INTRODUCTION
Rationale to the thesis
In recent years, Vietnam has made significant economic progress, becoming a member of the WTO and successfully negotiating key trade agreements, which have contributed to a notable reduction in hunger and poverty while decreasing the wealth gap However, this economic growth has also brought challenges, with inflation emerging as a major concern for the government, economists, and the public alike.
Inflation significantly hampers economic development, as evidenced by the galloping inflation experienced in Vietnam during 2007-2008, which resulted in soaring prices and diminished purchasing power This high inflation rate led to the collapse of thousands of companies and financial institutions, pushing over four million people below the poverty line Although the economy began to show signs of recovery in 2009, Vietnam's emerging economy remained unstable, characterized by fluctuating inflation rates.
To stabilize the macro-economy, the government has implemented various monetary and fiscal policies, including interest rate adjustments and reserve requirements, to balance supply and demand Collaboration among ministries and agencies has been essential in addressing the impacts of inflation However, effectively curbing inflation demands significant time, resources, and effort Therefore, learning from past experiences is crucial in developing strategic plans for the future.
Springing from practical requirements, the study of “Inflation in the period of 2007- 2016” is carried out for the purposes of dealing with following issues:
Definition, causes and effects of inflation and measures to curb inflation in theory
Main reasons and consequences of inflation in Vietnam in the period of
Solutions that the government applied to tackle inflation
Scope of the study
This research analyzes the inflation situation in Vietnam from 2007 to 2016, utilizing various sources such as websites, news articles, and existing studies The findings provide a comprehensive perspective and comparisons that lead to effective recommendations for the State Bank of Vietnam in its efforts to combat inflation.
Research methodology
To have an overview of inflation in Vietnam, the author has used some methods:
Collecting and analyzing data and information from State Bank of Vietnam‟s website, Ministry of Finance‟s website, specialist journals and other researches
Making comparisons, analysis and synthesis basing on actual data.
Structural organization of the thesis
Beside the Introduction part, the thesis is divided into four chapters:
Chapter II : Background knowledge Chapter III : Inflation in Vietnam from 2007-2016 Chapter IV : Solutions of the government
BACKGROUND KNOWLEDGE
Definition
Inflation is commonly defined as a general increase in the prices of goods and services within a specific country, leading to a decline in the value of money According to the Oxford Dictionary, it represents the rate at which this price rise occurs, while the Economic Dictionary emphasizes the resulting decrease in the purchasing power of money.
Inflation, as defined by Gillepie (2011), refers to a persistent rise in the general price level over a specific timeframe For instance, an annual inflation rate of 3% indicates that the average prices have increased by 3% within that year.
Inflation refers to a sustained increase in the overall prices of goods and services within a country, typically measured as an annual percentage change As inflation progresses, the purchasing power of money diminishes, meaning that individuals can acquire a smaller quantity of goods or services for the same amount of money.
Reasons for inflation
Reasons for inflation are broken down into three main ones: demand- pull inflation, cost- push inflation and excessive money supply
Demand-pull inflation occurs when strong consumer demand leads to rising prices, as multiple individuals compete to purchase the same goods This phenomenon affects the entire economy when it influences all types of goods, resulting in an overall increase in price levels According to Keynesian economics, demand-pull inflation arises from an imbalance between aggregate supply and demand, highlighting the relationship between consumer behavior and inflationary pressures.
When the aggregate demand in an economy strongly outweighs the aggregate supply, prices go up
Economists describe demand-pull inflation as a result of too many money chasing too few goods.
There are five causes for demand-pull inflation:
An increase in spending and investing of consumers padded on confident firms who then hire more people to meet demands
A sudden rise in exports which then translates to an undervaluation of the involved currencies
Forecasts and expectations of inflation, where companies increase their prices to go with the flow of the expected rise
An excess in monetary growth
Cost-push inflation is a phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials
Cost-push inflation happens when
AS shifts to the left (decreases), and intersects the AD curve to the left of where AD and AS cross
In the short term, cost-push inflation leads to a significant increase in money circulation and credit volume, surpassing the available supply of commodities This type of inflation occurs when consumers are eager to spend substantial amounts on goods, particularly when the market is balanced.
Cost-push inflation occurs when increased production costs lead to a decrease in aggregate supply, resulting in fewer goods being produced As supply diminishes while demand remains steady, the prices of finished goods rise, causing inflation The primary drivers of cost-push inflation are twofold.
This includes floods, earthquakes, tornadoes, or any other large event that disrupts any portion of the production chain and leads to increased production costs
Worker strikes, often linked to contract negotiations, and abrupt government changes—particularly in developing nations—can significantly disrupt a country's ability to sustain its previous output levels.
Rapid growth in the money supply compared to the economy leads to market volatility and soaring inflation, eroding public trust in currency As money loses value, it becomes ineffective as a store of value, prompting individuals to spend immediately to avoid further depreciation This uncertainty complicates business planning, as future prices become unpredictable Consequently, lenders impose higher interest rates on loans and credit to offset the diminishing value of money, which in turn restricts investment and consumer spending.
Classification of inflation
Moderate inflation, often referred to as creeping inflation, occurs when the annual prices of goods and services rise at a single-digit rate This type of inflation is characterized by a predictable increase in prices, allowing individuals to view money as a reliable store of value during this economic phase.
Galloping inflation, characterized by annual price increases of two-digit or even three-digit rates, significantly impacts middle and low-income groups, hindering their ability to save for the future Also referred to as jumping inflation, this phenomenon necessitates the implementation of strict measures to control rising prices and stabilize the economy.
Hyperinflation is characterized by an extremely high and uncontrolled increase in prices, typically exceeding a three-digit annual rate This phenomenon creates an imbalance in the supply and demand for money, resulting in a rapid loss of the currency's real value As money depreciates quickly, prices continue to rise, exemplified by the economic turmoil in Germany in 1922.
1923 is the best example of hyperinflation.
Measurement of inflation
Measuring inflation is a difficult problem for statisticians To do this, a number of goods that are representative of the economy are put together into what is referred to a
The "market basket" refers to a collection of goods whose cost is tracked over time to create a price index This index represents the current cost of the market basket as a percentage of its cost in a base year Inflation rates can be derived from various indexes, including the Consumer Price Index (CPI), Producer Price Index (PPI), and Gross Domestic Product (GDP) indexes.
