Vietnam Currency Discussion Board

[RICK C]

Vietnam imports inflation
IMF believes that with current policies, Vietnam is importing inflation and needs to take a new approach that makes every effort to reduce the rate to a single-digit level.

Price storm

2007’s inflation rate of 12.63% was a huge concern to Vietnamese people and authorities. However, what worries economists most is that Vietnam’s inflation rate was much higher than other regional countries, though dealing with the same influences from price increases on the world market. ADB’s member countries had an average inflation rate of 3.4% in 2005 and 3.3% in 2006.

According to IMF expert Bennedic Bingham, Vietnam’s situation is not actually very serious, but it is necessary to discuss measures to curb inflation now, before Vietnam suffers more serious consequences.

As for countries like Vietnam, it is not easy to control inflation because of outside factors that are completely out of its control, according to Chairman of ADB Haruhiko Kuroda.

Suffering poverty

This isn’t Vietnam’s first battle with inflation, in 2004 it hit 9.4%. However, current factors are very different.

First, the dollar keeps devaluating, which raises questions regarding Vietnam’s exchange rate policy which currently aims to stabilize the exchange rate.

Second, the foreign investment capital flow to Vietnam has become bigger and bigger. The State Bank of Vietnam has to buy foreign currencies and put VND into circulation, which has resulted in even higher inflation. Vietnam’s money supply growth rate is significantly bigger than regional countries.

In a country with a high population and a high population growth rate, the number of poor people may increase correlatively with high inflation. Only a small number of Vietnamese people can make financial investments to protect themselves from price increases. Meanwhile, poor people cannot protect themselves. They rely on their daily income.

Prior to that, ADB also asserted that high inflation will lower the purchasing power of poor people and have bad impacts on economic growth.

Importing inflation

Price increases in 2007 have been affecting many countries, but Vietnam’s developing economy is hit quite hard. The inflation rates of other countries in the region are much lower than Vietnam’s, including China, which has higher economic growth than Vietnam.

IMF’s experts believe the main factor explaining why China’s, Malaysia’s and Thailand’s inflation rates are lower than Vietnam’s lies in its exchange rate policy.

One of Vietnam’s primary goals is to stabilize the VND/US$ exchange rate to encourage export, and recently the dollar price has been fluctuating around the globe; meaning Vietnam imports the factors that cause inflation.

Meanwhile, other regional countries let exchange rates fluctuate in accordance with world changes. The dollar has devaluated 9% against the euro, and 7% against the yen, which means that the prices of commodities in dollars are increasing very rapidly. Other regional countries have wisely let exchange rates fluctuate in accordance with the dollar value, because this can help prevent the commodities prices from skyrocketing due to the devaluation of the dollar.

New policies, new ideas

International experts believe Vietnam needs a new exchange rate mentality and monetary policies.

Vietnam should not try to keep the VND/US$ exchange rate stabile, while ignoring the fluctuations of the dollar prices on the world market, experts say. If Vietnam takes this approach, it will see inflationary pressures eased and will not have to spend so much VND buying foreign currencies.



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