VietFinanceNews.com – Vietnam’s government should maintain a tight monetary and fiscal policy, including higher interest rates and tougher credit, until the currently “intolerable” inflation rate is less than 10 percent, the World Bank said.
Vietnamese inflation reached 19.78 percent in May, the highest since December 2008. The government said on June 3 it’s targeting 15 percent inflation this year, up from a previous projection of 11.75 percent. Foreign-exchange reserves at the end of 2010 had declined to cover about 1.4 months of imports, according to the International Monetary Fund.
The government’s actions since February show a willingness to accept slower economic growth to ease a period of “severe” macroeconomic instability, the World Bank said in a report prepared for a meeting in the central Vietnamese town of Ha Tinh. While the dong has stabilized and foreign reserves have started to climb, the “hard-earned gains of the past three months” can still be easily reversed, according to the global lender.
Vietnam’s “‘protecting growth at any cost’ approach to monetary and fiscal policies has been counterproductive, as it has produced higher inflation and greater macroeconomic instability without much growth,” wrote Deepak Mishra and Viet Tuan Dinh of the World Bank office in Hanoi.
The new policies should be kept in place until inflation “is reduced to a stable, single-digit rate,” Mishra and Dinh wrote. The policies should also be maintained until “the level of international reserves is adequate to finance at least 2.5 months of prospective imports,” the World Bank said, without giving a current level of reserves.
Vietnam’s growth rate will probably slow to “slightly under” 6 percent this year from 6.8 percent in 2010, while inflation should peak in the second quarter and fall to about 15 percent by the end of the year, the World Bank said.
“The authorities need to remain vigilant against premature withdrawal of stabilization measures,” wrote Mishra and Dinh. “With growth expected to slow down in 2011, there will be demands from various quarters to relax monetary and fiscal policies.”
Economic growth in “2012 is poised to see further improvements, though without some bold and decisive actions on structural fronts, we don’t see Vietnam returning to its pre- crisis heydays of growth in the near to medium-term.”
Vietnam’s gross domestic product expanded 8.5 percent in 2007, the fastest growth since 1996. (Bloomberg)