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June 7, 2008

Govt asked to tighten policy to fix 'overheating' economy

The IMF said Friday Vietnam should tighten monetary and fiscal policy to fix its "overheating" economy, which has been battered by double-digit inflation and a widening trade deficit.

The communist government should raise interest rates, cut the budget deficit, improve oversight of the banking sector and push market reforms, said AFP quoted International Monetary Fund (IMF) country chief Benedict Bingham as saying.

The IMF representative was speaking at a twice-yearly meeting between the government and foreign donors, the Consultative Group meet, days after several credit rating agencies downgraded their Vietnam outlook.

"Economic conditions have clearly become more difficult over the past year, with the economy overheating in the context of a weakening global financial environment," Bingham told the meeting in the mountain town of Sapa.

Inflation hit 25 percent year-on-year in May, driven by high global energy and food prices, and the trade deficit, fuelled by a surge of imports, widened to 14.4 billion dollars in the first five months, the government says.

Bingham said that inflation, rapid credit growth, an expansionary fiscal policy and aggressive investment growth by state-owned enterprises (SOEs) had significantly widened the external current account deficit.

"There are signs that weakening economic indicators are beginning to weigh on investor sentiment," he said, pointing also to a lack of timely economic data that he said had fed speculation and further harmed confidence.

"In addition to declines in the stock and property markets, downward pressure on the dong has emerged," Bingham added.

The currency dropped to 18,500 against the dollar on the black market this week, sellers said, compared to an official rate of around 16,000 dong, while the currency was rated even weaker in offshore forex trading.

Bingham praised Vietnam's recent market reforms and said strong foreign direct investment inflows this year backed the view that Vietnam's "longer term economic reform story... remains a compelling one."

He said "indications are that economic activity has so far remained reasonably robust, buoyed by healthy export growth and high commodity prices."

The IMF was "encouraged" by government plans to fix the problems, but this must translate into "a concrete and convincing policy package that will bolster investor confidence and restore macroeconomic stability," he said.

Bingham suggested the central bank raise interest rates "to provide adequate returns to savers and bring credit growth and inflation under control."

"The increase in interest rates should be complemented by strengthened oversight of the banking system to curb imprudent lending practices and address any emerging vulnerabilities in the banking system," he said.

Vietnam must also rein in SOE borrowing and spending, limit their operations to their core businesses, and continue to reform and privatise them, he said.

"We also remain of the view that greater exchange rate flexibility would simplify monetary management and help the central bank better manage shifts in capital flows more effectively," he said.

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