In the past, the government always presented “dual objectives” of ensuring macroeconomic stability and gaining a rather high growth rate. With Resolution 11, the government, for the first time, has made it clear that its current priority is to restore and solidify macroeconomic stability, writes Ayumi Konishi, country director for the Asian Development Bank (ADB) in Vietnam.
Let me first note, on behalf of the ADB, our sincere thanks to the government and the people of Vietnam for hosting the very successful 44th Annual Meeting of the ADB held in Hanoi in the first week of May.
I think the meeting was a great success not just for ADB, but also for Vietnam as it attracted a large number of participants including very high level government officials as well as leaders of the business community from so many different parts of the world, and I believe most, if not all, participants returned home with very positive impression on Vietnam despite the current macroeconomic concerns.
The general view must be that people have seen great potential in Vietnam in the medium to long run, and were impressed at the very vibrant economy. But such an impression is certainly consistent with the near term concerns on macroeconomic vulnerabilities, although I believe the general sentiment is more positive than negative.
As to my views on the current macroeconomic situation in Vietnam, three points can be made. Firstly, because of the “base effect,” i.e., the fact that month-on-month inflation rate was very low between April to August last year, even with effective implementation of Resolution 11, the “year-on-year” inflation figures are most likely to continue increasing until August this year, and at that stage the rate can be as high as 22-23 per cent. Only after that, it will start decreasing but we certainly cannot expect the inflation rate to come down very quickly, and it will take at least 12 to 18 months to restore the macroeconomic stability, particularly in terms of “annual average inflation rate”.
While huge economic strides have been made, it is important all segments of society enjoy the full benefits of development
Secondly, as the development partners are expected to note at the upcoming Mid-Year Meeting of the Consultative Group in Ha Tinh province on June 8-9, the reason why Vietnam often encounters macroeconomic instability reflects the systemic weaknesses including the aggregate supply capacity constraints and huge inefficiencies in the economy.
In fact, Vietnam’s policy makers are fully aware of the problem as the Socio-Economic Development Strategy 2011-2020 adopted by the 11th Party Congress in January this year has identified fundamental reforms of economic institutions, improving the quality of human resources, and addressing the infrastructure bottlenecks, as three “breakthroughs” Vietnam needs to achieve to ensure sustainable socio-economic development.
Thirdly, there is a danger that the government may try to rely on administrative measures to control the current macroeconomic instability through government regulation on prices or import restrictions. It should be clearly noted that although such administrative measures may have positive short-term impacts, they will adversely affect the development of an efficient market economy, with socialist-orientation, in the medium to long run. In making efforts to restore macroeconomic stability, the long-term vision to ensure development of efficient and competitive economy should not be lost.
We very much support Resolution 11. I think it was particularly important that for the first time, the government has made a clear determination that its current priority for the macroeconomic management is to control inflation and to restore macroeconomic stability. I particularly note that in the past, the government has always presented “dual objectives” of ensuring macroeconomic stability while also hoping to achieve a rather high rate of growth. But these two are not necessarily compatible, at least in the short run. In fact, there are short-term trade-offs between controlling inflation and achieving a high rate of growth. I thought the significance of Resolution 11 was that it has made the government’s priority for macroeconomic stability very clear.
Yet, it is regrettable that we still hear time to time “growth targets” or the expected rate of economic growth but the government’s target for lowering the inflation is not necessarily most clear. I believe it will be useful if the government announces its clear targets for the inflation rate, and then - if necessary - present its “anticipated” growth rate as a consequence, and not the other way around. This should make it clear that how long the government should keep implementing Resolution 11, or to measure the effectiveness of the implementation of Resolution 11.
While we appreciate the importance of Resolution 11, policies are just as good as they are implemented. In other words, we believe effective implementation of Resolution 11 will be the key. In this regard, while we have seen very active efforts of the State Bank in the area of monetary tightening and we are very pleased to see the stabilisation of the foreign exchange market. However, implementation of the other policy measures, namely fiscal austerity, reflection of costs in energy and fuel prices while safeguarding the welfare of the poor, developing international trade particularly through promoting exports, improving social protection measures and enhancing policy communication, can all be stepped up. With regard to fiscal austerity, probably more can be done in reducing government expenditures including the
expenditures of the state-owned enterprises (SOEs) and it will be particularly useful if greater data and information can be provided to the market and the public to see in concrete terms how the progress is being made and what kind of expenditures are being cut. Greater transparencies of the operations of SOEs will also be essential.
While we believe the removal of power or fuel subsidies is in the right direction, it would also be useful to disseminate more clearly the measures to protect the welfare of the poor. As to the trade policies, there are concerns that the current set of measures rely more on administrative control over imports and it can have very negative medium to long-term effects.
The social protection system in Vietnam is not well developed. During the global economic crisis, Vietnam has quickly formulated and implemented economic stimulus measures and we did commend the government in doing so. But in fact, we are aware that such economic stimulus measures were, in a way, social protection measures as Vietnam needed to have a reasonable level of economic growth to absorb new entrants to the labour market in the absence of effective systems to address the issue of unemployment.
In order for Vietnam to improve its resilience, it is important to develop a good social protection system so that the government does not have to rely on growth policies in the context of unfavourable macroeconomic climate. We have been repeatedly emphasising the importance of improved transparency, or the availability of economic and financial data and information. In anticipation of continued inflation, people buy US dollars and gold to protect the value of their assets, putting the pressure on the value of the Vietnamese currency and reducing foreign exchange reserves. As the prices of things are going up, people tend to think of increasing the prices of what they sell, resulting in spiral inflation driven by psychological factors.
While we welcome the government’s plan to improve availability of statistical information in the near future, it would be useful to advance the schedule and also deepen the scope of such an initiative. The unfortunate reality is that the efforts to control inflation and restore macroeconomic stability can hardly be achieved without a pain. And as the efforts to restore macroeconomic stability would require fundamental reforms of economic institutions, it would also require great courage and determination. Vietnam should pursue effective implementation of Resolution 11, and also embark on fundamental reforms of economic institutions, in order for Vietnam to successfully avoid middle income country traps, and to realise its full potentials to further transform the country to have higher value-added.
The key in this regard must be to improve the overall efficiency of the Vietnamese economy to enable Vietnam’s deeper participation in the regional and global value chains. We also hope that Vietnam will continue to pay particular attention to the welfare of its people, because, after all, the socio-economic development of Vietnam should benefit all the Vietnamese people including the poor.