Luxury can hurt

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Experts worried about unproductive spending

Pedestrians walk past a luxury shopping center under construction in downtown Ho Chi Minh City. Vietnam imported US$10 billion worth of luxury products last year.

Increasing affluence and consumer spending are good economic signs, and there is evidence aplenty of both in Vietnam.

But are consumers spending too much, especially on luxury goods?

According to the General Statistics Office, the country imported US$10 billion worth of luxury products in 2010, most of which were wine, tobacco, jewelry and phones. Some experts say this is too much, given that the country's trade deficit was recorded at $12.4 billion.

Economist Pham Chi Lan, a former advisor to the government, said $10 billion is a huge sum considering major export products of the country, like garment and rice, could only generate revenues of around $11 billion and $3.2 billion respectively.

"Import of luxury goods accounted for a large part of the country's trade deficit, because these products don't bring any production and export value," Lan said.

"The garment sector, for instance, imported nearly $10 billion worth of materials but its exports were valued at $11 billion. The woodwork sector had $1.2 billion worth of imports but its exports were $3.4 billion... Besides, these sectors also create jobs for the local workforce."

Lan said the trend of buying luxury goods is popular among people who rose to wealth quickly and "maybe in a wrong way". As they earn money easily, they spend it without any qualms, she said.

A little less critical than Lan, economist Hoang Tho Xuan of the Industry and Trade Ministry's research institute believes the import of luxury goods needs to be addressed from different perspectives.

Many luxury goods imported into Vietnam are hi-tech products that local consumers should be given a chance to use. Imported products can also encourage local companies to rethink their strategies and safeguard their share of the domestic market, Xuan said.

But on the other hand, in a country where most people have low incomes, the $10 billion import of luxury goods shows that the market "has problems," he said.

When it comes to luxury products, many people in Vietnam just follow others in buying every new thing, Xuan said. It's not right to see average income earners spend a lot of money on buying imported motorbikes and smartphones, he said.

Vietnam's trade deficit was more or less stable last year, but that's thanks to surging exports. The problem is that even though exports rose 25.5 percent to $71.6 billion, they could not offset the 20.1 percent increase in imports, to $84 billion.

Economist Le Dang Doanh said the increasing imports proved that more Vietnamese people are turning to foreign products. Although this is not something the government is against, the trend needs to be controlled in the context of ongoing dollar scarcity and widening trade deficit.

He said the government needs to impose higher taxes on imported products.

Under the Law on Special Consumption Tax, Vietnam started to levy luxury taxes in April 2009 on various imported products like tobacco, beer and wine, cars, private airplanes and boats. Phones, however, are currently not subject to this tax.

Deputy Industry and Trade Minister Nguyen Thanh Bien said in April last year that a luxury tax should be imposed on cell phones worth more than VND3 million to prevent excessive imports.

Vietnam's phone imports increased by 2.8 percent in terms of value in 2010 compared to the previous year. Although official statistics did not mention the import and consumption of luxury phones in particular, high end phones do sell well in the country, where there are 153.7 million mobile phone subscribers among a population of nearly 87 million.

Take the iPhone 4, the latest generation of Apple's smartphones, for instance. Sales of the phone via two official distributors Viettel and Vinaphone reached 15,000 units from September through December last year, and the firms said the demand for the luxury smartphone was still high. The phone now retails at around $780. Compare that to the country's per capita income of $1,200 a year.

Nguyen Minh Phong of Hanoi Socioeconomic Research Institute said the $10 billion figure for luxury imports is alarming. Luxury goods only exhaust the nation's foreign currency reserves, he said.

The authorities need to take strong measures to deal with this issue, Phong said. Even if the World Trade Organization membership requires the country to gradually cut tariffs on imported products, it can apply technical and environmental barriers or tighten lending to control imports.

Phong said in order to ease the pressure on Vietnam's dollar supply, authorities need to facilitate the use of other foreign currencies for import payments.

In fact, this is a measure that the central bank has been planning to take. State Bank of Vietnam governor Nguyen Van Giau said the central bank would issue regulations allowing importers to pay for luxury products in currencies other than the US dollar.

Some experts, however, remain doubtful. They say Vietnam still favors the greenback. For the central bank to allow the use of other currencies, it needs to build up sufficient reserves of those currencies first, and this takes a long time, they add.

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