Vietnam may undermine progress toward economic stability if it loosens monetary policy now, the International Monetary Fund and World Bank said as the nation struggles with the fastest inflation in Asia.
"The authorities need to move rapidly and decisively to ensure financial sector soundness while re-establishing macroeconomic stability," Sanjay Kalra, the IMF's resident representative in Vietnam, said in comments prepared for a conference in Hanoi Tuesday. "Failure to do so, or even loosening policies now, would jeopardize the gains already made."
Vietnam faces an inflation rate close to 20 percent, a trade deficit, slowing economic growth and risks in the banking sector. The government said Tuesday gross domestic product may climb about 6 percent this year, lower than 6.8 percent in 2010, and Kalra said a transparent framework for recapitalization and consolidation in the financial sector is "urgently needed."
Officials should consider raising interest rates again to support the nation's currency if necessary, and while Vietnam's foreign-exchange reserves rose in the summer, they "have declined again in an effort to contain renewed pressures on the exchange rate," Kalra said.
The dong was little changed at 21,009 per dollar as of 12:02 p.m. local time Tuesday and has fallen about 7.2 percent this year, according to data compiled by Bloomberg. The benchmark VN Index (VNINDEX) of stocks fell 0.3 percent, and is down 19 percent this year.
Asian stocks and currencies have retreated in 2011 and the region's policy makers have shifted their focus to shielding growth as Europe's sovereign-debt crisis and a struggling US economy increase the risk of another global recession.
Dong depreciation is linked to weaker domestic confidence and the State Bank of Vietnam intervened in the foreign-exchange market in October, the World Bank said in a separate report Tuesday. Foreign reserves covered two months of imports in July, it said.
Vietnam's economic stability is "fragile and premature loosening of policies will risk repeating the recent pattern of recurring instability," the lender said.
The IMF and World Bank reports were released for the meeting of the Consultative Group on Vietnam, which has convened annually since 1993 to help the nation's transition to a market- based economy.
The State Bank of Vietnam raised its refinancing rate in October to 15 percent from 14 percent. Its repurchase rate was last changed in July, when the central bank lowered it to 14 percent from 15 percent.
The nation's inflation rate eased for the third straight month to 19.83 percent in November. It remains the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.
Inflation is expected to slow to about 9 percent in 2012 and is under control, Prime Minister Nguyen Tan Dung told the Consultative Group. The government will continue to implement the Resolution 11 strategy, he said. Resolution 11, approved in February, aimed to tighten fiscal and monetary policies.
Dung said Vietnam will aim for 6 percent GDP growth in 2012. That's the lower end of a target of 6 percent to 6.5 percent approved by the National Assembly in November.
At the same time, Vu Duc Dam, chairman of the Government Office, said on Dec. 1 that the government has asked the State Bank of Vietnam to consider lowering interest rates.
The IMF said "repeated calls for lower lending rates cast doubt on the government's resolve to sustain tight policies."
The banking sector is showing signs of stress and asset quality remains a "concern" given "unusually high" credit growth in recent years, the World Bank said. Lenders are reporting liquidity shortages, it said.
Banks to merge
Vietnam's First Commercial Joint-Stock Bank, Tin Nghia Commercial Joint-Stock Bank and Saigon Commercial Joint-Stock Bank will merge, the central bank said in a statement posted on its website today. Last month, it unveiled plans to create a three-tiered financial industry dominated by 15 lenders as part of efforts to allay concerns over the banking system.
"It's clear that Vietnam needs to modernize and strengthen its banking and financial sector, and for that, it needs to open it to the world," said Jean-Jacques Bouflet, head of trade and economic affairs at the European Union delegation to Vietnam.
Vietnam's trade deficit may be $10 billion in 2011, the government said in its report for today's conference. The Consultative Group brings together the administration and nations and agencies that provide grants and low-interest loans.
Vietnam's economy, a production hub for companies from Intel Corp. to Honda Motor Co., may expand by 5 percent or less next year, estimates from U.K.-based Capital Economics Ltd. show. That would be the slowest pace since 1999.