Sunday, August 12, 2007

Vietnam’s economy remains healthy despite price storm

Economist Nguyen Dinh Bich said that one of the most important and urgent tasks for the coming months was to curb inflation. However, he said that despite the high CPI, Vietnam’s economy remained in good health, and there was no need to be too worried.

In an article published in Saigon Tiep Thi newspaper, Economist Nguyen Dinh Bich, Expert from the Institute for Trade Research, said that the national economy remained in good condition.

“No one can deny the necessity of curbing the inflation rate, as the price hike has been badly affecting 60% of the population which has low income. However, the national economy will remain healthy if the government can keep the CPI growth rate lower than the GDP growth rate. It would be okay even if the inflation rate is a bit higher than the GDP growth rate,” Mr Bich said.

In fact, the price increase is the problem of the whole world, as material markets are seeing continued fever with price escalations setting a series of 27-year records.

In April, both the World Bank (WB) and the International Monetary Fund (IMF) predicted that the oil price would reduce rapidly, while non-oil material would not skyrocket by 20-40% as seen in 2004-2006, but would just move by another 4.2-6.2%. However, both WB and IMF were wrong. The crude oil price in July hit the $73.6/barrel level, exceeding the peak of $72.45/barrel in 2006, setting a 27-year record. Meanwhile, the prices of other non-oil materials including aluminium, iron ore and wood have been escalating. The material price increases, of course, are not good for Vietnam, an economy that relies on material imports (accounting for 65-70% of total import turnover, and 50% of GDP).

In order to curb inflation, the government has instructed its ministries to initiate measures to raise supply and control prices. The government has also decided to lower import taxes in order to make goods cheaper on the domestic market.

Despite the big challenges, Mr Bich said that the national economy remained in good health, citing two factors to prove his viewpoint.

First, the price level in Vietnam is low; therefore, it is inevitable to see prices increase in the context of global economic integration.

If looking back at the development histories of other nations, one can see that those countries also had to experience such a stage of development. For example, in order to get the high economic growth rates in the last 10 years, giant China had to experience five years (1992-1996) of witnessing CPI booms. The lowest CPI growth rate was 6.4% in 1992, while the highest was 24.1% in 1994, which means a 13.9% growth rate per annum.

Second, the index that measures the health of the national economy shows good signs. It is the ratio between the GDP growth rate and the CPI growth rate. If comparing the GNI (Gross National Income) of Vietnam and other nine countries over the last six years, the ratio of Vietnam is 0.7, just higher than Cambodia (0.35), India (0.62), and lower than seven other countries (the highest was 0.84 and lowest 3.53).

If only comparing the GNI for the last three years, which witnessed the biggest price increases, the ratio would be 1, the same as Pakistan (which has the same development level as Vietnam), but Vietnam has the higher GDP growth rate (8.13% vs 5.26%).

In general, high economic growth rate always results in high inflation rate, especially as the world’s prices keep escalating. And the price Vietnam has to pay for the development is acceptable.

Therefore, Mr Bich said that curbing inflation should not be seen as the ‘supreme’ task, and it would be fine even if the task could not be fulfilled. The government should think of another important task: seeking solutions to support low-income earners and protect them from the price hikes.