, you are correct. The inflation rate is always influenced by the monetary policies.

 

In general, when the input material prices increase, such as the prices of petrol, electricity, black or colored metals, enterprises will reduce their outputs, and because of the output decreases, prices will go up further. As central banks of other countries in the world anticipate this, they try to reduce the money supply in order to prevent the prices from rising further. As you see, the oil price in the world has increased by 40-50 dollars per barrel to 100 dollars, but the inflation rates in other countries remain low.

 

Do you mean that the input material price increases will not always lead to the consumer price index increases?

The key lies in whether or not the central banks can control the money supply. When the input prices increases, which makes the output decrease, the central banks will reduce the money supply accordingly in order to keep prices stable.

 

We planned a very low money supply level this year. As per our calculation, though the input material prices increase in the world, with such a low money supply, the domestic prices are not likely to increase too sharply.

 

Can you please tell us about the significance of the harmonization of the monetary policies and fiscal policies in curbing inflation?

 

The most important thing is that we should let the fiscal policy seriously affect monetary policies.

 

In 2010, Vietnam issued government bonds, treasury bonds and development bank bonds in large quantities. It was because the government feared that enterprises would not invest due to the crisis, and it had to push up public spending in order to obtain growth. However in 2011, right from the beginning of the year, the government decided to cut down public investments sharply. This can be seen as an action to support monetary policies.

 

How will the money supply decrease and the input material price increase affect Vietnam’s economic growth rate in 2011?

 

Of course, when the input material prices increase, the output will decrease. Enterprises will try to save costs by reducing the output. If so, the GDP may go down. However, the government believes that the GDP will not drop to below seven percent, while the previously targeted level was 7.5 percent.



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