A study of solution to the inflation in vietnam from 2000 to present,graduation thesis

STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty GRADUATION THESIS A STUDY OF SOLUTIONS TO THE INFLATION IN VIETNAM FROM 2000 TO PRESENT Supervisors: Student: ID number: Prof Dr Tô Kim Ngọc Nguyễn Thị Hiền Hạnh, M.A Đinh Thị Huyền 11A7510055 Hanoi, June 2012 Graduation Thesis ACKNOWLEDGEMENTS I would like to forward the deepest of my appreciation and gratitude to my supervisors, Ms To Kim Ngoc (Prof.Dr.) and Ms Nguyen Thi Hien Hanh (M.A.) for their patience and constructive advice throughout the course of the thesis Not only did them help me with invaluable suggestions, I have also learned a lot from them The brotherly treatment they accorded me has served as an inspiration for the completion of this study I credit every piece of strength of this study to my supervisors and any weakness to myself I also owe a great deal of gratitude to all banking staff at Techcombank – Hoan Kiem Branch for the three –month internship, in which I experienced the professional working environment and gained a considerable number of practical knowledge Moreover, I am deeply grateful for all my classmates in ATCB K11 of Banking Academy and all my best friends for their timely encouragements and wonderful discussions during all stages of the study Above all, I am indebted to my parents for their love, affection and sacrifice to support me in completing this work Đinh Thị Huyền ATCB – K11 – Banking Academy Page i BANKING ACADEMY GRADUATION THESIS ABSTRACT One of the prime objectives of governments is achieving stable macroeconomic condition The objective requires that prices be kept to a reasonably stable level High and persistent inflation introduces uncertainties into the economy and may lead to the slowdown of economic growth by discouraging domestic as well as foreign investments It may also cause balance of payments problems, high nominal interest rate and unemployment rate The study aims at understanding the forces behind the current inflation process in Vietnam, especially period 2000 to present The findings suggest that the determinants of inflation in Vietnam from demand-pull and cost-push causes The most important forces behind demand-pull inflation are easy monetary policy, ineffectiveness of fiscal policy, weak management of foreign capital inflows The long run determinants of cost-push inflation, on the other hand, are the increase in resident’s income, the cost of imported materials, the hike of gas and electricity prices, and the rising trend of interest rate To contain inflation, therefore, the Government implemented the number of solutions such as not only the tight monetary and fiscal policies, but also export encouragement, deficit reduction, price control as well as minimum wage reform Finally, the paper also figures out and assesses some weaknesses of all solutions applied, followed by recommendations for further accurate and synchronous measures in order to curb inflation, which stabilizes macroeconomic environment in a long period Đinh Thị Huyền - ATCB – K11 ii BANKING ACADEMY GRADUATION THESIS TABLE OF CONTENTS ACKNOWLEDGEMENTS i ABSTRACT ii TABLE OF CONTENTS iii LIST OF FIGURES v LIST OF TABLES vi LIST OF ABBREVIATIONS vii INTRODUCTION CHAPTER 1: BACKGROUND OF INFLATION 1.1 DEFINITION OF INFLATION 1.2 MEASURES OF INFLATION 1.2.1 1.2.2 1.2.3 1.2.4 Consumer Price Index (CPI) Production Price Indices (PPIs) Cost of Living Price Index (CLI) Gross Domestic Product (GDP) Deflator inflation index 1.3 CLASSIFICATIONS OF INFLATION 1.3.1 Moderate inflation 1.3.2 Running inflation 1.3.3 Hyperinflation 1.4 CAUSES AND EFECTS OF INFLATION 1.4.1 Causes of inflation 1.4.2 Effects of inflation 1.5 INFLATION SITUATION IN SOME COUNTRIES 11 1.5.1 Hyperinflation in Zimbabwe 11 1.5.2 Inflation in Venezuela 13 1.5.3 Inflation in China 15 CHAPTER 2: INFLATION IN VIETNAM, PERIOD 2000 TO PRESENT 18 2.1 HISTORY OF INFLATION IN VIETNAM FROM 2000- 2012 18 2.1.1 2.1.2 2.1.3 2.1.4 Period 2000 – 2003 18 Period 2004 – 2006 19 Period 2007 – 2009 20 Period 2010 – up to now 20 2.2 CAUSES OF INFLATION IN VIETNAM 22 2.2.1 Demand -pull cause 23 2.2.2 Cost –Push causes 28 2.3 CONSEQUENCES OF HIGH AND UNSTABLE LEVEL OF INFLATION VIETNAM 31 Đinh Thị Huyền - ATCB – K11 iii BANKING ACADEMY 2.3.1 2.3.2 2.3.3 2.3.4 2.3.5 GRADUATION THESIS Unstable macroeconomic environment 32 High nominal interest rate 33 Decrease real income and living standard 34 Impact on unemployment rate 35 Impact on balance of payments 36 2.4 SOLUTIONS APPLIED FOR CONTROLLING INFLATION IN VIETNAM AND RESULTS 37 2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 The tight monetary policy 37 The tight fiscal policy 39 Boosting production and business, encouraging