Steady approach needed for monetary tightening

The National Assembly’s Economic Committee recently submitted to the government a 10-point proposal to help restore the local monetary market and lower inflation. In your view, what more is needed to help achieve these goals?

Monetary policies need to be further tightened but to conform to business development cycles. The money supply must be handled in a more efficient manner alongside paring down public investments while enhancing investment efficiency. Abolition of administrative regulations should also be seriously considered such as removing the regulation on ceiling deposit rates or just allowing banks to lend a maximum 80 per cent of their deposits. The central bank should not apply an equal credit growth of less than 20 per cent to all banks this year.

Besides, of crucial importance are ensuring an effective use of the compulsory reserve  tool, ameliorating the open market operations’ moderation efficiency, keeping order in the interbank market and bettering liquidity of smaller banks.

Do interest rates have a reasonable footing to fall?

There are two important factors, which could positively affect the interest rate. First, the interbank market lending rate tumbled from over 20 per cent to around 12-13 per cent per year and kept relatively stable over the past month. The interest rate may go down in the coming period if the central bank uses that tool in an effective manner.

Second, government bond coupon rates slid from 14 per cent to 12 per cent, per year. This indicates remarkable improvements in bank liquidity.

Those are important fundaments for the interest rate to fall in the coming months.

Would high estimated annual consumer price index (CPI) growth of 21-22 per cent for this year bring the economy to a standstill?

That is a warning as over-tightening monetary policies would result in plummeting productivity which will in turn cause product prices to spike and spur inflation. Though the economy came through its toughest period, a number of risks and challenges lie ahead given the current development context.

Since total money supply just hiked 3 per cent in 2011’s first half, the gross domestic product (GDP) growth in the third and the fourth quarter might only surge around 4 per cent. Capital scarcity, high interest rates, low productivity and lack of goods would contribute to pushing up inflation.

Demand for credit would see a nosedive particularly for dong credit due to high lending rates. That is a real threat.

It is important to reign in inflation, but we must avoid production stagnation because it will be a big problem if companies incur bankruptcy.

Must there be a new approach in late 2011?

In my view the government continues to manage the economy in light of Resolution 11 to ensure harmony. Management methods should be flexible on a monthly basis. Credit tightening will have negative impacts on growth, but in the long run the growth will be healthy and sustainable once the economy remains stable.