* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download CENTRAL INSTITUTE FOR ECONOMIC MANAGEMENT CENTER
Survey
Document related concepts
Non-monetary economy wikipedia , lookup
Real bills doctrine wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Business cycle wikipedia , lookup
Nominal rigidity wikipedia , lookup
Fear of floating wikipedia , lookup
Interest rate wikipedia , lookup
Money supply wikipedia , lookup
Phillips curve wikipedia , lookup
Early 1980s recession wikipedia , lookup
Monetary policy wikipedia , lookup
Transcript
CENTRAL INSTITUTE FOR ECONOMIC MANAGEMENT CENTER FOR INFORMATION AND DOCUMENTATION WORKING-PAPER MONETARY AND FISCAL POLICIES CONTROL UNDER HIGH INFLATION IN VIETNAM Hanoi, April 2008 CENTRAL INSTITUTE FOR ECONOMIC MANAGEMENT CENTER FOR INFORMATION AND DOCUMENTATION WORKING-PAPER MONETARY AND FISCAL POLICIES CONTROL UNDER HIGH INFLATION IN VIETNAM CENTER FOR INFORMATION AND DOCUMENTATION Tel – Fax: 084-4-7338930 E-mail: [email protected] TABLE OF CONTENT I. SOME CONCEPTION ON INFLATION 1. What is inflation 2. How to measure inflation 3. Negative effects of inflation 4. How to employ monetary and fiscal policies to deal with inflation II. CURRENT STATUS OF INFLATION IN THE WORLD AND VIETNAM 1. Inflation in the world 2. Inflation in Vietnam 3. To dissecting causes of inflation in Vietnam 3.1. Trade and payment balance deficit 3.2. Management of foreign capital inflows 3.3. Management of public investment 3.4. Monetary supply growth III. THE IMPLEMENTATION OF MONETARY AND FISCAL POLICIES UNDER HIGH INFLATION IN VIETNAM 1. The execution of monetary policy during the last time 2. The execution of fiscal policy during the last time 3. Some comments, remarks, and recommendations High inflation has returned after many years and becoming an enormous concern to policy-makers in almost all countries in 2008. Two-digit inflation in developing countries has been an existing constraint to macroeconomic stability, potentially slowing down economic growth and eroding achievements gained over the last years of poverty elimination work. Inflation has also extraordinarily increased in Vietnam during recent months, after a long time kept under control. In the first six months of 2008, consumer price index (CPI) increased with a year-on-year rate of 26.8 percent which is a terrified number and among the top highest of the world at current time. Since Vietnam’s transition to a market-oriented economy, inflation has never attracted as much attention of national and international analysts as it does now. The government has also taken many actions with a view to curbing inflation. However, the story of inflation is continuing and will certainly leave long-term impacts. The paper focuses on inflationary issues of Vietnam under current situation with three main parts. The first chapter reviews theoretic framework of inflation, in which concentrating on monetary nature of inflation. Inflationary situation of the world and Vietnam will be discussed in chapter 2 as an effort to figuring out rationales of inflation in the world generally and Vietnam particularly. Chapter 3 focuses on monetary policy management with at inflation curbing measures taken in Vietnam currently, while providing relevant remarks and policy recommendations for the future time. I. Theories on inflation and money supply 1.1. What is inflation A definition which is most widely accepted assumes that inflation is continuous price increase in the whole economy. To define whether there is inflation, attention is often paid to general price increasing trend rather than any sudden elasticity of common prices. Thus, short-term price increases of some certain goods in the market do not mean inflation occurring. Economic theories dedicated that general price increases as aggregate supply decreases or aggregate demand increase. Aggregate supply decrease may be resulted from an adverse technology sock, labour supply decrease, or increase in production factor prices. Aggregate demand increase may be resulted from increases on governmental expenditure, tax cut, or increases in monetary supply. Inflation is often divided into three kinds: demand pull – inflation; cost push – inflation; and monetary inflation. Viewing from longer-term point, however, all kinds of inflation are generally of monetary nature. Decrease in aggregate supply can derive from adverse socks, such as labour supply decrease, and increases in production factors. But aggregate supply decreases do not lead to continuous price increase unless they are backed by the Central Bank through continuous monetary increase. Familiarly, Aggregate demand increase may be due to governmental expenditure increase, tax cut, or monetary supply increase. Government’s expenditure increase and tax cut are limited; therefore they are unable to cause continuous price increase unless the state budget deficit is financed by continuous money issuance. In this case, only one factor that is unlimited is monetary supply increase leading to continuous increase of general price. Thus, although there are may factors leading to price increases, economists usually figure out monetary supply as a major cause of long-term inflation. No matter where and when inflation happens, its cause is always monetary one. 1.2. How to measure inflation Inflation is often measured by economists through two common indicators, namely: CPI (Consumer Price Index), and GDP Deflator – or GDP adjustment, in another word. The former bases on a basket of consumption goods and their prices at two different point of time. The latter is on a foundation of total annual finished goods and services and their prices at two different points of time, they are generally on a basis of fixed and current price statistics. There are no significant differences among these two measures. The approach of GDP Deflator will calculate inflation more accurately given the definition of inflation. However, CPI has its own advantage that is it allows calculating inflation at any time, basing on the basket of commodities while GDP deflator just allows calculating the annual inflation after the year report on GDP is provided. %M+%V=%P+%Y Or %P=%M-%Y-%V Inflation is also classified basing on its levels: low or moderate inflation is inflation with annual price increase rate of less than 10 percent. High inflation (galloping inflation) is inflation with two- digit annual price increase rate. Super inflation is inflation with three-digit annual price increase or even higher. In contrary, the phenomenon of decreasing of price or as price increase rate is negative is called deflation. CPI is used by Vietnam to calculate inflation rate. The General Statistic Office publishes inflation data after calculating consumption price index (CPI) of a basket covering 494 primary commodities divided into 10 categories of goods and services. The shares, or the contribution ratio in GDP (which is so called weighted numbers) captured by respective price increases of goods and services categories are as follows: restaurants and relevant services accounts for 42.85 percent (of which, grains – 9,86 percent, and food – 25 percent); housing, electricity, water, fuels, and construction materials: 9.99 percent; transportation and tele-communication: 9.04 percent; household appliances: 8.62 percent; garments, hats, and food wares: 7.21 percent. Contribution to GDP of each category is equivalent to the change of that category’s price (compared to the base time, e.g. the previous year or month) multiplied with respective weighted number. CPI is an aggregating value of such components. 