export, reducing trade deficit 40 Minimum wage reform 41 Price control, goods demand –supply balance 41 2.5 SHORTCOMINGS OF INFLATIONTORY SOLUTIONS APPLIED IN VIETNAM 42 CHAPTER 3: RECOMMENDATIONS FOR FURTHER SOLUTIONS TO 44 CONTROL INFLATION IN VIETNAM 44 3.1 3.2 3.3 3.4 3.5 3.6 3.7 RESTORE CONFIDENCE IN POLICIES APPLIED 44 ECONOMIC RESTRUCTION 45 INDEPENDENT STATE BANK OF VIETNAM 46 ADMINISTRATIVE REFORM 46 SELF- ANTI – INFLATION SOLUTIONS FOR ENTERPRISES 47 STRENGTHEN SOCIAL WELFARE 47 ACCURACY AND SPEEDING UP INFORMATION DISSEMINATION 48 CONCLUSION 49 REFERENCES 50 Đinh Thị Huyền - ATCB – K11 iv BANKING ACADEMY GRADUATION THESIS LIST OF FIGURES Figure 1.1: Demand-pull inflation and Cost-push inflation curve Figure 1.2: The short-term Phillips curve Figure 1.3: China’s inflation rate from 2009 to 2011 16 Figure 2.1: The CPI in Vietnam, period 2000-2003 18 Figure 2.2: The CPI in Vietnam, period 2007-2009 20 Figure 2.3: Vietnam - CPI inflation from 2009 to the early 2012 21 Figure 2.4: CPI in Vietnam , period Jan 2011 – Apr 2012 22 Figure 2.5: The credit growth, money supply and inflation, period 2000 -2011 23 Figure 2.6: The credit growth and M2 in Vietnam from 1994- the early 2012 24 Figure 2.7: Vietnam Government Budget, period 2000-2012 25 Figure 2.8: The investment structure of the public sector, non-state and FDI, 19952010 26 Figure 2.9: FDA, ODA, reimbursement in Vietnam, period 1997-2007 28 Figure 2.10: The gasoline prices in Vietnam, Jan 2011- Jan 2012 29 Figure 2.11: Electricity price from March 2009 to 2011 30 Figure 2.12: Vietnam GDP growth rate from 2002 to 2012 33 Figure 2.13: The real, nominal interest rate and inflation in VN, 2010 to June 2011 34 Figure 2.14: Vietnam unemployment rate from Jan 2000 to Jan 2012 36 Figure 2.15: Vietnam balance of trade from Jan 02 to Jan 2012 37 Đinh Thị Huyền - ATCB – K11 v BANKING ACADEMY GRADUATION THESIS LIST OF TABLES Table 1.1: Hanke Hyperinflation index for Zimbabwe, 2007-2008 12 Table 1.2: Global inflation rate: CPI YoY % change, 2008 14 Table 2.1: Situation of some socio-economic indicators in 2004 (Unit: %) 19 Table 2.2: Growth rate of consumer prices period 2004 – 2006 (Unit: %) 19 Table 2.3: ICOR in Vietnam, 2001-2007 26 Table 2.4: The minimum wage of State-owned enterprises from 2001 to 2012 29 Table 2.5: The inflation and unemployment rate in Vietnam from 2000 to 2011 35 Đinh Thị Huyền - ATCB – K11 vi BANKING ACADEMY GRADUATION THESIS LIST OF ABBREVIATIONS ASEAN Association of Southeast Asian Nations BCV Venezuela’s Central Bank CLI Cost of Living Price Index CPI Consumer Price Index EVN Electricity of Vietnam Group FDI Foreign Direct Investment FII Foreign Indirect Investment GDP Gross Domestic Product GOS General Statistic Office HHIZ Hanke Hyperinflation Index for Zimbabwe ICOR Incremental Capital Output Ratio IFC International Financial Institution IMF International Monetary Fund INPC National Consumer Price Index ODA Official Development Assistance OMO Open Market Operations PPIs Production Price Indices SBV The State banks of Vietnam SeABank Southeast Asia Commercial Joint Stock Bank SOEs State-owned enterprises USD United State Dollar VAT Value Added Tax VNBA Vietnam Bank Association VPBank Vietnam Joint Stock Commercial Bank for Private Enterprises WO World Bank WTO World Trade Organization Đinh Thị Huyền - ATCB – K11 vii BANKING ACADEMY GRADUATION THESIS INTRODUCTION Inflation has become an undeniable phenomenon that consumes non-stop efforts from policymakers and the press that creates the pressure on the socio- economic status in global scale, including Vietnam Therefore, macroeconomic stability especially inflation control –one of the four most pressing issues regarding macroeconomic stability (together with exchange rate management, budget deficits and trade deficit) is the key item on Vietnam’s policy agenda in the moment For more than two decades now, Vietnam underwent hyperinflation period 1980s-1990s It is the persistent hyperinflation, the joining the World Trade Organization (WTO) in 2006, the great influx of foreign exchange in 2007-2008, and the global economic crisis that influenced the economy and triggered the economic reforms since late 1980s Although the Government and State Bank of Vietnam (SBV) have attempted to implement a number of solutions to curb inflation and stabilize the economy, the inflation movement has still fluctuated from year to year because of these ineffective and asynchronous remedies Hence, the paper examines inflation with the desire to understand more comprehensively the causes and consequences both in theory and practice, especially in Vietnam from 2000 up to the early 2012 So the study of “Solutions to the inflation in Vietnam from 2000 to present” was carried out to answer some following questions:  What is definition, causes and effects of inflation in theory?  