The Consumer Price Index (CPI) measures the weighted average of prices for a basket of consumer goods and services, calculated by averaging price changes for each item within the basket This index is essential for evaluating cost of living adjustments and is frequently utilized to identify inflation or deflation trends.
Where: t is a particular year in time t-1 is the year before
The CPI represents the cost of a basket of goods and services across the country on a monthly basis Those goods and services are broken into eight major groups:
The Producer Price Index (PPI) measures the average change in selling prices received by domestic producers for goods and services over time, focusing on three key areas of production: industry-based, commodity-based, and final demand-intermediate demand.
Gross Domestic Product (GDP) represents the total monetary value of all finished goods and services produced within a country's borders during a specific time frame, typically calculated annually or quarterly It encompasses all private and public consumption, government expenditures, investments, and exports, while subtracting imports within a defined territory.
Possible impacts of inflation
Inflation acts as a driving force for heightened production, as an influx of money leads to increased consumer spending This surge in spending boosts aggregate demand, creating an incentive for domestic production of goods.
Higher inflation typically results in increased prices, prompting companies to raise wages This wage growth boosts firm income, which can help reduce debt on loans and mortgages, ultimately benefiting the companies.
In extreme circumstances, hyperinflation can wipe away peoples savings and cause great instability Inflationary growth causes a damaging period of boom and bust economic cycles
High inflation can hinder investment and long-term economic growth due to the uncertainty it creates Additionally, elevated inflation rates can diminish a nation's competitiveness by making exports less attractive, which results in decreased aggregate demand, a current account deficit, and ultimately, slower economic growth.
Inflation decreases the purchasing power of money, negatively impacting savers When inflation rates surpass interest rates, it can result in an unequal distribution of income within society.
Solutions to inflation prevention
The government can manage inflation by modifying fiscal and monetary policies to balance demand and supply, enhance consumption, and decrease the trade deficit These policies are crucial tools that significantly influence inflation rates In Vietnam, the State Bank employs three primary channels to implement these strategies effectively.
The State Bank of Vietnam can influence the economy by increasing interest rates, which affects the borrowing costs for commercial banks When the State Bank raises its rates, banks follow suit, leading to higher borrowing costs for consumers As a result, fewer individuals are inclined to take out loans, causing a decrease in spending This decline in consumer expenditure ultimately leads to lower prices and a slowdown in inflation.
Increasing reserve requirements mandates that banks hold a larger amount of money in reserve to cover withdrawals This reduction in available funds for lending means that consumers will have access to less credit, leading to decreased borrowing and, consequently, lower overall spending in the economy.
To manage the money supply effectively, the State Bank of Vietnam utilizes open market operations involving government securities such as Treasury bills, bonds, and notes When the bank aims to increase the money supply, it purchases these securities from banks, enabling them to lend more, which lowers loan rates and encourages borrowing and investment, thereby stimulating the economy Conversely, to decrease the money supply, the State Bank sells securities, withdrawing funds from banks and reducing the capital available for lending This restriction on capital access results in higher borrowing costs, leading to decreased investment and spending, ultimately slowing economic growth.
INFLATION IN VIETNAM FROM 2007 TO 2016
Galloping inflation 2007- 2008
The global recession in the period of 2007- 2008 and natural catastrophes were to blame for galloping inflation in Vietnam in this period
Vietnam's import and export activities faced significant challenges due to the global economic downturn triggered by the financial crisis in the United States, which led to the collapse of major financial institutions worldwide As stock markets plummeted and even affluent nations implemented rescue packages for their financial systems, traditional export markets for Vietnam, including the US, EU, and Japan, reduced their spending This decline in demand, coupled with the devaluation of the USD, adversely affected import activities, altered consumer psychology, and pressured businesses to increase prices These combined factors contributed to rising inflation in Vietnam.
Extreme weather events significantly hinder economic growth and sustainable development, as evidenced by the 2008 natural disasters linked to typhoons, heavy rains, and flooding, which resulted in the deaths of 550 people and the destruction of 210,000 acres of rice The estimated damages exceeded $700 million, causing a decline in commodity supply while food demand surged This imbalance between supply and demand triggered a rise in commodity prices, further exacerbating inflation.
In 2008, Vietnam faced significant inflation driven by severe weather conditions and natural disasters, which disrupted production and crop cultivation, leading to a shortage of goods This scarcity resulted in increased demand, as evidenced by a 4.45% growth in total retail sales compared to 2007, and an 8.7% increase from 2006, according to the General Statistics Office of Vietnam The inability of supply sources to meet this rising demand contributed to escalating prices, highlighting the phenomenon of cost-push inflation.
Prices of domestic goods rocketed due to two main cost- push reasons The first reason was the difference between the world and domestic prices From the second half of
From 2007 to April 2008, international prices for essential commodities surged significantly, with crude oil rising by 51.24%, steel by 43%, fertilizer by 67%, and rice by 130% These commodities heavily influenced Vietnam's Consumer Price Index (CPI), as raw oil accounted for 100% and steel for 65%-70%, leading to increases in domestic prices Initially, Vietnam's prices were lower than those in neighboring countries, with electricity prices at just 62% of Thailand's and diesel oil at 82% of Singapore's However, escalating global prices forced the government to raise domestic prices, impacting production costs Additionally, a rise in labor costs, driven by new regulations that increased the minimum wage by VND 90,000 starting January 2008, further contributed to rising production expenses, thereby pushing up the inflation rate.
Continuous high-level growth theoretically necessitates a substantial increase in the money supply A widening gap between money supply and GDP exerts pressure on the economy, leading to escalating inflation rates.
Between 2007 and 2008, there was a significant 30% increase in the currency in circulation, driven by a surge in the money supply During this period, foreign reserves reached approximately $20 billion, marking a substantial rise compared to previous years.
In 2008, Vietnam experienced a significant surge in Foreign Direct Investment (FDI), with total registered FDI reaching over $64 billion, nearly triple that of 2007 This increase included 112 new projects with $1.17 billion in registered capital, contributing to a 222% rise in total FDI compared to the previous year Consequently, from early 2007 to mid-2008, Vietnam's GDP grew by 22%, while the currency in circulation skyrocketed by 110% This disparity between GDP growth and currency circulation resulted in inflation rates in Vietnam surpassing those of neighboring countries Additionally, ineffective financial policies and prolonged, inefficient investments in infrastructure further exacerbated the inflationary pressures on the economy.
