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When the entire burden is put on the shoulder of monetary policy   2010-11-25 - Viet Nam Net

Economists always strive to change monetary policies when they think that it is necessary to do something to foster economic growth and curb inflation. Meanwhile the fiscal policy, an important link of a chain in the national economy, has sometimes been ignored. In fact, it would be ideal if both the fiscal and monetary policies are used harmoniously to attain larger economic goals.

Salt and the story about exchange rates

 

When local TV channels and newspapers reported the news about the severe floods in the central region, viewers could see the image that thousands of tons of unsold salt was melted. This also meant that all the efforts of farmers producing salt were in vain. Farmers had been warned that it would be very difficult to sell salt because of the profuse supply.

In the meantime , Vietnam still has to import hundreds of thousands tons of salt.

At the National Assembly’s session, when answering questions from the National Assembly’s deputies, Minister of Industry and Trade Vu Huy Hoang said that the import volume is about 200,000 tons. This is industrial salt which still cannot be made domestically.

Everyone knows that Vietnam has great potential for salt production. However, over the last 10 years, Vietnam has been lacking industrial salt and it has to resort to importing the product. Even though it would be much less difficult to produce salt than refine oil or mine bauxite ore, after ten years Vietnam still has not drafted a plan to produce industrial salt,

Nearly ten years ago, people once heard about a project on a salt industrial zone in Ninh Thuan province. However, the project has yet to be undertaken. Therefore, importing salt remains the easiest and fastest measure to meet domestic demands.

The story about salt importation shows the nature of Vietnam’s trade deficit. Vietnam exploits crude oil, but it has to import petrol and gas. It sells titan and iron ores and has to import metals. In order to make a pair of shoes, it has to import different kinds of materials.

Therefore, the more Vietnam exports, the more materials it has to import. This is the main reason behind the payment balance deficit and the dollar demand-supply imbalance.

Vietnam’s economy has been relying on foreign trade. However, it imports more than it exports. Trade still cannot bring enough dollars, and it has even caused a dollar shortage.

The stories about importing salt, the prolonged Dung Quat project and the underdeveloped supporting industries show that people should not expect long-term stabilization of the exchange rate.

A financial expert once said that after 20 years of opening the market to the world, China has become a country with trade surplus. Meanwhile, Vietnam, after 20 years, is still worried about the trade deficit and the foreign currency instability.

Inflation, monetary policies, and fiscal policies

Policy makers have been urged to raise the interest rates in order to fight inflation. The State Bank of Vietnam has been requested by others to consider applying policies that allow a quick withdrawal money from circulation in order to fight inflation.

Meanwhile, sometime ago, policy makers were urged to lower the interest rates in order to foster economic growth.

It seems that the interest rate policy has to bear a heavy responsibility that it has to serve the task of stabilizing the macro-economy.

At the end of the third quarter, experts raised a question if Vietnam should continue lowering interest rates when the inflation rate was going up, and the economic growth was optimistic. Another question was if Vietnam should strive to obtain high economic growth by spending more money.

At that moment, Vietnam was warned about the risk of high inflation. ADB said that the loosened monetary policy would lead to escalating inflation and put pressure on the payment balance.

Meanwhile, the monetary policy and fiscal policy do not “match each other”. An official from the State Bank said that while the bank deposit interest rate was encouraged to be slashed to 8 percent, the Ministry of Finance continued issuing government bonds at higher interest rates.

An expert said that this is a typical evidence for the inconsistency of the monetary and fiscal policies

The expert also said that when policy makers are requested to tighten interest rates in order to fight inflation public investments are still expanding Public investments are really the threat to inflation.



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