1.3. Negative effects of inflation Economists have vey different viewpoints regarding the scale of inflation’ adverse impacts. Some even suppose that losses caused by inflation are moderate, and this is true as long as inflation rate is kept at a stable and reasonable level. However, once inflation is at a considerable rate, its social effects on the property redistribution among individual are definitely significant, thus governments of all countries have to do their utmost to prevent this kind of inflation. If inflation is predictable, entities of the economy are able to response proactively, though there are still certain losses to the society. Inflation is similar to a tax imposed in money keepers, and the nominated interest rate is a sum of actual interest rate and inflation rate, therefore, inflation makes people less willing to keep money and the monetary demand decreases. This leads to more regular bank withdraws. Economists have provided the term of “shoe leather cost” to mention losses aroused due to more inconveniences and time consumption that people have to suffer comparing to those in noninflation period. In addition, inflation will certainly result to price increases, causing an additional expenditure of changing and reprinting product price lists to enterprises. This phenomenon is so called “menu cost”. Inflation makes relative prices change unexpectedly. For example, as long as inflation occurs, some enterprises increase their product prices (and of course menu cost aroused), while other enterprises want to keep the same prices to avoid menu cost; therefore prices of the latter group will relatively cheaper than those of the former group. Given the fact that a market economy distributes resources on a basis of relative prices, thus inflation lead to infectivity in microeconomic terms. Inflation can deviate II. Current situation of inflation in Vietnam and the world 2.1.Inflation in the world The world entered 2008 with a gloomy economic prospect. Some big economies like United States and EU have been dealing with increasing inflation and unemployment, and stanstill economic growth. Inflation in EU member economies was 4% in June 2008, breaking the inflationary record of 3.7% in May 2008, and twice as high as the inflation curbing target of ECB that keeping inflation in the euro zone of EU below 2 percent. United States has also been facing with inflation rate of more than 3 percent during this year; also two folded the number of previous years. Almost all developing countries and newly emerged economies have been suddenly fell in high inflation and faced with the risk of slowed down growth after a long time of rapid grow. Inflation in China is 8.5%, the highest level in recent 12 years; the number in Russia has jumped from 8 percent of the last year to 14%, etc. Some analyses reports that the above statistics are not efficiently calculated, and real inflation is expected even much higher. It means that two out of three parts of the world population are struggling with two-digit inflation. Major reasons of high inflation are increasing food and energy prices. Many analyses have showed that rapid inflation in developing countries derived from socks. However, a deeper reason lies in loosen monetary policies applied over recent years with a view to gaining desirable growth rate, which is the reason of all reasons. However, it is impossible to ignore a fact that triggered high and rapid inflation is the instability of financial sectors in developed countries, of which the largest economy of America is responsible for. It is clear that economic regression of American economy, which accounts for 25% of global GDP and 15% of total the world imports, has caused adverse impacts to the world economies. In addition, loosen monetary policies with continuous interest rate cuts and the US’ policy of maintaining weak dollar have even caused more difficulties to monetary policy management in newly emerged economies and developing countries. All analysis has clearly showed the reason of inflation Food prices are rising quickly. The rice price reached to the level of US$1200 per ton, doubled that of last year. Worries of food crisis has raised during the beginning of 2008 when some countries like India, The Philippines and others Africa countries were in the brink of serious food shortage. If there were no prompt support actions from Governments and international organizations, food crisis has been swollen and hurted those economies. Sadly, food prices are still on its high-sky trend. In China, for example, food price jumped by 22% last year while others slightly increased by 1.8%. It is demonstrated that food stuff accounts for 30% to 40% proportion of goods’ basket in developing countries, meanwhile this rate is only 15% in G7 countries. This shows that higher food prices have a much bigger impact on the overall rate of inflation than in richer economies, where food accounts for a smaller proportion of the goods’ basket. The question is why inflation was soaring in surprising way and in so short of time to various countries in the world? In fact, there are many analysis demonstrated that soaring inflation in developing countries was rooted from supplying shock. According to The Economist, from 2002 till now, emerging countries themselves with their big demand counted for 90% ( for oil and metal) and for 80% for food stuff has shot up the world demand on those commondities. It is also proved that developing countries has consumes a large amount of cereal for biology fuel. The short supply surely lead to continuous bumper price. The surface reason for food and fuel price shocks are lied on supply. However the underwater part of the iceberg showed that it is prolong loosen fiscal policies for dramatically development kicked the shocks. This lead to overheating development occurred for a long time in series of countries. The loosen fiscal