Vietnam experienced severe consequences from rampant inflation between 2007 and 2008, resulting in skyrocketing prices and market instability that prompted hoarding of rice and panic buying of gold The inflation rate peaked at a decade-high, surpassing that of other emerging Asian economies, significantly impacting daily life, particularly for low-income groups Despite a minimum wage increase from VND 450,000 to VND 540,000 per month and a 15% pension subsidy introduced by the government, the living conditions of employees did not improve markedly This rising social hardship triggered numerous strikes in the garment, footwear, toy, and electronics sectors, predominantly involving American, South Korean, and Taiwanese companies in and around Ho Chi Minh City.
Rural communities face significant challenges due to natural disasters, livestock epidemics, and rising costs of consumer goods, gasoline, and agricultural inputs, all of which adversely affect farmers' production activities Local reports indicate that these factors have been particularly impactful since 2008.
In recent years, the number of people living below the poverty line has surged to 4 million, marking a significant increase of 32.3% since 2007 This rise in poverty is particularly concentrated in the Northern Midlands and Mountains, the North Central Coast, the Central Coast, and the Central Highlands regions The challenges within the banking and financial system further exacerbate these issues, highlighting the need for targeted economic interventions.
The high inflation experienced during 2007-2008 significantly impacted all socio-economic sectors, particularly commercial banks This inflationary period diminished currency purchasing power, adversely affecting capital mobilization, lending, investment activities, and banking services As a result, commercial banks faced numerous challenges in raising capital, necessitating close adjustments of interest rates in response to capital market fluctuations The ensuing interest rate competition among banks, with rates soaring to 17%-18% per year for short-term deposits, led to the establishment of higher deposit interest rates, sometimes nearing credit interest rates Despite the banking sector's losses, interest rates continued to rise, further exacerbating the negative effects on the overall banking system.
To combat soaring inflation, the State Bank of Vietnam must adopt a stringent monetary policy to decrease the money supply, even as the demand for loans from businesses and individuals continues to rise, creating potential moral hazards within the banking system The declining purchasing power of the VND has led to increased prices for gold and foreign currencies Additionally, challenges have arisen in mobilizing funds with a six-month term, while the demand for long-term loans remains high Utilizing short-term capital for medium and long-term lending poses inherent risks, jeopardizing bank liquidity and heightening maturity and exchange rate risks.
High inflation in Vietnam has led to a significant reluctance among people to engage in cash transactions, with a World Bank survey revealing that approximately 35% of money exists outside the banking system and over 90% of individuals do not utilize banks for transactions This extensive circulation of currency hampers the State Bank of Vietnam's ability to manage cash flow and complicates the development of non-credit services by commercial banks, resulting in many enterprises facing bankruptcy due to capital shortages Furthermore, high inflation disrupts the capital market, undermining investor confidence and complicating decision-making for banks Despite these challenges, Vietnam's economy has demonstrated resilience, achieving a GDP growth rate of 26.29%, ranking 34th among the top fifty-two economies, and outperforming Thailand and the USA.
From 2004 to 2007, Vietnam's economic growth index consistently hovered around 5% However, in 2008, the GDP experienced a significant decline, with a growth rate that fell below previous years—recording 8.48% in 2007, 8.32% in 2006, and 7.79% in 2004—along with a shortfall from the planned target of 7.0% The table below illustrates the economic development of Vietnam from 2004 onward.
Figure 2: Economic growth in Vietnam (2004-2007) (percentage)
(Source: General Statistics Office of Vietnam)
Moderate inflation in 2009
In 2009, the global economy began to recover, prompting businesses to increase production and favorable weather conditions supported farmers in cultivating crops Despite these positive developments, the inflation rate remained high at 6.88%, driven by multiple factors.
(Source: General statistics office of Vietnam)
In early 2009, inflation was managed effectively, with an average monthly increase of 0.45% from December 2008 to February 2009 Between March and November, the Consumer Price Index (CPI) fluctuated between 0.24% and 0.62% due to the government's strict market price regulation policies February saw a 1.17% rise in CPI, peaking at 1.38% in December, largely driven by consumer psychology during the Lunar New Year Increased spending during this period led to higher demand for essential goods, particularly ahead of the Tet holiday, while domestic supply struggled to keep pace, resulting in significant price increases for food and textiles.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
In December, the essential food price surge significantly impacted the food and beverage (F&B) service index, with drinks and cigarettes increasing by 0.97% and garments, hats, and footwear rising by 0.81% Other categories, such as culture, entertainment, and household appliances, experienced modest growth between 0.07% and 0.25% Additionally, the USD appreciated by 10.7% over the year, increasing pressure on imported goods and raw materials, while high production costs compelled businesses to raise their prices.
The government's fiscal stimulus package, introduced in February 2009 to combat an economic slowdown, included a significant interest-rate subsidy program valued at 17 trillion dong, aimed at preventing factory closures This influx of capital into the economy has significantly contributed to inflation in Vietnam, as the increased money supply has exerted upward pressure on prices across various sectors.
Vietnam's government effectively managed inflation, leading to an economic growth rate of 5.2% and a lower-than-expected unemployment rate Additionally, the country's export activities successfully attracted foreign investment.
In Vietnam, the trade-service sector effectively met the demand for goods and product consumption, with exports rising by 2.4% compared to 2008 Notably, domestic exports surged by 40.3%, particularly in agriculture, where rice exports saw a remarkable increase of 71.3% in quantity and 76.2% in turnover, along with significant growth in cassava products (123.4%), pepper (64.5% in quantity and 15.5% in turnover), and tea (10.2% in quantity and 10.5% in turnover) Conversely, imports fell to USD 11.3 billion, a 45% drop from the previous year, with the domestic economic sector contributing USD 7.5 billion (down 50.4%) and the foreign investment sector at USD 4.3 billion (down 32.4%) By the first quarter of 2009, Vietnam achieved a trade surplus of USD 1.7 billion, maintaining a balanced and surplus trade and payment situation.
