Jan 2, 2013

Vietnam - Inflation Still Haunting Economy

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Inflation will remain a threat to the economy and consumers next year even though it is restrained relatively well in 2012.

This was a common view shared by many experts with experience in price management at a workshop on price and market developments in 2012 and forecasts for 2013 held in Hanoi last Thursday.

The most basic reason is that Vietnam’s economic structure has not changed much, said Vu Vinh Phu, chairman of the Hanoi Supermarket Association.

“As long as public investment remains rampant and the economic structure lags behind, inflation will still exist,” he said.

He remarked the country’s resources had been allocated unreasonably, leading to high inflation. “Small and medium-sized enterprises create a lot of jobs, yet they receive little care, while inefficient State-owned enterprises are given hefty investments,” he explained.

“If the economic mindset was not changed, if resources were not reallocated, then true entrepreneurs would continue to face capital shortage, resulting in inflation,” he stressed.

Sharing this view, Nguyen Tien Thoa, vice president cum general secretary of the Vietnamese Valuation Association, said: “The risk of inflation will remain intact next year. The root cause lies within the economy: poor competitiveness and low capital use efficiency, coupled with the impact of external factors, which may fuel inflation.”

The restructuring program has just gone through one year and thus it cannot remove the underlying cause in the economy, he said.

Nguyen Ngoc Tuyen, director of the Institute of Economics and Finance, noted the Government at the same time aims for two opposite targets, lower inflation and higher growth, making it very difficult to decide on policy.

“Without capital injection, there won’t be growth, but with it, there will be inflation,” he explained.

Ngo Thi Anh Duong, deputy director of the Price Statistics Department under the General Statistics Office, reminded that 30 provinces still had not adjusted their hospital fees. Hospital fee hike is the biggest cause of the consumer price index (CPI) growth in September.

“I am concerned that if these 30 provinces simultaneously raised their hospital fees, CPI might pick up a few percentage points,” she said.

Still, economists did not give any forecast for inflation next year. Meanwhile, it is believed that the reason for low inflation this year is the purchasing power of citizens and businesses have been exhausted, instead of efficient management.

Phu of the Hanoi Supermarket Association said: “It is the sharp decline in demand that has pulled down inflation rather than the decisions of the Government. Purchasing power has been exhausted. With monthly income of only VND2-3 million, workers in industrial parks can only pay for their meals.”

Thoa added: “An important reason for low inflation is the difficulties of the economy. Producers are mired in troubles due to inventory and bad debt. As they cannot sell their products, they cannot increase prices. Weakened aggregate demand and stagnant production keep prices from going up.”

Even when the central bank spends some VND200 trillion buying US$10 billion this year, just as in 2007, it does not cause inflation. “Three main factors, bad debt, inventory and falling aggregate demand, make CPI unable to rise, even though there are potential factors to sharply push up prices recently,” said Thoa.

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