Keep fiscal policy tight, World Bank advises

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The World Bank has advised against premature loosening of monetary and fiscal policy, saying Vietnam's stabilization gains remain fragile.

Any policy loosening will risk "repeating the recent pattern of recurring instability," the development lender said in a semiannual report Tuesday.

The Vietnamese government, aiming to restore economic stability, introduced a stabilization package called Resolution 11 in February containing a series of monetary and fiscal measures.

"Vigorous implementation of fiscal consolidation and structural elements of Resolution 11, including restructuring and reform of the state enterprise sector and the financial sector should help Vietnam return to a more sustainable macroeconomic environment while laying the foundations for greater efficiency and productivity to drive short and long-term growth," the report said.

The report, however, noted that slower than expected growth and renewed signs of macroeconomic risks will test the confidence of investors and the commitment of authorities to economic stability.

According to the Washington-based lender, monthly inflation slowed to around 1 percent since June 2011, but it is unlikely to decline substantially in the near future because of factors such as high commodity prices, minimum wage adjustments and possible hike in electricity tariffs.

The bank also said the tightening of monetary policy is starting to put pressure on the banking sector as the economic slowdown may result in some deterioration of the quality of bank sector assets.

On a positive note, the report said Vietnam's trade deficit is expected to improve in 2011 due to robust export growth. Performance of the country's labor-intensive, low value-added manufacturing exports such as garments, footwear and electronic goods has been strong, the World Bank said.

"A narrowing of the trade deficit and significant purchase of foreign currencies by the State Bank of Vietnam have enabled a buildup of foreign reserves to around two months of imports by the end of July, which could help to reduce the risk of any immediate balance of payments difficulties as well as ease depreciation pressures of the Vietnam dong," it said.

The World Bank forecasts Vietnam's inflation rate to slow to 10.5 percent next year, from 19 percent this year. The economy will expand 5.8 percent this year and growth will speed up to 6.1 percent in 2012, it said.

Real gross domestic product in developing East Asia is projected to increase by 8.2 percent in 2011 before slowing to 7.8 percent in 2012, the World Bank forecast.

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