This is the fourth consecutive interest rate cut since the beginning of the year after three interest rate rises late last year.

The move was taken by the State Bank of Vietnam (SBV) after the government requested SBV to slash interest rates promptly while stressing that operating interest rates must be cut in June 2023 to "immediately settle the consequences" of the low credit growth rate in the last five months. 

The statement showed the government's strict administrative nature that executive agencies cannot help but follow.

The government is impatient about credit growth. In the first five months of the year, credit grew by 3.17 percent only, a very low rate compared with the same period of previous years, including the 8 percent in the same period in 2022.

Nevertheless, SBV had reason to hesitate to loosen monetary policy. The US Federal Reserve (FED) decided to keep the interest rate unchanged at 5.0-5.25 percent in the June 2023 review. This was the first time the powerful agency did not raise interest rates after 10 increases, while ECB raised the interest rate again by 0.25 percent to 3.25 percent, for the seventh consecutive time in early May to respond to inflation.

As such, Vietnam is going against the world in credit policy. However, Vietnam’s problems appear to be different from the rest of the world.

Liquidity – the biggest problem

Unlike other countries, Vietnam did not incur high inflation because it was self-sufficient in food and foodstuff; economic stimulus packages were not that large; and more importantly, purchasing power was weak.

The inflation rate last year increased slightly for several reasons, including input cost increases and petroleum supply disruption, but the indicators were not serious, and the inflation rate was far below the limit of 4 percent set by the National Assembly.

Meanwhile, Vietnam, because of fear of inflation, insisted on a tight monetary policy, though businesses and the national economy needed huge capital to resume and expand business after Covid-19.

Only in the last days of 2022 was the credit growth ceiling lifted. However, the move did not bring effects as there was not much more time. The credit growth rate for 2022 was 14.16 percent, a bit higher than the initially planned 14 percent.

The monetary policy should have been loosened to help businesses maintain and develop production. However, because of the fear of inflation, the central bank did the opposite – tightening money policy, increasing interest rates, and not increasing the credit ceiling.

As a result, capital became scarcer and capital cost higher, which has made enterprises’ activities more difficult.

While the inflation rate was low, the bank loan interest rate was high and was raised in the last months of the year. This led to an imbalance between interest rate and inflation rate and a big gap between deposit and lending interest rates.

The modest growth rate of 3 percent of the economy shows that the health of businesses is problematic. A report from the Board for Private Economic Development Research (Board IV) in late May 2023 showed that businesses’ confidence in the macroeconomy was very low. Up to 81.4 percent of surveyed enterprises had negative or very negative views about Vietnam’s economic prospects in the remaining months of 2023. 

Companies in the construction sector, small and medium enterprises, micro enterprises, non-state enterprises, and enterprises in HCM City showed negative forecasts.

The biggest challenges enterprises face include a lack of orders (59.2 percent), accessing bank loans (51.1 percent), compliance with administrative procedures (45.3 percent) and the risk of criminalizing business transactions (31.1 percent).

Credit inaccessibility is the second biggest difficulty for the business community.

Tu Giang