Overcapacity contributed to low inflation rate last year
Overcapacity contributed to low inflation rate last year
One of the factors behind Viet Nam's low inflation in 2022 was overcapacity which constrained firms from rising product prices, according to Nguyen Duc Do, deputy director of the Institute of Economics and Finance (IEAF) at the Academy of Finance.
Do was speaking at the seminar 'Market development and price movement in Viet Nam: outcomes in 2022 and outlook for 2023' on Wednesday.
The deputy director underlined the mechanism of fuel price stabilisation as another factor that has kept inflation in check. This is because fuel prices are a major determinant of CPI, and the mechanism, centring around price subsidies and tax cuts, has helped ease the fuel-induced inflationary pressure.
"Price controls on electricity, healthcare, and education have also played a part in curbing inflation," added Do.
He also forecasted that the year-by-year CPI growth would rise to roughly 5.1 per cent in January and then fall to around 3.0 per cent, resulting in a year-round inflation of 3.5 per cent for 2023.
Economist Nguyen Minh Phong forecasted that interest rates in Viet Nam would not fall until the second half of 2023. He also said keeping interest rates high might be a double-edged sword for the economy.
On the one hand, high policy rates would drive down monetary supply and boost savings, thereby putting demand-pull inflation under control. On the other hand, high policy rates would drive up firms' production costs, contributing to cost-push inflation.
"Higher interest rates means firms have to incur higher costs of borrowing, which will eventually be passed on to product prices," said Phong.
The economist also forecasts that cost-push inflation will rise in 2023 due to the wage-raising scheme, the expiration of some tax cuts, higher interest rates, and other unfavourable factors.
Pham Minh Thuy, head of the Department of Price and Market Research, IEAF, remarked that fuel management in Viet Nam had shown some cracks in the past few years.
Specifically, fuel firms are required to reserve an amount of fuel sufficient for 20 days of consumption. However, in reality, many firms fail to reach that reserve level, leading to fuel shortages during volatile periods.
Additionally, fuel prices must be adjusted periodically on the first day, eleventh day, and twentieth day of every month. Thuy said such a requirement is inflexible and needs to be revised.
Economist Vu Minh Phu underlined several factors that elevated fuel prices in Viet Nam in 2022. One was the tight global supply caused by geopolitical conflicts, and another was a large number of middlemen in supply chains, which added substantially to fuel end prices.
The economist also said the price adjustment period of ten days is problematic because it causes a delay in fuel price management. He called for the period to be cut to five days to be more responsive to global price shocks.
"Fuel firms should be given more leeway to run themselves. They would operate better should they be left to their own devices," stressed Phu.
