Danger of reflation warned

That the Government has deployed the consumption and investment stimulus packages with the aim of overcoming consequences of the crisis is completely right and suitable for Vietnam’s current economic situation. However, due to loosening monetary policy coupled with deploying the stimulus packages, a large amount of money has been put into circulation, causing a high increase in the money supply, thus there is a danger of reflation, particularly when these flows of capital are yet to be used effectively.

Firstly, to prevent economic downturn, the Government has taken a lot of measures to give a kick to demands on investment and consumption, increase money supply in the economy through interest rate support and tax exemption. If the money is effectively used, it will stimulate the domestic business and production, create plentiful source of goods and jobs and improve the people’s income, and as a result it will not send inflation higher.

With a big money supply, if the Government spending is ineffective, it not only will not promote production effectively, but also increase the risk of inflation and bring about a lot of other consequences such as increased budget deficit, having a negative impact on social life. So it is necessary to reconsider how long the interest rate support will be deployed and which sectors will continue to get support and which sectors will not be supported any more. In addition, another factor can cause inflation again is that credit growth rate in recent months has risen.

In the current difficult context, such credit growth rate is good, but a so fast and robust growth also shows a danger sign of inflation. Besides, from this quarter, consumption and production demands are possibly bigger when the economy sees signs of recovery.

Another factor is Vietnam’s dependence on export and import. When world prices are up, raw materials still have to continue to be imported to meet domestic demand on production and processing, the country’s export turnover is also higher, accordingly, the domestic goods prices are made higher.

Recently, the world economy has showed signs of recovery, many imported goods have seen an increase in prices. Moreover, the weakening US dollar is causing investors to worry about a danger that the monetary crises will increase possibility of inflation in the world, including Vietnam.

Budget deficit possibly increases faster than expected

The economic stimulus packages deployed by the Government have caused difficulties to the State budget. It is expected that the country’s budget revenue will be reduced by around VND 29 – 63 trillion compared to the estimates while pressure on spending is still great.

If budget deficit stands at 8% of GDP, outstanding debt will reach around 40% of GDP, which is a very big budget deficit level while the main sources of revenue such as from crude oil and taxes reduce sharply. This brings more pressures to bear on the offset for budget shortages.

According to experts, any strong stimulus package can adversely affect the sustainability of the State budget. If so big an amount of money is invested and the fiscal and monetary policies are loosened for a long time, the budget overspending rate will increase to high levels, thus increasing the risk of inflation. The widened budget deficit will also make private investment decrease or current account deficit widen.

About investment effectiveness

In recent years, Vietnam’s incremental capital-output ratio (ICOR) have always fluctuated at high levels (in 2005, 4.85%; in 2006, 5.04%; in 2007, 5.38% and in 2008, 6.68%), which is much higher than the figure in other countries in the same development period. That shows that economic effectiveness of investments in Vietnam is low, caused by many other reasons including poor investment planning and management, corruption and overinvestment and limited science-technology level.

To curb inflation in the first half of 2008, the improvement of investment effectiveness was given first priority. A lot of investment projects were cut down in order to combat overinvestment, loss and wastefulness.

When economic crisis broke out, a large amount of money was poured into building infrastructure to give a kick to investment demand while economic growth slowed down, so ICOR index was even higher.

Once again, the effectiveness of these investment projects needs to be carefully reconsidered to ensure that investments have been deployed in accordance with the set targets.

Living standards down

In the context that the economy is in difficulites, workers without jobs, decreased income, the people’s living standards has also reduced considerably, especially in rural areas.

Many people are facing with difficulties, with lower income because enterprises are affected by the global economic recession. Wages paid by foreign-invested companies to their workers reduce by 15 – 50%. There are even more unemployed workers in industrial parks and export processing zones.

According to the predictions made the Ministry of Labour, War Invalids and Social Affairs, in the worst situation, the number of people losing their jobs nationwide will be 400,000 at the end of this year. Meanwhile, farmers’ income is going down because the markets of their importing partners are being narrowed.

In addition, the real income of the majority of people is lower due to current high prices of goods and services. The prices in food and foodstuffs have considerably increased, causing more difficulties for low-income farmers.

So, we do not only focus on preventing economic slowdown but also have to give a care to people’s living standards.