Addressing the Inflation Problem in Vietnam

The inflation problem looks simple in any economist's eye: the money supply is bigger than the amount of commodities and services created. But addressing the high consumer price index, which surged by 6.19% in the first seven months, does not look that easy for Vietnamese policy makers, reported Vietnam News recently. The latest measures announced by the Ministry of Finance by cutting import tariffs, though applauded by the vast public, still put many experts at odds over whether this is the right way.  Local media in Vietnam have voiced concerns over galloping prices, reasoning that the inflation is likely to rise to a level higher than deposit rates at banks, and such a price surge would hit the people hard, especially the poor.

The CPI in the past years has been hovering at alarming rates, staying at 9.5% in 2004, 8.4% in 2005, 6.6% last year, and likely above 8.4% this year. Therefore, the combined CPI in the 2004-2007 period is estimated at 37.2%, much higher than any deposit rates at banks.  The paper rejects arguments that for the sake of high economic growth, high inflation should be accepted. The economy should expand alongside the rising wealth of the people, it says.

Tuoi Tre, in an interview with Dr. Nguyen Ngoc Tho as an expert at the HCMC Economics University, also warns against the rising price that can adversely impact on the people's livelihood. "High inflation causes huge difficulties for the people," it quotes the economist as saying.
Many other newspapers join the argument, saying the people's livelihood should not be sacrificed for the high economic growth.
Therefore, the Finance Ministry decides to slash import tariffs on hundreds of key product lines, with many being halved to cool down the price fever on the local market.
The ministry also says it will keep on hold any plans to increase input prices on the local market, and will launch inspections into signs of market manipulations by certain monopolistic companies. However, several other economists point out that slashing import prices is not the right answer to the problem.
Deputy Finance Minister, Truong Chi Trung, said that the rising price on the local market is influenced by world prices, which have increased steeply so far this year, says  Furthermore, the fact that the Government early 2007 hiked input prices of essential commodities such as power, coal, and petrol has also pushed the CPI up by 0.33%.
Dr. Nguyen Quang A, a well-known economist, pointed out in an article on VietnamNetpoint out that the inflation takes its root from the faster increase in money supply than the volume of goods and services, so the key question is whether the money supply is effectively controlled.  Economic growth is not necessarily associated with high inflation.  The central bank, according to him, needs to bring into play its mandatory role by tightening the money supply via such vehicles as increasing its reserves, hiking the required reserves at commercial banks, and boosting open market operations.

Given the slashed tariffs, prices will be stabilized and even fall steeply, and in case market players seek to maintain high prices, inspections will be launched and punitive sanctions imposed. This will meet the people's aspiration in the short term, says deputy head of the Vietnam Economics Institute, Tran Dinh Thien.  The tariff revision is just the temporary measure. The key now is that the Government should tighten its acquisition plans so as to choke the flow of money into the economy.

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