Preventing Power Tariffs From Stoking Inflation

Preventing Power Tariffs From Stoking Inflation

By Dr. Nguyen Minh Phong

It is vital to postpone the power tariff hike, recalculate the magnitude of the increase and make the power trading sector more transparent to minimize the inflationary risks in the years to come

The Ministry of Industry and Trade argues that the power price hike is essential as part of the liberalization of the power market and that an increase of 4.91% is already reasonable, in view of rising prices in sectors which exert an influence on the cost of power generation. In particular, the Ministry of Industry and Trade does not want to push up prices excessively for fear that the tariff increase will cripple the economy, which has just recovered from the economic turmoil.

However, the Ministry of Industry and Trade also says that the Prime Minister allows it to adjust power tariffs twice a year and that it will assess how the economy responds to the proposed price hike to make adjustments by late 2010. This ministry contends that since the market-based pricing mechanism for power, announced in Decision 21/2009/QD-TTg by the Prime Minister, was adopted on March 1, 2009, input costs in the power generation sector have soared. In 2009, the costs of power generation and trading were VND2.565 trillion higher than expected.

Reality shows that Vietnam’s monopolies keep incurring losses, whether global prices rise or fall. Furthermore, the detrimental impacts of each price hike are often more severe than the power sector estimate. Several reasons account for this. First, the power sector tends to downplay the deleterious effects of a power tariff increase to make its case more convincing. Meanwhile, there is no independent organization to appraise the reliability of the estimates provided by this sector. The Ministry of Industry and Trade, in particular, says that a power price hike of less than 5% will increase the consumer price index (CPI) by merely 0.15-0.20%, push up production costs by VND1.94 trillion and raise household living expenditure by some VND1.119 trillion. In contrast, the Electricity of Vietnam Group squandered VND1.7 trillion, or one-tenth of the Government’s stimulus package, on producing fixed-line telephones for its sales promotion program in 2009.

Second, simply multiplying the new power tariff by the power consumption by households and enterprises is likely to give an erroneous estimate of the change in CPI as this approach fails to consider the increase in the prices of other commodities triggered by this power tariff hike. Furthermore, the power tariff increase in March will provide a basis for prices to continue their upward movement after the Lunar New Year.

The General Statistics Office says that CPI in January 2010 rose by 1.36% month-on-month and 7.62% year-on-year. Ten out of the 11 commodities in the general basket of goods saw their prices inch up by 0.27-2.24%. Post and telecom prices dwindled by 0.11%. Together with food and foodstuffs, construction materials such as steel and cement have been costlier as various giant realty projects in big cities nationwide are under way or about to start. CPI is expected to increase by 2-2.5% in February.

If the aforementioned proposal is approved, CPI in March 2010 will probably hover at 2% and above, which translates into a 5.3% increase in the first quarter (the increase was less than 7% in 2009). In case of unexpected changes in domestic and global markets, double-digit inflation is entirely possible in 2010.
In addition, as the market for power generation has not been fully competitive, a market-based pricing mechanism will merely benefit monopolies at the expense of society, the business environment and the Government’s economic governance.

Therefore, it is vital to postpone the power tariff hike (until the end of the second quarter at the earliest), recalculate the magnitude of the increase and make the power trading sector more transparent to minimize the extent to which the increase in power prices stokes inflationary pressure in the years to come.