Vietnam will increase the minimum wage by 14 percent next month, raising concern that higher labor costs may fan inflation that is already at a 25-month high.

The government will lift the monthly minimum wage to VND830,000 (US$40) from VND730,000 ($35), effective May 1, according to a statement posted late Monday (April 4) on its website.

The government has shifted its focus from growth to taming rising prices through tighter monetary and fiscal policy that includes reducing targets for credit growth and the budget deficit. The country raised borrowing costs for the second time in less than a month on April 1 when it boosted its repurchase and refinancing rates to 13 percent from 12 percent on the same day.

“This is the right policy by the government to partly make up for the difficulties of workers amid the context of accelerating inflation,” said Cao Sy Kiem, president of the Vietnam Association of Small- and Medium-Sized Enterprises, in a telephone interview on Tuesday.

“The question is what signal is this sending to the economy?” Vishnu Varathan, an economist at Capital Economics in Singapore, said in a telephone interview. “It could actually cause a bit of circularity in inflation and not help the situation in the longer run.”

Consumer prices increased 13.89 percent in March from a year earlier, the fastest pace since February 2009.

‘Challenging but achievable’

The Asian Development Bank (ADB) said on Wednesday that Vietnam’s inflation is anticipated to remain high through 2011 averaging 13.3 percent, before moderating to an average 6.8 percent in 2012.

The Manila-based bank said in its latest Asian Development Outlook that Vietnam has launched comprehensive measures to control inflation and restore macroeconomic stability under Resolution 11, which it called a “timely” move. If measures are effectively implemented, macroeconomic stability can be restored, it said.

ADB, however, reduced its growth forecast for Vietnam in 2011 to 6.1 percent from 7 percent projected in September 2010.

Vietnam’s inflation rate measured by “year on year” basis will continue to increase in the next few months, ADB Country Director Ayumi Konishi said in a statement. “Bringing down ‘year on year’ inflation rate to a single digit by the end of this year will require the average monthly rate to be below 0.4 percent. It is challenging but achievable,” he said.

“Stability and efficiency will be the foundations of Vietnam’s sustainable economic growth, and we are very confident about the strong potential of Vietnam over the medium term,” Konishi added.

Asia, excluding Japan, will grow 7.8 percent in 2011, faster than a September estimate of 7.3 percent, ADB said. Growth may ease to 7.7 percent next year, it forecast. The impact of Japan’s March earthquake on the region is “likely to be temporary and limited,” it said.

“Inflation will need to be carefully managed using a mix of policy measures, including more flexible exchange rate management and coordinated capital controls, rather than simply relying on tighter

monetary policy,” the ADB said in a press release accompanying the report. Rising cooking and oil prices as well as Japan’s disaster “present a potential threat to sustained, inclusive growth,” it said.

Fuel, food prices

Vietnam’s move to boost wages follows similar increases in markets including China, Hong Kong and Thailand this year. Vietnam’s minimum wage in terms of purchasing power parity is $85 a month, compared with $295 in Thailand, $148 in Indonesia and $379 in the Philippines, International Labor Organization statistics show.

Vietnam’s wage hike “hasn’t yet followed the pace of price increases,” Kiem said. The move may cause prices of commodities and services to increase, “creating pressures on inflation in the short term,” Kiem said.

Inflation is expected to accelerate because of increased domestic demand and rising food and fuel prices, Australia & New Zealand Banking Group Ltd. wrote in a note on April 1.

The government raised petroleum-product prices as much as 15 percent on March 29, on top of increases of as much as 24 percent in February following a surge in global oil costs.

The most recent climb in fuel prices will add 1.5 percentage points to the consumer-price index, Nguyen Tien Thoa, director of the price control department at the Ministry of Finance, said on March 30.

“Wanting to bring the budget deficit below 5 percent means the government has less room to subsidize food prices,” said Varathan from Capital Economics.