The lowering of the targeted credit growth rate to 20 percent, the five-year lowest will lead to capital shortage for the production sector, because the capital will be transferred from the public to the private sector, officials of the State Bank and experts say.

According to Le Xuan Nghia, Deputy Chair of the National Finance Supervision Council, in 2010, the credit growth rate was 30 percent, while the M2 supply increased by 28 percent, but the interest rates were still high because the money was mainly pumped into the public sector.

Capital to be transferred from public to private sector

The Government has decided to lower the targeted credit growth rate to 20 percent and keep the M2 supply at 20 percent (8 percent lower than that in the previous year). In theory, with such a tightened monetary policy, the interest rates will keep increasing, which will make it more difficult for enterprises to borrow from banks.

However, Nghia does not think this will happen in reality. He said that together with the restriction in credit growth, the Government will control the cash flow into the public sector, while the Government bonds to be issued will be just a half of the amount of the previous year. Capital will be transferred to the private economic sector, which means that small and medium enterprises will have more profuse capital to develop their production.

Governor of the State Bank of Vietnam (SBV), in the talk with Tuoi tre, also assured that while striving to control the credit growth rate in 2011, the central bank will drive the credit to a number of important fields, including the production sector, rural areas, small and medium enterprises, supporting industries and electricity projects.

According to SBV, the lowering of the targeted credit growth rate from 23 percent to 20 percent will lead to the reduction of 50 trillion dong in capital. Meanwhile, with the implementation of the four measures in the fiscal policies, the figure could reach more than 100 trillion dong in total.

Compulsory reserve ratio increase proposed

Le Duc Thuy, Chair of the National Finance Supervision Council, said the macroeconomic problems could not be settled overnight, and comprehensive measures were needed.

An expert said that in order to curb the inflation rate at nine percent, it would be necessary to reduce the M2 supply and total outstanding loans to less than 20 percent and to regulate the interest rate policies in a more flexible way. The State Bank of Vietnam once set the refinancing interest rate at a low level of nine percent, much below the market interest rate. As a result, the central bank created a cheap source for some banks to trade capital on the interbank market.

An abnormal situation has been taking place since 2009 – the net lending from the State Bank has been increasing. Therefore, the so called “tightened monetary policies”, were not in fact, “tight”. Such a high money supply has led to the high inflation. Therefore, the State Bank of Vietnam has raised the refinancing and rediscount interest rates to 11 percent.

The State Bank of Vietnam has also been urged to take actions to stop the interest rate race by acting as the final lender. Last time, the central bank, despite setting up the ceiling interest rate, could not bring capital to the banks which really needed it. Therefore, the interest rates could not be stabilized.

Thuy has suggested raising the compulsory reserve ratio on deposits to 10 percent. He said that if the measure is taken, the central bank would be able to attract 240 trillion dong more which it can use to stabilize the market. “It is necessary to change the way of regulating the monetary policies in order to obtain a sustainable stability, while it is not advisable to use administrative orders,” he said.

Giau from the central bank also thinks that the tightened monetary policies will not make the interest rates increase further, because the current interest rates are overly high. Banks will have to ease interest rates if they want to find borrowers.

C. V