In cases of Vietnam, what are the main reasons and consequences impacting on Vietnam’s economy, especially period 2000 to present?  What are the solutions applied to curb inflation in Vietnam and the results?  What are the shortcomings of these policies and recommendation for further solutions? Because inflation is closely related to various issues such as exchange rate, interest rate, economic growth, unemployment, balance of payment, this study was conducted by applying the systematic research methods, including dialectical materialism, materialistic dialectics, inductive and deductive method, comparison and contrast, combined with the illustration of tables and figures through secondary data collected from various sources Đinh Thị Huyền - ATCB – K11 BANKING ACADEMY GRADUATION THESIS In summary, in order to support the readers and person interested in this topic, the study is organized into three clear and coherent parts  Chapter 1: Background of inflation – in which the fundamental knowledge of inflation in definitions, measures, types, causes and effects, and the study of inflation in some countries are presented  Chapter 2: Inflation in Vietnam period 2000 to present – in which giving an overview of inflation in Vietnam: the history, main causes and consequences on the socio-economic situation and then the solutions applied and results  Chapter 3: Recommendations for further solutions – in which some suggestions are released for tackling inflation in Vietnam Đinh Thị Huyền - ATCB – K11 BANKING ACADEMY GRADUATION THESIS Figure 2.15: Vietnam balance of trade from Jan 02 to Jan 2012 Source: Trading economics As shown in statistics, from 2003, Vietnam’s trade balance has become more surplus, and the intensive gap has widened In 2003, the trade deficit was around $2.581billion, but it was up to $12.783 billion in 2005, times higher than its number in 2003 After years, the trade deficit experienced an acceleration of 15.412 billion, more than 5.9 times higher compared to that in 2003 In 2010, the trade balance was in favor of excess of imports over exports with the gap of approximately $12 billion In 2012, Vietnam is estimated to run a trade deficit of $101 million in the first two months, equaling to 0.7% of the country’s total export turnover, the General Department of Vietnam Customs said on its website on the 9th of March In one word, the figure showed that the trade balance trends inversely in comparison with the inflation that can be seen precisely through the above figures 2.4 SOLUTIONS APPLIED FOR CONTROLLING INFLATION IN VIETNAM AND RESULTS 2.4.1 The tight monetary policy Inflation is due to many factors such as economic structure, import-export situation, the money supply, credit relations, and fiscal policy However, inflation concentrates on expressing through the prism of monetary relations It is essential to apply monetary policy and its instruments to intervene and control inflation It is considered as Đinh Thị Huyền - ATCB – K11 37 BANKING ACADEMY GRADUATION THESIS the central and decisive solutions to curb inflation that appropriate for the economic situation In this circumstance, tight monetary policy has been applied since the 5th November 2010 and enhanced with the Resolution 11 dated on the 24th February 2011 It can be said to tighten monetary policy along with administrative support is a reasonable option in the higher volatility Credit growth fell from 27.7% in 2010 just to 10.9% in 2011 The reduction in aggregate demand has brought inflation down, reached a single digit in May 2012 of 0.18%, and made the demand for imports decline remarkably, leading to the stability of the domestic currency The SBV has also raised a number of support policy, there are control credit growth below 20% in 2011, concentrate capital credit on business development, agriculture and rural development, support small and medium enterprises, reduce credit loan ratios of non-manufacturing sector, regulate organizations or individuals, especially state corporations to sell foreign currency, tight control of gold trading activities, increase inspection and supervision in compliance with the regulations on foreign exchange, etc As a result, in 2011, credit growth was about 12-13%, including manufacturing and business credit, agriculture and rural credit, export credit rose by 12-13%, 15%, 24%, respectively in contrast with the slump of securities and real estate credit Since August 2011, the CPI has been below 1% per month, softening the rate pressure Thus inflation has been curbed Moreover, exchange rate and foreign exchange management has been at the top priority The average interbank rate has been adjusted up to 9.3% from 