Inflation will pick up in the second half of the year because according to yearly rules, prices of goods will increase in the third and fourth quarters. That is not all; the policy of pumping more money into the market through public investment has been made, and money has been quickly released by banks to ensure credit growth for the year.

Increasing prices

Since July 1, the average price of electric power has increased by 5%. Early this year, Finance Minister Vuong Dinh Hue said that if the electricity price grew by 5%, its direct and indirect influence on CPI would be approximately 0.36%. Generally, an increase in electricity prices will begin to affect household expenditure after about one or two months, which also means it will impact on CPI from August. 

Within only one month after the price of electricity went up by 5%, the prices of  both gasoline and cooking gas have been adjusted up with a drastic rise of VND3,050 per liter after being increased four times.

Electricity, fuels and cooking gas are essential items, so their price rises have sent prices of many other goods soaring as a result.

After fuels, gas, electricity, and water have marked up, food and foodstuffs will also go up. Medical fees have surged drastically. Private schools in Hanoi and HCMC are seeking higher tuition fees for the coming school year.

Prices of transportation, housing, construction materials, and a number of other goods will leap as well.

Those price rises will place the economy under inflationary pressure. When CPI went down in June and July, inflation remained high. Vu Duc Dam, minister-chairman of the Government Office, explained that CPI in June and July was minus, but if power and food – the two items dependent much on external conditions and on crops, but independent of financial and monetary nature of the economy – were discarded from the basket of goods used for CPI calculation, inflation has been on the rise in the last two months. 

Looking forward, even the level of CPI without exceeding 7% for the whole year 2012 is still high.

According to Duong Manh Hung, deputy chief of the National Account System Department, inflation in 2012 is estimated at 7.7-7.8%. In contrast, three months ago, the Vietnam Center for Economic and Policy Research (VEPR) of Hanoi National University anticipated that inflation in 2012 would be only 6.2%.Vu Dinh Anh, an expert in finance, said inflation in 2012 might be 8%. However, he suggested the ceiling interest rate for deposits be pushed down from 9% to 8% to lower the loan interest rate to 12-13%. 

Howver, when inflation is about to rise, how can interest rates be lowered?

When prices of raw material and fuels move up sharply, consumer price rises will certainly happen and this will be very dangerous for the economy because production is still sluggish and inventory high while an improvement in consumption is not in sight.

High prices will obviously lead money supply to rise and credit to increase, but unchanged quantities of goods will stoke inflation.

The Government has increased public investments after a hiatus. In addition to the pouring of about VND21,000 billion per month from now to the end of this year, the Government has been on account of VND30,000 billion in fiscal 2013. Therefore, there will be VND22,000-23,000 billion for public investments every month until the end of the year.

The State Bank of Vietnam has also allowed the increasing expenditure of ten credit organizations with a healthy financial position whose credit growth has reached over 50% of the central bank’s targets since the beginning of the year. Instead of 17%, 15%, 13%, and 8% per year for four groups of banks stated early this year, the new growth targets will increase by 27% in some banks. So, banks will be allowed to lend more.

A new whirl

On the positive side, the economy has not faced deflation as feared but the looming inflation is a cause for concern. According to Pham Chi Lan, an expert in economics, inflation in the first few months of this year was low and even fell but it does not mean that inflation will be low in the entire year.

The increase in prices will absolutely put more pressure on society, as consumers will have to spend a lot more money. And not only consumers but also businesses will fall into the whirl where they have to swim with the tide.

The basic cause leading to the standstill of the economy, even with growth of 4-5%, is the ebbing purchasing power. Representatives of the HCMC and Hanoi Departments of Industry and Trade said sales at supermarkets and malls decreased by 50%. Besides, unsold consumer items and feedstock for the manufacturing sector have snowballed 30-40%.

This is also part of a reason that CPI increased slowly in March and was minus in June and July. This has not helped improve consumption but has even left negative impacts on purchasing power.

For businesses, according to Pham Chi Lan, their greatest difficulty is access to bank loans, so extending loans to them is what they are looking forward to at the moment. Therefore, the central bank has eased monetary policy.

Le Dang Doanh said that we should not stimulate the economy. “Loosening fiscal and monetary policy at the moment will lead to a return of inflation,” he said. He added that the Government should draw experiences from the past when Vietnam was entrapped in a repeated cycle of inflation and recession.

In the report on Vietnam’s economic situation in the first seven months of the year and forecasts for all of 2012, the National Financial Supervisory Commission said that CPI and inflation might increase again in the coming months or years if monetary easing was excessive. 

And money should not be pumped too much through the public investment channel because more public investments are synonymous with more public debts (domestic and foreign debts).

A survey conducted by Vietnam Report with business leaders about prospects in 2012-2013 showed that when the economy fully recovers is unknown. This made entrepreneurs even more pessimistic about the second half of 2012.

According to a survey conducted by the European Business Community in Vietnam in July, the EuroCham Business Climate Index (measuring business confidence and outlook among European businesses in Vietnam) dipped 5 points to 48. Preben Hjorthund, EuroCham Chairman, said this is the first time since the chamber began its survey in the third quarter of 2010, the index is below the average of 50 points.

Source: SaigonTimes