Recent changes in credit and banking activities have significantly enhanced capital mobilization, enabling enterprises to invest and expand their operations Total capital mobilization reached 8,000 billion VND, marking a 31.10% increase over 2008 and surpassing the planned target by 0.85% Loan turnover was estimated at 16,100 billion VND, reflecting a 39.32% rise compared to the previous period The economic growth rate in 2009 exceeded the 5% target, while foreign exchange reserves remained at a secure level Additionally, the stock market showed signs of recovery, with the VN index rising by 37% in March 2009 The stable growth of commercial banks indicates effective government control over inflation.
Domestic consumption is recovering, with total retail sales of consumer goods and services rising by 21.9% The private sector experienced a significant increase of 22.9%, while the state sector grew by 1.4% and the FDI sector by 9.5% This overall growth rate surpasses that of key sectors like agriculture, forestry, aquatic products, and industry-construction.
In 2009, the average monthly income for state sector employees rose to VND 3,084,800, marking a 14.2% increase from the previous year Urban workers earned an average of VND 3,979,100, a 16.1% rise, while rural employees saw an income of VND 2,532,900, up by 13% Additionally, the national poverty rate decreased to an estimated 12.3%, down from 14.8% in 2007 and 13.4% in 2008, reflecting an overall improvement in the daily lives of employees and workers.
Galloping inflation in 2010-2011
Figure 4: CPI index in 2010 and 2011
(Source: General statistics office of Vietnam)
The table illustrates the fluctuations in the Consumer Price Index (CPI) during 2010 and 2011, highlighting significant increases at the start and end of 2010, particularly around the New Year and Lunar New Year This rise was driven by surging food demand amid limited supply due to adverse weather and harvest conditions By December 2010, the CPI peaked at 1.98%, primarily influenced by escalating food prices (4.67%) and rising costs of housing and construction materials (2.53%).
2011, it was estimated that Gross Domestic Product (GDP) in the first nine months surged by 5.67%, in comparison with 2010 Compared to 2010, prices of goods in
In 2011, Vietnam experienced significant inflation fluctuations, with the Consumer Price Index (CPI) peaking at 3.32% in April, surpassing the highest monthly rate of 2010 by 1.43% The country faced rampant inflation during the 2010-2011 period due to multiple contributing factors.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Inflation from 2010 to 2011 was attributed to two main external reasons: financial situation and natural disasters
In the aftermath of the global financial recession, the economy underwent significant changes as governments implemented long-term expansionary monetary policies to stimulate growth This led to a notable rise in the prices of essential commodities, with coffee reaching a 16-year high and cotton prices soaring by 60-70% Other key raw materials, including rubber, pepper, cashew, and rice, also experienced sharp price increases Additionally, surging international oil prices contributed to rising domestic oil costs, while other commodities such as gas, chemicals, coal, and fertilizers saw similar upward trends.
The Mekong Delta region of Vietnam faced significant challenges between late September and early December 2011, as epidemic diseases in cattle and poultry, coupled with severe flooding—the worst in 11 years—diminished productivity Over 600,000 people were affected across several provinces, including An Giang, Dong Thap, Can Tho, Vinh Long, Hau Giang, and Kien Giang, resulting in 85 fatalities and the evacuation of nearly 13,000 families due to flooding and landslides The floods devastated property and livelihoods, destroying approximately 11,768 acres of rice fields Additionally, the demand-supply imbalance was exacerbated by the appeal of neighboring markets in China, Laos, and Cambodia.
In 2009, the inflation rate indicated an economic recovery, leading to increased consumer demand and rising commodity prices This surge in demand was fueled by expansionary monetary and fiscal policies that promoted import activities, ultimately driving up the demand for gold and dollars, which contributed to the higher inflation rate.
Between 2010 and 2011, Vietnam experienced inflation primarily due to two cost-push factors The first was currency devaluation, with the State Bank of Vietnam devaluing the VND three times, culminating in a significant 9.3% drop in February 2012 This devaluation, detrimental to the economy due to Vietnam's reliance on imports, led to increased import costs and subsequently higher production expenses, fueling inflation The second factor was the rising prices of essential goods, such as electricity and gasoline, which further contributed to the overall increase in prices across various sectors.
Figure 5: Fluctuation in the price of gasoline
Figure 6: Price of electricity from 2009 to 2011
(Source: Vietnam Electricity and vietstock.vn)
Electricity and gasoline are crucial for economic growth, with significant price adjustments occurring between 2010 and 2011 Notably, in the first quarter of 2011, electricity prices surged to VND165/kWh, a sharp increase compared to the average price in 2010 This spike in electricity costs led to higher production expenses for various goods, contributing to rampant inflation.
In 2010-2011, the Consumer Price Index (CPI) rose unexpectedly due to a combination of complex factors Key monetary influences, including foreign direct investment (FDI), national currency exchange rates, and foreign indirect investment, exerted significant pressure on the State Bank This led to an increased demand for foreign currency to stabilize the USD/VND exchange rate, resulting in a sudden rise in the money supply and contributing to high inflation levels.
Despite facing similar challenges such as the global financial crisis and adverse weather conditions, Vietnam's inflation rate has been notably higher than that of other Southeast Asian nations The chart below illustrates the significant disparities in inflation levels across these countries.
Figure 7: Inflation rate of Southeast Asian countries in 2011
BruneiCambodiaIndonsiaLaosMalaysiaMyanmarPhilippinesSingapore
In 2011, Vietnam experienced an inflation rate exceeding 18%, significantly higher than the average 3% seen in neighboring countries like Myanmar, Indonesia, the Philippines, and Thailand This volatility in inflation, ranging from 0.8% to 18.13%, highlighted the limitations of Vietnam's macroeconomic policies, particularly the ineffective investments in State-owned enterprises (SOEs) These SOEs, prioritized for resource utilization and state budget support, lacked the incentive to generate profits, leading to irresponsible business practices and ineffective investments A notable example is VINASHIN, which incurred a loss of $4.4 billion in 2010 and struggled to repay its debts, alongside ALC II, which lost nearly 3,000 billion This disparity between money in circulation and GDP adversely affected economic development, contributing to soaring inflation rates.
In 2011, the stock market experienced a significant decline, with bond prices dropping to levels lower than those of various vegetables Notably, the VKP code (Tan Hoe Plastic Joint Stock Company) marked a historic moment as it became the first stock in Vietnam's market to fall below 1,000 VND, closing at just 700 VND on November 22 Additionally, the listing of DVD (Vien Dong Pharmaceutical Company) was canceled after their stock price plummeted to 3,500 VND This downward trend continued, culminating in further losses by December 27.
