The government tightened monetary policy since the start of 2011, but eight months have now passed and some experts feel the policy has yet to pay off.
Economist Le Tham Duong said high inflation is a result of many different factors combined, including money supply, input costs, speculative activities and also public confidence. The problem is policymakers have been too focused on withdrawing money, he said.
The central bank has capped credit growth at 20 percent and money supply growth at 16 percent this year. According to Duong, although money supply has slowed, the fight against inflation has not been a success.
"From 1999 until now, credit growth averaged 30 percent a year while money supply rose by 23-25 percent. Even though credit and money supply affected inflation over the past years, their inflation rates were all lower than this year," he said.
Prices of many products, from tomatoes to gold, have surged, mainly due to lax market management, he said.
"It's time we stayed calm and considered what should be done in the remaining months," Duong said.
Vietnam's inflation reached an annual rate of 23 percent last month, according to the General Statistics Office. The economy, which has been long focused on growth, lost some of its momentum this year, expanding 5.7 percent in the second quarter. The Asian Development Bank said growth has moderated from last year's 6.8 percent as both monetary and fiscal policies were tightened to cool the economy.
Duong said the local business community has been seriously hurt by the "over-tightened" monetary policy implemented to battle inflation.
"Around 6,000 companies go bankrupt in Vietnam every year. But the bankruptcy figure in the first half of 2011 alone already doubled the usual half-year number," he said.
Loans expanded 8.85 percent through August 30, much lower than the annual target of 20 percent. So the government is now facing a dilemma, Duong said.
If more money is pumped into the market at a fast pace in the rest of the year, it will fuel inflation, he said. But if the tightened policy remains unchanged, the consequences could be even worse as production and supply of goods would be badly affected.
"When companies are already bankrupt, there is simply nothing that can cure the economy," he warned.
"So it's necessary to supply more money. The key is how much money should be pumped into the economy to boost it without putting much pressure on inflation," he said.
But analysts at the Economist Intelligence Unit warned that loosening policy too soon might not be a good thing.
They said in a report on September 1 that concerns persist over whether the government is willing to implement tougher measures that may be needed to stabilize the economy. As the government generally favors economic growth, there is a risk policymakers could "take their foot off the brake" in order to prevent growth from slowing too sharply.
Such a move before inflationary expectations have been anchored could hurt confidence in policymaking, the analysts said. They forecast that consumer prices will rise by 18.9 percent in 2011, before slowing to an average of 8.4 percent in 2012-15.
While the State Bank of Vietnam promised to bring interest rates down to 17-19 percent and ease credit difficulties for businesses, it also ruled out the option of letting loans expand at too fast a pace in the next few months. It's not necessary to max out the credit target of 20 percent either, central bank governor Nguyen Van Binh has said.
Economist Duong said when supplying more money, the government also needs to "steer" the capital flows toward the right borrowers including small and medium enterprises, agricultural producers and exporters. Even the stock and real estate markets should not be neglected anymore,
"If money is injected in the right place, it could have a positive impact on consumer prices. More money doesn't necessarily mean high inflation," he said.
Viet Capital Securities said in a note on Monday there was some good news at the end of August with gasoline prices dropping VND500 per liter.
"Looking ahead, general food prices began to decline since mid-August which could help ease the consumer price index in September," the company said, noting that increasing educational fees, and rising rice prices combined with dong depreciation could put pressure on the CPI in September.
"We forecast CPI in September could rise by 0.8-0.9 percent, remaining well above the historical average of 0.48 percent for that month. Accordingly, the consumer price index in September could reach 22.5 percent year-on-year, easing slightly against August's year-on-year figure," the company said.
Economist Tran Du Lich, a National Assembly representative, said so far this year fiscal measures to help address the inflation problem have not been implemented effectively either.
"We started the tightening when we had already invested too much. Hard as we try, there are now only two things that we can do: withhold money for projects in 2012 and strictly stick to the investment plan of 2011," Lich said. For ongoing projects there is no way back, he said.
Reviewing investment needs to be a priority for the government in the next five years, Lich said, noting that capital spending has gone out of control.
"It's not acceptable for the country to have development investment that equals to more than 40 percent of its gross domestic product because it will lead to a fiscal imbalance," Lich said.
Vietnam plans to slash 10 percent, or VND97 trillion (US$4.65 billion), of development investment this year, the Ministry of Planning and Investment said. A cutback of VND6.53 trillion was made as of August 26, coming from delaying or scaling down 2,103 projects.
The ministry, however, said many cities and provinces have been hesitant in cutting their investment. Hundreds of projects have been granted money even though they are not on the priority list of 2011.
"The country can't afford whatever project it wants"¦ So it has to reconsider how it will invest," Lich told Thanh Nien.
He said high economic growth should not be a target for Vietnam. The economy only needs to expand 6 percent a year, but there must be efforts to improve the financial market and make local businesses stronger.
"The economy has to go through a fundamental restructuring or it would keep circling around instabilities and then measures to deal with them. That's not sustainable development," he said.