Vietnam spending cuts may not be enough to stop inflation

Jun 24, 2008, 11:27 GMT

Hanoi - Vietnam has finalized a list of government spending cuts intended to help reign in skyrocketing inflation, but analysts worried Tuesday that the cuts were not large enough to be effective.

In an interview, Deputy Minister of Planning and Investment Cao Viet Sinh said the final list of projects to be delayed included 1,000 projects worth a total of 2 trillion Vietnamese dong (120 million dollars). A further 600 projects with combined investment capital of 3.5 trillion dong (211 million dollars) would be slowed down.

The influential Vietnamese economist Le Dang Doanh said the cuts were insufficient.

'That figure doesn't mean anything,' Doanh said. 'If the combined capital of the projects to be stopped or delayed accounts for less than 10 per cent of the total investment (of government-funded projects), then the government is just doing it for fun. It should be more than 10 per cent.'

Vietnam is desperate to bring down its inflation rate, which topped 25 per cent in the year through May before falling somewhat in June. Inflation is hurting Vietnamese exports, driving workers to strike for higher pay, and damaging confidence in the dong, leading analysts at Morgan Stanley, Deutsche Bank and elsewhere to warn of a possible currency crisis.

The cuts Sinh announced represent just one part of the government's multi-pronged effort to reduce expenditures. The government has also pledged to reduce expenditures on 'off-budget' infrastructure projects, funded by bond issues, by 25 per cent, which would represent a cut of over 8 trillion dong (480 million dollars).

Further, the government has ordered large state-owned enterprises to cut back on unnecessary expenditures and investments in non-core business areas.

In recent years, many large state-owned companies had branched out into apparently unrelated businesses, with state shipbuilding conglomerate Vinashin moving into finance, electricity monopoly EVN investing 250 million dollars in a beach resort, and oil monopoly PetroVietnam building a five-star hotel in Hanoi.

On Monday, Vinashin announced it was pulling out its 1-billion-dollar investment in a 5-billion-dollar steel mill project it had entered with the South Korean firm Posco. Vinashin chairman Pham Thanh Binh told the Vietnamese newspaper Tuoi Tre the company was delaying or slowing 49 other projects worth a total of 6.5 trillion dong (392 million dollars).

But PetroVietnam and state-owned telecom conglomerate VNPT representatives told Deutsche Presse-Agentur dpa Tuesday they had no plans to cut back on expenditures.

'It's hard to say how much is enough' for cutbacks to begin reigning in inflation, said economist Vu Thanh Tu Anh of the Fulbright Economic Training Program in Ho Chi Minh City. Anh echoed economist Doanh's estimate of 10 per cent of the total investment budget.

Doanh said the government should postpone 'white elephant' projects, including the new National Assembly building and the Hanoi Museum. Other analysts pointed to a planned 419-million-dollar second terminal at Hanoi's international airport, scheduled to begin construction in October although the airport handled just 3.5 million passengers in 2006, well below its current capacity of 6.5 million.

Economists say the ultimate question is whether the government's spending cuts and revenues will add up to a budget deficit below 2007 levels. Besides the planned reductions in infrastructure spending, that means resisting demands for subsidies to help groups suffering from inflation, such as new gasoline subsidies.

Vietnam's Government Statistical Office said no figures were yet available on expected total revenues and expenditures for 2008.

On Monday, Sinh said the inflation rate for the month of June would likely come in at about 2.2 per cent, well below the 3.9 per cent recorded in May.