18.932 to 20.693VND/USD applied on the 2nd November 2011 and the trading band was narrowed ± 3% ± 1% in order to enhance the liquidity of the markets, promote export and reduce trade deficit, improve balance of payments and contribute the increase of exchange reserves In addition, the SBV controlled strictly the lending and selling of foreign currency that paid for unessential imported goods Besides, it is important for the market to monitor, forecast changes in world price of gold, the domestic supply and demand for gold in the operation of logical gold import, effectively preventing from speculation, hoarding, manipulating in the market Đinh Thị Huyền - ATCB – K11 38 BANKING ACADEMY GRADUATION THESIS 2.4.2 The tight fiscal policy In order to eliminate the unstable inflation movement and stabilize macroeconomy; the Government has instructed ministries, localities to pay much attention to the implementation of tight fiscal policy including the reduction of the budget deficit, public expenditure savings, and increase in state budget volume associated with the effectiveness of monetary policy Specifically, the Ministry of Finance coordinated with the ministries, agencies and localities in an effort to increase the State budget by 7-8% compared with the prediction of the National Assembly At the same time, the Government targeted the budget deficit of below 5% of its GDP in 2011, closely monitored the loan, repayment of foreign loans, especially shortterm ones, ensured the outstanding government debts, outstanding public debt within the accepted level In 2012, The Ministry of Planning and Investment will not advance the State budget, government bonds for projects, inspect and review the investment conducted by economic corporations, and State –owned corporations, petition the Prime Minister to handle and remove the inefficient investment projects, including foreign investments Moreover, Prime Minister instructed not to begin construction of new projects using the State budget and government bonds, except the projects for urgent prevention and disasters repairing Consequently, in 2008, public investment was considered to cut trillions VND, reduce nearly 7000 billion VND on the unessential works ( particularly State budget cut USD 5,876) of total State budget expenditures, in order to lower the money supply into circulation, support other indispensible expenditures that contributed the stability of social security Thanks to the aggressive tighten fiscal policy in 2011, the financial sector has successfully completed the tasks of State budget revenue estimating exceed 13.6% (compared to 2010 of 20.4%) In particular, budget deficit reduced to 4.9%, lower 0.4% than the target assigned by the National Assembly Đinh Thị Huyền - ATCB – K11 39 BANKING ACADEMY GRADUATION THESIS 2.4.3 Boosting production and business, encouraging export, reducing trade deficit According to the Government’s Resolution No.11, in order to promote production and business, encourage exports, restrict trade deficit, and ensure energy efficiency, the Prime Minister assigned the Ministry of Industry and Trade to coordinate with concerned ministries, institutions and localities in the second quarter of 2011 to promulgate and enforce a regulation on balancing demand and supply for some kinds of essential goods, provide guidelines for effective rice export, stabilize domestic food prices, cooperate with the Ministry of Finance in managing national reserves to ensure food security, and take timely anti-speculation measures Trade deficit must be kept at not more than 16% of total exports; lay down suitable principles and procedures to control the import of goods, materials and equipment for projects using State budget and government bond capital, restrict the import of consumer goods The ministry also instructed Electricity of Vietnam Group (EVN) and its member companies to make plans for power plants to operate at full capacity in order to meet electricity demand during the dry season and give priority to ensuring sufficient power supply for production In addition, the Ministry of Finance coordinated with relevant ministries, agencies and localities to apply necessary measures and reasonable tax and fee policies to profits of exporters and traders of steel, cement and other commodities which use cheaper inputs than market prices, consider exempting, reducing, and delaying taxes on imported inputs for export-oriented industries like textile, footwear, seafood, cashew nut, wood and pharmaceuticals It would continue refunding value-added tax to exported goods in 2012 As a result, in 2010, the trade deficit stood at about $12 billion, compared to $12.8 billion in 2009 and a record deficit of $17 billion in 2008 Vietnam's trade deficit narrowed