policy, especially in emerging economies lead to an significant increase of monetary supply. Also reported in The Economist, the monetary supply in emerging economies has an average of whopping increase by 20% same period of last year and was triplicated the developed countries. Monetary supply increased will in turn push up the domestic demands that fosters food prices in high level. In a nut shell, the reason of all reasons lies on fiscal managing policy. Central banks in emerging countries had inadequate independence as well as flexation when maintaining loosen fiscal policy that uses low interest rate for political target to fast grow and employment. Given a tight fiscal policy, food prices could have been decreased that also well controls the inflation. In developing countries and emerging economies where apply inappropriate monetary policies, the increase of inflation is a prominent response to soaring prices of key products. It firstly came under the shape of surging food and fuel prices and gradually expands to increase price of other commondities. Due to fear of continuously rampant prices, there are upward pressures to level up salary. This in turn has impact to swell the price and contributes to a bigger inflation spiral. We could not unacknowledged the real detector of inflation that lies on the instability of rich economies, in which biggest responsibility is counted for America. The world biggest economy, America, for instance, conceded that they were sunk in economic depression. Economic depression was rooted from collateral crisis since end of 2007 that took away payment capacity of many banks, pushed banks into the brink of bankruptcy. Bear Stearns, for example, would have announced of bankruptcy if the America did not give a hand to support. This crisis were dragging along dozens of banks inside and outside America that burdened billions of USD loss. The crisis also spread to others business field such as Insurance and manufacture sector. Until now, the America has not recovered from this serious crisis. So far in the beginning of July, the America has once again shaken violently when 2 biggest banks, Fannie Mae and Freddi Mac had stuck with huge loans of 5000 trillion USD (which accounts for ½ of all market). It was second times in a month the Government and FED urged for urgent meeting to find the solution. The estimated bulk jumped to 1000 trillion USD. It is obviously the America might suffer from a vicious economic crisis. There were argument that this has been the 80 year worse crisis since the depression in 1929-1933. The America Government has applied various whole package solution to saves it economy since end of 2007. Despite high risk of inflation, America Government is maintaining perversely a loosen fiscal policy. The Federal Reserve has reduced interest rate several times since the beginning of 2008, at 2% currently comparing to 5-6% last year. The president Bush tried to persuade the Congress approve to reimburse 150 trillion USD of tax in an aim to pump money into circulation that in turn would encourage consumption and economic growth. This move however seems don’t have much positive effect to America economy. The stock market had month-on-month stumble, the dollar depreciated to those key money notes, inflation and unemployment reached to highest points in recent years. It is expected that the growth of America can gain only 1%, lowest in years. The recovery will only come end of 2009. Further analysis on land crisis in America also should be done. The reason of the crisis is from the move of “speculation” which were furnished by derivation fiscal tools of America banks themselves. The main reason lies above. Quick housing price increase phenomena during a year is rarely happened in America. Neglecting the fact that soaring price over real cost within a year would create bubble, lots of citizens could not believe that the price would crack down. Many parties were involved, including monetary trader. Bankers overstated housing price for one reason, the higher price was, the higher demand for house and the higher the service fee reached. Furthermore, American law was changed under which allowed multi fields financial trading, banks were allowed to do debit business (debit stock). The bank will issue a stock per housing loan and sell to investors. This considers a risk extract policy. Once the house price increase, it will immediately boost the stock value, encouraging collateral housing loans. Consequently, when the bubble was busted, investors failed to pay loans and being squeezed by banks as a result. Banks in turn also being threatened to serious losses by inability to pay loans, land price reduce, loosing stock value. Once banking system is broken, the economic crisis will be inevitable. A similar story could be told of Vietnams stock market and land market in which commercial banks play roles in boosting demand and pushing assets prices. Further studies to other commodities showed beside the above narrowed supply, there is increasing participation of derivation tools in asset speculation. Such tools as stockilized, future transaction, options transaction becomes strong tools in hands of investors to rare commodities. And its results are oil price reached its highest point ever recorded, gold and other farm products and raw material also surprisingly increased. According to Lehman Brothers, total entrusted assets amount in commodities index markets from 75 billions USD in 2006 to 235 billion USD in mid-April 2008, triplicate that in 2006. The Financier George Soros in his speech to policy makers in June 2006 affirmed that the current price bubble due to speculation were “supper bubble”. The result when that supper bubble busted, prices would be fallen to The “Y axis” causing unexpected serious impacts to world economy. It therefore proved that derivation fiscal tools put the international financial market into a insecure and fragile situation. America, even though is considered to create firm law framework for the stable development of financial market, got such big matters. Never occurred a depreciation which caused by out of control financial market under economy rules built up after the crisis in 1930. Previously, the inflation mainly caused by over money printing serving war expenditure, or soaring oil price without any actions of monetary policies, or the overheating development. At present, new fiscal tools that were made to increase banks and financial parties’ interest but without controlling tools are provoking the world economy. Obviously, the depreciation of America has negative effect to world economy. The America economy which accounts for 25% of global GDP and over 15% total import value in the world has strong impact to the