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Time to end fuel-price controls

Update: March, 20/2012 - 08:58

Director of Ha Noi Economics and Business University's Centre for Economic and Policy Research, Nguyen Duc Thanh, spoke to the Tuoi tre (Youth) newspaper about petrol price management.

What is your opinion about fuel price policies recently?

Following the domestic fuel price hike on March 7, along with the strong possibility of another electricity rate increase, I estimate that this year's inflation rate could be 1.6 per cent higher than previously predicted. The country consistently attempts to keep petrol prices in check, but the curb causes collateral damage to the economy. When the Government reluctantly allows the price to increase, it means it no longer commands the resources to subsidise the price. Petrol distributors know this, so they chose this time to put a squeeze on the supply, forcing policymakers to make up their mind. What we end up with is that, instead of gradual fuel price increases that follow market signals, fuel price increase with jerky movements, resulting in shocks and affecting consumer sentiment towards the economy. If the Government wants market prices, then now is the time to end administrative controls on the market.

But, if we do that, won't it be difficult to achieve the objective of curbing inflation?

Many countries have higher petrol prices than Viet Nam, but their annual inflation rates are about 2-6 per cent, much lower than those in Viet Nam. So, petrol prices are not the leading factor contributing to Viet Nam's high inflation rate.

Furthermore, when the price is set by the market, it will bring immediately apparent benefits. First, it will help the Government concentrate on fundamental measures to address the root causes of inflation. Secondly, it will help avoid shocks to market, creating a healthy fuel market in which prices can go up or down in a predictable fashion, avoiding speculation and strong upward pressures on the price.

But don't fuel price controls help reduce costs for consumers, at least for a while?

They do, but it's only short-term stability. Subsequent adjustments are simply more traumatic, since they have to make up the gap between the controlled price and actual market price. Moreover, speculators take advantage of increased fuel prices, creating a kind of inflation caused by public attitude. If prices are set by the market, consumers will get used to the seasonal fluctuation in global prices. If governments could keep petrol prices stable, major economies like those of the US and China would do it. But they can't, and every nation has to accept the market price.

And even with petrol prices set by market principles, a mechanism is still necessary to oversee the market and punish violations. — VNS

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