Võ Trí Thành

*Võ Trí Thành

HÀ NỘI — Inflation is quickening around the world, upping pressure on policymakers to revise their strategies and to think about its possible impacts on the economic recovery. It may be not a risk to Việt Nam this year, but may become a big concern next year when the country is building a master programme to gear up for a post-pandemic recovery.

Around the world, consumers are paying higher prices for goods and services, and though reasons vary by country, price rises are turning into a global economic phenomenon in the last months of 2021 besides the resurgence of the COVID-19 pandemic.

Many countries have reported higher-than-expected inflation rates which compels them to re-think their monetary policies.

In its latest report on November 30, Eurostat reported eurozone inflation soared to 4.9 per cent in November, the highest level in the past 25 years and more than twice the European Central Bank (ECB)’s 2-per-cent target.

South Korea’s government data also showed its consumer inflation jumped to a decade high in November to 3.7 per cent from a year earlier, far above the central bank’s 2-per-cent target.

In the United States, the consumer price index (CPI) rose by 6.2 per cent in October compared to a year ago, the fastest growth since 1990.

Reasons may include prices of crude oil, gas, food, rent, or electronic chips increasing but generally, it is cost-push inflation. Prices of all main input materials have increased sharply which is deteriorated by rising logistics costs and disrupted supply chains.

Inflation pressure keeps building and is fanning the view that major central banks may adjust their monetary policies and push up the base rate. However, as inflation pressure is not being observed equally around the world, policymakers may change their policy at their own pace.

Although inflation is now more than twice its target, ECB has promised to continue stimulus with bond buys and record low rates throughout 2022. Meanwhile, the US Federal Reserve is considering winding down the bond-buying stimulus more quickly and dialling back its ultra-low interest rate to counter higher inflation.

Since last year, countries have mainly employed accommodative policies to revive economies hit hard by the COVID-19 pandemic. At present, the recovery process still needs supportive policies, so if the governments boost interest rates and increase borrowing costs, it could slow down the recovery growth.

Inflation is a big problem as it will adversely impact economic recovery, which is accelerating in many countries, impede business production and create many social problems, but if monetary easing was rolled back and interest rates increase, businesses may find less energy to recover, and this will also turn into slower production and sluggish growth. A tightened policy may also affect capital movements in the world, pressing down the recovery growth of developing countries.

Việt Nam’s concern in 2022

In Việt Nam, many people predicted inflation would increase in the last months of the year, but the CPI only edged up by 0.32 per cent in November and 1.84 per cent in the last 11 months over a year earlier, the lowest increase since 2016.

Inflation is not Việt Nam’s concern this year as CPI by year-end will likely top around 2-2.5 per cent, much lower than the Government’s 4-per-cent target. However, inflation risk could be higher when Việt Nam is drafting an economic stimulus programme to accelerate its economic recovery.

Việt Nam’s GDP is predicted to increase just around 2 per cent this year, far behind the Government’s target of 6.5 per cent, but such a modest growth has still demonstrated enormous efforts of the Government in driving the economy out of the abyss given the economy has been frozen for most of the latter half of this year.

Due to the prolonged pandemic, Việt Nam’s 2022 outlook is forecast to still face many difficulties.

In its October report, the International Monetary Fund (IMF) expected the global economy to grow 5.9 per cent this year and 4.9 per cent next year. However, due to the emergence of the Omicron variant of the coronavirus, IMF’s managing director Kristalina Georgieva last week said IMF will likely downgrade global economic growth projections.

Việt Nam’s GDP growth is forecast to reach 4-4.5 per cent in 2022 if there is no further significant supporting policy package. The country needs a special economic stimulus programme that is strong enough, large enough and long enough to not only help recover the economy but catch up with the world’s growth.

The major challenge to Việt Nam next year is how to implement the programme effectively while still being able to manage risks, including inflation risk in the context that the authority continues to pump money into the economy and increase budget spending.

In addition, hefty price rises may drive central banks of major economies (which are also big trading partners of Việt Nam) to adjust their monetary policies and exchange rates, so this will affect the capital flows and also the management of Việt Nam’s macroeconomic policies.

Risk management

Việt Nam’s two-year economic stimulus programme will focus on five solutions including strengthening the healthcare system; social security stabilisation; supporting businesses, cooperatives and households; boosting public investment; and reforming administrative procedures.

The programme, which will be submitted to the National Assembly at the extraordinary meeting at the end of this year, has calculated its impacts on growth, employment, income and major government balances such as the budget deficit, public debt and inflation to make quantitative adjustments over the next two years.

In the short term, Việt Nam may accept higher deficit and public debts (but still controllable) to support the recovery as well as to help for reaching a long-term goal of more stable and sustainable economic development. Risk management, therefore, is key to the programme’s success.

If the previous support packages mainly placed the burden on monetary policy, the new programme will need a pearl of wisdom in combining fiscal and monetary policies. The expansion of fiscal policy which relies significantly on domestic borrowings will help somehow reduce pressure on inflation, while flexible management of money supply to the economy can support businesses but not put pressure on prices. Credit growth next year is expected to not change much with an expansion target of 13-14 per cent.

In addition, inflation risk driven by exchange passthrough is also not a big problem although some countries may employ exchange rate policy to increase the export advantage. Việt Nam’s balance of payment is relatively good and export remains strong which allow it not to depend too much on nominal depreciation. The Vietnamese đồng may lose about 2 per cent next year.

Learning the lesson of the financial crisis in 2008-09 when Việt Nam used US$7-8 billion for stimulating the economy which resulted in a two-digit inflation rate and macro-instability, there is a need for a good macroeconomic policy coordination and refined supervisory mechanism with measures to limit speculation in financial asset markets such as securities and real estate markets.

Once inflation can be under control, it is hoped that Việt Nam's economy will achieve the expected growth rate, and more importantly, the economy will catch up with the world's recovery momentum and lay a solid foundation for sustainable economic growth with a focus on developed infrastructure and innovation. — VNS

*Võ Trí Thành is a former vice-president of the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. The holder of a doctorate in economics from the Australian National University, Thành mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms and financial systems.