Vietnam too hasty to cut down interest rates?

Vietnam too hasty to cut down interest rates?

While foreign institutions have warned that Vietnam has slashed interest rates too sharply, Vietnamese economists believe that the interest rates should be eased further and immediately.

“Be cautious, Vietnam” was the warning given by Alliance Bernstein, an investment fund management company, about the economic risks the country would face after it slashed the interest rates too rapidly and sharply.

In the eye of the institution, with the moves of continuously cutting down the interest rates sharply and suddenly, the State Bank of Vietnam has been determined to push up the economic growth. However, it should have been warned about the heavy price the economy would have to pay – the increasing worries among investors about the possibility of balancing the international payment and the local currency.

The foreign institution gave the warning in late April 2012. Prior to that, the State Bank slashed the ceiling deposit interest rate by one percent in mid-March, and then made another similar move in April. Meanwhile, Governor of the State Bank of Vietnam Nguyen Van Binh once implied that Vietnam would be very cautious in slashing interest rates, just by one percent for every quarter.

Meanwhile, the World Bank, at the press conference held on the occasion of the mid-term consultative group’s meeting on May 28, also warned that if Vietnam continues slashing the interest rates too rapidly as it is doing now, this would influence the economic growth rate.

Though the bank believes that Vietnamese businesses need low cost capital to develop, the rapid interest rate reduction may cause negative impacts on the economic growth.

Dat Viet newspaper has quoted Tomoyuki Kimura, the ADB Vietnam Country Director as saying that the over hastiness in slashing interest rates may put Vietnam dong under new hard pressure. This may lead to the lessened efficiency in the efforts to stabilize the macro economy, influence investors’ confidence and weaken the foreign currency reserves.

Meanwhile, Vietnamese economists do not think this way. Bui Kien Thanh, a well- known economist has rejected the opinion that the too sharp interest rate cut would lead to the return of the high inflation, affirming that even the 7-8 percent interest rates would not cause inflation.

In the interview given to Infonet, Thanh said that the interest rate reductions so far still cannot satisfy the demand for economic growth. The sky high interest rates of over 20 percent existing for a long time have killed a lot of enterprises.

“The high interest rates should be seen as a dangerous weapon for the Vietnam’s national economy,” Thanh said.

The State Bank needs to learn to know what the national economy needs, and how low the interest rates should be to be sure the normal operation of enterprises. Thanh said he does not think that the interest rate should be cut step by step by one percent per quarter.

“If businesses say they need the low interest rate at less 10 percent to survive, the State Bank, within its jurisdiction, should consider the proposal and try to force the interest rates down to less than 10 percent,” Thanh said.

“If Vietnam still keeps hesitant in cutting down interest rates, businesses would all die. It’s necessary to take actions to rescue businesses,” Thanh added.

The State Bank has slashed the interest rates three times so far this year by three percentage points in total.

However, bankers have said that despite the deposit interest rate reductions, businesses still have to wait three months to get the low cost capital at the interest rates of less than 14 percent.

vietnamnet