VietNamNet Bridge – While Vietnam has been tightening the monetary policies strictly to curb inflation, it has been slow in adjusting the fiscal policy to help fight against inflation.

 

Difficulties coming from all four sides

 

The State Bank of Vietnam has decided that the credit growth rate in 2011 must not be higher than 20 percent, in comparison with 2010, considering this an important step to help curb inflation. The decision has raised big worries with the weak liquidity of banks.

 

Several weeks ago, a representative from a bank “sent words” to the State Bank at a workshop, intimating that his bank is a big bank which provides capital to many key national projects, therefore, the bank needs a higher “quota” than 20 percent.

 

However, the State Bank has clearly stipulated that the same cap of 20 percent will be applied to all banks, no matter they are big or small; state owned or joint stock banks.

 

A bank official said that since the beginning of the year, especially after the government released the Resolution No 11 on curbing inflation, the whole banking system only has been targeting one goal: trying to restrain inflation.

 

Together with the plan to cut the credit growth in the whole banking system by 70 trillion dong in 2011, the State Bank has been tightening the monetary policies by raising a series of key interest rates, including the re-discount interest rate and refinancing interest rate, and scaling down the open market operation.

 

Of course, the tightened monetary policies will help restrain inflation, but they have also brought side effects: the worries about liquidity have become bigger.

 

The liquidity problem is actually the reason that explains why the State Bank still has not decided to raise the compulsory reserve ratios on deposits--also a tool to withdraw cash from circulation to restrain inflation.

 

Governor of the State Bank, Nguyen Van Giau, described the compulsory reserve ratio as a “violent tool”, because just a one percent increase in the required compulsory reserve ratio, would be enough for the State Bank to withdraw 20 trillion dong of cash from circulation.

 

Meanwhile, commercial banks are complaining that they are not only facing the liquidity problem, but they also have to fight against the “capital bleeding”

 

A source told Vietnam Economic Forum (VEF), that the deposits of a state owned bank have dropped by 17 trillion dong, because other commercial banks offer higher deposit interest rates to attract depositors. As a result, depositors have withdrawn money from the state owned bank to deposit at other banks which offer higher interest rates.

 

A credit officer of another bank said that his clients are demanding the deposit interest rate of 19 percent per annum, even though the State Bank has stipulated that the deposit interest rate must not be higher than 14 percent per annum. “If we do not accept to pay 19 percent, the clients have threatened to deposit money at other banks,” he said.

 

Bankers say they have foreseen a pessimistic prospect for banking operation in 2011, since banks now have to struggle with the liquidity problem, while they will not be able to push up credit to make profit since they must not obtain high credit growth rates.

 

Fiscal policy remains an outsider

 

According to Duong Thu Huong, Secretary General of the Vietnam Banking Association, remarked, while the monetary policies have to undertake the task of fighting the inflation, the banking system’s liquidity has been hurt. The fiscal policy remains the outsider of the fight against inflation. The commitments to cut down regular expenses by 10 percent, and cut down public investments and reduce state budget over expenditure, have not been fulfilled.

 

Over the last month, the Ministry of Planning and Investment has sent 10 delegations of officials to localities to check public investment projects. However, many public investment projects have not been announced.

 

A member of the National Assembly’s Economics Committee has commented “it is very difficult to cut down public investments, because no locality wants to cancel projects which can bring money to localities and to themselves.”

 

Tran Du Lich, Member of the National Advisory Council for Monetary Policies, has attributed this to the current mechanism on budget allocation. He believes that it is necessary to tell distinctly; the state budget apart from the local budget.

 

VEF