Though Government Resolution 11 has made good initial progress including lowering the monthly inflation rate, it is too early for Vietnam to ease macroeconomic policies, the Asian Development Bank (ADB) reports today in Hanoi.
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| Inflation is projected to ease gradually to 18.7%, revised up primarily because of higher food prices, before declining to 11.0% next year. |
According to the ADB, Resolution 11 – a comprehensive policy package – has made good initial progress by helping stablise the exchange rate, allowing foreign reserves to be replenished, and lowering monthly inflation from June to August. However, the organisation claimed it was too early for Vietnam to ease macroeconomic policies as year-on-year headline inflation remains above 20%. Premature easing could undermine macroeconomic stabilization efforts, erode business and consumer confidence in the dong, and renew downward pressure on foreign reserves.
The medium-term outlook depends very much on the Government demonstrating a continued commitment towards restoring macroeconomic stability. Sustained and consistent implementation of Resolution 11 would lower inflation and allow interest rates to come down. This would boost investor confidence and stimulate economic activities.
The Asian Development Outlook 2011 Update (ADO Update) forecasted a slightly lower Vietnam growth outcome from 6.1% to 5.8% for 2011, with a quickening to 6.5% in 2012. Inflation is projected to ease gradually to 18.7%, revised up primarily because of higher food prices, before declining to 11.0% next year.
ADO Update commended efforts taken by the Government, but observed that the market was receiving mixed signals on both monetary and fiscal policies that was undermining the effectiveness of the macroeconomic stabilization package.
“Investors and residents are likely to have more confidence in economic management if policies and policy making are given greater clarity, consistency, and transparency,” says Tomoyuki Kimura, ADB Country Director for Vietnam.
A deteriorating bank credit quality remains a risk. Macroeconomic tightening, after a period of rapid growth in credit, will have placed stresses on borrowers and banks. The Government needs to take concrete actions to safeguard the financial sector.
“Restoring macroeconomic stability is the immediate priority, but addressing the root causes of high inflation requires greater efforts in terms of structural reform. These reforms include reducing bottlenecks in production and transportation, safeguarding the finance sector, increasing the efficiency of public investment, and imposing market discipline on large state-owned enterprises,” says Kimura.