The VN Index has officially dropped by 350 points, while the HNX-Index has decreased by 56 points In 2011, the financial landscape was dire, with 65 securities companies going bankrupt and 71 others facing significant losses At that time, market capitalization was only slightly above 20% of GDP, forcing businesses to navigate numerous challenges High interest rates and limited access to capital further exacerbated the situation, pushing around 50,000 companies to the brink of bankruptcy in an unstable economy.
In 2011, amid an unstable economy, Standard & Poor's (S&P) downgraded Vietnam's long-term debt rating from BB to BB- and also lowered the credit ratings of three major domestic banks—Bank of Investment and Development of Vietnam, Techcombank, and Vietcombank—to BB- Additionally, Hoang Anh Gia Lai's corporate credit rating was reduced to B-.
The termination of government subsidies has restricted capital access for small and medium enterprises (SMEs), while financial institutions continue to struggle with low transparency and hidden risks Consequently, the effectiveness and competitiveness of these businesses remain stagnant, and state-owned enterprises (SOEs) still exhibit inefficiencies in capital, asset, and land utilization Overall, inflation poses a significant threat to the entire economy.
Inflation in 2012-2016
From 2012 to 2016, Vietnam successfully maintained a moderate inflation rate, marking a significant achievement for its economy and contributing to macroeconomic stability In contrast to the high inflation rates observed in 2008 (19.89%) and 2011 (18.13%), the inflation rate was effectively controlled, starting at 6.81% in 2012 and steadily decreasing to 1.81% in 2014 Notably, the country experienced its lowest inflation rate of 0.6% in 2015, while the GDP showed signs of recovery during this period, indicating a positive economic trajectory.
Between 2012 and 2016, the Vietnamese economy faced significant challenges due to global economic uncertainties and risks The Eurozone's economic outlook remained bleak, contributing to a sluggish recovery in the world economy Additionally, the sharp decline in oil prices adversely affected commodity prices, which in turn negatively impacted exporting countries like Vietnam amidst the instability of the global financial landscape.
The Chinese economy significantly influences the global market, and in Vietnam, fluctuating international prices, particularly the decline in oil prices, have created pressure on the state budget However, this situation also serves as a catalyst for reducing input costs, promoting production growth, and stimulating consumer spending.
During the period following the high inflation of 2010-2011, low consumer demand for commodities significantly contributed to a reduced Consumer Price Index (CPI) As individuals adopted frugal spending habits, the growth rate of consumption improved from 2012 to 2016, yet consumer demand only rose by 6.5% This indicates a persistent influence of cost-push factors on the economy.
Global gasoline prices have significantly dropped due to a decline in oil prices, leading to a reduction in imported petrol costs Consequently, domestic oil prices fell from 26,000 VND/liter to 18,000 VND/liter, representing a decrease of approximately 30% This price drop has also contributed to lower prices for other commodities Additionally, from 2012 to 2016, food prices experienced a decline attributed to a robust domestic supply.
Annually, the SBV proactively oriented exchange rates between 1% -3% per annum (adjusting level no more than 1% in the last months of 2011, not exceeding 2% -3% in
Between 2012 and 2015, the exchange rate adjustments remained minimal, ranging from 1% to 2%, which improved market transparency and allowed businesses to formulate operational plans effectively Following a significant 9.3% annual adjustment in February 2011 due to the economic crisis, the exchange rate experienced slight annual increases, except in 2015, influenced by the devaluation of the Chinese Yuan The State Bank of Vietnam (SBV) actively utilized monetary regulatory tools to stabilize the exchange rate and collaborated with interest rate measures to strengthen the domestic currency, encouraging citizens to save in VND rather than USD.
Re- discount interest rate 7 7 6.5 6.5 Refinance interest rate 9 5 4.5 4.5 M2 growth 18.46 18.51 17.69 17.9 Credit Growth 20.828 21.036 21.246 21.890
Figure 8: Monetary and Fiscal policy from 2012- 2016
( Source: the Ministry of Finance, the General Statistic of Vietnam, the State Bank of Vietnam)
Timely and sensible government adjustments have fostered investor and business confidence, leading to increased production and business expansion As a result, the economy has shown positive trends, with inflation steadily under control.
In the period of 2012- 2016, Vietnam economy witnessed positive changes in many sectors
Labor, employment and people‟s life
According to World Bank data, Vietnam's per capita income increased significantly from around $100 in the 1980s to approximately $2,100 by 2015 As of January 2015, the labor force aged 15 and above reached 54.61 million, marking an increase of 185,000 from 2014, while the working-age population stood at 48.19 million, up by 506,100 Among these, 142,000 individuals were employed, with the agriculture, forestry, and fishery sectors comprising 44.3%, industry and construction at 22.9%, and services making up 32.8%.
2015 was estimated to reach 21.9%, higher than the previous year‟s rate of 19.6%
In 2012, the percentage of people living in extreme poverty in Vietnam fell to 3% based on the 2011 Purchasing Power Parity (PPP) line of $1.90 Over the past decades, Vietnam has made significant progress in social indicators, achieving several Millennium Development Goals (MDGs) ahead of schedule The population has benefited from improved education and higher life expectancy compared to many nations with similar income levels Notably, the maternal mortality ratio has decreased below the upper-middle-income average, and the under-five mortality rate has halved Access to essential infrastructure has also seen remarkable improvements, with nearly universal electricity coverage and clean water and sanitation access rising from under 50% to over 75% of households Despite these advancements, approximately 30 million people, or one-third of the population, still fall into the 'poor' or 'near poor' categories, with half of these households belonging to ethnic minorities, who are particularly vulnerable to climate change, natural disasters, and economic and health shocks.
Vietnam has enhanced its international economic integration through several key free trade agreements, including those with the Eurasian Economic Union, the European Union, South Korea, and the Trans-Pacific Partnership Additionally, the establishment of the ASEAN Economic Community on December 31, 2015, is expected to provide further opportunities for Vietnam to deepen its integration with regional and global economies.