sharply to $9.5 billion in 2011, the lowest level in a decade, government estimates showed Wednesday, though concerns over the country's economic stability remain Exports rose 33.3 percent year-on-year to $96.2 billion, while imports were up 24.7 percent to $105.7 billion, the GSO published in a preliminary report In one word, although Vietnam's trade deficit has been controlled by implementing these policies with the decreasing trends, the balance of payments still has insufficiency Đinh Thị Huyền - ATCB – K11 40 BANKING ACADEMY GRADUATION THESIS 2.4.4 Minimum wage reform Currently, the Government is gradually implementing the roadmap of wage reform and gaining a lot of positive results Another VND 220 000 was included to the monthly minimum wage from May 1st 2012, according to a different Government decree Accordingly, the rise is going to be applied whatsoever Condition agencies, individual’s military, socio-political organizations and Condition-possessed one-member limited companies It's the fourth increase in the minimum wage within the last years: From 20092012, the increase was VND 650 000, VND 730 000,VND 830 000 and VND 1050 000 respectively Deputies has discussed and adopted a Resolution No.11 on the 2012 budget that has improved people’s living standards, particularly for workers, the poor people, and the low income earners On May 1st, the minimum salary increased about 25% with another 25% allowance for civil servants The same raise applied to pensioners and people who have rendered great service to the nation The National Assembly allocated around 2.8 billion USD to salary increases and raised people’s real income by 100-150% To sustain higher living standards, the Resolution aims to keep the CPI below 10% and the inflation rate between and 7% next year The National Assembly believes the projected inflation is feasible if a number of measures are taken 2.4.5 Price control, goods demand –supply balance Prime Mister Nguyen Tan Dung requested the Government members should seriously look at problems resulting in the rising prices those impacts negatively on production and people’s lives He required the ministries, branches and localities to focus on implementing the comprehensive solutions to stabilize markets and prices, boost production to ensure balance between demand and supply of goods The services were requested to strictly supervise businesses which received preferential loans to stockpile goods for the holiday The ministry also asked market watchdogs to keep close watch on traders’ conformity to regulations on prices, especially prices of essential goods to avoid goods speculation or irrational price hikes Đinh Thị Huyền - ATCB – K11 41 BANKING ACADEMY GRADUATION THESIS The ministries and branches to coordinate with the provincial People’s Committee lift constraints on mechanisms and policies, business environment, administrative procedures, capital, business networks for enterprises to actively promote development of business, ensure sufficient supply and stable prices for essential goods; continue to implement measures to overcome consequences of the floods, drought, early recover and stabilize people’s living At the same time, localities strengthened the control of price, facilitated network expansion, increased the sales’ sites, and took goods to the rural, regional, and remote areas All policies and resolution has controlled numerous essential prices, for instance, rice, vegetables, fuel, electricity, etc that the citizen’s confidence on the Vietnamese has been consolidated and inflation rate has been in the safer level as well 2.5 SHORTCOMINGS OF INFLATIONTORY SOLUTIONS APPLIED IN VIETNAM Although the economy in Vietnam has gained a lot of positive achievements thanks to solutions controlling inflation in recent years, such as the decrease in inflation rate during the early four months of 2012, the stability of foreign exchange and goods prices, the lowering of interest rate, the improvement of social welfare, i.e., many shortcomings has been revealed when implementing these solutions  Ineffectiveness of combination between monetary and fiscal policies Some economists stated honestly that the combination of two policies has not been as easy as the Government said The confusion was witnessed through the year when the people expect tightening of public spending applied to reduce the budget deficit, at the end of 2011 and the early 2012, the finance public authorities are satisfied with “the achievements” that both revenues and expenditures have far exceeded the expected amount from last September and October, although the real GDP is far less than its forecast  High lending interest rate maintenance In spite of the fact that lending rates of commercial banks decreased