Researchers at the University of Economics and Business in Hanoi have warned that inflation could hit a whopping 18.2 percent if the government does not firmly implement its policies.
The university's Vietnam Center for Economic and Policy Research released its annual economic report, titled "Economy at the Crossroads," on Tuesday.
Nguyen Duc Thanh, head of the research team, said this year's report looked at two scenarios for the economy.
If the government is consistent with its tightened policy stance throughout this year and public investment is slashed, inflation will stand at 15.5 percent at the end of the year. A lower inflation rate is also possible if prices of materials fall sharply in the final months. The economy, in this scenario, will expand by around 6.2 percent.
However, if the government decides to loosen its grip on the policies under pressure of business community a move already seen in the third quarter last year, inflation could hit a record high of 18.2 percent, Thanh said. In this case, even if growth is a little bit higher, at 6.5 percent, economic instability will lessen the value of that growth.
The government revised both its economic growth forecast and inflation target earlier this month. Minister of Planning and Investment Vo Hong Phuc said on May 3 that gross domestic product may expand 6.5 percent this year, down from a December estimate of 7 to 7.5 percent. Inflation may be 11.75 percent by year-end, far higher than the previously announced target of 7 percent.
Vietnam's economic growth, driven by strong exports and a buoyant domestic market, will reach 6.2 percent this year, the UN Economic and Social Commission said in a report on May 5. But it warned that high inflation would be a key challenge for Vietnam this year.
"Soaring inflation, combined with high interest rates, will unfavorably affect economic growth and the stability of financial, banking and asset markets," Thanh said.
For the long term, economists at the Vietnam Center for Economic and Policy Research have proposed a shift away from the state sector. It's necessary to stop thinking that state-owned enterprises will be pillars of the economy because it does not go along with the development of a market economy, they said.
As state companies still control a major portion of key production sectors, the government first needs to create new policies to support private companies and create a market for them to operate in, they said.
Speaking at the launch of the report, Le Xuan Nghia, deputy head of the National Financial Supervisory Committee, said interest rates are now at their peak.
The problem is while small companies find it hard to get loans, there is a risk of more capital flowing into the state sector, Nghia said. Some state companies use loans with a disregard for interest rates and they even get their payment deadlines extended, he noted.
Meanwhile, smaller firms are struggling with high borrowing costs. "A business owner told me that sacking workers and smuggling are his only options now," Nghia said.