Vietnam - Economic stabilisation rests on SBV strategies

by lexie Sun Nov 20, 2011 9:36 am

November 19, 2011

Economic stabilisation rests on SBV strategies

In a move to cut public spending and maintain economic stability, the State Bank of Viet Nam has been advised to contain inflation for at least six months and adopt aggressive macro-economic policies.

The strategy emerged at an international seminar titled Monetary policy co-ordination with other macro-economic policies in a challenging global economic environment hosted by the bank, the Asian Development Bank (ADB) and the Banking Academy in Ha Noi yesterday.

ADB director for Viet Nam Tomoyuki Kimura said despite the Government's firm commitment to stabilising the foreign-exchange market and replenishing foreign reserves, year-on-year inflation remained high at 21.6 per cent as of October.

"Closer co-ordination between the monetary policies of banks and other macro-economic policies is also critical to ensuring stability," said Kimura. "Restoring macro-economic stability is the immediate priority, but addressing the root causes of high inflation requires greater structural reforms."

To Ngoc Hung, director of the Banking Academy, said that there had to be co-ordination between the banking world's monetary policies and the Government's fiscal policies relating to income from taxes and bonds.

This meant monetary policies should maintain inflation targets and contribute to economic growth, while fiscal policies should maintain budget balance at a reasonable level and ensure sustainable growth.

However, experts at the seminar said co-ordination had not been smooth in recent years.

In 2011, the State budget deficit is projected to reduce to 4.9 per cent of GDP against the planned figure of 5.3 per cent. Meanwhile, the money supply is eyed to increase by 12.5 per cent, credit growth by 12 per cent in 2011 against the planned figures of 20 per cent and 16 per cent, respectively.

In the first half of 2008, when monetary policy tightened to contain inflation, both the money supply and total balance growth fell, yet Government expenditure exceeded estimates by 19 per cent, up 22 per cent against 2007 and accounting for 3.075 per cent of GDP.

"The degree of tightening fiscal policy was much less than for monetary policy," said Hung.

Hung suggested that strong commitments were required from the State Bank to curb inflation and maintain levels for at least six months.

Other experts said policy makers should stop making sudden changes to both monetary and fiscal policies, take into account catch-up effects to identify the appropriate time, dose and degree of changes, and avoid making excessive impacts to achieve short-term objectives. They said this could create future adverse effects.

Iskandar Simorangkir, head of the Economic Research Bureau at Bank Indonesia, suggested that to alleviate the volatility of capital flows, policy makers should apply prudential measures by minimising holding periods and requiring higher levels of foreign exchange reserves.

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