slightly, many banks has still had the lending interest rate of over 20percent that causes the small and medium-sized enterprises cannot easily access bank loans, making interest rate reduction policy inefficient, numerous businesses are on the verge of bankruptcy due to the Đinh Thị Huyền - ATCB – K11 42 BANKING ACADEMY GRADUATION THESIS insufficient capital for production, or high manufacturing costs leading to inconsiderable gain  The insignificance of raising minimum wage Wage growth does not keep pace with the price growth which results in the meaninglessness of wage reform Minimum wage has not raised yet, the price of efficient commodities rose The Government has adjustments for the minimum wage from VND 650,000 to VND 1050,000 in the period 2009-2012 but not enough to offset the escalation of essential prices so how to satisfy the minimum demands of employee The wage for staff and officials only respond about 40% of their needs Salary is calculated by mechanical and unequal regulation that cannot encourage and attract the staff and talents The risk of falling into a spiral inflation “wage, price, money” has great potential  Continuous trade deficit The fact shows that the solution calling corporations, groups for using domestic goods, increasing importing tax or instruction of The State bank to limit the foreign currency supply for the non-essential importing items has no comprehensive effect By the end of the first quarter 2011, it has covered with a dark color on the import, which is prominent on the imported goods that should be limited and luxury items The import of luxury goods accounted for 40 percent of the trade deficit Expensive cars, phones, cosmetics, wine, etc still pour massively into Vietnam  Ineffectiveness of administrative agencies The state agencies in Vietnam are apparatus, layered and overlapping The function distribution between agencies and government officials are not clear, conflict, leading to release the inconsistent policy, carry out stagnant management activities that induces decisions slowly and inefficiently, remain bureaucracy, disorganization As a result, many policies are released but not implementing strictly and achieving desired results Đinh Thị Huyền - ATCB – K11 43 BANKING ACADEMY GRADUATION THESIS CHAPTER 3: RECOMMENDATIONS FOR FURTHER SOLUTIONS TO CONTROL INFLATION IN VIETNAM Besides comprehensive solutions applied by the Government and the State bank of Vietnam, the thesis will suggest some further recommendations to curb inflation more effectively as follows 3.1 RESTORE CONFIDENCE IN POLICIES APPLIED Looking back the whole process of Vietnam’s economic reforms, inflation has always been one of the most disturbing issues, the most damage for the economy Psychology of people is quite sensitive to inflation and often over react as pushing inflation higher This makes the achievement of operating policies more unreachable Meanwhile, the Government’s responses against inflation are often slow, passive and inconsistent, causing people lose more confidence in the effectiveness of the policies This can be expressed by the fever of the gold and dollar marker or real estate in recent years when people rushed to invest and hold other financial assets replacing VND These operating policies are often temporary but long-term plans For example, in the first six months of 2010, when inflation showed the sign of heating up, the Government implemented the tight monetary policy, then under the pressure of business and the economic growth, the Government applied the loose one The results were that the credit growth reached only 10%, the money supply was only 7% in the first six months, while the rest months of 2010 witnessed the credit growth up to 31% and money supply growth of 28% It is the temporary policies in a short time that has left behind various consequences for years later This has led people, businesses, domestic and foreign investors to lose confidence in the Government and the State banks, whether they can control inflation Therefore, it is extremely important for the Government and agencies to restore and strengthen the confidence in the policies applied by making the timely and effective ones Đinh Thị Huyền - ATCB – K11 44 BANKING ACADEMY GRADUATION THESIS 3.2 ECONOMIC RESTRUCTION In the process of nation building over the time, a lot of State agencies and economic units not keep up with the developments of the situation changing The global financial crisis as well as the complex inflation movement has a strong impact on the economy Therefore, the Government needs to restructure the economy and change the model of economic growth There are three main areas of restructuring: public investments, the SOEs and banking finance sectors, which will be a comprehensive