Expert suggests tax reduction to cool down gasoline price

March 22, 2022 - 11:03

Việt Nam's prospects for economic recovery and macro stability in 2022 are under some pressure due to the Russia-Ukraine military conflict. Nguyễn Đức Độ, deputy director of the Institute of Economics – Finance, talks to Đầu tư & Tài chính (Investment and Finance) online newspaper around this issue.

Việt Nam's prospects for economic recovery and macro stability in 2022 are under some pressure due to the Russia-Ukraine military conflict. Nguyễn Đức Độ, deputy director of the Institute of Economics – Finance, talks to Đầu tư & Tài chính (Investment and Finance) online newspaper around this issue

How will the sharp fluctuations in the prices of basic commodities such as gasoline, iron and steel, as well as fertilisers, affect the prospect of economic recovery of Việt Nam in the near future?

The increase in the prices of basic goods in the world affects the economic growth of Việt Nam mainly through two channels. Firstly, the cost of production and transportation of goods will increase accordingly, causing many businesses to fall into difficult. We know that domestic demand is still weak.

Statistics show that in the first two months of the year, the total retail sales of consumer goods and services increased by only 1.7 per cent over the same period in 2021, and if the price factor is excluded, it will decrease by 0.3 per cent.

Although production costs have increased, many businesses have not been able to increase sales prices, so have to accept reduced profits. Some projects may also be delayed due to rising input costs.

Of course, the most affected are businesses that provide goods and services to meet domestic demand, typically the transportation industry. As for exporters whose goods are in high and sustainable demand, they can pass on a significant portion of the cost to the end-users.

Secondly, an increase in the price of basic goods reduces the demand for final consumer goods. Typically, a sharp increase in gasoline prices will affect people's real incomes.

Although they still have to travel and transport, as this is an essential need, when real income decreases, people can cut back on other non-essential needs, thereby making the economic recovery process slow down.

Is it possible to achieve the target of controlling inflation below 4 per cent this year?

I think inflation this year is still under control. Compared to the same period last year, the consumer price index (CPI) in February only increased by 1.42 per cent, while core inflation was at 0.68 per cent. With the current weak consumption demand, core inflation is likely to stay low until the end of this year.

As for petrol prices, maybe this is just a short-term shock. When the tension in Ukraine cools down, oil prices are likely to cool down as well. Moreover, if oil prices stay high for a while, the supply of shale oil will increase and cause oil prices to fall again.

High oil prices will slow down world economic growth and reduce demand for oil. Historically, the average price of WTI oil in 2008 and 2013 approached US$100 per barrel.

Even if the average oil price of 2022 reaches $100 per barrel, inflation in Việt Nam is still not worrisome. Try doing simple maths. If the price of oil increases by an average of 50 per cent this year, the price of the transport group in the CPI basket will rise by about 15 per cent. With the proportion of about 10 per cent, a 15 per cent hike in traffic prices will result in CPI increase by 1.5 per cent. This is the main channel of influence.

With core inflation currently at just under 1 per cent, it is possible to control the average CPI growth rate below 4 per cent this year.

Besides input prices, gold prices and dollar prices recently increased when the Russia-Ukraine conflict occurred. How do these factors affect Việt Nam's macro-economics?

In the context of high inflation in the United States (7.5 per cent) and the US Federal Reserve (Fed) raising interest rates, the dollar tends to appreciate in the international market. This will cause some disadvantages to Việt Nam's exports, as the State Bank maintains a stable VNĐ/USD exchange rate. However, in my opinion, the negative effects are not much.

Currently, Việt Nam's exports are produced by using a lot of imported input materials. So basically, Việt Nam's exports are less dependent on the exchange rate, mainly depending on the world's demand. When the world economy grows steadily, we do not need to worry too much about exports.

Regarding the price of gold, whether the uptrend is short-term or lasts long is still unclear. However, the reality shows that in the 2016-19 period, when the gold price increased from $1,100 per ounce to $2,000 per ounce, Việt Nam's macro economy remained stable. Therefore, we can believe that, even though the gold price may increase sharply in the near future, the phenomenon of people withdrawing their savings to queue to buy gold will not happen.

So the biggest concern is the impact of the world price of gasoline and raw materials on the domestic economic recovery. What is your recommendation on this?

We can not do anything to adjust the price of gasoline, the price of raw materials in the world. However, to some extent, we can partially cool down domestic gasoline prices through tax reduction.

Currently, how much tax reduction should be is being calculated by the Government and the Ministry of Finance. I think that, in the current context, tax reduction is the most feasible solution. — VNS