Vietnam central bank to focus on low inflation, stability

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Vietnam's central bank said on Tuesday its top priority next year would be controlling inflation and stabilizing the economy, and the International Monetary Fund advised further monetary tightening.

In 2011, the State Bank of Vietnam "will actively, flexibly and prudently conduct monetary policies in order to give the first priority to controlling inflation and stabilizing the macroeconomy, contributing to growth economy", Governor Nguyen Van Giau said in remarks prepared for a donors' meeting.

Consumer price inflation stood at 11.1 percent in November, the highest level in nearly two years. Economists expect full-year inflation to be more than 10 percent on the back of higher commodity prices and a slide in the dong. The official government target is 8 percent.

The dong has fallen steadily against the dollar in the past three years and was quoted on unofficial markets this week around 8 percent weaker than allowed by its official band.

The central bank raised its benchmark interest rate by 100 basis points at the beginning of November to 9 percent, and pledged not to devalue the currency before the Lunar New Year in February. It stuck to the 9 percent rate for December.

Giau's priorities are in tune with a change in government rhetoric in recent weeks that has signaled a shift towards focusing on stability rather than simply pushing for growth.

But donors and economists have criticized the government for a "stop-go" policy that has swung between the two priorities.

On Tuesday the International Monetary Fund called for immediate policy changes in Vietnam in light of a pick-up in headline inflation, high credit growth, a widening trade deficit and constant pressure on the dong.

"A further tightening of monetary policy is required to restore orderly conditions in the foreign exchange market and contain inflationary pressures," Masato Miyazaki, the IMF's division chief for the Asia and Pacific department, said in remarks prepared for Vietnam's annual donors' meeting.

Among other steps, the government should raise policy rates further to achieve an inflation rate closer to 3-4 percent, which was necessary for exchange rate stability.

Giau said credit was expected to increase this year by about 25-27 percent. The official target was 25 percent -- a rate Miyazaki said was "too high for the economy", adding that credit targets should be significantly lower.

"Once the credibility of monetary policy is re-established, it might be beneficial for Vietnam to move toward a more flexible exchange rate regime," Miyazaki said.

The authorities also needed to implement a fiscal consolidation plan aiming to lower the public debt-to-GDP ratio in order to "raise confidence and create fiscal space against the backdrop of concerns over explicit and implicit contingent liabilities".

It projected that the current account deficit (excluding gold) would be "just under 7 percent" of GDP, and said that although international reserves had stabilized this year, "they remain low at 1.8 months of prospective imports", as of the end of September.

Giau and other officials said in prepared remarks that Vietnam's gross domestic product growth would be 6.7 percent this year, just above the official target of 6.5 percent.

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