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29 May 2009

Vietnam struggles to keep inflation below 10%

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Vietnam needs to further tighten its financial and monetary policies to ensure annual inflation stays below 10 percent this year, reported Reuters quoting remarks made by a government minister said.

Vietnam also needs to increase tax collection and limit the state budget deficit to no more than 8 percent of gross domestic product (GDP) to reach the inflation target, Planning and Investment Minister Vo Hong Phuc, was quoted by the official Lao Dong newspaper as saying.

“Financial monetary policy needs to be further tightened,” Phuc told Lao Dong on the sidelines of a National Assembly session on Wednesday.

“The most important thing is to manage to make investment more efficient, practice more thrift in regular spending while ensuring budgetary and financial and monetary balance.”

Phuc's comments reflected concern that the high inflation that Vietnam experienced for much of last year, peaking in August at around 30 percent, could return as the government tries to stimulate the economy.

The issue has been a topic of discussion in a month-long parliament session which opened in Hanoi last week.

Last Wednesday, the government asked parliament to approve an annual inflation target in single digits, revising down an earlier target of below 15 percent. It also asked permission to widen the budget deficit to 8 percent of gross domestic product.

“The entire banking system will continue to strive to achieve the target of containing inflation as well as reducing the impact of the economic downturn,” State Bank of Vietnam Governor Nguyen Van Giau told a banking conference on Thursday.

Despite the concerns, the latest data did not show signs of increasing price pressure. Consumer price inflation was estimated at 5.58 percent in May, the lowest rate in five years.

Earlier this month, a government think tank forecast average inflation this year would be between 8.2 percent and 9.4 percent.

“Vietnam's economy in 2009 will grow at a pace below that in 2008 (and will have) high inflation and a relatively large budget deficit due in part to the implementation of the government's stimulus package,” the Central Institute for Economic Management said in a report.

The government has projected economic growth will slow this year to around 5 percent from 6.2 percent last year and 8.5 percent in 2007, which was an 11-year high.

From October last year to this February the central bank unwound its tight monetary stance as inflation eased and the global downturn developed, halving its benchmark base rate to 7 percent where it has stood since.

The central bank has been saying it will pursue a flexible monetary policy this year. It decided to keep its base rate, used as a reference rate by commercial banks to set their lending rates, unchanged at 7 percent in June.


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