Cash circulation necessary to stimulate economy

The government had placed large sums of money into circulation to support the domestic economy during the ongoing Covid-19 pandemic. 

Cash circulation necessary to stimulate economy
Relationship between inflation, GDP growth, velocity of money. (Source: Author's synthesis)

However, this money seems to be stuck within the financial system, or is being poured into stocks and real estate, rather than into production. Drastic measures are now necessary to bring this cash flow back into the production sector. 

Speed of money flow

In 2019 and 2020, the State Bank of Vietnam had lowered the interest rate three times in order to implement the monetary expansion policy and stimulate the economy. Looking at economic recovery in a post Covid-19 pandemic scenario, the Government has been implementing a combination of expansionary fiscal and monetary policies to boost GDP growth. However, besides the concept of the money supply, it is also important to consider the speed of money flow, which is another way to measure the health of the economy.

According to Milton Friedman's calculated theory M*V=P*Q, which guages money quantity, M is the quantity of money supply, V is the velocity of money, P measures price change of goods and services in an economy, Q is the volume of goods and services traded. The velocity of money is related to the frequency of monetary transactions in the economy. The high velocity of money is often a sign of a healthy economy, because money is exchanged for fast commodities, and the cash flows faster. Economists divide money into two categories. First, money primarily used by people and companies for transactions which is called "operating money", and second, money used to save and accumulate which is called "idle money". The more idle money there is in the economy, the slower the speed at which money is circulated.

Fig. 1 shows that the velocity of money in Vietnam has continuously dropped to a very low level over the last 20 years. There is concern if the current velocity of money is so low due to too much idle money in the economy. The decreasing velocity of money in Vietnam implies that the cash flow from hand to hand is very slow, reflecting a decline in transactions and consumption of businesses and households after 2011. Instead, most of the money can be used to pour into investment channels such as stocks, real estate or exist in the form of savings rather than production and consumption. This cash flow may be the source for the bubble caused recently in real estate and stocks.

Since the outbreak of the Covid-19 pandemic until the end of 2020, 95 documents have been issued to support businesses and people with four major policy packages, namely, VND 250,000 bil for credit support; VND 180,000 bil of tax-deferred support; VND 16,000 bil for 0% interest rate loans; VND 30,000 bil for fiscal packages and a series of other measures. This has been followed by the social security support package of VND 62,000 bil under Resolution 42/NQ-CP on measures to support people in difficulty due to the Covid-19 pandemic.

However, the velocity of money continued to decline during this phase, showing that the huge amount of money that seemed to have been trapped in the public financial system showed reluctance to be consumed by the people, and also slowed GDP growth which did not meet expectations. Disbursement conditions for manufacturing enterprises and services are quite strict, and the social security system can be considered as old, making effectiveness of support policies decrease significantly. 

 

Solutions to stimulate growth

First, it is vital to increase the flow speed of money. To increase the flow speed of money and fasten the speed of spending on goods and services, there is need to increase the demand for goods and services, stimulate production, employment, increase income, and ultimately boost GDP. In society, low-income people are usually the group that spends money fastest on goods and services every time they have money at hand.

Therefore, the Government needs to strongly reform the social security policy, so that the money can be quickly delivered to the people, especially the disadvantaged and low-income groups. When money turns up, they will use more services, increase their purchasing power, stimulate production and more jobs are then created, wages also increase and in turn this creates a vortex to promote economic development.

Second, there is need to promote credit growth. The manufacturing sector is an important driver of economic growth. Therefore, the Government should have solutions to facilitate credit flow to businesses and households. Besides, tightening capital flow into real estate or investing in stocks to avoid deviation of investment cash flow causing asset bubbles, which are not conducive for socio-economic development. Banks can also lower their profit targets, and share them with producers and households with medium-term loan packages, with attractive and stable interest rates, helping them to stabilize production. When production is stable and employees have jobs, it becomes a fertile platform for banks to seek profits.

Third, it is essential to promote digital transformation via enterprises and state management agencies. It is wise to invest in digital transformation today to create future economic growth, save costs and improve operational efficiency. The digital transformation process will help businesses increase productivity, promote output growth in proportion to the increase in money supply, and will also help keep inflation at a stable level. Digital transformation can be the key to the production process, creating a turning point for the economy, helping the economy move away from stagnant forces, and gradually move closer to stable growth, without too much fiscal and monetary stimulus from the Government.

SGGP

Macrostability helps cultivate market confidence

Macrostability helps cultivate market confidence

Macroeconomic stability and low inflation are the results of persistent management efforts in recent years that aim to make people and businesses feel secure when making investments.

Turning point for development of the digital economy

Turning point for development of the digital economy

In the past few years, Vietnam has achieved important milestones in the process of promoting the digital economy.  

 
 

Other News

.
Hanoi wants to tax abandoned villas
Hanoi wants to tax abandoned villas
BUSINESSicon  04/06/2021 

Hanoi has proposed to the Ministry of Finance the imposition of a tax or fine on owners of half-finished and abandoned townhouses and villas which were causing considerable waste of land resources.

