Vietnam's Choices for Post-Financial Crisis, Monetary Policies

The Vietnamese economic development in 2010 depends largely on the targets we have set on and the selection of macroeconomic policies to attain these targets. These targets on their part will require the choice of appropriate macroeconomic policies. This is why we should be careful in choosing macroeconomic policies and socioeconomic development targets in the short, medium and long term, based on scientific and realistic reasoning.

Strategy for Socioeconomic Development
The year of 2010 is the last one in the implementation of the 2001-2010 Strategy for socioeconomic development period so this is the last opportunity to achieve the targets of the strategy. With the most important target to double the Gross Domestic Product (GDP) after 10 years, it is necessary that the economic growth rate in 2010 must attain at least 6.5percent as set by the National Assembly's Resolution. On this bumpy road, the Vietnam's economy "vehicle" still relies on the traditional driving forces that are:

First, economic growth still relies mainly on the increase of investment with the total social investment capital ratio growing continuously from one third of GDP in the last part of the 20th century to nearly 40 percent in the last few years, ensuing the overall investment effectiveness has decreased drastically as demonstrated by the high ICOR index.

Second, the slow restructuring of the economy created no change in quality of growth, even though the speed of economic growth might attain the strategic target and more critically, no premises can be created to get a breakthrough for higher growth rate.

Third, the growth model is based on exports while the change of export commodities and markets structure is limited. Within the structure of export commodities, the ratio of raw materials and resources still occupy a large share while the light industrial group of products is mainly composed of cheap labor-intensive processing products with low value added.

Fourth, the stability of macro economy is not solid yet. The inflation rate (as reflected by CPI [Consumer Price Index]) in the period of 2001-2010 is lower that the preceding one. However, if inflation in the period of 1991-2000 followed a downward trend, it started to go up since 2001.

Affecting Economic Growth
Control of inflation has become a focal concern in the stabilization of the Vietnam's macro economy during the last few years, but recently, the efforts to maintain the main equilibriums of the economy have created many problems affecting directly the stability of the macro economy and limit the space for the management of policies. The most striking example is the deficit in the trade balance. Although export trade has made outstanding gains in turnover, because of the limitations in structure, in export development model and in imports control, excess imports have persisted for a long period of time and affected negatively on the economic growth and the socioeconomic stability.

The target to control imports to reduce the trade deficit to under 10 percent of the GDP and under 20 percent of total exports turnover is very necessary to stabilize the macro economy and at the same time to create a premise and motive force to restructure the economy and speed up the time to regain the trade balance equilibrium.

Trade deficit is the decisive factor causing the heavy deficit in the current balance of payments in recent years and dragging along deficit in comprehensive balance of payments. In addition to trade deficit, State budgetary deficit lingering for many consecutive years has also increased the risks for the economy, including growth risks and destabilization of the macro economy.

Fiscal Policy Options
The short-term focus of the fiscal policy is to ensure that the level earmarked to the state budget at one fourth of the GDP no less but also no more so as not to increase the burden to mobilize for the state budget of the economy. However, all discriminations about economic sectors should be reduced to the lowest level albeit to abolish completely both in obligations to contribute to the state budget as well as to benefit from the state budget spending or disbursement of such nature.

The second priority is to reduce the budgetary deficit in the roadmap to restore the state budgetary balance in the long-term.

Choice of Monetary Policy
If the fiscal policy should be "neutral" in short term basis and active in promoting the restructuring of the economy in the medium and long term range, the monetary policy will become the policy tool to promote economic growth and ensure macro stability. The flexible and marketable character of the monetary policy should be promoted to realize at the same time these two core targets.

On one hand, increasing aggregate credits has been and will be the key factor to promote economic growth while other financial channels for businesses are still scarce. Reality has shown that the economic growth rate of Vietnam has an organic link with opening up credits. On the other, the degree of stability of the macro economy, particularly inflation in Vietnam also has a dialectic relationship with the growth rate of credits though it has a certain latent period. Interest rates should be implemented flexibly and following market mechanisms.

Assessment
To achieve the important macro economic targets, particularly the control of excess imports, to attract foreign investments, to ensure the equilibrium of the balance of trade, current accounts and payments, to balance investment saving and consumer accumulative spending and to manage foreign debts, the foreign exchange policy will play a very important role.

It is foreseen that, under the pressure of the economic disequilibrium between domestic and foreign scenes, in 2010, the devaluation of the Vietnamese Dong is inevitable but the scope and timing should be synchronized with the foreign exchange control and trade policy in order not to create a shock to the macro economic stability while refraining from too much expectation in solving immediately all the macro disequilibrium that have been accumulated through the recent years, especially with only a separate tool such as the exchange rate adjustment.

Faulty Management Cause of Growth-Inflation Imbalance

In November, the inflation rate rose to 4.78 percent, and it has created several complex problems for the government. In itself, this inflation rate is not dangerous, but the circumstances under which this rate has been recorded rings a danger bell.
For the past some time, the inflation rate was quite low due to recession, but whatever was the rate was due to sudden rise in prices of very essential food items.

Pressure on RBI
The inflation rate in respect of essential food items has reached 20 percent pushing up the overall inflation rate. The problem is that the government does not have any immediate remedy to reduce prices of essential food items. There is growing pressure on the Reserve Bank of India (RBI) to increase interest rates, but there is danger of it adversely affecting the improvement in economy. Second, how effective would the monetary steps be on price rise due to shortage of food items is also being argued continuously.
The manner in which we run our economy is still quite old fashioned. The RBI would certainly take some steps to reduce cash, but the question is when? The government could certainly make some efforts to increase availability of food items, but arresting this price rise can take place only be after the Rabi harvest comes.

Result of Mismanagement
In fact, price rise in essential food items because of shortage that we are suffering from is the result of mismanagement of past several years. While the growth rate has increased due to development in service and industry sectors, the agriculture sector still stands where it was. We don't have any plan for long-term needs.
Food items of our everyday need also keep going through the vicious cycle of less production, more prices and more production, less prices. If a big country like ours would leave its agriculture on the vagaries of the market and the monsoon, crisis will be created.

Affecting Price Hike
There has been less rain this year and prices of pulses have gone up. More pulses would be produced next year and the prices would fall. But when growing pulses would become a less profitable proposition and the rains would be good, farmers would again reduce growing pulses.
The present crisis toward the end of the first decade of the 21st century is warning us that it is necessary to pay attention to agriculture, otherwise people would keep suffering from price hike, and policymakers would continue to work out the complex arithmetic of growth and inflation rate.