world, dragging various economies’ depreciation. Several OECD countries announced to lower their growth criteria this year. American depreciation also has domino effect to Euro area and other big economies such as China, India, Brazil, etc,… Nevertheless, the policies which unrest cut down interest rate and maintain a weak dollar added troubles to developing and emerging economies. These economies are suffering from huge off shore capital inflows, especially the dollar, to enjoy the interest discrepancies. Since 1970 the capital inflows have been loosen and facilitated a lot. In order to cope with numerous monetary inflows, state banks in developing countries are facing a dilemmas. The escalading capital inflows will put strong pressure to appreciate the domestic money. However instead of appreciating the domestic money, state banks prefer to bump more money (by printing more money) in order to neutralize the capital and maintain the exchange rate, stimulating their exports competitiveness. This action of state banks in one side curbs domestic money appreciation but the other side boosts the inflation spiral. Mean times, the policy of increasing interest rate encourages more capital inflows. It therefore makes this policy be useless. Dramatically, the appreciation of domestic money will attract turbulent investments and thus increase inflation. This issue are provoking China. 2.2 Inflation in Vietnam Vietnam has witnessed two- digit inflation with highest level since 1992, which is also the highest rate in the region and falling into the top high of inflation in the world at current time. High inflation has become an enormous fear to the government and the people. Vietnam’s growth rate will certainly slow down in 2008. Real income of the people decrease, particularly that of farmers and paid workers. Inflation also threatens undermining achievements of poverty elimination that Vietnam gained over the past years. There are arising and unsolved questions concerning why inflation in Vietnam is much higher than almost all countries in the world. So far, inflationary risks have been reviewed and granted the top priorities in Vietnam. In the meeting in late March, the Government agreed on the central tasks given the current conditions, including: curbing inflation, stabilizing macro economy, ensuring social security and sustainable growth, of which inflation curbing is the first priority. Reasons of inflation have also discussed. In addition to objective ones, such as high inflation in the world due to increased oil, food, and input material prices, other significant contributors to high inflation in Vietnam are weaknesses in the government’s management, particularly monetary management. In general, difficulties of the economies are resulted from: impacts of investment capital boom in 2007, the unbalance between foreign currency and domestic currency capital, ineffective money flow controls and management, trade deficit, adverse effects caused by state economic corporation. Of which, the most remarkable reasons are trade and payment balance deficit; inflow foreign capital management; public investment management; and money supply management. Inflation in Vietnam has dizzily increased since 2008. The inflation in the first 6 months of 2008 is 18.44%, increased by 26.8% comparing to same period last year. The speed of inflation, though is now reducing in June, it is predicted to be at 27.25% for all year of 2008 after three policies of growth and inflation innovated recently by Vietnam General Department of Figure 1. Inflation in Việt Nam 30 27.25 20 10 7.8 5.8 4.84.2 6.8 0 4 -0.4 7.8 7.3 4.3 7.1 6.9 8.4 8.2 8.4 12.68.5 7 6.6 -1.6 -10 1998 1999 2000 2001 2002 2003 2004 2005 2006 Inflation 7.8 4.2 -1.6 -0.4 4 4.3 7.8 8.4 6.6 12.6 27.25 Growth 5.8 4.8 6.8 6.9 7.1 7.3 7.8 8.4 8.2 8.5 7 Source: General Statistic Office, data for 2008 is estimated 2007 2008f Statistic. The two digit inflation rate of Vietnam is evaluated highest since 1992 (refer to Picture 1), highest rate in the region and also amid of highest countries in the world. Surging inflation is now becoming serious concern to the economy. It threatens each individual life as well as economic activities. It has been such a long time since the three digit inflation in 1986-1987, the ghost of hyperinflation comes back and put heavy burden to Vietnamese. Vietnam puzzled with some rumors that told the old story of a crisis Vietnam with collapse Dong and of that the Government would carry out money changing as before. In fact, inflation is not a ghost but a real worry of Vietnam economy. Obviously, the growth will slow down this year. The net income of citizens will reduce, especially farmers and workers. Inflation, in additional, are threatening to remove achievements of Vietnam in poor elimination resulted from dozens of years afforts. If we turn back the hand of time to the end of 2007, at moment the inflation started in Vietnam. The official number announced by The General Department of Statistic was 12.6% in 2007, surprisingly high since 1992 disregarded the controversial new method of statistic. There were plentiful of warnings on surging inflation stated on news papers as well as be discussed in international and domestic workshops. However, the awareness about inflation were not fully understood. For example, there were irrational attitudes that put growth first but together with illogical statement “ must keep the inflation rate lower than growth rate”. The increase of inflation were shortly assigned to external reasons such as surging fuel price and foodstuff price in all over the world. Reasons for inflation in Vietnam were announced that the cost inflation were boosted due to increase import value, or “import inflation”. There were also several objective reasons such as disease in cattle, fowls and prolong damaging cold causing farming losses. Some very firstly solutions of the Government aimed at boosting supply such as cutting tax, subsidies. These solutions in contrast, caused budget deficit. Recently, the Government has to increase the fuel price by 30% and conceded by the Financial Ministry that the National Budget can not afford the subsidies of 60-70 trillion USD from now on end of the year. Not until the unrest surging inflation early 2008 and lots of hanging question of why inflation in Vietnam is significantly higher than those of other countries in the world. In the meantime, all policies aiming at supply do not work, were inflation risk and reasons once again put into the discuss round table and curbing inflation put priority. In regular meeting end of March 2008, Government got the consensus: curbing inflation, stable the marco economy, ensuring living stands, stable growth, in which curbing inflation