30% inflation rate possible

The inflation rate for the first half of the year reached 18.44%, the highest increase in recent years.

Nguyen Duc Thang, Deputy Head of the Trade, Services and Prices Department under the General Statistics Office (GSO), said that GSO can predict three inflation scenarios for 2008. In the low scenario, commodity and service prices increase by 1% a month in the last six months of the year, which will lead the CPI to increase by 25% in 2008. In the medium scenario, the prices increase by 1.2% a month and 27.5% in 2008. In the high scenario, the inflation rate would be 30% in 2008, if the monthly CPI increase is 1.5%.

Vu Dinh Anh, Deputy Head of the Institute for Market and Price Research, said that the Ministry of Planning and Investment seems too optimistic predicting a 22% CPI increase for 2008. The 22% increase could be reached in just a few months.

Pham Minh Thuy, an analyst with the Institute for Market and Price Research, said that the CPI increases will slow down in the second half of the year. However, he has warned that prices may increase sharply in October, November and December after the market laws.

He said that if Vietnam implements measures to restrain inflation well, the average price increase would be 1.5-1.7%/month, which means the CPI in December 2008 will have increased by 129-131% over December 2007.

Cutting interest rates advisable

Nguyen Thi Mui of the Finance Institute believes that the government’s actions of cutting public expenditures, raising deposit compulsory reserve and limiting credit growth have successfully withdrawn money from circulation.

Statistics show that in the first six months of the year, credit growth slowed to 20%, much lower than that of 2007. Meanwhile, deposits had increased by 19.5% by the end of May 2008 compared to the end of 2007.

While raising interest rates is considered necessary to curb inflation, it burdens enterprises. When inflation is controlled, bank interest rates should be lowered to create favourable conditions for enterprises to develop.

High interest rates make the production costs of enterprises increase, and push up the sale prices of products. This influences low-income earners, who are the majority of society, while it doesn’t restrain the consumption of high-income earners.

Most Vietnamese enterprises have small business scale and rely on bank loans. Therefore, if the interest rates remain overly high, enterprises will not be able to access capital to serve their production. Meanwhile, they are the main suppliers of commodities to society.

Mui said that the current high interest rates cannot help attract more capital to banks anymore. Money simply goes from banks which offer lower interest rates to banks which offer higher interest rates.

Nguyen Minh Phong at the Hanoi Socio-Economic Research Institute also said that overly high interest rates limit investments, and lead to stagnation and recession, unemployment and bankruptcy.
Source: Vietnamnet