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Saturday, October 1, 2022

Perceiving and harnessing inflation

By Phan Minh Ngoc

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Such key words as “price storm” or “rising price” or “inflation” have become buzzwords in Vietnam and the world as well. The issue here is that individuals and businesses in any price storm should resort to their own measures instead of solely relying on the Government’s capacity.

When writing about inflation, the local media often recommends that inflation control rest with the Government’s policy and that businesses need to find their own ways to cut costs.

On its part, the Government, specifically the Ministry of Finance and the Ministry of Industry and Trade, would resort to common measures when challenged, saying they would step up price management; keep a close watch of supply-demand changes for suitable solutions; enhance inspections to promptly deal with violations; boost dissemination of information on ways to stabilize prices and control inflation; or implement tax and fee reduction and exemption among others.

The people have very good reasons to lean on the Government for anti-inflation measures, partly because it is the Government’s mandate to control inflation and stabilize the macroeconomy, and partly because of statements that have nurtured the people’s expectation on the role of the Government to fight inflation. If inflation is not contained as expected, the Government’s image will be blurred to some extent.

This mindset and expectation should be changed for the good of the Government as well as the people and enterprises. All stakeholders should come to an understanding that the Government (of Vietnam and elsewhere), no matter what efforts they take, can only deal with inflation at a limited level (and at a painful cost as well) until they succumb to market forces. By being aware of this truth, individuals and enterprises will take their own measures to cope with price storms without overly relying on the Government.

For their part, Government agencies should be more frank when introducing their own solutions. Please refrain from messages like “consolidating” or “strengthening” this and that, since such catchphrases give way to a big question of whether these agencies have been derelict of their duties until price storms move in. And please also not abuse non-market measures like inspecting shops and stores one after another to see if they speculate on goods or if they fail to publicize prices; or banning the export of certain items to stabilize local prices. Even cutting taxes and fees is not always the right cure.

It is important that competent agencies frankly admit to their limited capacity in containing inflation so as not to frustrate the people and enterprises. As stated above, any government can curb inflation to a limited extent before giving in to market forces.

So what measures can competent agencies in Vietnam do more cost-effectively given the current price storm? We can learn from the Singaporean Government, which is very capable and highly responsible towards the people and enterprises.

Singapore has in the past few months endured high inflation unseen in the past decade. The first thing that Singapore has done, via the Monetary Authority of Singapore (MAS), is to announce a slight interest rise in January. This step has improved the value of the Singapore dollar and eased the pressure of imported inflation. The central bank MAS in particular and the Singaporean Government in general have been very transparent in their policies, like the way they had announced beforehand their move to raise the interest rate (1).

The lesson for Vietnam is that in order to contain inflation, an effective measure should be the monetary measure, which in particular is monetary tightening, and this measure needs to be pronounced in advance so that the market and the people can prepare themselves for such a change. So far, there have been almost no discussions about this topic in Vietnam, as attention has for the most part focused on non-market measures with little value that has been stated early on. One of the reasons behind this situation could be the concern about the psychological impact caused by monetary tightening as well as its consequences on business and production recovery and development after two years struggling with the Covid-19 pandemic.

The Singaporean Government in its next step has taken some more measures while keeping a close watch of and forecasting inflation. If inflation tended to rise higher than expected, then apart from monetary tightening, they provided more assistance so that the people could survive rising prices (2).

These supportive policies are concrete, targeting needy groups instead of covering all. Specifically, Singapore has provided financial support packages to low-income households, VAT refund vouchers, and spending from the social security budget. If prices tend to further escalate, especially once the carbon tax takes effect next year, the government will increase allowances of power, water and fuel for families living in apartments owned by the government.

The lesson from Singapore’s measures for Vietnam is that, instead of taking the non-market approach, the Government should admit its limited capacity, and let individuals and enterprises comprehend the grim reality that prices would increase, even strongly for a long time. The Government’s efforts, therefore, should be selectively cannoned to low-income people. This policy should be executed quickly and benefit the right people.

(1) https://www.channelnewsasia.com/singapore/why-singapore-inflation-rising-prices-higher-what-can-be-done-2463081

(2) https://www.straitstimes.com/singapore/government-will-do-more-to-help-singaporeans-if-inflation-is-higher-than-expected-lawrence-wong      

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