were put first priority. On 30th March 2008, The president Nguyen Tan Dung gave his important speech on 7 solutions to curb the inflation that evaluated as feasible solution. Inflation roots were deeply analysised. Besides the increase of fuel price, food price, and material price, the weakness of managing competence of Government, especially financial management, were frankly conceded. On the regular meeting early 2008, the president Nguyen Tan Dung frankly took responsibility on weakness of management that is still subjective and in fiercer. Paradoxically, Vietnam is an agriculture country that obtains significant achievements: 2nd biggest rice exporter in the world, 1st exporter of various farming products such as shrimp, coffee, rubbery, etc, …. In other words, there is no concerns about food security in Vietnam. In the mean time, foodstuff accounts for big proportion of CPI of commodities basket (food accounts for 43% of total basket). Vietnam, according to rational idea, should have stronger capacity in curbing inflation than others food and fuel dependent countries. Why this contradiction happened? 3. Deeply analy inflation roots in Vietnam Inflation in Vietnam has deep root lies on instable of the economy. According to Mr. Alan Greenspan, formal president of FED, there are several reasons leading to economic difficulties: impact of bursting investment since 2007, unbalance between domestic currency and foreign currency, ineffectiveness in capital flows management, import surplus and negative impact from state own economy. Details are as follows: 3.1. Trade deficit and payment balance deficit. Let have an overview on commercial deficit. According to the report of World Bank, the deficit of temporary account in 2007 was estimated to 15% GDP, which worried by World bank (Picture 2). It were announced by GDS on 1st July 2008, import surplus in 6 first months was estimated 14.8 billion USD, accounts for 49.8% the export turnover, much higher than overall of 2007. Import surplus is a chronic disease of Vietnam years on years. Import surplus advocates agued that Vietnam is on process of modernization and industrilization so it need a big import amount of machine. Furthermore, export enterprises also need input material. In the contrast, recently, the portion of import should be take into consideration which significant Figure 2. Trade and Payment balances of Viet Nam in 2000-2008 increase of consumption goods, especially luxury goods. Importing car separately touched the point of 1.306 billion USD in the first five months of 2008, jumped by 392,4% the same time of last year, the gold import of enterprises ( not state bank) went up to 4 billion USD, making Vietnam the world biggest gold importer, higher than China and India did. In the meantime, import of other commodities also set up new peaks such as steel and fertilizer were double last year. The paradox is that despite prices are on high-sky trend, those imported commodities will be re-exported out of the border, not to be used in manufacture. It is common knowledge that too big and prolong import surplus ( comparing with export and GDP) will seriously sterilize balance of payments. Although balance in Vietnam is still evaluated surplus thanks to foreign currency storage, foreign Investments (both direct and indirect investments), offshore remittance. However, if import inflation is considered as one of reasons causing high inflation in Vietnam, over surplus import is threatening the marco economy. 3.2. Offshore capital inflows management Foreign investment has played a crucial role in to the economic growth in Vietnam. These foreign currencies do not only contribute to the economic growth but also compensate for the commercial deficit and enhance the national reserve. The underlying reason of commercial deficit in Vietnam lied on exchange policy management. For years, the dollar seriously depreciated versa almost key currencies in the world. The year on year peg of the dong versa the dollar resulted to appreciation of the dong versa the dollar, contributing to curb export and to encourage import which in turn caused the continuous deficit on temporary accounts, fluctuating from 1.7% to 4.9% GDP in 3 years. According to Vu Quang Viet, statistic expert of United Nations predicted that the dong appreciated 13% versa the dollars. Consequently, the president of Vietnam has command to parties to curb import surplus as an important solution to stable the macro economy and constrain the inflation. High inflation has become an enormous fear to the government and the people. Vietnam’s growth rate will certainly slow down in 2008. Real income of the people decrease, particularly that of farmers and paid workers. Inflation also threatens undermining achievements of poverty elimination that Vietnam gained over the past years. There are arising and unsolved questions concerning why inflation in Vietnam is much higher than almost all countries in the world. So far, inflationary risks have been reviewed and granted the top priorities in Vietnam. In the meeting in late March, the Government agreed on the central tasks given the current conditions, including: curbing inflation, stabilizing macro economy, ensuring social security and sustainable growth, of which inflation curbing is the first priority. Reasons of inflation have also discussed. In addition to objective ones, such as high inflation in the world due to increased oil, food, and input material prices, other significant contributors to high inflation in Vietnam are weaknesses in the government’s management, particularly monetary management. In general, difficulties of the economies are resulted from: impacts of investment capital boom in 2007, the unbalance between foreign currency and domestic currency capital, ineffective money flow controls and management, trade deficit, adverse effects caused by state economic corporation. Of which, the most remarkable reasons are trade and payment balance deficit; inflow foreign capital management; public investment management; and money supply management. 