Economist urges to take measures to reduce the total demand in national economy

Published: 20/02/2011 05:00



In an interview with the local press, Dr Tran Du Lich, former Head of the HCM City Economics Institute, now a Member of the National Assembly’s Economics Committee, emphasized that the priority for 2011 is reducing the total demand in the national economy in order in order to curb the inflation.

At the beginning of the year, the government conveyed a message that curbing inflation and stabilizing the macro economy will be a priority in 2011. However, the State Bank of Vietnam has raised the dong/dollar exchange rate sharply by 9.3 percent, which has raised the worry that the move will trigger a new wave of price increases. Meanwhile, the prices of electricity, petroleum and coal will also increase as scheduled. Do you think that the target of curbing inflation will be reached?

Dr Tran Du Lich: The move by the State Bank of Vietnam to adjust the dong/dollar exchange rate should be seen as the action of “legalizing” the exchange rate which has already been on the market for a long time. Therefore, the move does not mean “devaluing” the Vietnam dong.

In fact, the dong/dollar exchange rate adjustment is a must, because the existence of a nominal exchange rate for a long time will bring negative impacts to the national economy.

Regarding the scheduled electricity and coal pricing, the price increases are a part of the plan to marketize prices of some essential goods in order to eliminate the subsidization scheme. The plan has been discussed for many years, and the implementation should not be delayed any further. So, the main task here is how to stabilize the macro economy based on a new commodity price ground.

Could you please elaborate more on “new commodity price ground”?

The main reason behind the high inflation is the “push cost” (i.e the higher input material prices lead to higher prices of finished products and services – reporter). As the prices of all goods and services have increased, a new commodity price ground has been set up. The new price ground can be seen in the consumer price index (CPI) released monthly by the General Statistics Office. It is still unclear how much further the CPI will move up and when it will move up.

I think that the government should take initiative in creating a new price ground after considering the price package of the goods that need to be adjusted, such as electricity, coal and petroleum, and the new basic wage (the basic wage is expected to be adjusted by early May 2011). With the move, the CPI will see sharp increases in some months, but a new commodity price ground will be set up in the national economy, but this will be a stable ground which will exist for a long time.

Are you sure that the new price ground will be stabilized after it is set up?

Here is the problem. The solution that I have suggested will only become feasible if the government accepts to reduce the targeted GDP growth rate (the targeted GDP growth rate for 2011 is 7-7.5 percent) and focus only on stabilizing the macro economy and ensuring social security.

If we follow the policy, we will have to tighten monetary policies and curb the credit growth rate at below 20 percent in 2011. We will have to restrain the money supply increase at 15-6 percent, cut investments and public spending, reduce the budget overspending and temporarily delay investment projects which use many imported materials. Besides, it is necessary to take measures to reduce the current account deficit and restore confidence in the stable value of the Vietnam dong.

In general, we need to reduce the total demand of the national economy. This is the important condition to curb inflation. If the macro economy is stable and public confidence can be restored, the GDP growth rate of 6-7 percent per annum will be within reach. I have to repeat that in current circumstances, we should not focus on the GDP growth, but on macroeconomic stability.

C. V

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