In the period of 2012- 2016, average growth rate achieved 5.91%, and growth rate showed an upward trend as the chart bellow
Figure 9: GDP growth from 2012 to 2016 (US billion)
In 2015, GDP growth reached an impressive 6.68%, amounting to USD 193.6 billion, surpassing the target by 0.48% The agriculture, forestry, and fishery sectors grew by 2.41%, while industry and construction saw significant increases of 9.64%, with manufacturing rising by 10.60% and construction by 10.82%, the highest since 2010 The services sector also experienced growth of 6.33% The economy's scale expanded to 4,192.9 trillion dongs, and GDP per capita rose to 45.7 million dongs (approximately USD 2,109), an increase of USD 57 from 2014 Additionally, final consumption grew by 9.12%, accumulated assets increased by 9.04%, and the trade balance improved with a reduction of 8.62% in the difference between imports and exports of goods and services.
According to data of GSO, in December 20, 2016, total means of payment increased
2012 2013 2014 2015 2016 up by 13.59% compared to 2015‟s same period); credit growth of the economy reached 16.46%
In 2016, the insurance market experienced robust growth, with total premium revenues projected to increase by 22.1% compared to the previous year Life insurance premiums saw a significant rise of 30.5%, while non-life insurance premiums grew by 12.5%.
Between 2008 and 2016, the Vietnamese economy experienced significant changes due to both internal and external factors The soaring inflation during 2007-2008 and again in 2010 adversely affected economic growth and impacted various socio-economic sectors In response to the challenges posed by high inflation and economic decline, the government took on a vital role in overseeing and regulating the economy through effective policies and tools.
SOLUTIONS OF THE GOVERNMENT
Monetary policy and fiscal policy
High inflation in Vietnam from 2008 to the present has primarily been driven by an increased money supply During this period, the government has implemented flexible monetary and fiscal policies, utilizing various tools such as interest rates, reserve requirements, and exchange rates to manage the economy.
Since 2008, global integration has posed significant challenges for monetary and fiscal policy implementation, particularly in managing inflation To stimulate GDP growth and recover the economy, the Vietnamese government adopted a tight monetary policy, aiming to reduce money circulation and control credit growth, which peaked at 30% in 2008 The State Bank of Vietnam (SBV) raised the benchmark interest rate three times in the first half of 2008, increasing it from 8.25% to 14% per annum, leading to short-term deposit rates of 17%-18% and lending rates of 23%-25% by June 2008 Inter-bank interest rates also surged to 25%, while the SBV maintained deposit rates below 12% In December 2008, to address the fragile economic situation, the Vietnamese government enacted Resolution 30/2008/NQ-CP to enhance production and business activities, boost exports, stimulate investment and consumption, and target a credit growth of 6.5% for 2009.
In 2009, the Vietnamese government implemented Decision No 131/QD-TTg, allocating USD 1 billion to subsidize lending interest rates as part of a 600 trillion VND stimulus package aimed at revitalizing the economy From 2009 to early 2010, the State Bank of Vietnam set a prime interest rate, limiting credit institutions to mobilizing and lending rates in VND to a maximum of 150% of this prime rate Despite enhanced cooperation between fiscal and monetary policies, the economy faced deflation risks To address this issue, the government revised its fiscal and monetary strategies to stabilize macroeconomic growth and support business activities in the subsequent years, starting from March 18.
In 2014, the refinancing interest rate dropped to 6.5%, significantly lower than the 15% rate recorded at the end of 2011, while the discount rate stood at 4.5% The following table illustrates the government's interest rate policies from 2008 to 2015.
(Source: GSO, Ministry of Finance, SBV)
In summary, the current economic landscape is characterized by stringent fiscal and monetary policies, which include raising the prime interest rate, increasing the discount interest rate, and elevating reserve requirements These measures aim to limit credit growth and money supply, discourage enterprises from borrowing, and ultimately reduce the overall availability of money in the economy.
The required reserve ratio has been adjusted in response to monetary and fiscal policies over time To manage surplus liquidity in the banking system and enforce a tight monetary policy aimed at controlling inflation, the State Bank of Vietnam (SBV) raised the reserve requirement and increased the interest rate on required reserves for credit institutions in mid-2007 and early 2008 However, by the end of 2008, the SBV lowered the required reserve ratio to alleviate liquidity pressure and reduce mobilization costs for credit institutions, encouraging them to boost lending activities Consequently, the reserve requirement for VND deposits significantly decreased from 11% in mid-2008 to 3% in the first quarter of 2009, a rate that has remained stable In contrast, the ratio for foreign currency deposits declined more gradually, from 11% in 2008 to 4% in 2010 Starting in 2011, the required reserve ratio for USD deposits was established according to Decision No 1925/QĐ-NHNN, effective from September 2011.
VND deposit Foreign deposit Non- term deposit and < 12 months
Non- term deposit and < 12 months
State-owned commercial banks (excluding
Agribank), urban joint stock commercial banks, foreign bank branches, joint venture banks, financial and financial leasing companies
Vietnam Bank for Agriculture and Rural
Rural joint stock commercial banks, cooperative banks, central people's credit funds 1% 1% 7% 5%
Credit institutions having required reserve under
VND 500 million, Vietnam Bank for Social Policies 0% 0% 0% 0%
Figure 11: Reserve requirement of credit institutions in Vietnam
Source: The State Bank of Vietnam
The open market operation (OMO)
Since July 2000, open market operations have served as a primary economic regulatory tool for the State Bank of Vietnam (SBV) In the initial seven months of 2008, these operations were complemented by the implementation of monetary and fiscal policies, including an increase in reserve requirements and adjustments to the prime interest rate.
The interest rates for short-term investment options are set at 7.5% per annum for a 182-day term and 7.75% per annum for a 364-day term To enhance short-term capital for credit institutions, the State Bank of Vietnam (SBV) has initiated selling sessions for short-term valuable papers with durations of 7, 14, 21, and 28 days, adjusting the daily bid volume according to capital needs and monetary market trends.
In 2009, the State Bank of Vietnam (SBV) adopted an expansionary monetary policy to enhance liquidity and enable credit institutions to effectively increase their lending During the first half of that year, the SBV conducted 14-day buying sessions, resulting in a decrease in interest rates from 9% to 7% per year to support short-term capital needs In 2010, to combat rising inflation, the SBV introduced 7-day, 14-day, and 28-day notes with reduced interest rates, with the 7-day rate falling from 7.8% to 7% and the 14-day rate decreasing from 8% to 7.5% The average bid volume reached approximately 5,400 billion per session By 2011, the SBV continued its tight monetary policy to address persistent inflation, injecting VND 14,188.4 billion in June while attracting VND 20,669.7 billion, ultimately withdrawing VND 64,811.3 billion through open market operations.