3.3.Management of public investment In term of theory, this is also a way of selling ineffective enterprises to collect money for the State, transforming from owning tangible assets to owning value. Then, the collected money will be invested into more profitable areas, thus, its value will not be lost but transformed into another form. For joint-stock enterprises in which the State holds shares accounting for less than 50 percent of charter capital. Actually, the rest of material assets has been sold to individuals and they have ownership to the share that they bought, but it is impossible to find any cases in which factories or mechinaries are disassembled of taken to pieces to distribute to these individuals. However, there are still a phenomenon of buying shares in bulk taken in some places, but people have failed to discover such muster in a group of shareholders. In fact, these enterprises are operating very well under the management of a new board of directors, even shareholders representing the State in these enterprises are also put under control of such board of directors. In accordance to a research, so far, none of equitized enterprises have been privatized; up to 90 percent of existing joint-stock enterprises have recorded good business performance, increased their state revenue contribution, labourers income, social capital mobilization, and job creation, and stopped lost indemnification from the state budget. The rest 10 percent of poor performing enterprises are due to a fact that they were already of poor performance when they were SOEs, furthermore, they failed to define proper business strategies, and to settle shortcomings neither. In addition, there have beeb also some scandals in these enterprises, such as: inner disunity, fighting over power, some even suffered from undue interference of local authorities right from the stage of equitization project approval to sending representative personnel of state capital to the new board of managers, etc. Since the beginning of 2005, the adoption of public bidding for shares, for large enterprises (sold out shares are of more than 10 VND billion) it is required to be taken on bouse, has further facilitated the transformation to joint-stock companies with publicized orientation. Even in his analysis on the classic capitalism-oriented society, Anghen did state: “Capitalism-oriented production is because joint-stock business companies are no longer of private production”, so how equitization of SOEs can be make privatization under current mechanism in Vietnam 3.4.Monetary supply growth Inflation is basically a monetary phenomenon. Persistent inflation occurs by an injection of purchasing power into the economy beyond its absorptive capacity. It is empirically well known that excess liquidity usually stimulates both output (temporarily) and prices. But it is important to distinguish the case in which this liquidity injection occurs internally and the case in which it comes from external sources. The classical balance-ofpayments crisis of the 1960s-80s, in which IMF played a crucial role, starts with an irresponsible government which over-spends its revenue. The resulting fiscal deficit is financed by printing money. This increases domestic credit and money supply, and creates inflation. On the balance of payments, the current account worsens and the capital account also deteriorates as the country sinks deeply into debt until no one lends money to this country. The monetary authority runs out of international reserves to pay for imports and debt repayments. The country has no option but to go to IMF and ask for an emergency loan in exchange for the monitored execution of belt-tightening macroeconomic measures. However, as an increasingly large number of developing countries open up to capital inflows, another type of macroeconomic problem emerged in the 1990s. As a country liberalizes its capital account, foreign investors are aroused and begin to invest aggressively in that country. They often follow herd behavior under the condition that information is imperfect and domestic financial markets are primitive and not properly regulated. Foreign funds may come in the forms of bank loans, stocks, bonds, real estate purchases, and so on. FDI, remittances, and even ODA may also be attracted to a country which is rumored to be a rising star. As these funds are received, there will be broad repercussions in the macroeconomy through the usual Keynesian multiplier effect. This generates consumption and construction booms as well as land and stock market speculation. Goods markets and asset markets reinforce each other to sustain the overheating. This is the situation that Vietnam and China are experiencing at present. The macroeconomic symptoms of irrational exuberance include strong growth, accelerating inflation, rising international reserves, and gradual overvaluation (the loss of international price competitiveness). This mix is troublesome enough, but the real risk is the possibility of serious crisis if this situation proceeds too far. A severe reversal may occur as asset markets collapse, foreign investors leave the country, the currency plummets, bad debt mounts, and credit crunch emerges. This type of crisis, caused by an excessive inflow of foreign funds and their subsequent withdrawal, is called the capital-account crisis, as opposed to the traditional current-account crisis generated by loose fiscal policy. The Asian financial crisis of 1997-98 was a typical capital-account crisis, but Vietnam was not directly hit by it because its capital account was closed at that time2. To be not too alarmist, however, it should be stressed that such a disaster is not inevitable. Even with continued capital inflows, serious crisis may not develop and the economy may suffer only from mild inflation and mini asset bubbles. Outcome depends on the size and nature of capital inflow as well as the appropriateness of policy response. IV. THE IMPLEMENTATION OF MONETARY AND FISCAL POLICIES UNDER HIGH INFLATION IN VIETNAM 1. The execution of monetary policy during the last time In 2008, domestic commercial banks need to utilize their advantages and at the same time expand their markets to foreign countries. Global competition requires them to improve their financial capacity and technological standard as well as the management capability and the quality of products and services so that they can maintain and increase their market share. In 2008 the equitization (partial privatization) of State-owned commercial banks will continue at a higher speed. This is one of the most important measures to accelerate the international integration process of the domestic banking sector. It will create favorable conditions for commercial banks to improve their financial capacity and enhance their competitiveness, helping them operate in accordance with market principles. Domestic commercial banks can seek the financial support and learn the management experience of foreign banks in order to develop new kinds of products and services. The participation of foreign banks in the Vietnamese banking sector will also help domestic commercial banks develop agent relations and expand cooperation with foreign partners in the fields of international payment and technological exchange. However, due to their limited financial capacity and low competitiveness, and due to growing global competition, domestic commercial banks will possibly have to