Vietnam should not rush for growth: ADB

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Vietnam should not "rush" ahead and should focus instead on economic stability and efficiency, says Ayumi Konishi, Asian Development Bank Country Director for Vietnam.

Improving the efficiency of its economic system is an important task in order for Vietnam to deepen its integration into the regional and global value chain, he said.

"Without enhancing the efficiency of the country's economic systems, attempts to achieve a higher economic growth rate will inevitably invite the return of high inflation, and people's concern over inflation will result in the pressure on Vietnamese dong.

"Inflation will make the poor suffer the most, and the devaluation expectations will discourage the continued inflow of foreign direct investment," Konishi said at a press conference held in Hanoi on Tuesday to launch the bank's Asian Development Outlook 2010 report.

The economy's stability and efficiency "will be the engine of Vietnam's sustainable economic growth, and it is not the time to rush [for growth]," he said.

By the end of 2009, rapid growth of money supply and a depreciation of the exchange rate stoked inflation again, and by March 2010 the consumer price index was rising at a year-on-year rate of 9.5 percent, the report said. Bank credit to the economy expanded by 39.6 percent in 2009.

Many banks started experiencing a shortage of liquidity in late 2009, partly a result of a slowdown in growth of deposits due to expectations of rising inflation.

Single digit inflation

The report said inflation in 2010 would accelerate to average about 10 percent on account of the rapid growth of money supply last year, the dong devaluations, and projected pickup in economic activity and world commodity prices in 2010.

Assuming monetary and fiscal policies are tightened this year, inflation could ease to about 8 percent in 2011, it said.

In fact, fiscal policy has been tightened somewhat, as the 2010 budget targets a narrower overall fiscal deficit of 8.3 percent of gross domestic product (GDP).

In addition to the increase in the central bank's base interest rate in late 2009, the authorities have set a credit growth target in 2010 at 25 percent, below the actual growth rate of 39.6 percent last year. The central bank also removed interest rate caps on medium- and long-term loans in February 2010, enabling banks to raise lending rates.

Economic prospects

ADB said Vietnam's GDP growth is projected to accelerate to 6.5 percent in 2010 and to 6.8 percent in 2011. Expected increases in remittance inflows and incomes will speed up growth of private consumption. Improvement and consolidation of global financial conditions will bring about an upturn in foreign direct investment inflows and foreign-financed investment.

At the same time, growth of public consumption and domestically financed investment will moderate due to the decline in budget spending and tighter bank credit, the report said.

It said exports will pick up in 2010 as external demand strengthens. Tourism and remittance flows are projected to rise in line with improvements in the performance of industrial economies. However, imports will rise more than exports because of the projected acceleration of domestic growth and higher import prices.

The current account deficit is forecast to widen slightly to 7.6 percent of the GDP in 2010.

"Shortages of foreign exchange in the formal market, which undermine confidence in the currency, fuel inflation, and hurt investment, should be addressed through a combination of tighter monetary policy and increased exchange-rate flexibility," the report advised. Vietnam's estimated foreign exchange reserves were around $15 billion by the end of 2009, ADB said. At the end of 2008 they stood at about $23 billion.

It will be important to improve the legal and institutional framework for monetary policy over the medium term. Maintaining price stability should be the primary goal of monetary policy, and the central bank should be given enough operational autonomy to pursue this goal effectively, the report noted.

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