economic reform However, it is important for the Government to consider what we can manage that brings results The mistake will be revealed if the Government desires to obtain the unreachable achievements The restructuring of the three areas mentioned above is that the State must concern and can manage Public investment is conducted by the State, thus it is certain for the State to restructure: modifying the plan, amending the investment mechanisms, cutting the ineffective investment, buying the uncompleted projects for other investors, etc For the corporate sector in general, the State can only restructure them indirectly through the State policies to create a self-motivated restructuring such as editing bankruptcy law, reforming the judicial system or creating the confidence…It is essential for policy makers to take the effective economic units as the core to expand joint venture associated with other enterprises Therefore strong corporations specializing in different domains are capable of performing the tasks of developing the economy and social affairs in the new period For the banking and finance sectors, the key tasks will carry out are to make the financial system healthy to deal with bad debts, ensure capital volume stipulated by the law The credit organizations should be classified into three main categories: healthy credit institutions, temporary lack of liquidity institutions and the weak ones The healthy credit organizations will facilitate the development of scale and competitiveness at home and abroad while the weak institutions, unsafe potential for the system, should be restructured In brief, restructuring is a long-term plan and it must be synchronous, prudent, and transparent Đinh Thị Huyền - ATCB – K11 45 BANKING ACADEMY GRADUATION THESIS 3.3 INDEPENDENT STATE BANK OF VIETNAM Vietnam needs to set up an independent and flexible central bank to deploy monetary policies to stabilize prices, which is what experts of the IMF said “The central bank as it is now needs more specific and independent tasks”, IMF senior economist Rina Bhattacharya stated at a seminar about policy challenges of Vietnam As cited in Section 1, Article of the 2010 State Bank Law says that the central bank’s functions are to stabilize the domestic currency value, ensure the security and efficiency of the banking system as well as the payment system, and contribute to the socio-economic development with socialism orientation The Government should only give the oriented goals rather than intervene deeply on the State bank’s instruments such as exchange rate, interest rate, total payment, which enhance the State bank’s decisions more timely and effectively For example, the Government determines the exchange rate or interest rate target, within this limits, the State bank will be the institution operating through the instruments, for instead reserve requirements, the amount of regulation through Open Market Operations (OMO) Until the interest rate target cannot meet the changes of market and need to adjust, The State bank will consult the Government’s decision In most modern economies, they separate the central banks independently Actually though separating, the objectives of the Government and State bank are in the same direction to ensure the benefits for the nation and economy Thus, not only interested in controlling inflation but also regarding the economic growth, the tasks of the independent central bank must be always harmonized these goals 3.4 ADMINISTRATIVE REFORM It is essential for the Government to reform the administrative system because the professional administrative and complete legal systems always economize the cost of society the most Cumbersome, overlapping functions and duties will lead to the effectiveness of operation According to the whole administrative reform during 10 years, in 2020, the government will build a pure, powerful, modern, professional and effective administration system The focus is to improve the quality of staff, reform regime and wage policy in Đinh Thị Huyền - ATCB – K11 46 BANKING ACADEMY GRADUATION THESIS order to create the real incentives for officials working to upgrade the administrative and public services 3.5 SELF- ANTI – INFLATION SOLUTIONS FOR ENTERPRISES Inflation occurs because of cost-push So in order to push against the costs, enterprises need to reduce production costs The cut is one of the long-term measures, affecting the competitiveness of enterprises in the integration period They need to apply modern technologies and appropriate governance model to lessen production costs and increase labor productivity The weakness of the enterprises in Vietnam is to set up a long-term development strategy, which is diversification of business lines to stabilize