Price hikes could push poverty figures up

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Sacrifice growth to cool inflation; wrong time to loosen price controls, economists say

Vendors sell fruit at the Hom Market in Hanoi.
Inflation climbed 17.51 percent in April from a year earlier, the highest rate since December 2008.

Soaring consumer prices are pushing many low-income citizens closer to poverty. The government needs to take urgent action to ease inflation and ensure social welfare, experts say.

Prices have surged by around 50 percent over the past three years, which means citizens have actually lost half of their income value if they have not been given any salary raise during the period.

Economists urged the government to implement "right" policies to ease the burden on the public in the second half of the year.

Around Asia, resurgent global food prices are threatening to push millions of people into extreme poverty, the Asian Development Bank (ADB) said in a report published on Tuesday. Rapid and persistent increases in the cost of many Asian food staples since the middle of last year, coupled with crude oil reaching a 31-month high in March, are a serious setback for the region which has rebounded rapidly and strongly from the global economic crisis two years ago.

The Manila-based bank warned that a 10 percent rise in food prices in developing Asia, home to 3.3 billion people, could push an additional 64 million people into extreme poverty based on the US$1.25 a day poverty line.

The current poverty line in Vietnam is VND400,000 ($20) per person per month for rural regions and VND500,000 ($25) per person for urban areas. The number of families living below the poverty line was 9.45 percent in 2010, compared to 22 percent in 2005, according to a government report released in February. These gains could be pushed well back by inflation, economists warn.

The government on March 30 decided to spend VND3.1 trillion on providing inflation relief to low-income citizens in the second quarter, according to the Ministry of Labor, War Invalids and Social Affairs. People eligible for the program would receive VND100,000-250,000 each, disbursed twice by June, the ministry said.

"For poor families in developing Asia, who already spend more than 60 percent of their income on food, higher food prices further reduce their ability to pay for medical care and children's education," said ADB chief economist Changyong Rhee. "Left unchecked, the food crisis will undermine recent gains in poverty reduction made in Asia."

Vietnam's inflation climbed 17.51 percent in April from a year earlier, according to figures released by the General Statistics Office. The rate is the highest since December 2008.

Food and foodstuff prices accounted for a large part of the rise in consumer price index, increasing 24.4 percent year-on-year and 4.5 percent over the previous month.

Market weaknesses

Nguyen Minh Phong of Hanoi Socioeconomic Research Institute told Thanh Nien that double-digit inflation in April had exposed market weaknesses, especially in the food sector.

Inflation will ease in May, but things tend to get complicated in final months of the years due to natural disasters, Phong said. If measures launched under Resolution 11 are implemented effectively, inflation will be controlled, he added.

The government introduced a group of measures to control inflation and restore macroeconomic stability under Resolution 11 in February, which the ADB has hailed as a timely move.

Nguyen Xuan Phuc, head of the government's office, said on Monday that inflation will cool in June or July if concerted measures are taken, particularly to cut public investment.

Experts said it would take some time before the government's policies start taking effect and inflation pressures begin to abate the key is to be consistent with the policy tightening stance.

Meanwhile, the ANZ bank said on Monday that though recent evidence suggests that access to credit has tightened, the impact of recent measures on inflation will not become clear until later this year.

"Food inflation accelerated despite increased supply. Input prices continued to suffer from the impact of the dong's depreciation and the government's hikes in electricity and fuel prices," the bank said.

It expected the central bank to hike its key interest rates further. "Furthermore, as the authorities will have to step up their fight to control inflation expectations, we do not rule out an increase in the reserve requirement for dong deposits this year," the bank said.

Sacrifice growth

Analysts at Viet Capital Securities said the government may need to use stricter fiscal and administrative mechanisms and it may take until the second half of the year for policies to start taking effect.

Economist Le Tham Duong even suggested the country's economic growth be sacrificed to cool down inflation if necessary.

"We need to aggressively implement the measures under Resolution 11. We may only achieve economic growth of 3 or 4 percent, but at least we will have solved the inflation problem," he said. "Many countries during tough times accept just 1-2 percent growth and even contractions as long as they can keep the economy stable."

Vietnam is aiming for economic expansion of about 7 percent in 2011, up from 6.8 percent last year.

Some economists said the government should think twice about plans to raise prices of essential goods like electricity and petroleum products through the end of the year.

The government should be "very cautious" with power and fuel price hikes because they were the main causes behind the inflation peak in April, economist Pham Chi Lan said.

Power prices were increased by about 15 percent in March. Lan warned that a government decision allowing the prices to be adjusted based on market conditions in June may signal further increases.

Nguyen Van Trinh, vice president of the University of Economics and Law in Ho Chi Minh City, said it was necessary to change power and fuel prices depending on market forces, but it isn't essential during these tough times.

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