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Economist says Vietnam’s trade deficit disease needs urgent treatment   2010-09-06 - Tuoi tre

An economic advisor to the Government stresses that to achieve macroeconomic stability, Vietnam should not rely on devaluing the dong, but strive instead for a trade surplus.

 

The trade deficit volumes in recent years

Dr. Tran Hoang Ngan, the Deputy President of HCM City’s prestigious Economics University, is also a member of the National Advisory Council for Finance and Monetary Policies. 

 

Talking with Tuoi Tre recently, Ngan said that since 1986, the beginning of the doi moi (renovation) era, Vietnam has had remarkable economic success: GDP growth rate averaging seven percent per annum and an increase in income per capita to $1160.  However, macroeconomic stability has proven elusive.  Trade deficits have been very high over the last few years, which has decreased foreign currency reserves and forced Vietnam to devalue the dong continuously.  To obtain sustainable development, Ngan declares, it is necessary to control the trade deficit.

 

Tuoi tre: What alarms you about Vietnam’s trade deficit?

 

Mr Tran Hoang Ngan

Tran Hoang Ngan: The Government’s goal is to curb the trade deficit at below twenty percent of export revenue. However, we now only consider the trade balance, that is, the gap between exports and imports, and that doesn’t show the whole picture of the economy. In other countries, the current accounts balance is considered.  Current accounts include not only the balance on trade in goods, but also purchases and sales of services.  Services include receipts or payments for things like tourism, healthcare, money remittances and debt payment.  If we counted services as well, Vietnam’s trade deficit would be higher.

 

Economists are alarmed if the current account deficit exceeds five percent of GDP.  It’s been more than eight percent for Vietnam these last three years.

 

The high trade deficit forces us to adjust the dong/dollar exchange rate regularly. Our trade deficit is expected to reach $13 billion this year.  That may be less than  20 percent of export revenue, the official target, but it isn’t satisfactory in my view.  Until we can control the trade deficit, we’ll have to devalue the dong more frequently, with bad consequences for the investment environment and for people’s everyday life.

 

Tuoi tre: Some experts argue that the deficit on trade in goods is offset by foreign direct investment (FDI), kieu hoi (remittances – money sent ‘home’ by overseas Vietnamese) and loans.

 

Dr. Ngan: We have bet heavily on attracting FDI, giving substantial incentives to investors.  However, that is a short-run solution.  In the long term, this will make the trade deficit more serious.  Real estate projects, for example, need a lot of foreign currency to import construction materials. The projects’ developers sell their products in Vietnam’s market and then collect foreign currency to send profit abroad.  It’s the same for foreign-invested consumer goods: sooner or later the investor will want to take his profit out of the country.

 

While we have focused on attracting FDI, we’ve not given many investment incentives to our own businesses.  Further, our homemarket is wide open

to foreign imports.

 

I’d like to see a big change.  We ought to use our foreign currencies to import machines and equipment for production, and waste less on imported consumer goods.

 

Tuoi tre: Wouldn’t that violate our commitments on trade liberalization, since Vietnam is now a member of the World Trade Organisation?

 

Ngan:  We can reduce the trade deficit by installing technical barriers.  Of greater importance, however, is that we help our enterprises to make good products for local consumption and export. We need to calculate how to offer more incentives that are ‘WTO-legal’ to Vietnamese firms, supporting them in obtaining capital and giving them preferential tax and land policies.

 

It is really necessary to get our interest rates down.  Deposit interest rates ought to be eight percent per annum, not eleven – which is very high.  The lending rate to entrepreneurs should not be higher than twelve percent.  Domestic manufacturers will not be able to sell for less if they have to bear high interest rates. In other countries now, central banks set a base interest rate of less one percent per annum, while in Vietnam the rate is seven or eight percent.

Tuoi tre: Some people have said that to control the trade deficit, it is necessary to control public spending.  In other words, they say the problem is our national budget deficit.  Do you agree?

Ngan: Yes.  We need to reduce the budget deficit to five percent of GDP, and then to three.

 

Tuoi tre: Do other ASEAN countries face a trade deficit?

 

Tran Hoang Ngan:  They did, back when the financial crisis broke out in 1997. Since 2002, however, Indonesia, Thailand, the Philippines and Malaysia have all become countries that export more than they import.

 

The trade deficit can be brought under control in into two phases.  By 2015, we ought to reduce the trade deficit to below 10 percent of our export revenue.  We should aim to be moving into an export surplus by 2020.



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