Macroeconomic Stability Key To Policy Success
Reported by Thanh Thuong
The economy is clearly in trouble, with 12,000 enterprises shutting down in the first quarter of 2012. Is a reduction in interest rates justified? What else can be done? Dr. Vu Thanh Tu Anh from the Fulbright Economics Teaching Program shares his view with the Saigon Times.
|Dr. Vu Thanh Tu Anh from the Fulbright Economics Teaching Program|
Q: The State Bank of Vietnam (SBV) has lowered the deposit interest rate from 13% to 12% recently. Several foreign organizations consider this a hasty move. What do you think?
A: It is not a hasty move. If the consumer price index (CPI) in July does not surge, year-on-year inflation will be around 11% and depositors will enjoy positive real interest rates. I think CPI will continue to decrease in the next few months and hover around 8-9% in June. If this is the case, SBV can even ponder deeper cuts.
Enterprises, banks, as well as the stock and realty markets all need interest rate cuts. Many companies have experienced stagnation due to limited access to capital and crushing interest rates. Industrial output growth at the end of the first quarter was merely 4.1% while inventories jumped by a record 35%. Unless there are brighter prospects, the realty market will be even riskier, adversely affecting commercial banks.
Besides, a number of banks are currently haunted by liquidity problems because of sky-high interest rates and the fear of lending to clients with woeful credit records. This is why treasury bills have been in higher demand lately despite offering interest rates of only 10-11%.
How will slashing interest rates help enterprises pull through these tough times and boost sales?
Lower deposit interest rates can lead to smaller lending interest rates, thus stimulating investment and production. Of course, this is possible only if risks are reduced. Statistics show that household depositors are on the rise. As people save more, consumption only rises slowly. Consequently, inflation-adjusted retail sales in the first quarter climbed by only 5%.
The current interest rate cut is unlikely to work wonders, especially with regard to investment, consumption and, above all, aggregate demand. Instead, it should be considered as part of a road map for reducing interest rates and avoiding excessive inflation. Once macroeconomic stability is fostered, market confidence will soar.
In 2009, the Government introduced a stimulus package based chiefly on interest subsidy. Should a similar approach be adopted now?
This is both inadvisable and impossible. The stimulus package in 2009 fell short of expectation and bred numerous macroeconomic problems in 2010 and 2011. There is not much room left for fiscal expansion at the moment. Besides, price stability is key. Stimulus packages that feed inflation will arguably do more harm than good.
Is there any way out? How can the Government encourage consumption and fuel production?
The authorities should consider lowering corporate taxes and interest rates to boost production while ensuring macroeconomic stability. Only when real income is not eroded can people spend more and enterprises opt for higher investment and output.