Private sector should be economic driver
Macroeconomic uncertainty is among the biggest problems the country is facing. Efforts are being made to restructure the economy so as to achieve stability. The Saigon Times Daily talked with Pham Do Chi, senior economist of the Star Plus program, former expert at the International Monetary Fund (IMF), on the fundamental issues of Vietnam’s economy. Excerpts:
The Saigon Times Daily: There have been production stagnation, high inventories and bankruptcies. And the central bank has signaled interest rate cuts. Vietnam is entering another battle against economic downturn. What is your comment on this?
Pham Do Chi: This is true. Concern over high inflation has turned to worry about production stagnation. Stagnant production since the fourth quarter of last year is the price to pay. I’m not surprised at this situation because once the policy on aggregate demand reduction is carried out, inventories will definitely shoot up and retail growth will dwindle, sending enterprises to the verge of bankruptcy and push up joblessness. The greatest challenge at present is how to flexibly combine the policies together to administer a correct dose for inflation while ensure such a dose is not so bitter. The key is the combination between the fiscal policy and the monetary policy. The Government is going in the right direction when loosening the monetary policy. The problem lies in the fiscal policy, given the high public spending that has been pressuring the monetary policy over the past years, building up inflationary pressure. In my opinion, actual inflation is caused by the lax fiscal policy. The Government has overemphasized public investment. As evidence, the public investment rate of Vietnam is the second highest in Asia, at 42% of GDP, only after China. Fortunately, the rate started to go down last year, but still stays at high. Furthermore, as the incremental capital output ratio (ICOR) remains high meaning investment efficiency is low, it is necessary to further slash public investment, and encourage private investment instead. I think this will be a long-term effective dose for inflation.
But it seems the fiscal policy is already tightened, according to the criteria of the National Assembly (NA). What do you think?
- I think there is a serious problem in restraining the ratio of the State budget deficit over GDP. Through the budget deficit was said to be less than 4.9% of GDP last year, absolute deficit still stood at high due to the drastic changes in inflation and forex rates in 2011, making us believe that the fiscal policy had proved successful. But this is absolutely not the case, because inflation and forex rates in 2011 were much higher than in 2010. When making the State budget estimate in 2011, we assumed the inflation would be a mere 7%, but it has turned out to be over 18%. The forex rate was VND19,500 per U.S. dollar in 2010, but it exceeded VND21,500 per U.S. dollar in 2011. As inflation and forex rates soared high, the State budget deficit also surged, sparking a demand for budget deficit financing, thus Government bonds had to be issued. Banks purchased the Government bonds, and then brought them to the central bank for refinancing and rediscount. As a result, the central bank has largely financed the State budget deficit, which increased the volume of currency and caused inflation. This already happened in 2008 and 2009 when we experienced higher inflation and forex rate than expected, thus the State budget deficit shot up sharply. The same thing occurred last year. I’m afraid that it will repeat this year. The Government and NA should take this into account when making budget estimate for 2013.
In your opinion, what is the main reason for the vicious circle of inflation and economic downturn in Vietnam in the last five years?
- Since 2008, our macro-economic policies have undergone 180-degree changes for three or four times. The reason is the economy has suffered macro-economic imbalance since 2007. Unlike the previous decade, when Vietnam recorded high growth of 7.5-8.5% a year, inflation stayed at single-digit level. Since 2007 to date, we have constantly revised our targets as long-term development plans turned improper. I suggest we should adopt new strategy, as public spending is too high, public investment dominates but brings in low efficiency, while private investors have mere presence. Therefore, the long-term solution to maintain moderate growth and control inflation is highlighting the role of the private sector as economic driver. In addition, it is necessary to further develop agriculture and rural areas as an economic pillar.
Vietnam has embarked on developing an economic restructuring program. Is it enough?
- The economic restructuring program focusing on public investment, State-owned enterprise and commercial banks has responded to the basic shortcomings of the economy. However, it will take much time to carry out these policies, and stronger solutions are needed. The top priority is still boosting the efficiency of the economy, through enhancing the role of the private sector, which is the driving force to pull the economy out of the current woes.
What is your view on the comment that the toughest time of the economy has passed together with this year’s first quarter?
- I think the property market crisis will prolong and prices will plunge further until hitting the bottom in 2013 or 2014. Inevitably, the difficulties of the banking system will drag on until then. The economy will bottom out then, with the problems of the realty market, the banking system and bankruptcies. But I hope this will not happen.
Could you suggest how to save Vietnam’s economy from the vicious circle of inflation and stagnation?
- The Government should replace the growth focus, not striving for high growth at all costs. Vietnam should pass the role to promote the economy to the private sector, rather than maintaining it at the State and the State-owned enterprises.
Second, administrative measures should be taken together with market measures. Administrative measures only have short-term effects, thus cannot replace the market measures.
Furthermore, leaders of the financial sector, the Ministry of Planning and Investment, the Ministry of Finance, the central bank, the Ministry of Industry and Trade, and the National Financial Supervisory Commission need to join hands to send out clear signals and make long-term development plans.
These suggestions may help the Government map out macro-economic stabilization program in the middle term, and serve as foundation for economic restructuring.
Reported by Tu Giang