Prioritising macro-economic stability target

Even though the consumer price index (CPI) has fallen significantly over the past few months, down to 0.18 percent in September, the Government still pursues a tight monetary policy.

“This shows the Government’s determination to give priority to stabilising the macro economy and curbing the runaway inflation,” says Dr Vo Tri Thanh from the Central Institute for Economic Management.

He describes the Government’s precautions as a necessary step given the strong fluctuations in domestic and global prices from now till the end of the year.

According to him, despite a downward trend, the CPI for the whole 2008 remains high, estimated at between 20-30 percent. In addition, Vietnam will be indirectly affected by the US financial crisis.

“It will be very risky if the Government loosens its monetary policy now,” says Mr Thanh.

Ironing out business snags

Dr Supachai Panitchpakdi, General Secretary of the United Nations Conference on Trade and Development (UNCTAD), says that a tight monetary policy is necessary for Vietnam, given the current context, but it will stifle production in the long term, particularly in the private sector.

Dr Ngo Tri Long from the Ministry of Finance points out that many businesses are in dangerous waters, as they neither get access to bank loans nor pay their debts.

“If this situation lasts any longer, it will have a great impact on the long-term stability of the national economy,” says Mr Long.

According to Dr Thanh, the State Bank of Vietnam’s decision to raise the deposit interest rates for credit organisations from 3.6 percent to 5 percent per year as of September 2008 will ease businesses’ thirst for bank loans. The move will also encourage commercial banks to increase capital sources for the market.

Earlier, the State Bank called on commercial banks to reduce lending interest rates to support businesses. In response, many commercial banks have lowered their interest rates to share the burden with businesses and are expected to lower rates even further following the State Bank’s latest decision.

Leading economic experts analyse that reducing interest rates is one of the measures that can save commercial banks from crisis because they will be directly affected if businesses – their main clients – do not take out loans. The banks’ liquidity will get worse if they fail to lure potential clients and businesses are not able to pay overdue debts.

It is worth mentioning that last year commercial banks gave many businesses loans to invest in the property market. However, the frozen property market made it possible for the banks to get back the debts. It is a valuable lesson for commercial banks.