The exchange rate policy is crucial for stabilizing Vietnam's economy, particularly following its WTO membership, which boosted foreign investor confidence and led to significant capital inflows In late 2007, the domestic currency supply became uncontrollable, prompting an increase in the exchange rate fluctuation band from 0.5% to 0.75% on December 24, 2007, and then to 1% on March 10, 2008 To address these issues, the State Bank of Vietnam prohibited commercial banks from trading USD through third currencies and intervened in the foreign exchange market, although these actions fell short of expectations During this time, the interest rate on VND deposits reached 15.5%, compared to 14% previously, highlighting the need for significant adjustments in exchange rate instruments to better align with market supply and demand.
In 2011, the foreign exchange market faced significant volatility, prompting the State Bank of Vietnam (SBV) to increase the exchange rate by 9.3% in February and reduce the trading amplitude from +3% to +1% The SBV subsequently implemented flexible interventions to stabilize the exchange rate and mitigate dollarization Between 2012 and 2013, the SBV aimed to limit the exchange rate fluctuation to 2-3% annually to curb the depreciation of the Vietnamese Dong (VND), allowing businesses to better plan and execute their strategies Notably, on June 28, 2013, the SBV raised the exchange rate by 1%.
In 2014, the State Bank of Vietnam (SBV) made a 1% adjustment to the exchange rate on September 19, which remained stable for the rest of the year However, in 2015, challenges arose due to the global economic recession, the devaluation of the Chinese Yuan, and anticipated interest rate hikes by the Federal Reserve, leading to instability in Vietnam's exchange rate To address these challenges, the SBV devalued the Vietnamese Dong (VND) three times throughout 2015—in January, May, and August Additionally, on August 12, the SBV widened the exchange rate band from ±1% to ±2%, and further increased it to ±3% on August 19.
The State Bank of Vietnam (SBV) has proactively set an exchange rate adjustment guideline of approximately 1% to 3% per annum Specifically, the adjustment is capped at no more than 1% in the latter months of 2011, 2% to 3% for the years 2012 and 2013, 1% to 2% in 2014, and a maximum of 2% thereafter.
In 2015, measures were implemented to improve transparency and market orientation, allowing businesses to effectively create production and business plans Consequently, the frequency of exchange rate adjustments decreased, with the average interbank exchange rate experiencing a significant 9.3% annual adjustment in mid-February 2011, followed by gradual yearly increases of 1% to 2%.
To maintain exchange rate stability, the State Bank of Vietnam (SBV) implemented a comprehensive approach, utilizing both direct measures like interbank exchange announcements and synchronized monetary regulatory instruments By focusing on interest rate tools for both domestic and foreign currencies, the SBV aligned its strategies with macroeconomic trends, effectively safeguarding the value of the domestic currency.
Supply – demand balance and price control
Since 2007, price control measures have been implemented to stabilize essential commodity prices Following a price increase in February 2008, the costs of cement, steel, and coal remained unchanged until June, alongside stabilized electricity and water prices Prime Minister Nguyen Tan Dung directed ministries and agencies to identify factors contributing to rising commodity prices, leading to a focus on sustainable solutions to maintain market stability and balance supply and demand These adjustments aimed to control the rising prices of essential goods and reduce the high inflation rate.
From 2009 to 2010, the Ministry of Finance regulated fuel prices to align domestic rates with global markets, following Government Decree No 84/2009/NĐ-CP on fuel trading In 2011, the Ministry proposed a nationwide reduction in retail petrol prices by VND 500 per liter.
The Ministry of Planning and Investment, in collaboration with relevant agencies, actively monitors and manages the supply and demand of goods to ensure balance The government has mandated that ministries identify and promptly address any emerging imbalances in the market.
The Ministry of Trade is responsible for regulating essential commodities nationwide, focusing on those that address regional imbalances Key items such as food, sugar, petrol, and cement are monitored for supply and demand balance on a quarterly and monthly basis.
Stimulate consumption
The Ministry of Finance has collaborated with relevant agencies to implement essential measures and establish fair taxes and fees on commodities, benefiting exporters and traders in sectors like steel and cement Additionally, the Ministry has lowered import taxes on input products for export-oriented industries, including textiles, footwear, seafood, cashew nuts, wood, and pharmaceuticals Furthermore, certain exported goods were eligible for value-added tax refunds until 2012.
The Ministry of Industry and Trade, in collaboration with various ministries and local authorities, has initiated goods reserve programs to stabilize the market and balance supply and demand for goods and services Furthermore, these branches are proactively facilitating conditions to enhance production.
The Ministry of Agriculture and Rural Development is dedicated to enhancing livestock and aquaculture production through supportive policies Additionally, it has initiated a rice stockpiling program in the Mekong Delta to boost the efficiency of rice exports.
The Ministry of Information and Communications carried out propaganda activities to ensure that policies were conducted adequately, transparently in order to create a consensus of the society
Corporations and individuals are actively restructuring their operations for greater efficiency, adopting innovative technologies, and lowering production costs This strategic approach not only enhances trade activities but also aims to broaden both regional and global consumption markets.
The Prime Minister has mandated ministries and agencies to promote the "Vietnamese people use Vietnamese goods" initiative, enhancing awareness among citizens about the rights and responsibilities of both producers and consumers This includes conducting advocacy programs aimed at agencies, enterprises, party members, and employees Additionally, the ministries are intensifying inspection and supervision efforts to ensure the quality of goods in the market and to regulate their distribution and consumption effectively.
Trade deficit reduction
To address high inflation from 2007 to 2016, Vietnam focused on reducing its trade deficit, primarily by increasing exports The Prime Minister directed the Ministry of Finance and the Ministry of Agriculture and Rural Development to manage the prices of gasoline, oil, and essential foods In line with this, the Ministry of Trade urged businesses to enhance exports, particularly in key sectors such as rice, handicrafts, garments, and aquatic products Over the past decade, Vietnam's exports have consistently risen, with major products including telephones and spare parts (19%), textiles (14%), electronics and computers (10%), and footwear (7%) The United States emerged as Vietnam's largest export partner, accounting for 20.7% of total exports, followed by China (10.6%) and Japan (8.7%).
