Monetary policy must prioritize inflation control

Assoc. Prof. Dr Pham The Anh.

How do you assess the growth of Vietnam's economy in recent years?

From 1991-2021, Vietnam's economy has made impressive progress, with GDP increasing by 6.57% per year on average. GDP growth rate is high and stable compared to the world. The economic scale in 2021 will reach about US $ 363 billion, entering the top 40 largest economies in the world. Over the years, the inflation rate has been kept in single digits; the trade balance has continuously been surplus since 2016; stable foreign investment; foreign currency reserves increased ten times from 2010-2021.

However, Vietnam's economy also faces many challenges. GDP growth has been on a downward trend in recent years. Specifically, ten years after the renovation (1991-2000), Vietnam's GDP grew by 7.6%/year. However, in the next 10 years (2001-2010), GDP growth decreased to 6.6 %/year; in ten recent years (2011-2021), GDP has decreased to 5.6 %/year. The cause of the slowdown in growth is the result of weak macroeconomic policies in the previous period, the influence of the unfavorable international economic environment, the economic growth in the breadth is reaching its limit, and the impact of the economic growth on the economy is limited and impact of the Covid-19 pandemic.

Besides, the Vietnamese economy also faces a burden of public debt that could destabilize the economy in the next decade. Accordingly, from 2010-2021, Vietnam's public debt has increased 3.2 times (from VND 1,144 to 3,655 million billion), and the growth rate is 11.3 %/year, much higher than the economic growth rate. On the other hand, monetary policy is heavy on administrative intervention; Shortages of qualified labor could impede growth spurts.

Another challenge is that Vietnam's growth relies on exports and foreign direct investment (FDI). Accordingly, the export growth rate will reach 18.4 %/year in 2001-2021. The export/GDP ratio exceeds 100%. Vietnam participates in many FTAs. Disbursed FDI in recent years has reached approximately US $ 20 billion /year, twice as much as ten years ago.

Regarding Vietnam's state budget revenue, the revenue growth rate has slowed but remained high, from 11.5%/year in the 2011-2015 period to 8.8%/year in the 2016-2020 period. The budget revenue/GDP ratio increased from 23.6% to 25.2% in the same period, the highest in 5-ASEAN. The tax and fee revenue rate decreased rapidly, from 88% in 2011 to 72% in 2020. The proportion of corporate income tax decreased rapidly to only about 17% recently. VAT accounts for the most significant proportion and tends to decrease slightly. The import and export tax proportion decreased to only half in the period 2016-2020 compared to 2011-2015.

In your opinion, what should Vietnam's fiscal policies focus on to promote economic recovery and continue to grow in the coming period?

Monetary policy must prioritize inflation control. To achieve this goal, controlling the money supply growth rate suitable for economic growth is necessary, not to jump too high like in previous periods.

On the other hand, monetary policy must be especially compliant with the rules, be transparent and have clear explanations. This is a huge disadvantage of Vietnam's monetary policy. An unpredictable, non-transparent policy often surprises the economy. Therefore, it creates a very negative shock. In contrast, monetary policies that are carried out according to certain rules, such as raising or lowering interest rates, must have a reason.

Looking at the US economy, before market policy adjustment, businesses could predict it. It means they know the tendency of interest rates that would increase and how much to increase based on information about the economy, inflation, financial market movements, exchange rates, and unemployment rate. Therefore, the country's adjustments are not surprising. There are no adverse shocks.

However, Vietnam's monetary policy is almost unaccountable. For example, we can see that, for a long time, interest rates have not been raised, but "all of a sudden" increased by 1%, and a few weeks later, increased by 1%, causing an unexpected shock to the market. Such unexpected policies make the economic environment very risky, and people and businesses cannot make long-term business plans stably.

Besides the above recommendations, to ensure macroeconomic stability, what do we need to do?

In my opinion, monetary policy should focus on stabilizing the macro-economy, They are policies that monitor the system's safety. For example, it can monitor the minimum capital adequacy ratio, medium and long-term mobilization/lending, bad debt, etc.

Vietnam's monetary policy over the past decade has pursued many goals. However, in addition to controlling inflation and stabilizing the exchange rate, it must also contribute to growth. As a result, the monetary policies of the State Bank of Vietnam (SBV) have gained more credibility, including exchange rate issues. The exchange rate was constantly volatile in the last decade with sharp devaluations, but this phenomenon has disappeared in the last ten years. Therefore, monetary policy should pursue a managed floating exchange rate regime instead of the current rigid exchange rate anchoring policy.

ASEAN-5 countries pursue a managed floating exchange rate policy. Since the beginning of the year, their currencies have depreciated by 9-10%, equivalent to Vietnam, but they have not encountered any problems with interest rates. Meanwhile, we try to raise interest rates to keep the exchange rate under control. Currently, Vietnam's interest rate environment is quite high compared to ASEAN-5 countries (currently up to 2 digits), while interest rates are quite high. The rate of other countries in the region remains at 4-5%/year.

In addition, Vietnam's monetary policy must eliminate administrative interventions. The highest goal of inflation control is to control the money supply, especially the base money (newly printed money issued by the state budget), not credit control. Because credit is an activity subject to market rules, as long as banks comply with systemic safety norms, they will be allowed to freely trade the capital they raise.

The application of a credit ceiling will make the banking industry less competitive. This is because good or bad banks are divided into limits, and no bank's market share decreases; in other words, the bank's market share is not associated with competitiveness when entangled in the lending limit. In addition, applying the credit limit also means that capital flows can be "disguised" in other forms. Since then, it has led to other administrative interventions, limiting the development of the financial system. At the same time, facing the risk of shifting domestic savings/assets abroad.

Therefore, Vietnam should soon end the use of credit ceilings and other direct administrative interventions in the capital/money market. Instead, control the base money and supply and regulate it indirectly through the target interest rate. At the same time, closely supervise commercial banks including minimum capital adequacy ratio (CAR); loan-to-deposit ratio (LTD); bad debt ratio; a ratio of short-term deposits for medium and long-term loans.

Thank you very much!