Vietnam unsure how to shield poor from gas prices

Jul 23, 2008, 11:40 GMT

Hanoi - Vietnam's government said Wednesday it would take steps to cushion the impact of a drastic fuel price hike on the country's poor, but released few details of what the steps might include.

On Monday, the government raised the retail price of gasoline 31 per cent, to 19,000 dong (1.13 dollars) per liter. The price rises are painful for poor people dependent on gasoline use, such as taxi drivers and fishermen.

Vietnamese press reported Wednesday that fishermen hurt by higher fuel prices would soon receive additional fuel subsidies from the government. But Deputy Agriculture Minister Nguyen Viet Thang told Deutsche Presse-Agentur dpa no decision had been made yet.

'We are waiting for a proposal from the Ministry of Finance,' Thang said. 'I think the rise in the fuel subsidies for the fishermen should be equivalent to the rise of 31 per cent in the price of fuel.'

Vietnam's poor are already bearing the brunt of the country's galloping inflation, which topped 27 per cent in the year through June.

To curb inflation, the government tightened credit rules for banks, raised the prime interest rate to 14 per cent, and cut or delayed tens of millions of dollars in spending by government and state-owned enterprises. In March, it froze the prices of key commodities, including gasoline.

The efforts seemed to bear fruit in June, as the monthly inflation rate dropped to 2.2 per cent, from 3.9 per cent in May. But Monday's fuel price hike will filter through into higher inflation this summer, said the International Monetary Fund's Hanoi representative, Benedict Bingham.

'I think they would have been far better off not to have made the commitment back in March to freeze prices, and to let the increase in oil prices continue to feed through in a gradual way,' said Bingham. 'That would have given households and businesses a better chance to adapt to the situation, rather than being faced with a large shock.'

Bingham said the decision to raise prices now 'was the right one, but given the magnitude of the adjustment it is important that they put in place some measures to cushion the impact of the fuel price hikes on the poor.'

Figures released Wednesday by the Ministry of Planning and Investment estimated the inflation rate through the end of 2008 at 25 per cent, but it was not clear whether gasoline price hikes had been factored in.

The ministry forecast growth of 7.5 per cent in the second half of the year, but with a dramatic trade deficit of 19 billion dollars, over 21 per cent of projected GDP. Vietnam's trade deficit is financed by inflows of billions of dollars in direct foreign investment, as manufacturers confident of future economic growth expand their operations.

The fuel price hikes and high expected inflation have contributed to falling prices on Vietnam's stock exchange. The VNIndex fell 2.8 per cent Wednesday, its fourth straight day of losses.

But Peter Ryder, CEO of Indochina Capital, said the falling market was mainly due to profit taking after a month-long rally that raised the VNIndex some 33 per cent, and not to the fuel price hike.

'People were pissed because the government came out and said a few weeks ago they weren't going to raise prices, and then they went ahead and did it,' Ryder said.

'But I'd give kudos to the government for maybe recognizing that the market was going to trade off anyway, so why not throw (higher gas prices) into the mix.'