merge. Those banks that are inefficient may have to close. The establishment of new banks will make the shortage of manpower, especially highly qualified human resources, even more serious. This is a pressing problem of the entire domestic banking sector. In such a situation, to ensure the safety of the banking system, the State Bank of Vietnam (SBV) must focus on improving legal documents, especially the regulations related to licensing, safety supervision, bankruptcy, and deposit insurance. Improving the capability of bank inspectors and supervisors is a need. The Government-set target for GDP (gross domestic product) growth in 2008 is nine percent. Another target is to curb the inflation rate below the GDP growth rate. Curbing the inflation rate in 2008 is not easy because prices of fuels, materials and food in the world market are rising and the amount of foreign currency flowing into Vietnam is increasing. To contribute to the realization of the above two targets, and to ensure the safety of payment activities within the entire banking system, SBV will be more active and flexible in managing the monetary market based on market principles. SBV will apply appropriate monetary policies to control and regulate the amount of money in circulation as well as to adjust the market interest rate in accordance with the orientation of the State. SBV has worked out a number of measures. Specifically, it will improve the capability for short and medium-term forecasts about the macroeconomic situation, the monetary market, and the inflow of indirect foreign investment. In addition, SBV will perform the open-market business more flexibly to withdraw money from circulation and regulate the amount of usable capital at credit institutions. SBV will also be more flexible in managing interest rates. At the same time, SBV will continue to improve its legal documents, focusing on the draft State Bank Law and draft amendments to the Law on Credit Institutions, which will be submitted to the National Assembly for approval. Appropriate measures will be taken to accelerate the reorganization of domestic credit institutions and the modernization of the banking sector as well as to expand the use of non-cash means of payment in the economy. Tthe REER index is computed from the monthly price and exchange rate data of Vietnam and its 21 largest trading partners. Vietnam's REER was on a rising (appreciating) trend until 1997-98 when the Asian financial crisis broke out. During this crisis, Vietnam's REER was pushed up temporarily as the currencies of most neighboring countries fell relative to VND. Subsequently, the REER of VND declined (depreciated) moderately until 2003 then rose (appreciated) modestly until 2007. The IMF Staff Report stated in 2006 that "[t]he CPI-based real effective exchange rate fluctuated significantly over the last few years without exhibiting any noticeable longterm trend." (IMF, 2006a, p.30) If Vietnam is going through an economic boom caused by external capital inflows, why is overvaluation not detected? The answer is the real depreciation of the US dollar. From the peak of March 2002 to end 2007, the REER index of USD declined about 20%. The overvaluation of VND, which is closely tied to USD, should be measured against this declining trend of USD. As the counterfactual calculation in Fig. 3 shows, Vietnam's REER index should have continued to fall if Vietnam had maintained the inflation rate of 3.1%, which was the actual average rate during 1996-2003, after 2004. Relative to this trend, VND was already overvalued 22% in September 2007. The apparent lack of overvaluation is therefore spurious. The Vietnamese dong is already overvalued, but this fact is camouflaged by the falling US dollar. Should VND be floated or at least made more flexible? It is reported that the State Bank of Vietnam is pursuing a roadmap toward a more flexible exchange rate regime, and IMF strongly supports it. However, it is not clear what this policy implies for the movement of VND. First of all, the Vietnamese foreign exchange market is too shallow and primitive relative to the size of global capital markets. The authorities should have the ability to curb speculation and volatility when Vietnam liberalizes currency trade ("fear of floating"). Second, after floating, whether VND should appreciate or depreciate is not clear as both would produce negative effects (further loss of competitiveness versus further booms and inflation). To say that everything should be left to the market, including any volatility or misalignment that comes with it, does not sound like good advice to a transition economy. After all, it is difficult to find a satisfactory solution as long as the root cause of the unwanted boom and inflation, namely large capital inflows, is not directly addressed. Finally, the most useful lesson from the recent currency crises appears to be that capital flows should be properly monitored, and regulated if necessary, in the process of capital-account liberalization. This is a double-edged sword, because too much control would scare foreign investors and result in lost opportunity in mobilizing foreign savings. Vietnam should begin to study concrete policy options to stabilize capital inflows and manage capitalaccount crisis risks without sacrificing its development potential. 2. The execution of fiscal policy during the last time While receiving a large amount of external funds is the root cause of the current inflation, it is not the only cause. Fiscal activism is an additional internal factor which accelerates the economic boom created by the injection of external purchasing power. Supported by strong economic performance, the Vietnamese government has ambitious plans to upgrade the country's infrastructure. Sustaining high growth is a top priority and any sign of slowdown is met by renewed efforts to accelerate public investment projects and secure their inputs by any means. According to GSO, the budget deficit amounted to 5% of GDP in 2006 and is increasing. Pro-cyclical fiscal spending has also been observed elsewhere including Indonesia and a number of resource-rich Latin American countries such as Mexico and Brazil. As the economy grows strongly, public investment is also expanded to provide necessary infrastructure and diversify economic structure. However, risks associated with such policy should be well recognized. Aggressive spending may lead to huge indebtedness and economic crisis when the situation turns around. Both commodity markets and investor psychology are known to fluctuate wildly over time. Countries with externally driven booms should install mechanisms to smooth these swings, including a public fund to save windfall revenues for rainy days. In sum, current inflation in