Twin threats poised to ratchet up inflation

Inflation are eating into ordinary people’ purses

The State Bank has just devalued the dong against the US dollar by 9.3 per cent, to VND20,693 per dollar from VND18,932.

The central bank’s move was to stabilise the forex market, adding that it would not negatively impact on inflation.

However, analysts claim the depreciation would fan the flames of inflation, warning that it would threaten the economy’s stability.

“We believe the weaker dong will have a negative impact on inflation and inflation expectations,” said Prakriti Sofat, an economist at Barclays Capital.

According to Barclays Capital’s estimation, a 1 per cent weakening of the dong versus the dollar added roughly 15 basic points to inflation.

But the weakening dong will not be the only factor creating an upward inflation rate trend, following the 9.3 per cent depreciation of dong, the government decided to increase power tariff next month.

Meanwhile, fuel traders  already asked permission to increase fuel prices due to rising global crude oil prices.

Tran Xuan Gia, chairman of Asia Commercial Bank and also former Minister of Planning and Investment, said the price increases could result in the government failing to curb inflation as targeted by the National Assembly.

“We are facing a series of strong price adjustments focusing on important products and services. This will create a new pricing level in the country,” he said.

Inflation was 11.75 per cent last year and analysts said it was on the upward trend as it rose 1.74 per cent in January against December, 2010. This year, the National Assembly targeted to curb the rate below 7 per cent.

National Financial Supervisory Committee vice chairman Le Xuan Nghia told VIR the government needed to hike electricity and fuel prices because the state budget could not cover the subsidy  in the long term. He said if the government approved the proposals to increase electricity and fuel prices, inflation would rise an additional 2.4 per cent this year.

Barclays Capital, in a note sent to its clients, expects Vietnam’s inflation to hit 14 per cent for 2011, versus 13.5 per cent it previously forecasted.

Curbing inflation therefore would be the priority among the government’s immediate measures to stabilise the marcoeconomy,  the cabinet meeting last Thursday heard.

Minister of Finance Vu Van Ninh said that the state spending in 2011 would continually be cut back by 10 per cent while state funds on basic construction stayed unchanged against last year. 

At the meeting, the State Bank Nguyen governor Van Giau proposed the growth targets for credit this year at 20 per cent, instead of 23 per cent as announced previously.