Local economists blame FDI for inflation spike

18-Jul-2007 Intellasia | Vietnamnet | 6:40 AM Print This Post

The rapid price increase in local markets since earlier this year has upset a lot of people. People have tried to find out why the consumption price index (CPI) increased to 5.2% in the first half this year. In this article economist Nguyen Xuan Thanh from Fulbright economic teaching programme in HCM City looks at some possible causes.

The fact that the rate of inflation decreased to 6.6% last year after maintaining the very high levels of 9.5% in 2004 and 8.4% in 2005 created a false optimism that was shattered by prices rising from the beginning of the year and the rate now standing at 5.2% for the period January-June. The CPI has seen an increase of 7.8% against the same period last year. This is the biggest concern in macroeconomic terms besides positive GDP growth, export, and foreign direct and indirect investment. The question is what root causes create pressures on inflation. The most mentioned reason is the increase in the price of energy, construction materials and agricultural products in the world market which sways domestic prices. But, if inflation increases because of external price hikes, the influence must be seen in other countries as well, especially in Southeast Asian and East Asian countries.

Let consider China, Thailand, Indonesia, and Malaysia. Reliable statistics from these countries show that inflation in their countries is much lower than in Vietnam. In Indonesia, it was quite high at 10% in 2005 and was curbed at around 6.6% last year and the CPI in the period January to May this year stood at 1.8%. Thailand and Malaysia saw domestic prices increase just 2% in the January to May period this year while Vietnam’s figure was 4.3%. Only in China, where the growth rates of industrial production and financial investment are as high as those in Vietnam,

The CPI in these countries is under the similar pressure to inflate but the inflation rate China, for example, between January and May was a mere 2.9%. Therefore, it is very likely that the reasons why CPI of Vietnam is much higher than that of previous years and of regional countries originate from Vietnam’s typical economic conditions. What factors have impacts on Vietnam’s economy recently and directly impinged on macroeconomics and CPI? The answer is FDI.

In the first half this year, the country has disbursed some US$2.2 billion of FDI and attracted US$5.2 billion of FDI to the local stock market. To add up, there has been US$7.2 billion in FDI injected into the economy, excluding ODA disbursement and remittances. Given such big hard currency inflows, SBV in the January to May period bought US$7 billion to increase its hard currency reserve. That means the state bank must issue more dong. Assuming that the exchange rate is 16,000 dong against US dollar, it is estimated that SBV had to issue some 112 trillion dong more for the domestic economy.

Obviously, as the regulator of monetary policy, SBV has applied some measures to reduce money supply. The most important measures were to intensify the sales of government stocks through bids on the open market and to increase compulsory reserve rate. Indeed, at the end of May, SBV raised the compulsory reserve rate for non-period deposits and deposits of less than one year for commercial banks and financial institutions from 5% to 10%. This move drew about 25 trillion dong out of circulation. Also in the first five months this year, SBV has acquired a similar amount of currency through bids on government stocks on the open market.

In conclusion, the impact of the above measures is that some 60 trillion dong in cash had been put into circulation in the first half of this year. This colossal amount is equivalent to or 6% of GDP or 18% of spending on goods and services excluding loans granted by the SBV to commercial banks through discounts and re-discounts. In brief, the main reason for the rise in inflation is the increased amount of FDI and the fact that the SBV bought an amount of hard currency equivalent to the inflows in the same period. In a bid to curb the pressure caused by the increase in FDI inflows, which are anticipated to continue rising in the second half this year, it is recommended that a tightening of monetary supply policy based on increased credit control of banks should be applied. The impacts of price hikes on energy and agricultural products despite the fact that they contribute to increasing inflation are beyond of control.


Category: Economy

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