Vietnam should be understood as the consequence of three combined forces: (i) pressure from the large inflow of foreign funds (main cause); (ii) aggressive public investment; and (iii) exogenous and largely uncontrollable shocks from global commodity markets, animal diseases, and natural disasters. One puzzle concerning Vietnamese inflation is the apparent lack of overvaluation. Exchange rate overvaluation is usually measured by the real effective exchange rate (REER), an exchange rate against multiple trading partners adjusted for their inflation relative to the home country's. In essence, REER is an overall index of international price competitiveness with weights reflecting the importance of each trading partner. As an increasing number of countries face the syndrome of excessive capital inflows, some lessons should be recalled from the painful experience of capital-account crises in the 1990s and the early 2000s. The most important thing is that the macroeconomic situation must be diagnosed correctly as being caused by capital inflows, not as a purely domestic malaise or a current-account crisis. This is necessary to avoid wrong measures that would aggravate the situation. Fiscal and monetary policy should be managed to lean against the privatesector wind rather than toward it. That means that moderately tight macroeconomic policy stance is appropriate while capital flows in. If, unfortunately, a big reversal occurs and domestic demand begins to shrink, policy stance should be revised quickly to be more expansionary. In this regard, Vietnam's current fiscal spending is overgenerous given the already strong private-sector demand and the soaring land market. The IMF's advice to tighten fiscal and monetary policies is appropriate (IMF 2007). Asset markets such as land and stocks should be monitored carefully and restrictive measures should be introduced if there is evidence of speculative bubbles. Between the land and stock market, the former moves more slowly while the latter, driven by short-term market psychology, exhibits more volatility. For this reason, the monetary authority may consider accepting moderate corrections and mini-crashes in the stock market rather than trying to prop up the prices when they wants to fall. This is necessary to avoid making a small bubble into a gigantic one, for which soft landing is very difficult. 3. Some comments on monetary policies with high inflation situation in Vietnam Unless inflation is prevented, there will be further unrests to social and economic life of Vietnamese people. Thus, inflation fighting is the first concern of policy makers. Inflation showed some signs of increase in the last years, and reached remarkably high levels in late 2007 and 2008, which is resulted from the pursue of widen monetary policies aiming at desirable growth targets. This leads to too high and rapid money supply increases, and eventually inflation. The situation is even more serious given international inflation conditions and Vietnam’s deeper international integration. The perception and the consideration of inflation remained subjective until the end of 2007, therefore failing to provide proper and timely measures to cope with the situation. Some administrative measures of monetary policies during this time even made the situation more serious. Just in March 2008, proper and effective policies were provided, although there is still some certain time latency. Although it is rather late, the option of tightening monetary policies and interest rate increase as tools of inflation fighting is seen effective and suitable. This has resulted to the slowdown of inflation rate in June. Recent interventions of the State Bank, including direct and indirect measures, with a view to effectuating tightening monetary policies, are provided basically in the right manner, however, there remains some lack of rationality in terms of time, dosage, and implementation schedule, particularly during the end of 2007 and the beginning of 2008. This demonstrates a fact that the State Bank of Vietnam has not been serious enough in their analyses, assessments, and forecasts, especially with the supervision of the whole system, as a major monetary policy management authority. So far, monetary tightening policies adopted by the State Bank, including basic interest rate increase, and foreign exchange rate loosening, have been effective. This means the adoption of market-oriented mechanism to monetary policy management is definitely appropriate. Have the State handled market signs in more sensitive and better ways, thereby making prompter policy responses, the results would have been much more impressive. It is necessary to make policies further transparent in the time to come because this will create considerable contribution to people and enterprises’ confidence enhancement. Inflation fighting has been set as first priority with “whole package” measures. This means monetary alone can not fully prevent inflation. Moreover, inflation derived from fiscal policies too. Therefore, synchronous implementation and close connection of fiscal (public spending) and monetary policies aiming at common goals are crucial factors. In other words, tightening monetary policies will not lead to results as wishes unless public spending and investment are tightened, particularly to ineffective investment projects. As a matter of fact, although domestic inflation may be curbed by the end of this year it is still likely to suffer from adverse impacts of the world price increase, which could be a significant constraint to inflation fighting policies in Vietnam, and thus should be paid efficient attention to. Such conditions require more precise, cautious, and flexible solution to prevent the economy from falling to a worse situation. There are some concerns that following inflation it could be regression which is even more terrified than inflation. Such concerns are rather reasonable given too high capital costs, with annual lending interest rate of more than 20 percent, burdened by enterprises. Almost all businesses find themselves hardly make profits with such interest rates. Furthermore, many enterprises made notable investments into securities and real estate markets while they are currently frozen. This fact will lead to bankruptcy of many businesses by the end of 2008, and then difficulties faced by the banking system due to bad debt increase. It is reckoned that this should be seen as an opportunity to restructure business system, including banks also, towards market-oriented regime. The battle against inflation is always a touch and suffering one, requiring painful commutation. However, these are expenses to restore macroeconomic stability – a foundation factor for sustainable development.