Inflation may hit growth

Rising commodity prices could negate the positive impact of economic growth

The International Monetary Fund’s representative in Vietnam, Il Houng Lee, said that inflation remained stubbornly high, with the 12-month rate estimated to have risen back above 7 per cent since April 2007.
“Adjustments in electricity and petroleum prices, together with a resurfacing of food supply shocks, have contributed to the recent uptick in prices,” he said.
However, he said that large increases in the prices of commodities other than food would also seem to point to growing demand pressures, that may become more difficult to contain as growing inflows of capital complicate monetary management.
“This risk of rising inflation could be heightened if a large positive fiscal impulse were to further add to the demand pressures in 2007,” he said.
According to preliminary data just released by the General Statistics Office (GSO), inflation in the first five months was up 4.32 per cent and inflation in June is predicted to hit 0.5 per cent.
The rising prices of key industrial products such as petrol, cement, coal, electricity and fertilisers are increasing the pressures on business efficiency and economic growth this year, a monthly government meeting was warned last week.
If prices continue to rise, there will be a negative impact on economic growth, according to a Ministry of Planning and Investment report presented at the meeting, which was chaired by Prime Minister Nguyen Tan Dung.
However, GSO officials remained concerned that inflation could potentially break from tradition and accelerate if the relevant government bodies failed to prevent price hikes. As a result, government statisticians predicted that the consumer price index (CPI) could grow faster than the GDP.
“A more restrained monetary policy will likely be required to contain inflation, and limit the potential expansion of non-performing loans,” Lee said.
According to a recent IMF report, “Credit growth has showed signs of re-acceleration in recent months, with the rate of credit growth rising from 23 per cent in the year prior to September 2006 to about 29 per cent in the year prior to February 2007.”
“While the authorities’ monetary program for 2007 envisages a slowing of credit growth to 20 per cent by year-end, the achievement of this objective is threatened by ample excess bank liquidity,” it stated.
“The authorities’ recent efforts to introduce prudential restraints on commercial bank lending for stock market purchases are welcome steps, which should help reduce banks’ exposure to stock market risks and guard against a potentially costly boom-bust cycle in stock prices.
“The authorities also need to take more pro-active measures to mop up excess liquidity, by allowing the State Bank of Vietnam to exercise adequate autonomy in the issuance of bills,” it stated.