The country’s consumer price index (CPI) growth rate of between 10.5-11 percent in 2007 was higher than the economic growth rate of 8.5 percent, prompted the inflation rate to rise sharply. It is predicted that CPI growth in 2008 will somewhere between 108.2-108.5 percent above the 2007 level.

What are the pros and cons of increasing FDI?

According to Dr. Kenichi Ohno of the Vietnam Development Forum (VDF), the attraction of a huge volume of foreign direct investment (FDI) is the main cause of escalating inflation in Vietnam, but it is not a unique reason.

In the face of the redundant inflows of investment capital in many countries, it is essential to draw experiences from the crisis of capital accounts in the 1990s and early 2000s.  It is a question of how to exactly forecast the situation of the macro economy, which is often affected by inflows of investment capital, domestic instability and the crisis of current accounts. In addition, it is imperative to strictly control FDI inflows, which can also be adjusted if necessary in the process of liberalising capital accounts, Mr Ohno said.

However, Dr. Nguyen Thi Hien, a former member of the Research Board of the Prime Minister said the strong inflows of FDI into Vietnam inevitable as the country is having a good investment environment and offers incentive policies aimed at encouraging investment.

The Government should increase investments in developing infrastructure facilities and building more roads rather than focusing on urbanisation and the real estate market in order to make a good balance, said Mrs Hien.

Mr Ohno shared his views but described FDI adjustment as a double-edged knife. If tough intervention and control measure are put in place, there will be a risk of missing opportunities to attract foreign investments. Therefore, Vietnam needs to study and work out specific policies in order to stablise the inflow of FDI and prevent the risk of a capital accounts crisis.

Much needs to be done about monetary policy

A study conducted by the International Monetary Fund (IMF) came to a doubtful conclusion that monetary factors seem to be an important part that has resulted in inflation in Vietnam over recent years. The study also showed that soaring prices for food and crude oil would last longer here than in a other Asian nations.

This is the first time in the past ten years, Vietnam has seen a high inflation rate. Nguyen Dai Lai from the State Bank of Vietnam (SBV) said that the “negative real interest rate” was mentioned. Many commercial banks currently suffer from a shortage of Vietnam dong and an abundant of US dollars.

Regarding weakness in management of currency policy Dr Nguyen Thi Hien gave an example that within a month, the SBV had bought US$7 billion. The sudden move led to an uncontrollable inflation rate. Therefore, the bank should consider when and how to buy foreign currency in order to increase reserves and control inflation. Meanwhile, in the second half of this year, the inflow of foreign currency has constantly been increasing but the SBV has not devised any measures to cope with this problem.

Does Vietnam look like Thailand of 1997?

The warning is not abstract, Dr Nguyen Thi Hien emphasized. International experts have given a number of warnings, similar to traffic jams in urban areas, however Vietnam did not devise effective measures so it fell into a passive situation.

One reason for the high inflation rate is the weakness in macro-management. Dr Nguyen Dai Lai said as Vietnam could not identify the real causes of inflation and overused some band-aid solutions, such as the subsidy for petroleum and electricity and a tax cut.

Sharing the same view, Cao Sy Khiem, deputy head of the National Finance and Monetary Consultancy Council said that the management of some products to adjust prices is confronted with reality. High inflation is due to weak price management. For example, Vietnam raised retail prices while the world prices were being reduced. Furthermore, the country has not devised any strict sanctions to fine those who scheme to drive up prices. 

Economists said Vietnam’s high inflation rate was attributed by three factors – strong inflows of foreign investment, robust growth of public investment (including infrastructure and transport), big exogenous and uncontrollable shocks from the global market as well as animal epidemics.

Weak sense of forecast

Dr. Nguyen Thi Hien said right after the MPI predicted that FDI in Vietnam may surpass the US$12 billion mark in 2007, some economic experts foresaw a risk of high inflation in the country. It is a pity that the relevant agencies failed to give adequate analysis to better control inflation.

She said that forecasting remains weak in Vietnam while the relevant agencies fail to work together effectively to provide overall forecasting. Businesses and producers are in dire need of accurate and quick forecasting. Therefore, more attention in the near future should be paid.

Will CPI climb up in 2008?

Nguyen Duc Thang said inflation is likely to remain high in 2008 from between 8.2 and 8.5 percent resulting from the consequences of the galloping inflation in 2007.

Dr. Nguyen Van Lich from the Trade Research Institute under the Ministry of Industry and Trade also said that price increases will continue to stand high in 2008. But still, the CPI will rise at a more controllable rate as a number of the measures will be applied by the government in order to withdraw money from circulation. It is forecast that the CPI in 2008 will increase at a lower level than that of 2007, running between 7.5 and 8 percent.

Meanwhile, other experts said CPI in January and February, 2008 will continue to go up, even higher than in the first two months of many previous years. As the lunar New Year Festival (Tet) falls in early February, the CPI maximum is likely to fall during this month.

It is predicted that CPI will increase by 1.2-1.5 percent in January and by 2.5 percent in February. In March, CPI may drop by 0.5 percent due to the decline of social demand.