Inflation surges in Vietnam's red-hot economy

Nov 28, 2007, 10:43 GMT

Hanoi - Inflation in Vietnam surged to 9.45 per cent in the first 11 months of 2007, driven by rising food prices and a recent hike in the cost of gasoline, local media reported Wednesday.

The official Vietnam News cited Le Duc Thang, deputy director of the government's General Statistics Office, as blaming flood damage to agriculture in central Vietnam for the rise in food prices.

But other financial experts said the deeper factor driving inflation was the central bank's attempt to keep the Vietnamese dong pegged to the falling US dollar.

'Vietnam should have a flexible exchange rate, more in line with the dollar's value on the world market,' Le Dang Doanh, a prominent economist and former advisor to the prime minister, said in an interview.

He said efforts to use interest rates and currency exchange policies to slow inflation 'haven't done much to adjust the inflation rate.'

Vietnam has long had a policy of keeping the dong roughly pegged to the dollar to encourage investor confidence in the local currency, while allowing it to slide gradually to encourage exports. But the dollar's rapid fall has made this policy increasingly difficult to maintain.

Another source of inflation has been a massive influx of foreign currency and investment attracted by the country's fast-growing economy. Vietnam's GDP grew 8.5 per cent last year.

The government has tried to neutralize the inflationary impact of currency inflows by issuing bonds and by requiring banks to hold larger foreign currency reserves, but those tools may be reaching their limits.

Doanh argued the government's bond issues have actually had a perverse effect. 'The money raised by issuing government bonds is invested in state-owned companies or state construction projects, many of which are not economically effective,' he said.

'The government has to use money from the state budget to subsidize these companies and projects, resulting in worse inflation.'

Vietnam's move on November 22 to allow gasoline prices to rise, from 11,300 dong per liter to 13,000 (about 0.81 dollars), has further fueled inflation.

But with world oil prices rising to over $90 a barrel, the country had little choice but to let gasoline prices rise. The government says it spent 375 million dollars to subsidize gasoline prices during the first 10 months of this year. It now plans to phase out gasoline subsidies entirely over the next several years.

Higher fuel prices will result in higher transportation costs, which may drive food inflation even higher than the 14.9 per cent annual rate it has posted over the past year.