Source: www.tradingeconomics.com,General Statistics of Vietnam
To combat inflation in Vietnam, the government implemented a strategy to reduce imports by monitoring and publishing a list of non-essential goods and domestically produced commodities deemed unnecessary for development This approach has yielded positive results, as evidenced by the favorable changes in Vietnam's trade balance in recent years.
Figure 13: Balance of trade of Vietnam
To ensure long-term sustainability, local businesses must pivot towards importing machinery and advanced production technologies while decreasing their reliance on foreign consumer goods Additionally, diversifying import markets will help domestic companies reduce dependence on traditional sources.
RECOMMENDATIONS
Achievements
Vietnam's economic growth has faced challenges, particularly from inflation, which hindered development between 2007 and 2016 However, through careful observation and timely interventions by the government, the economy experienced positive changes and achieved significant milestones.
In 2016, Vietnam experienced a gradual stabilization of its macro-economy, with a GDP growth rate of 5.5%, outpacing many other Asian nations The country's foreign reserves reached an unprecedented USD 41 billion, reflecting economic strength Additionally, the business environment saw significant improvements, elevating Vietnam's ranking to 82nd out of 190 countries globally.
Vietnam experienced remarkable business growth, with over 110,000 new enterprises established for the first time, totaling more than VND 891 trillion in registered capital, the highest on record Additionally, the signing of the TTP agreement has opened new trade opportunities for Vietnam, boosting its trade volume with other countries.
Vietnam achieved a record in attracting foreign investment, with implemented Foreign Direct Investment (FDI) reaching an unprecedented $15.8 billion As of December 26, the country welcomed 2,556 new FDI projects, totaling a registered capital of $15.18 billion.
Fourthly, under the direction of the government, the Prime Minister, the political system took part in the prevention of natural disasters, droughts, salinity intrusion and joined in environmental protection.
Limitations
Besides positive changes, it was undeniable that Vietnam economy seems still more vulnerable than other Asian countries and faces threads of inflation again Vietnam economy had some limitations:
Inflation is primarily driven by underlying economic limitations, including a sluggish growth model and ineffective economic structures that have persisted over the years Additionally, the implementation of proposed solutions has been slow and lacking in coordination.
Vietnam's international competitiveness and innovation rankings have declined, with the country now positioned 60th globally, a drop of four places, making it sixth among ASEAN nations Additionally, the global innovation index for 2016 fell seven spots, placing Vietnam at 59th out of 128 countries and territories.
Southeast Asia ranks 4th due to ineffective government policies, a lack of knowledge, and the weak competitive capacity of enterprises To address these challenges, it is essential to develop a targeted strategy for sustainable development.
Thirdly, there were lack of tight cooperation between “tangible hand” of the government and “intangible hand” of the market, which was barrier for synchronous development
Fourthly, the economic knowledge was applied in practice passively and theoretically, which was not suitable for Vietnamese culture and habits
The enterprise failed to implement proactive preventive measures, resulting in limited public awareness of inflation During this time, numerous weak commercial banks faced significant capital losses, leading to several banks being acquired for virtually no value As a result, Vietnam often grappled with an unstable economic environment.
Recommendations
In the prospect of inflation again, Vietnam need to take steps to enhance ability of preventing inflation Some recommendations have been made for the purpose of proposing strategic plans:
To effectively address the challenges posed by the global financial crisis, it is essential for the government to establish clear goals and priorities Key objectives include controlling inflation, stabilizing the macro economy, and implementing a balanced approach to credit growth Timely execution of these critical tasks is vital for economic recovery and stability.
To ensure sustainable economic growth alongside inflation control and macroeconomic stability, the government must prioritize adjusting interest rates, managing loan growth, and enhancing the demand-supply relationship within the domestic market Encouraging participation in the "Vietnamese people use Vietnamese goods" program will help boost domestic production Additionally, leveraging trade agreements is essential for expanding export markets and fostering economic resilience.
The third lesson emphasizes the need for a strict integration of the State's "tangible hand" and the market's "intangible hand." The "intangible hand" is crucial for fostering a competitive environment among market players, but it is essential to ensure fair competition to enhance the effectiveness of the "invisible hand." A diverse array of businesses is necessary for healthy competition, as monopolies hinder this process Meanwhile, the "visible hand" serves to mitigate the adverse effects of market mechanisms and protect disadvantaged elements within the economy.
In addition, the implementation of controlling and orienting the market price of some goods and services is necessary
The fourth lesson emphasizes the importance of proposing effective solutions once goals are established Analyzing the experience of inflation control reveals that the inflation rate decreased from March to July, followed by a surge from August to September Consequently, the recommended strategies should aim to sustain low inflation during the March to July period while implementing measures to mitigate the rising inflation from August to September.
To ensure sustainable economic development, the government must align basic operating solutions with real-world conditions, enhancing operational flexibility Consumer demand typically declines from Lunar New Year to August and September, necessitating measures like lowering interest rates, increasing credit, adjusting minimum wages, and modifying prices Short-term solutions can lead to unexpected consequences, such as unstable inflation rates, making fundamental measures more effective for long-term stability Addressing inflation requires tackling its root causes, including cost-push and demand-pull factors, as well as fiscal and monetary policies, while also considering public sentiment Improving investment efficiency and labor productivity is crucial, underscoring the need for a transformation in the growth model and economic restructuring for sustainable progress.
The sixth lesson emphasizes the importance of fostering social consensus in policy implementation, requiring information to be objective, accurate, timely, and comprehensive Additionally, authorities must effectively predict market trends to develop reasonable solutions.
The seventh lesson focuses on strengthening enterprises' ability to combat inflation, particularly addressing cost-push inflation as a primary factor Reducing production costs is essential for long-term inflation control, and businesses can achieve this through modern technological innovations that lower costs and enhance productivity It is crucial for companies to safeguard themselves against the adverse impacts of inflation.
Inflation refers to the rising general price level of goods and services, which leads to a decline in currency purchasing power It is categorized into three types: moderate, galloping, and hyperinflation While moderate inflation can stimulate economic growth and support sustainable development when managed properly, it also poses challenges, such as decreased purchasing power and difficulties for businesses in production and distribution To address inflation and achieve economic goals, the Vietnamese government must enhance policies and management capabilities to mitigate external influences Despite the author's limited economic knowledge, there is a strong desire to explore this topic further, and constructive feedback from lecturers is welcomed to improve the essay.