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Why has the inflation rate climbed to the peak of the last 20-years?   2010-11-26 - Viet Nam Net

The consumer price index (CPI) in the last three months saw the sharpest increases in comparison with the same periods of the past 20 years.

Meanwhile, HCM City has announced that its CPI in November increased by 1.73 percent over the previous month, and Hanoi 1.93 percent. This means that the CPI increase in November of the whole country is be relatively high.

High inflation is the result of a combination of factors

Suppose that the CPI increase of the whole country in November is equal to that of HCM City, or 1.73 percent. The CPI would increase by 9.44 percent in the first 11 months of 2010 and increase by 10.95 percent over the same period of the last year, exceeding the initially targeted level of eight percent.

The high CPI increases in the last three months surprised many people, because the CPI was well controlled in the months before. The CPI increases in the last thee months (September, October and November) were the highest ones in the same periods of the past 20 years.

Official statistics show that the credit growth rate in the first 10 months of the year only reached 22.5 percent, while the M2 money supply increased by 21.7 percent. The levels which are not high if comparing with previous years.

In fact, the actual total increase in money supply in the national economy may be much higher than the released figure. The total value of the Government bonds issued in the first 10 months of the year reached 80 trillion dong. Besides, due to the dollarization in the national economy, people do not want to keep Vietnam dong thereby making the money supply increase.

The total investments in the national economy in the first nine months of the year reached 44.19 percent of GDP. The ICOR (Incremental Capital Output Ratio) in the first nine months of the year was 7.19, while the ratio was over 8 in 2009.

The figures show that the investment efficiency in the last two months is very low. Growth of the national economy still depends much on investment capital, mainly the investment of the state economic sector.

Low investment efficiency plus the large volume of money gained from bond issuance and put into circulation has also put pressure on inflation.

High inflation rates in the last three months have also been blamed on a combination of many other factors. The natural calamities in the central region have caused severe damage to the region and made the production stagnant. In Hanoi, new price levels have been taking shape after the great ceremony of the 1000th anniversary of Thang Long-Hanoi.

Ten percent depreciation of the dong in the last two months has made imported products become more expensive.

The consequences

With high inflation rates bank interest rates have been pushed up, thus hindering the business plans of several enterprises. Meanwhile, at the moment it is clear that the stock market has few positive signs, especially when people and investors are worried about high inflation rates. The prices of stocks keep falling even though many businesses have announced satisfactory business results.

High inflation can be seen as a type of tax imposing on consumers, who hold cash. In the long term, high inflation will badly affect Vietnam’s achievements in poverty elimination and hunger reduction.

High inflation will prompt people to hoard gold, goods and foreign currencies instead of the Vietnam dong.

What to do?

In 2008, when Vietnam also faced the high inflation, the government took a series of drastic measures to intervene in the national economy. The State Bank increased the required compulsory ratio, raised basic interest rates and issued compulsory bonds. The government also stopped many public investment projects.

These were unfavorable decisions, but they really helped curb the increasing inflation in that year.

The lessons of 2008 can also be applied now. In fact, the State Bank is also trying to tighten the monetary policies. And it is very likely that the government would take actions soon to tighten fiscal policies. First of all, it is necessary to reduce the budget deficit and check public investment projects. In the long term, the most strategic measure is to restructure the national economy in order to increase the investment efficiency.

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