Tough medicine to bring economy to health

Theoretically, the new exchange rate, after putting on 9.3 per cent, with 9.3 per cent devaluation of the dong to dollar  will push exports and put a brake on imports. Thanks to that ‘double’ effect, it was considered a viable solution to bridle the trade deficit. However, given the current state of Vietnam’s economy, the after effects will be critical.

For example, the total export value of textiles-garments and footwear, Vietnam’s two key export items, hit $16.3 billion in 2010. However, the total import value of cotton, fabric, fibre, materials and accessories servicing these two sectors came to approximately $11 billion, representing 67 per cent of these sectors’ total export value. Besides, the exchange rate revision tool will not work towards goods, for which domestic manufacturers and consumers have no other choice than to import.

This was evidenced through the fact that Vietnam’s economy was for years plagued by trade deficit pressures. One question was raised whether it was the right time to hike exchange rate.

The answer might be not. Vietnam’s export value surged 26.4 per cent or 4.4 times over the set target in 2010 while the trade deficit stood at 17.5 per cent lower than the projected 20 per cent. The import-export situation in the first month of 2011 was generally positive.

Latest General Statistics Office figures showed that the country’s export value amounted to $6 billion in January, up 18.1 per cent and import value stood at $7 billion, up 15.5 per cent, on year.

Meanwhile, soaring exchange rate will surely amplify the country’s efforts to bridle inflation in the coming period. The comment came from some following factors.

First, the consumer price index (CPI) in January hiked 1.74 per cent compared to December 2010, a leap compared to January CPI hike in the past 16 months.

Besides, this was the fifth straight month the CPI rose more than 1 per cent. Assuming that February CPI hiked 1.96 per cent similar to that one year ago, the CPI growth in the first two months would reach 3.7 per cent. The CPI growth in the last 10 months will then have to be kept at less than 3.3 per cent to fulfill 2011 set target of at most 7 per cent.

Second, the impact created by exchange rate’s upward revision would become more critical given constantly increased input material costs in the world’s marketplace which were believed to be the root of Vietnam’s high pressure in the past five months.

International Monetary Fund statistics revealed that the price of diverse materials in the world’s market hiked continually from July, 2010 until present while Vietnam’s CPI began to jump up from September 2010, two months later.

It is worthwhile to mention that when energy cost began to augment from August, 2010 with an accrued growth of 18.7 per cent by the end of 2010, the price of non-oil materials sharply rose right from July with an accrued growth hitting 26.5 per cent in the same period.

This was particularly adverse to Vietnam’s economy because non-oil materials represent around 45 per cent of Vietnam’s total import value while fuel accounts for about 20 per cent only.

Besides, it is pernicious that the price of non-oil materials leaped 11 per cent in January 2011, a record in at least the past two decades. Energy cost also augmented 3.9 per cent.

April’s CPI was, therefore, expected to jump amid current escalating imported energy and material prices as well as recent rising exchange.

In conclusion, the exchange rate’s upward revision was indispensable. It, however, would make us one again drop the Vietnamese government’s target to contain inflation at a moderate rate.