Price hikes force belt-tightening measures

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Inflation could negate Vietnam's development gains, says economist


With prices continually on the rise, many consumers in Vietnam now have to think carefully before they buy milk products.

Nguyen Thu Trang cannot escape a feeling of shock and dread as she shops for formula milk for her one-year-old son in Hanoi.

"Prices increase every day. Workers like us now cannot earn enough to feed our children," said the 25-year-old woman. A tin of formula milk now costs more than VND400,000 (US$19), up from some VND360,000 over a month ago.

With a monthly salary of VND4 million, she can only afford milk for her infant son, so the food intake for her threeyear-old daughter may be cut, Trang said.

Trang's experience of higher prices forcing tough choices is being shared by many people as the cost of food, construction materials and services soar, seriously threatening the government's efforts to keep inflation at 7 percent this year. A new pricing level has been set after the dong's recent devaluation as well as the government's decision to increase power prices.

Nguyen Thanh Nhan, vice general director of the Saigon Co.op supermarket chain, said many distributors of products have informed that they are going to increase their prices by 5-10 percent. The products are mainly imported food, garments and home appliances or goods produced with imported materials.

The prices of many milk products and cooking oil have increased by 5-15 percent due to the impact of the dong devaluation, traders say.

Dao Duy Kha, vice director of the Vietnam Plastic Corporation, said: "In the context of a higher exchange rate (between the dong and US dollar), and the increase in prices of electricity and gasoline, the price hike is inevitable. The prices of materials have increased and we are calculating to raise the cost of our products very soon."

The central bank devalued the dong against the dollar by 9.3 percent on February 11, and the government has announced power prices will go up 15.3 percent from March.

Inflation quickened to a two-year high in February. Prices rose 12.31 percent from a year earlier, compared with a 12.17 percent pace in January, according to figures released by the General Statistics Office in Hanoi on Wednesday. That's the highest since February 2009. Prices increased 2.09 percent from January.

High inflation is posing a major challenge to the government even as it deals a big blow to poor people, many of whom are choosing to eat less as a way to cope.

Nguyen Thi Hanh, a fruit trader on Dinh Cong Street in Hanoi, said the price hike has made her business more difficult. "Everything now is expensive. So, people spend mainly on essential food such as rice and meat. Fruit is unmarketable."

"Poor people can't afford VND45,000-50,000 for a kilogram of oranges. I may close my shop, and seek other work," she said.

"˜Difficult target'

Economist Ngo Tri Long, former deputy head of the Market and Price Research Institute, said: "In the current context, it is difficult to meet the target of keeping inflation below 7 percent this year. Without drastic measures to curb inflation, the possibility of double-digit inflation is very high."

"We should put top priority on inflation reduction. We have to accept slower economic growth to control inflation," he said. "High inflation will nullify all results of development."

The government is targeting economic growth of 7.0-7.5 percent this year.

Prime Minister Nguyen Tan Dung has said that the government will take a series of measures to curb inflation, ensure macroeconomic stability and social welfare in 2011, with top priority given to keeping inflation in check.

The government will mobilize all sources to ensure enough foreign currency is available to meet the demand of enterprises, and strengthen management of foreign currency and gold trade, he said.

The State Bank of Vietnam will have to apply strict and cautious monetary policies. It also has to coordinate monetary and fiscal policies to keep credit growth this year to below 20 percent, Dung said.

The government also plans to cut the budget deficit to below 5 percent of Vietnam's gross domestic product and reduce public spending by 10 percent to curb inflation pressures.

It will also boost production, especially in the agriculture sector, and maintain close watch over the trade deficit, the prime minister said. The country ran a trade deficit of $1 billion in January and $1.294 billion the previous month.

Meanwhile, many ordinary people are trying to increase their income by working extra jobs.

Nguyen Thi Hang, a retired teacher, said: "Life has become more difficult than in the past. Salaries have not increased, while prices have risen sharply, so people's real income is decreasing.

"My pension is not enough for my life, so I have to look for work," she said. "I've worked as a tutor for a group of students as an extra class for them. They are children of my neighbors."

INTEREST RATE HIKES

The State Bank of Vietnam on Tuesday raised its reverse repurchase rate, tightening the monetary policy to slow inflation.

"The move is necessary after we increased the refinancing rate and overnight rate," State Bank Deputy Governor Nguyen Toan Thang said in a telephone interview in Hanoi on Tuesday after confirming the reverse repurchase rate for the seven-day term was increased to 12 percent from 11 percent.

This is the second time Vietnam raised borrowing costs in less than a week. Vietnam boosted its refinancing rate by 2 percentage points to 11 percent on February 17, the first increase in the measure since November.

"This step to tighten monetary policy is a move in the right direction," said Benedict Bingham, the International Monetary Fund's senior resident representative in Vietnam. "It's probably a more significant move than the refinance rate adjustment."

The repurchase rate is used by the State Bank in its daily open market operations to withdraw cash from the financial system. The reverse repurchase rate for the seven-day term had been at 11 percent since January 10.

Tuesday's move "just confirms the tightening bias of the State Bank of Vietnam," Francois Chavasseau, head of fixed-income research at Sacombank Securities Joint-Stock Co., said in a telephone interview from Ho Chi Minh City.

Combined with the increase in the refinancing rate, "it signals a switch of policy stance from the central bank more toward stability in the mid-term rather than the pro-growth stance that we've seen in the past," he said. (Bloomberg)

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