The consumer price index, a key measure of inflation, increased by 5.2% in the first six months of 2007, compared to 4% in the first half of 2006.

Nguyen Tien Thoa, director of the Ministry of Finance's Price Management Department, spoke to Viet Nam News reporter Thu Lan about his concerns that prices could crawl, higher in the months ahead despite the Government's commitment to keeping inflation below the GDP's growth rate.

• What has led to rising prices?

I think there are three main causes. One is the supply and demand of goods. On the world market, prices have risen on key commodities that Vietnam must import in great volume, such as steel and fertiliser. Steel increased by 15%, steel ingot by 24.4% and urea fertiliser by 7.4%.

Whereas those goods that Vietnam exports are also fetching higher prices in the world market such as rice rising by 16.5%, coffee by 27.4%, rubber by 5.1% and pepper by 90.3%.

These are outside factors. In the domestic market, consumer demand also rose thanks to Lunar New Year festivities. Consumption levels during this period increased, driving prices higher on such goods as food, restaurant services, transportation and entertainment.

Second is monetary factors with substantial amounts of foreign investment, both direct and indirect, flowing into Vietnam. This has increased the supply of foreign currency and creates pressure on the Vietnamese dong. The total means of payment of the economy increased.

Third is price control policies. Since the beginning of the year, the Government has applied market-based prices on some inputs. Electricity rose 7.6%; petroleum prices increased twice by 8.9% in March and 7.2% in May. Coal costs climbed 20% for cement, paper and fertiliser manufacturers, and 10% for power generators.

Other than that, some shops and producers took advantage of these trends to raise prices of their goods unjustifiably. We cannot quantify this factor.

Overall, an increase of 5.2% (on overall inflation] in the first half of 2007 is a large increase. However, inflation has not caused serious consequences to the livelihood of wage and low income earners.

On the other hand, GDP also has risen, growing by 7.9% in the first half, and macroeconomic balances have been kept stable; exports are doing well and Government revenues and expenditures have been fairly balanced.

• Do you think prices will continue to rise in the later half of 2007?

From now until the end of the year, there are some underlying factors that will increase prices. Commodities on the world market can hardly fall back to the low price levels seen in the past - prices may even creep higher.

Meanwhile, livestock and poultry epidemics still threaten to complicate the market.

If we carry out measures efficiently, then we may be able to keep prices within the 7-7.5% range for the full year, which is less than the GDP growth forecast of 8.5%.

• What measures are you taking to control prices?

There are three main measures. First is to maintain macroeconomic balances, for example, to provide sufficient power generation, supply of fertiliser, water and other materials inputs for agriculture.

Second, the State Bank of Viet Nam [SBV] continues to regulate monetary policy with prudence and flexibility by keeping a check on credit growth and maintaining stable key interest rates on the Vietnamese dong.

In fact there has been monetary policy tightening with the SBV increasing the reserve requirement in May, and executing open market operations for example through issuing bonds.

Over the next few months, the SBV should closely watch the effects of higher reserve requirements on dong and dollar deposits.

Third, the Ministry of Finance [MoF] continues to use fiscal instruments like taxes and subsidy removals to increase competitive pressures and lower prices. The MoF should also keep a close check on the State budget to ensure the deficit is within 5% of GDP. The ministry particularly needs to control prices on those basic commodities with limited competition.

• What goods will be most watched by regulators?

I think it will be essential goods. Two groups of goods may see prices rise. One is food and foodstuff. As Vietnamese producers complete rice export contracts, world price have increased and may drag up domestic prices.

Meat will also be more expensive because diseases may lead to supply shortages.

The second group is oil and petroleum products. World market prices are still high and seem to be edging higher, which will affect Vietnam.

• Given that prices increased less dramatically in the past few years, is it shocking to see inflationary pressure so strong now?

Looking at the speed of CPI [consumer price index] growth, there is no shock. Prices have increased bit by bit. The first six months have some similarities and some irregularities compared to previous years. The similarities are, firstly, prices were influenced by global trends and, secondly, inflation was attributed to higher demand because of festivities early in the year.

The irregularities, however, include livestock and poultry that have suffered from diseases and have not recovered, throwing some heat on food prices. Meat was one of the categories that posted the highest increase in prices at around 7.32%. Food and restaurant services account for 42.85% of the CPI, thus driving inflation figures.

Another difference is this year the Government has taken the initiative to deregulate controls in order to allow prices to reflect market forces.

• How do policymakers intend to balance its goals of lowering subsidies and stabilising prices?

The Government has taken the initiative to regulate prices according to market forces - previously subsidies were the norm. The timing is, (unavoidable] because liberalising price controls was an imperative, so we had to do it.

Though we knew that demand for goods and services would be high in the beginning of the year and push up prices, we also knew that conditions have allowed us to do that.

There are two crucial measures that do not violate market oriented mechanisms: one is to harmonise supply and demand. If we prevent supply-demand imbalances, then the market will not be in turmoil.

Second, you must carry out market inspection to unsure shop? and industries do not abuse prices. We have the regulatory and enforcement framework in place...

You can also link this to growth. If we let these industries - for example power and coal - generate losses, the economy won't grow. Therefore, it is time to liberalise prices so these sectors can continue producing goods and services.

Source:  VietnamNet