Since the Ministry of Finance and the State Bank of Vietnam jointly developed a framework for fiscal and monetary policy coordination, some have hoped that the move will phase out obstacles to macroeconomic stabilisation in the country.
Nguyen Van Binh, governor of the State Bank of Vietnam (SBV), has been under immense pressure to lower interest rates to help struggling enterprises, especially as inflation has been arguably under control. He has opted for a cautious rate cut to lessen enterprises’ suffering while still guarding against a surge in prices.
Unfortunately, SBV’s effort may not work wonders immediately. Cao Viet Sinh, deputy minister of planning and investment, who has contributed to most of Vietnam’s macroeconomic reports, is well aware of the crushing interest rates that enterprises have to shoulder. “The economy in general and banks in particular are in liquidity trouble. Lending rates, while lower, continue to substantially surpass deposit rates -by 4-5 or even 6-7 percentage points,” he says.
Sinh adds that the number of bankrupt companies hit a dozen thousand and credit dived by 2.13 percent in the first quarter. “First-quarter gross domestic product growth was merely 4 percent, which is extremely low and indicative of bleak employment, social security and business prospects,” he says. “Banks must streamline costs and pull down interest rates to enhance industrial production. Enterprises and households must thrive instead of struggling to survive.”
Vu Viet Ngoan, chair of the National Commission for Financial Supervision, has just finished a fact-finding trip in HCM City and Danang. He recalls several problems gripping enterprises -huge inventories, meager profit and so on. “Businesses are battered,” he says. Ngoan adds that it is impossible to attain credit growth of 15-17 percent this year. Given the negative credit expansion rate in the first three months, the figure for the first half will be at most 2-3 percent. Credit cannot balloon by 12-13 percent in the second half; in fact, if it swells at such a rate, inflation may return next year.
Ngoan believes that fiscal constraints make it difficult for tSTC mapping out monetary policies to drag interest rates down by 3-4 percentage points. He proposes using fiscal contraction as the main weapon against inflation. Fiscal discipline helps to lessen the need to issue government bonds and makes it less likely for the government to finance budget deficits via loans from banks. Meanwhile, monetary policies can be eased gradually, both to cut interest rates and to revive production.
Given the limitations of SBV’s toolkits at present, many economists and policymakers have turned to fiscal policy in search of a solution to Vietnam’s economic woes. The recent agreement between the Ministry of Finance and SBV is considered insufficient. According to Phan Thanh Ha, deputy head of the Ministry of Finance’s Department of Finance and Monetary Affairs, this agreement must be institutionalised to provide the legal framework for a more stringent fiscal policy.
Ngoan suggests keeping budget spending under control -for instance, the government may request provincial authorities not to tap into the difference between budget revenue and spending yet.
Fiscal discipline is a perennial problem in Vietnam, especially in the absence of accountability. This was evident in 2011, when spending for development purposes was VND193.8 trillion, up from the planned figure of VND152 trillion. Budget expenditure in the first quarter of 2012 was almost VND199 trillion, up more than 13 percent year-on-year. Budget deficits were VND26.19 trillion, or 18.7 percent of the target.
However, Ha says that there is still room for fiscal adjustment. Budget spending may remain high thanks to bonds and treasury bills (which reached 30.9 percent of the year’s target in the first quarter or 43.8 percent of the figure recorded in 2011). “The Ministry of Finance should not rely on bonds to finance budget deficits,” Ha says, adding that the government should scale down its bond issues by VND10-20 trillion.
Dr Trinh Quang Anh from the Vietnam Maritime Bank says that banks hold some 80 percent of government bonds. In other words, the government has mobilised significant financial resources from commercial banks, instead of other economic organisations or households. Consequently, the credit available for the private sector has been limited, making it difficult to swiftly decrease interest rates. Furthermore, SBV has indirectly funded budget deficits by offering bond discounts to commercial banks. This certainly does not bode well for anti-inflationary efforts.
Vu Dinh Anh, a high-profile economist, is concerned that these problems may persist. The current economic quagmire is ascribable to monetary contraction in 2011. Anh is worried that higher land sale, taxes and fees will increase budget revenue, which stands at 28 percent of GDP (the highest in the region). The Ministry of Finance’s promise to push up budget revenue by 5-8 percent is hardly good news to struggling enterprises.
“By right, fiscal policy should join forces with monetary policy to prop up the economy,” Anh says. Unfortunately, these policies sometimes clash instead of moving in tandem. It will take time to rectify this disparity.
Recent developments show that Vietnam has entered a new cycle of economic downturn. Worse, the government is no longer able to introduce a significant stimulus package, a policy adopted in 2009. Nguyen Dinh Cung, vice director of the Central Institute for Economic Management, says that fiscal policy can, and should, help to fill this gap.