Dinar Daily
Would you like to react to this message? Create an account in a few clicks or log in to continue.

Get Daily Updates of the NEWS & GURUS in your EMAIL

Enter your email address:

Vietnam - Avoiding the year-end pressures DinarDailyUpdates?bg=330099&fg=FFFFFF&anim=1

Vietnam - Avoiding the year-end pressures

Post new topic   Reply to topic

Go down

Vietnam - Avoiding the year-end pressures Empty Vietnam - Avoiding the year-end pressures

Post by lexie Sun Oct 23, 2011 12:37 pm

October 23, 2011

Avoiding the year-end pressures

Monetary policy will continue to be crucial in constraining the traditional inflation blowout during the final months of the year.

Besides, it’s time to seriously tighten fiscal policy to bring inflation to single-digit levels in 2012, with concrete measures to implement recent decisions by the October meeting of the Central Committee. Dr. Pham Do Chi, former IMF economist, takes a further look at the issue.

In August, inflation experienced a 0.93 per cent month-on-month rise, but still a 23 per cent increase compared with August, 2010. It fell further to 0.82 per cent in September and will probably fall further in October. Past experiences, though, show that inflation is likely to rise in the last two months of the year due to high spending patterns during the upcoming holidays, so the year-on-year inflation rate will most likely reach 18-19 per cent this year.

Tight monetary policy will likely be maintained for the last three months and probably the opening months of 2012, burdening most enterprises, especially small- and medium-sized ones. Although a tightening of monetary policy cuts demand in the private sector, it is not enough to decrease aggregate demand including public spending, which is the main reason for high inflation. According to the latest figures, state budget expenditure in the first nine months of the year was “bulging”. Vietnam’s economy faces the continuing challenge of tackling inflation and economic growth.

Furthermore, the domestic gold price is far higher than international prices, reflecting people’s inflationary expectations remain rather high. Moreover, the USD/VND exchange rate and the adjustment in the minimum wage from VND830,000 a month to VND2 million, depending on the region, will also have a negative impact on the consumer price index (CPI) during the remaining months.

But the most important factor is that the rising rate of outstanding loans and total liquidity (M2) during the year-end months (20 and 15-16 per cent, respectively), if implemented, will be far higher than in the earlier months of the year. The central bank’s strong policy of pumping in money in September (a net amount of VND28 trillion or $1.35 billion) to cause banks to “obey” a ceiling deposit interest rate of 14 per cent and a lending interest rate of 17-19 per cent is sparking such fears. This is being closely watched with a concern that it is following the “old path” from the end of last year, when the central bank pumped in liquidity to stimulate demand. If so, inflation can climb well beyond 19 per cent by the year’s end.

The central bank began to implement its new plan to pull down lending interest rates with a determination to manage the activities of banks. First, a number of measures were taken to warn banks who were skirting around the law to push the deposit interest rate up from the ceiling of 14 per cent. Second, to force banks to apply their maximum lending rates of 17-19 per cent as another new “administrative measure”, the State Bank has chosen to pump in considerable liquidity since September. Again, this would create new pressure on the fight against inflation in the ending months of 2011.

Adjusting “policy assignment”: using the IS-LM model

With signs of stagflation in recent months, it is time to consider another policy assignment in addressing the economic slowdown. Amid a tight monetary policy, it is necessary to effectively employ a tight fiscal policy to cut public investment and government expenditure, resulting in better inflation controls.

Open market operations (OMO) and reserve requirement policies will still be helpful measures to reduce the money supply. But now is also the time to cut interest rates and establish a normal yield curve in the credit market.

Without support from a tightened fiscal policy it will be difficult for monetary policy alone to effectively lower interest rates. Pumping excessive liquidity into the banking system could eventually raise inflation in late 2011 and early 2012, as happened last year.

In the face of such a situation, coordination between fiscal and monetary policy as an anti-inflation strategy is becoming more critical than ever in the policy assignment against inflation for the rest of 2011 and for 2012. We can utilise the simple model of IS-LM in macroeconomic theory to illustrate the policies being applied in Vietnam currently as well as changes proposed in future policy assignment. A simple concept, yet with significant policy value:

This model (see chart) can be seen as the most basic tool to display the impact of fiscal policy (IS) and monetary policy (LM) on total output or growth (Y) and interest rates (r).

- An expansionary stance on fiscal policy, which is being used consistently in Vietnam, tends to shift the IS curve to the right, raising interest rate r and output Y (stimulating growth).

- Contracting monetary policy utilised since February 2011 tends to shift the LM curve to the left, also lifting interest rate r while decreasing Y (via declining aggregate demand)

- High interest rates in Vietnam at present can be explained by both policies.

Therefore, it is suggested to utilise contracting fiscal policy (shifting the IS curve to the left) as the main tool against inflation and high interest rates. On the other hand, gradually loosening monetary policy (i.e. shifting LM curve to the right) can be used to reduce interest rates and prevent Y from shrinking. The key here is the interplay between these moves.

In Vietnam’s economy, it is now crucial to carry out these steps:

- Implement solid and firm decisions on fiscal policy to weaken aggregate demand by cutting down on government expenditure, especially public investment.

- Introduce a more flexible monetary policy to lower the role of reducing aggregate demand and enhance the role of stimulating aggregate supply.

- Abolish the interest rate ceiling of 14 per cent to emphasize the role of market operations in the banking system rather than applying administration tools with distorting effects.

The above coordination of policies is also to weaken “crowding out” effects of expansionary fiscal spending and to give rise to more efficient private capital outlays, the first step towards truly restructuring the Vietnamese economy, as emphasized by the Central Committee decisions in its October 6-10 meeting.


Elite Member
Elite Member

Posts : 1812
Join date : 2011-06-24

View user profile

Back to top Go down

Back to top

Permissions in this forum:
You can reply to topics in this forum