Vietnam faces challenges in curbing inflation at 4% in 2018

Tuesday, 2018-01-09 17:11:30
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Consumers are shopping at the Coop.mart supermarket in Ho Chi Minh City. (Photo: Ha Thu)
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NDO – Inflation control is an important factor which contributes to macroeconomic stability. Maintaining the inflation rate in 2018 at less than 4% has also been approved, which will create challenges for the country in the context of fluctuations in both the domestic and global economic situation.

Great pressure

In 2017, the Vietnamese economy achieved a double success: controlling inflation and economic growth exceeding the target set by the National Assembly (NA)

The NA has passed a resolution on the plan for the country’s socio-economic development in 2018, in which the consumer price index (CPI) in all circumstances must remain below 4%. Although the average CPI in 2017 rose by 3.53% against 2016, inflation control in this year still faces many challenges.

The GDP growth target for 2018 is set at from 6.5% - 6.7%. Accordingly, 6.5% is the optimum growth rate which will not put pressure on inflation. Meanwhile, a growth rate of over 6.7% could also be feasible if the stimulus measures are applied, but it will cause inflation to increase. In addition, if improved policies prove effective, the gross domestic product (GDP) growth is forecast to reach a higher rate this year.

Keeping inflation at less than 4% is also a big challenge as measures to accelerate growth in 2017, such as promoting investment and easing credit limit, may have a tardy impact on the developments of the CPI in 2018. The late impact of monetary factors on inflation from 2017 to 2018 is weak due to credit intensive estimated at 2.04 times in 2017, a decrease of 2.81 fold compared to 2016. However, money supply will affect inflation if the relevant agencies do not pay attention to controlling the quality of credit growth in 2018.

Inflation this year will be under pressure mainly from the adjustment of the prices of public services and food. The public service prices will continue to be adjusted in 2018 under a roadmap for 2016-2020 period, which is forecast to contribute around 2 – 2.5 percentage points to the overall inflation.

The adjustment of the prices of medical examinations and treatment services not covered by the medical insurance fund in 18 provinces and centrally-run cities, as well as the base wage in calculation of healthcare costs, will also have an influence on the CPI. In addition, the increase of from 8% to 10% in the educational service prices this year will drive up the CPI by 0.3%.

A hike of 6.08% in power costs from December 1, 2017 is expected to cause the CPI to increase by 0.1% and indirectly affect the costs of other items which use electricity as cost input. The average world price of crude oil is forecast to fluctuate from US$50 to US$55 per barrel and gasoline prices will be from US$66 to US$70 per barrel, up from 5% to 10% over the previous year, which will cause fluctuations in domestic petrol prices. Food prices are expected to increase because the world rice supply is forecast to fall. Pork prices are projected to rise again after the sharp decline last year. The adjustment of the regional minimum wage and base salary in 2018 will be also factors affecting the CPI.

In addition to the above challenges, there are several factors that will reduce the pressure on the price levels this year. Based on the macroeconomic stability, the supply of essential commodities is increasing, while the prices of post and telecommunications services continue to be stable or decline thanks to the extensive international integration. Drug prices are forecast to decline due to the implementation of national bidding for drugs as well as the tightening of the management of drugs sold in pharmacies in hospitals and the enhancement of the review of drug prices declared by the relevant agencies. Especially, the prices of original specifics with expired licenses are expected to fall deeply, by at least 10% - 15%. The exchange rates and interest rates will continue to be stable, contributing to reducing costs for enterprises.

Executive solutions

In order to achieve the target of curbing the 2018 inflation rate at less than 4%, price management needs to closely follow and support growth goals, avoiding the creation of expected inflation or the ‘lateness’ of inflation in later years. The direction for inflation control will closely follow the law of supply and demand in the market, without imposing administrative procedures. The relevant ministries, agencies and localities should closely monitor the price movements of essential commodities; take initiative in preparing sources of goods for Tet (Lunar New Year) and other festivals at the beginning and end of the year to control their prices; and set out rational measures to stabilise the market.

It is essential to control the price options and levels for goods and services priced by the State as well as to supervise enterprises' price declarations for price stabilised and declared commodities. All goods and services priced by the State should be adjusted as appropriate in 2018 in order to avoid hikes in their prices.

Regarding petrol and oil commodities, the Ministry of Industry and Trade (MoIT) and Ministry of Finance (MoF) will continue monitoring global oil prices while making use of the fuel price stabilisation fund to reduce any negative influence of the price increase on the CPI. Moreover, in the case of increasing the price of electricity, the MoIT should proactively develop plans to calculate the influence level on the CPI, producer price index (PPI) and GDP growth.

The legal system on prices should be improved, particularly economic and technical norms which serve as a basis for the determination of service prices under the roadmap to ensure the accuracy in costs of services. In the case of a price being higher than the current charge rate, the relevant agencies should map out an appropriate roadmap, ensuring the goals of inflation control and macro-economic stability.

The implementation of monetary policy must be in a flexible and synchronous manner, closely following the developments of financial and monetary markets to stabilise the foreign currency market. Maintaining macroeconomic and financial stability remains the biggest priority in managing monetary policy to control inflation. In addition, the State Bank of Vietnam (SBV) will maintain reasonable interest rates in line with macroeconomic developments and gradually strive to further reduce interest rates as conditions permit. The SBV should not pump money into the market excessively in order to avoid the risks of bad debt and should also not adjust the exchange rate suddenly, shocking the market, while considering the absorption capacity of enterprises when providing capital.

The fiscal policy is also very important, affecting inflation control. With a strict fiscal policy, along with effective control of budget spending, the target of keeping inflation at about 4% in 2018 is feasible.

Associate Professor, Dr. Ngo Tri Long/Translated by Nhan Dan Online