VN may have to reduce renewable power in the next five years: energy institute
VN may have to reduce renewable power in the next five years: energy institute
BUSINESSicon  04/06/2021 

It is likely that Vietnam will have to reduce renewable energy sources in the next five years, as booming development in recent years was weighing on the power system, according to a recent report by the Institute of Energy.

Vietnam Airlines to sell 11 aircraft
Vietnam Airlines to sell 11 aircraft
BUSINESSicon  04/06/2021 

The national flag carrier Vietnam Airlines has announced the plan to sell 11 A321ceo aircraft made in 2004, 2007 and 2008.

Covid-19 pandemic helps clean up condotel market in Vietnam
Covid-19 pandemic helps clean up condotel market in Vietnam
BUSINESSicon  04/06/2021 

Severe economic impacts as a result of the pandemic have put more stress on the local condotel market.

IPs set up, but Vietnam still needs to do more to attract investors
IPs set up, but Vietnam still needs to do more to attract investors
BUSINESSicon  03/06/2021 

There were positive developments of industrial parks in Vietnam in the first five months of the year, but experts still say the country should do more to attract big investors.

CPI growth in Jan-May lowest in five years
CPI growth in Jan-May lowest in five years
BUSINESSicon  03/06/2021 

The country’s consumer price index (CPI) in the first five months of the year grew 1.29% year-on-year, the lowest for the period since 2016, according to the General Statistics Office.

Deposit interest rates rising despite pandemic
Deposit interest rates rising despite pandemic
FEATUREicon  05/06/2021 

After many months of staying at low levels, deposit interest rates at banks have increased since late May.

Ministry of Finance proposes keeping fee reductions until end of 2021
Ministry of Finance proposes keeping fee reductions until end of 2021
BUSINESSicon  03/06/2021 

The Ministry of Finance has proposed extending the reduction periods of several fees beyond the current expiration date of June 30.

Nearly 60,000 businesses withdraw from market
Nearly 60,000 businesses withdraw from market
BUSINESSicon  03/06/2021 

The number of newly established enterprises is still increasing, but the rate of businesses withdrawing from the market has also risen.

LG pulls out of smartphone production in Vietnam from today
LG pulls out of smartphone production in Vietnam from today
BUSINESSicon  02/06/2021 

Today, June 1, is the last day that South Korean conglomerate LG produces smartphones in Vietnam before it focuses on making home appliances only.

VIETNAM BUSINESS NEWS JUNE 3
VIETNAM BUSINESS NEWS JUNE 3
BUSINESSicon  03/06/2021 

 Stock market hits historic peaks

Investment into local start-ups expected to rise this year
Investment into local start-ups expected to rise this year
BUSINESSicon  01/06/2021 

The investment capital into Vietnamese start-ups this year would see a breakthrough despite a year-on-year decrease of 48 per cent in 2020 to reach US$451 million.

Businesses seek sources to buy vaccines for their workers
Businesses seek sources to buy vaccines for their workers
FEATUREicon  02/06/2021 

The electronics, textile and garment, footwear, wooden furniture and dairy sectors have proposed that the Government allow them to seek vaccine sources and pay for vaccinations at their enterprises so they can maintain production.

Vaccines yet to come, but biotech share prices escalate
Vaccines yet to come, but biotech share prices escalate
BUSINESSicon  02/06/2021 

Biotech shares, especially the shares of vaccine producers, are being sought by investors.

Selling farm produce online: e-commerce sites compete to attract farmers
Selling farm produce online: e-commerce sites compete to attract farmers
BUSINESSicon  02/06/2021 

For years, farmers had to rely on the wholesale distribution method and could not sell products directly to consumers. But that has changed in recent years.

Money flows strongly into Vietnam’s stock market
Money flows strongly into Vietnam’s stock market
BUSINESSicon  02/06/2021 

The flow of money from several hundred thousand newly-opened accounts into the stock market has expanded the pockets of Vietnamese billionaires by hundreds of millions of US dollars in a short time.

Difficulties facing the country eased by corporate social responsibility activities
Difficulties facing the country eased by corporate social responsibility activities
FEATUREicon  03/06/2021 

After the Covid-19 vaccine fund was established, Vietnamese businesses contributed hundreds of billions of Vietnamese dong. Many companies said they are willing to vaccinate their employees and customers with their own sources.

New master plan for seaports needed to further boost economic development
New master plan for seaports needed to further boost economic development
BUSINESSicon  01/06/2021 

A new master plan for seaports is needed to further boost the country’s socio-economic development in the rapid international integration process, experts have said.

Realty tax needs revamp to ensure fairness
Realty tax needs revamp to ensure fairness
BUSINESSicon  31/05/2021 

Realty tax not only creates sources of collection for the State budget but also is a policy able to spur growth and reduce bribery related to land. Vietnam does have realty tax.

Many companies manufacture components for Samsung, Foxconn resume operations
Many companies manufacture components for Samsung, Foxconn resume operations
BUSINESSicon  01/06/2021 

The Management Board of Industrial Parks of Bac Giang Province has allowed nine enterprises in Van Trung, Dinh Tram and Quang Chau industrial parks in Viet Yen district, Vietnam’s largest epidemic hotspot, to resume operations.

 
 
 
Leave your comment on an article

OR QUICK LOGIN