Harmonizing monetary policy with fiscal policy in 2023 would help Vietnam’s government curb inflation and cope with forex risk pressures to ensure macroeconomic stability, says National Financial and Monetary Policy Advisory Council member Le Xuan Nghia.
Vietnam succeeded in curbing inflation and securing fast economic expansion last year. What do you think about this?
In 2022, Vietnam had one of the highest growth rates worldwide, and it controlled inflation while keeping forex rates stable.
But its interest rates were among the world’s highest, at an irrational level, while credit supply was very low. Both are still having negative effects now, and will continue to do so at least in the first two quarters of 2023.
Inflation in 2022 stood at 3.15%, but interest rates at some points hit 13-14%, so actual interest rates were up to 16-17%. It was theoretically inexplicable. Technically, monetary policy did not work well.
The Vietnamese business community is still facing many difficulties due to two years of the pandemic, but must confront such high interest rates. Market liquidity has fallen but the State Bank of Vietnam has not increased credit supply, therefore lenders have been forced to raise deposit rates to lure money from the public.
It’s not natural to tighten monetary supply due to fear of inflation. In 2022 and 2023, inflation has not been caused by monetary factors - it's the lack of money in circulation that's behind high interest rates.
The Ministry of Finance’s decision to reduce the petroleum tax made substantial contributions to Vietnam’s 2022 success in curbing inflation because petroleum imports made up 60% of its total import spending.
Therefore, in 2023, whether inflation is well controlled or not will largely depend on whether or not the ministry will maintain reduced import taxes for commodities, especially petroleum imports, or whether global prices will go up or not. It will not depend on Vietnam’s efforts to tighten monetary policy.
What should be done this year to cut interest rates and support growth?
Credit supply in 2022 was too low. It was just 7% higher than in 2021 while GDP growth exceeded 8%. In 2021, credit supply increased by 11% against 2020 while the GDP growth rate was 2.4%. Low credit supply in 2022 will result in slow GDP growth in the first half of this year.
In theory, low credit often has two consequences: slow GDP growth and deflation. Without deflation now, low credit supply in Vietnam will hike interest rates, directly hiting the business community. Low credit in 2022 and this year will cripple the economy.
Therefore, policymakers and regulators need open approaches to solve the problem and support the business community and economic growth.
Public investments, which can rise to huge amounts, are often expected to serve as a supporting tool. However, contractors are facing unfavorable conditions on public-funded projects because construction materials are more expensive and they have to take out bank loans to complete these projects before they are recompensed.
Major construction contractors have said they do not want to complete projects quickly in order to cut losses. They are just trying to maintain pace to pay their workers. There are cases where site clearance has been completed but contractors do not want to break ground because they are not profitable.
Another issue is that Vietnam's 2022 unemployment rate was very high. This means that low CPI or high GDP growth doesn't carry much meaning.
A proper approach now for the economy is to increase credit supply on one hand and use fiscal policy on the other to reduce import taxes, reduce commodity prices and control inflation. Concerted coordination is needed because current core inflation is around 5%. If credit supply increases, it will reduce interest rates but increase inflation pressure.
Cutting import taxes will benefit both manufacturers who import materials and the business community in general, noting that these cuts will not cause interest rates to jump. It is essential to reduce interest rates and control inflation in 2023.