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Curbing inflation: the optimal goal of monetary and fiscal policies

Monetary and fiscal policies have been tightened to fight inflation in Vietnam (though it is among the lowest in the world), instead of aiming to recover production and boost growth, which is needed after several years of pandemic.
SBV Governor Nguyen Thi Hong

Monetary and fiscal policies have been tightened to fight inflation in Vietnam (though it is among the lowest in the world), instead of aiming to recover production and boost growth, which is needed after several years of pandemic.

Since Vietnam began implementing Resolution 128 on safe and flexible adaptation and effective control over the pandemic, production and business activities have revived and capital demand from businesses has become higher than ever.

Some associations, businesses and commercial banks have asked to lift the cap on the credit growth rate to satisfy the thirst for capital.

Nevertheless, the State Bank of Vietnam (SBV) has been steadfast with its policies amid public opinion. It has even tightened cash flow to the real estate market, even though the sector makes up a large proportion of the country’s GDP (gross domestic product).

SBV Governor Nguyen Thi Hong admitted that she is under  pressure. “Many people believe that SBV should consider raising the ceiling credit growth rate to 15-16 percent this year, instead of 14 percent as set earlier this year."

However, Hong has defended her view. She said at a workshop on macroeconomic stabilization chaired by the Prime Minister late last week that the central bank must be realistic when regulating credit growth in amid high inflation rates in the world.

“In the immediate time, SBV will still pursue the 14 percent credit growth rate plan,” Hong said.

She said that the ceiling credit growth rate of 14 percent designed for this year is higher than the 13.6 percent in 2021 and 12.17 percent in 2020, affirming that the 14 percent is high enough to stimulate economic recovery.

However, the question is why the credit growth rate is designed for 2022, when the national economy has now reopened and businesses are thirsty for capital. It is just a bit higher than 2021 and 2020, when business activities became frozen because of lockdowns.

The other question is why the Governor, during the workshop, did not mention inflation, an important factor that any central bank would consider in making a decision on reducing or raising interest rates or credit.

Hong said that Vietnam’s ratio of credit to GDP, according to the World Bank (WB), is the highest in the world – 124 percent of the revised GDP (which is higher by 25 percent), and 184 percent of GDP calculated with the old method.

Meanwhile, the ratio of credit to mobilized capital has jumped to above 99 percent, which means that banks are lending 99 dong out of every 100 dong worth of capital they can mobilize.

Fiscal policies

In 2022, the National Assembly had to release two resolutions on socio-economic development with the aim of accelerating public investment and the economic stimulus package. 

The disbursement of public investment capital in the first seven months of the year was just 34.5 percent of the yearly plan, which was even lower than that of the same period last year (36.7 percent).

The main problem behind the slow disbursement rate include the overlapping of legal documents related to implementation of public investment projects. The tardiness in site clearance is also a problem. 

The slow disbursement of public investment capital has reduced the effectiveness of the use of fiscal resources to stimulate growth.

Deputy Prime Minister Le Van Thanh at a recent meeting said that disbursement is below expectations and requested full disbursement prior to December 31, 2022.

This shows that fiscal policy seems to be very tight as money cannot be spent. The argument is supported by statistics. In the first seven months of the year, state budget expenditures were VND843 trillion only, equal to 47 percent of the yearly estimates and increasing slightly by 3.7 percent compared with the same period last year.

In such circumstances, state budget collections are very high,  VND1,094 trillions of dong, equal to 77.5 percent of yearly estimates and 18 percent compared with the same period last year. This is the highest excessive revenue in history.

Meanwhile, the launch of the VND340 trillion economic stimulus package has been very slow.

The General Statistics Office (GSO) reported that the average consumer price index (CPI) in the first seven months of the year increased by 2.54 percent only compared with the same period last year and the core inflation rate was 1.44 percent.

With such low inflation rates, Vietnam would be better to loosen monetary and fiscal policies. The loosening won’t lead to overly high inflation rates, and it will help economic recovery.

Vietnam’s inflation rate is among the lowest in the region and the world. Many countries report a 40-year high inflation rate. According to the Bank for International Settlements (BIS), more than 50 percent of developing countries have an inflation rate of over 7 percent. The figure is 5 percent in 60 percent of developed economies.

Tu Giang

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