Maintaining tightening money policy may help reduce inflation
Asian Development Bank (ADB) has appraised the government’s Resolution 11 on curbing inflation, stabilising macro economy and ensuring social security. ADB has also lowered Vietnam’s GDP growth forecast while raising the country’s inflation prediction this year.
At the launching of Asia Economic Outlook 2011 publication on 14 September in Hanoi, Tomoyuki Kimura, ADB Country director for Vietnam, expressed his high opinions of the government’s drastic efforts citing comprehensive policy packages of monetary and fiscal squeeze in the face of double digit inflation, a tumble in foreign currency reserves and weakening local currency.
“GDP growth is expected to stay at 5.8pct for 2011 and 6.5pct for the following year while inflation rate is forecast to climb to 18.7pct in 2011 before dropping to 11 percent in 2012. What may affect these projections is the premature easing of macroeconomic policies”, said Tomoyuki Kimura.
Also, the report assumes that short-term prospects would largely be subject to government’s commitments as well as implementation. Inflation and interest rates could have good grounds for a relaxing given continued consistent implementation of the Resolution 11, which would mean investors’ confidence improvement and then economic stimulus.
In addition, inflation is anticipated to cool down since food production is likely to pick up rapidly thanks to improvement in agriculture activities. Austerity policies along with gradually stabilised local currency, subdued credit growth and stagnant consumption and investment have altogether put a brake on inflation.
According to ADB specialists, the year inflation rate of 20pct would make it too early for macroeconomic policies to be eased. Premature relaxing is likely to make efforts to stabilise macroeconomic condition pointless as well as to deal a blow to businesses’ and consumers’ confidence in the local currency, thus hurting foreign currency reserves.
ADB’s country economist, Dominic Mellor emphasized five principal risks facing Vietnam’s economy including mixed monetary policies, banking industry vulnerability due to excessive credit growth, currency vulnerability, rigid regulations in food market and adverse external factors.
Additionally, foreign exchange rate and bad debts are also mentioned in the publication. In fact, the document said risks already emerged in May and June when the central bank acquired an enormous amount of foreign currencies from the free market so as to strengthen liquidity.
Overnight interbank rate fell 7 percentage points to 11pct within four months until the end of August 2011. “Interbank rate fluctuations are there to come due to instable liquidity”, added ADB.
With respects to bad debts, the agency warned of potential risks concerning poor banking credit quality. Normally, macroeconomic tightening in the wake of galloping credit growth takes heavy toll on borrowers as well as credit institutions. Comprehensive measures would, therefore, be required for banking operational safety.
ADB affirmed the top priority should be given to macroeconomic recovery and stabilisation, yet inflation monitoring calls for drastic efforts in structural reforms.
Category: Economy
