What lies behind the high inflation rate?

The consumer price index (CPI) increased by 5.2% in the first six months of the year, a figure that surprised every one. Head of the Ministry of Finance’s Price Management Department Nguyen Tien Thoa talked about this.

According to official explanations, prices in Vietnam escalated because prices increased all over the world. However, prices did not increase so sharply in other countries which also were affected by oil price increases and animal epidemics. How can you explain this?

I know you want to know why price increases were different in different countries, though the countries were all in the same situation. Firstly, I think the root cause is the weak competitiveness of the national economy. You can see this in the high production costs of Vietnam-made products. It is clear that the high domestic production costs plus the higher input material prices pushed the selling prices up.

Secondly, the measures which have been carried out by Vietnamese enterprises to cope with the difficulties caused by the world’s price fluctuations remain insufficient.

Thirdly, in a national economy like Vietnam, the imports of many key materials are always at very high levels. For example, Vietnam imports 100% of petrol, 60-70% of ingot steel, 90% of materials for drugs. Therefore, Vietnam is heavily affected by the world’s price fluctuations, and domestic prices escalate right when the world’s prices increase.

Other countries seem to find it easier to cope with the difficulties caused by the price hikes (for example, they improve production technologies and try to reduce fuel consumption), while Vietnamese enterprises still find it hard to overcome the difficulties.

I also have to say that other countries have got used to the market pricing system with no subsidies, while Vietnam still maintains the subsidisations of several key product items. Therefore, price increases do not cause special impacts in other countries, while causing shocks in Vietnam as the price increases are bigger in Vietnam than in any other countries.


In the last six months, the central bank has bought $7bil, which means some VND112tril has been put into circulation. How has the move affected the monetary supply? (Total goods and service retail value was VND335tril, or $20.93bil in the first six months of the year)

In the first six months of the year, the foreign investment inflow increased, which has resulted in bigger supply of foreign currencies, putting pressure on the local currency to revaluate against other foreign currencies, while increasing the total means of payments. In the last six months, Vietnam has attracted $5.2bil more in foreign direct investment (FDI), $1.7bil in portfolio investment.

The central bank has put more money into circulation by buying more foreign currencies for reserve, while trying to withdraw cash from circulation by selling SBV bonds. The total sum of money put into circulation since the beginning of the year is equal to 67% of that approved by the Government for the whole of 2007.

The stock market keeps developing, the total value of listing securities has reached VND221,156bil, or $14bil, or 22.7% of 2006’s GDP.

Regarding the total means of payment and credit, an estimate by the central bank showed that by the end of May, the total means of payment had increased by 16.9% over the end of 2006, and by 39.8% over the same period of 2006. The total outstanding loans increased by 15.04% over the end of December 2006, and 33.53% over the same period of 2006.

Two groups of goods and services saw price increases higher than the average levels, construction materials and food. Could you please give more details about the increases of the two categories of goods?

The real estate markets in Hanoi and HCM City saw price fever when prices rose by 20-50%. The prices of fuel, including petrol, also increased twice, by 8.9% and 7.2%, while the prices of gas and steel also saw sharp increases.

Food products saw big price increases due to higher demand and higher export prices, while the supply was shorter due to animal epidemics.

The Government plans to apply a lot of measures in order to curb inflation. In the immediate time, taxes will be cut as a result of global integration with the average reduction of 44%, especially on products which have high tax rates, including paper, wooden products and cars.

In terms of monetary policies, the central bank will maintain the basic interest rate for VND, while requiring higher compulsory reserve ratio, withdrawing money from circulation, thus easing the pressure on prices.

Vietnam began implementing WTO commitments right at the beginning of the year, which has resulted in the reduction of prices of many goods. What can you say about the impact of WTO membership on prices?

You should not think in the one way that WTO membership will only make prices lower. There will be both price decreases and increases, which will depend on market supply and demand. More foreign-made goods will be imported thanks to lower tariffs, which will lead to the price decreases of many goods, but when Vietnam exports more goods, this will make the prices of the export items on the domestic market increase.

The principle that the Government and relevant ministries will observe is to follow the world’s market closely.

Source: VNE