Last week, the Asian Development Bank released its widely-followed Asian Development Outlook 2011, in which it forecasts economic growth for Asian countries including Vietnam in 2011 and 2012. The main theme of the report for Vietnam is that the country badly needs to control inflation if it is to sustain growth.
In 2010, average inflation reached 9.2%. This was the highest in Southeast Asia. Just two years before that in 2008, the number was a staggering 22.97%. Since 2005, the cumulative effect of inflation has been around 80%. Yes, you read it right, prices almost doubled in only 5 years. If you have not been to Vietnam for some time, the effect is easily noticeable, from the price for a bowl of pho to parking your motorbike in downtown Saigon.
There is no sign that the inflation is slowing. There are only obvious suggestions of the opposite. In March, the year on year inflation was 13.9%. The government also recently adjusted prices of fuel and electricity, promising to send another wave of price hike throughout all sectors.
The impact of high inflation will be felt by all in the country. Yet, the group that would be hit hardest is the poor. Prices of necessities like foodstuff, electricity, and transportation have shot up at a higher rate than the average inflation.
The government has been trying to alleviate the problem. Starting in May, the public sector wages will be increased by 14%. In February, the government stated that in the short term, it will focus more on stability than growth. The State Bank of Vietnam also increased it refinancing rate and rediscount rate to tighten credit.
The government is clearly taking firm action. In my opinion, it is just not addressing the core of the problem: wasteful and unprofitable investment in State Owned Enterprises (SOEs). Much remains to be seen how the government tackles the problem throughout 2011. However, as long as the economy is still overly focused on SOEs, inflation is not going away.
Sources: Asian Development Bank, Financial Times.
Hey, I agree with the idea that inflation in Vietnam is really high.
But there’s a lot of holes in the rest of the story. For one, 80% in 5 years is not the same as double in 5 years. If the country could attain its 7% inflation target, it’d be more like “double in 8 years”, or if it’s more like 12% this year and 8% next year then “double in 7 years”, but again that’s using extrapolation to predict the unpredictable. There was also a period of time within that when inflation was basically flat.
The inflation story has been on everyone’s mind for the past half year or so, not just inside the country but from outside as well, and for most people it’s not a matter of “high inflation will be felt” but rather poor people have been feeling it for a long time already. The problem was a focus on growth at the expense of rising inflation, but since Tet that has changed. These policy changes and their effects should have been given more analysis.
I’m not so sure parking prices in downtown Saigon are due to core inflation, but rather illegal price gouging.
But yeah, inflation is high, government needs to do more.
Hi tomosaigon,
Thanks for the insightful comment. I agreed that doubling is a bit stretching it. Prices of certain products in the inflation basket such as foodstuff certainly more than doubled. This year inflation is expected to be very high again. Some helpful info from this article: http://www.bloomberg.com/news/2011-04-24/vietnam-inflation-accelerates-to-fastest-pace-since-2008-government-says.html
As you pointed out, the government needs to do a lot more. I see controlling price gouging as part of their job. It does not happen only to non core products but also to foodstuff and building materials. At the end of the day, all those contribute to how much people have to have for basic products and services.