Special edition

In terms of surmounting the negative influences of the global financial crisis and economic downturn from 2008 to 2010, Vietnam was quite successful in regulating macro-economic instruments and policies, especially financial and monetary policies.

Tran Du Lich National Assembly’s Economic Committee member

This was done to prevent the economic recession, stabilise the financial-credit-banking system and serve social security targets. However, the national economy was exposed to more obvious weaknesses and shortcomings originating from the inside of the economic structure, these must be identified to link short-term tasks with medium- and long-term targets in development policies.

Entering 2010, Vietnam’s economy saw signs of re-inflation amid recovery from the global financial crisis and economic downturn. The situation saw Vietnam face two contradictory macro-economic goals which had to be carried out at the same time: Inflation had to be curbed in the face of rehabilitating economic growth.

As a result, in 2010, the national economy expanded 6.78 per cent but the inflation rate was not reined in as planned (the Consumer Price Index - CPI jumped 11.75 per cent against the set target of 8 per cent). In addition, fluctuations in world prices, and particularly in the prices of food, foodstuffs and crude oil, impacted on domestic prices.

In 2011, the country’s economy faces huge challenges. The first is the pressure of high inflation. In the first quarter of 2011, the CPI rose over six per cent against late 2010 and would continue increasing while the interest rate on VND deposits was relatively high (14 per cent/year). The second is the devaluation of Vietnam dong against the US dollar, which forced the State Bank to raise the forex rate by 9.3 per cent to remove the two-price situation on the market. The macro-economic instabilities influenced market confidence, making the government drastically adjust policies in 2011 to prioritise the reining in of inflation, stabilising the macro-economy and ensuring social security.

The national economy’s short-term difficulties involve external factors but are largely the result of complex reasons based on the nature of economic structure over many years with three major associated problems.

Firstly, the economy’s competitiveness has been weakening globally since Vietnam became a member of WTO in early 2007. The prolonged breadth economic growth model, mainly based on the increase in investment capital, a cheap workforce, raw material exploitation and export processing, is seen via indicators such as incremental capital-output ratio (ICOR), added value per production value, the structure of exports and labour productivity.

Secondly, the prolonged trade and current account deficits have caused forex supply-demand imbalance, creating pressure for VND devaluation.

The nation’s economy is export-oriented but after 20 years it still faces a growing trade deficit. Industrial products are largely dependent on imports and are processed at the final stage for domestic consumption. A look at the export-import structure for goods and current account balance sheet (export and import of goods and services), reveals that Vietnam’s market still leans towards consumption of semi-products and imported end-products.

Third, ineffective public investment and state budget over-expenditure are an increasingly serious problem. Increasing state budget overspending against GDP and asynchronous public investment have contributed to pushing up ICOR. Over the past 10 years, in a bid to boost GDP, the public investment sector has been ramped up, attracting a large amount of credit, and part of this budget over-expenditure is based on commercial credit.

Even government bonds are also mainly dependent on commercial banks while proceeds raised from the public accounted for only a small proportion. A large amount of money has been poured into the sector but the investment is prolonged and asynchronous so that a corresponding volume of assets is not created. Thus the sector fails to have effects on economic growth while causing pressure on aggregate demand, contributing to pushing up inflation.

Prioritising macro-economic stabilities

In the context of these numerous difficulties, the government’s message to stabilise macro-economy right from early 2011 has not helped build the market’s confidence in a stable economy in future. Expectations of high inflation and VND devaluations have resulted in speculation in foreign currencies, causing strong pressure on forex rates and interest rates. The market remains unconfident that the government is able to stabilise exchange rates, and this has given rise to foreign currency speculation while the economy is dollarised.

The phenomenon of USD speculation has caused heavy pressure on forex supply-demand. Consecutive devaluations of VND in recent years amid USD devaluations in the world market and the increase of almost all the national currencies of newly-emerging economies against USD have shown that Vietnam’s economy is structurally weak. Current account deficits, state budget over-expenditure and a surge in short-term outstanding loans are direct reasons for macro-economic instabilities.

In response, the government’s Resolution 11/2011/NQ-CP dated February 24, 2011 promulgated a package of solutions to curb inflation, stabilise the macro-economy and ensure social security. The move can be seen as “a heavy dose” that not only creates temporary solutions but also favourable conditions for a stable macro-economy in the coming years.

It can be said that among the six groups of solutions, the two groups of monetary and fiscal solutions play a decisive role in the inflation curbing target. The “tightening and cautious” monetary policy which aims to reduce credit growth to under 20 per cent and total payment instruments to 15-16 per cent in 2011, is able to meet credit demand for production and business activities. But it is necessary to limit commercial credits flowing into property and securities speculation.

The fiscal policy of “tightening, slashing public investment and reducing state budget overspending” is more drastic with many specific measures. These include: cutting regular spending by 10 per cent; not advancing capital from the state budget and government bonds in 2012, not extending time for executing projects, delaying, suspending or postponing non-urgent investment works in 2011, and reviewing projects invested by state-run corporations and groups, in a bid to slash state budget over-expenditure to below 5 per cent of GDP this year.

The above measures will surely cut the national economy’s total demand and reduce the trade deficit and public debts, thus creating favorable conditions to move towards the further target - solving macro-imbalances such as those in state budget collection and expenditure, the current account balance, and savings-investment and accumulation-consumption. In comparison with macro-economic policies and instruments over the past three years, monetary and fiscal policy are quite synchronous, at this time. This shows the priority placed on curbing inflation. If they are implemented strictly, positive results will be surely attained.

Along with the above solutions, the government is drawing up a roadmap on reducing the dollarisation, controlling the gold market (mentioned in Resolution 11) and policies to carry out plans on restructuring and transforming the economic growth model in the coming years. Vietnam is moving towards perfection of market economy but it must adopt the following view: The state adopts policies, measures and instruments to impact on the market according to the state’s orientation and the market itself, rather than the state, will influence the investment and business orientations of enterprises. Administrative measures are designed to support the market, rather than to replace the market.

In terms of achieving sustainable development, given the current tightening fiscal policy, public investment and expenditure reshuffles should be considered to develop a positive and effective public finance. The in-depth reason for macro-economic instabilities lies in the economic structure that comprises the financial market structure in general and the fiscal policy in particular. The task of the financial-monetary policy is not only to aim at temporary solutions to short-term targets but also to integrate and create synchronism in executing macro-economic policies and instruments. This is with a view to gradually reshuffling the financial market, creating favorable conditions for sustainable development, and restoring investors’ confidence in long-term performances.

The recent implementation of the Resolution 11 has shown the state’s determination and the society’s consent when it comes to stabilising the national macro-economy, providing necessary conditions to carry out the roadmap on restructuring and transforming the economic growth model.

With a view to supporting the government’s efforts in executing the package of macro-economic stability solutions and meeting the goals of the first five-year period in the 2011-2015 socio-economic development strategy, the 9th session of the 12th National Assembly in March 2011 enacted a resolution. It emphasizes the needs of “promptly following orientations, defining the economic growth model transformation roadmap and restructuring the economy, especially reshuffling resource allocations for industries and sectors, completing investment socialisation mechanisms and policies, boosting rearrangement and equitisation of state-run businesses, making public and transparent information about financial situation and production-business activities of state-owned enterprises.”