Vietnam seeking solutions to industrial waste

By Do Thien Anh Tuan

In regulating monetary policy, it is necessary to understand that money is the “root” and prices are only “branches.” To harness inflation, the “root” should be tackled first.

The panoramic picture depicting Vietnam’s target and actual inflation rates in 2009 and 2010 has shown contrasting colors. In 2009, the inflation rate was expected to be high as a result of the massive economic stimulus packages. However, the actual rate stood at 6.88%, way below the 10% goal set by lawmakers.
The Vietnamese economy entered 2010 with policymakers’ hopes that they would manage to put inflation under control or at least be no longer under heavy pressure because no stimulus programs were in the pipeline. And yet, this year’s inflation has surpassed both the 7% level initially set by the legislature and the 8% revision endorsed later to be well on the path to the 10% threshold.

Given the inflation rate in the region, Vietnam’s is quite high. According to Victoria Kwakwa, country director of the World Bank for Vietnam, Vietnam’s registered an average inflation rate of 8.8% in the past decade versus 2.7% in Thailand and 5.1% in the Philippines. In 2010, the average regional inflation rate ranges between 2% and 4%. Some analysts have picked world prices of materials and fuels as one of the reasons for Vietnam’s spiraling inflation. While this argument may be justifiable to a certain extent, it should not be recognized as the real culprit of the high inflation due to the fact that world prices exert their influence on almost all open economies and Vietnam is no exception. Increasing world prices are only the necessary condition and Vietnam’s export of raw materials is considerable. What really counts here, or the sufficient condition in other words, is caused by the internal weaknesses of a subcontracting economy which has to rely heavily on imported materials and accessories.

What’s more, the finger of suspicion is pointed at the exchange rate between the dong and the U.S. dollar (VND/US$) as the rate has boosted prices of imports, thus sending local prices soaring proportionately. A rising VND/US$ exchange rate may mean either a depreciation of the dong or an appreciation of the greenback. However, how can we assess whether the dong depreciates or appreciates? The answer requires some knowledge of the monetary system. Simply put, we must link the value of money to the value of goods. To know whether the U.S. dollar appreciates or not, its value must be compared with goods value (or the purchasing power). In comparative terms, if viewed from other strong currencies, it is easy to see that the greenback has not risen in value; contrarily, it has depreciated. Consequently, should the value of the dong remain unchanged, the VND/US$ exchange rate must go down. Meanwhile, it has actually gone up because the dong has remarkably lost its value compared with goods. To put it differently, the rising VND/US$ rate should not be ascribed to higher prices of imported goods. Instead it should be explained as a result of a rising inflation rate in Vietnam. Once again, the theory which states that the exchange rate has to change to faithfully mirror inflation in a pair of countries is well illustrated by this case of Vietnam.

A look back to Vietnam’s month-by-month inflation in 2010 shows that it resembles a hammock. In the first two months of this year, the monthly consumer price index (CPI) topped one percentage point. Then, the CPI dropped significantly from March to August, especially in July when it moved up just 0.06% over June. It was this plunging CPI during this period that prompted policymakers to be overoptimistic about keeping inflation lower than 8%. But since September the hesitancy in the subsequent monetary policy has partly led to the return of high inflation. Worse, when inflation came back strongly in September, some reports even stated that “there is no evidence” of a high inflation return. Evidently, such groundless statements have aggravated gnawing doubts among investors.
From the macroeconomic standpoint, the central bank is expected to deliver a clearer and more consistent policy message in this backdrop. Recently, however, during the annual Consultative Group meeting which gathered Vietnam’s aid donors, a top representative of the State Bank just said as policies on credit tightening and inflation control had been in place for only a month, it would need more time to fully assess the market response so that further steps could be taken. Such an attitude toward policies, too prudent in this case, will only further erode market confidence.

Putting inflation under control and restoring confidence: more determination needed

As inflation goes hand in hand with prices, putting inflation under control must involve marking down prices. However, the reserve of this statement is not necessarily right. Despite the multiple factors which affect CPI, the root of inflation remains money while prices are just the outward appearance of money depreciation. In monetary policy regulation, it is necessary to understand that money is the “root” while prices are only “branches” of inflation. To address the inflationary problem, it needs to radically tackle the “root,” not “branches.” Macroeconomic regulation measures taken by the Government over the time have indicated that the Government has often made determined moves in price control. For instance, in the resolution of the monthly meeting of the cabinet, the Government requested ministerial and local authorities to proceed with strong measures to stabilize prices. On the one hand, such measures are justifiable because institutional and competitive factors of a market economy have yet to take shape in Vietnam. On the other, however, the Government should give more forceful and consistent instructions on monetary policy.

This argument is based on two points. First, Vietnam’s high inflation originates directly from the incongruity of fiscal and monetary policy. Second, on the path to a full market economy, Vietnam should gradually minimize administrative measures and orders in economic management. When a monetary policy has been adopted, its implementation must be consistent. Only in doing so, policymakers can restore market confidence, a key factor in macroeconomic stability which is also an essential prerequisite for sustainable development.