the finance, and reduce risks They will be half successful if they have a proper business planning In addition, it is necessary for businesses to use risk prevention tools It is high time for enterprises to protect themselves by using derivative financial instruments Enterprises indifferent to the insurance tools will face hardships 3.6 STRENGTHEN SOCIAL WELFARE The Ministry of Labor, Invalids and Social Affairs needs to be responsible for coordinating with the other ministries, agencies and localities to synchronously deploy social welfare policies under the approved programs, projects, plans, and speed up the implementation of measures to ensure social welfare as stipulated in the Government’s Resolution No.02 The Government should focus on assisting poverty reduction in rural areas, particularly in extremely poor communes, villages, supporting poor households and localities to export manpower and providing loan for students The Ministry of Finance should coordinate with the Ministry of Planning and Investment to allocate capital to assist localities to deploy social welfare policies in accordance with the new poverty benchmark, assist poor households after the electricity prices are adjusted to make sure that the assistance benefits the right people Đinh Thị Huyền - ATCB – K11 47 BANKING ACADEMY GRADUATION THESIS 3.7 ACCURACY AND SPEEDING UP INFORMATION DISSEMINATION The ministry of Information and Communications will be responsible for coordinating with the Commission for Popularization and Education and bodies to be in charge of controlling mass media agencies to: Firstly, direct the mass media agencies, based on the Party and State’s guidelines and policies as well as the content of the Resolution, to provide the masses with update information, particularly in the fields of finance, money, price, social welfare policies, policies on assisting poor households directly affected by the adjustment of electricity prices, so as to create social understanding and consensus Secondly, apply strict punishments to the provision of untrue information relating to the Party and State’s policies on controlling inflation, stabilizing macro-economy and ensuring social welfare Đinh Thị Huyền - ATCB – K11 48 BANKING ACADEMY GRADUATION THESIS CONCLUSION In conclusion, after three chapters, the thesis summarized some theoretical framework of inflation and the situation of inflation in Vietnam from 2000 to early 2012, which emphasized the inflation in recent years It is seen that the Government and the State bank of Vietnam has not controlled inflation successfully as expected, and many enterprises has not really concerned about inflation Inflation in Vietnam depends on numerous factors, especially the objective ones and outside sources The ability to cope with the changes of our Government is very passive; the solutions given have been somewhat slower compared to the situations and have not anticipated all the impacts of these solutions, or sometimes with undesired effects Basing on the analysis of inflation in Vietnam, as well as putting inflationary theory into practice on socio-economic situation, the thesis initially proposed some solutions in the hope of contributing to control inflation and stabilize economy There are still some shortcomings in this graduation thesis, such as not analyzing and referring some problems as well as the relationships between inflation and exchange rate, interest rates, or the closed circle interaction between these factors In the future, with the meaningful advice and assistance of the supervisors, I will try to further researches so that the thesis can overcome the above weaknesses and gain more remarkable achievements Hanoi, June 2012 Đinh Thị Huyền Đinh Thị Huyền - ATCB – K11 49 BANKING ACADEMY GRADUATION THESIS REFERENCES Frederic S.Mishkin, “The economics of money banking and financial market”, Columbia University Marc Labonte (July 26, 2011) “Inflation causes costs and current status” David Andolfatto (August 2005) “Macroeconomic Theory and Policy” John H.Boyd and Bruce Champ, “Inflation, Banking, and Economic Growth” John P.Judd and Brian Motley, “Controlling inflation with an interest rate instrument” Cornell University, IRL School, “Inflation and Unemployment: What is the connection?” Ben S Bernanke, Frederic S Mishkin, “Inflation targeting: A new framework for monetary policy?” Amy Auster, Head of International Economics (13 Febuary 2008), “Tackling inflation in Vietnam” Kaushik Basu, Chief Economic Adviser, Ministry of Finance, Government of India (August 2011), “Understanding inflation and controlling it” Tran Thi Kim Chi (2008), “Inflation in Vietnam during the period from 2003 to present and related policy suggestions” Hoang Thanh Tung (2007), “Controlling inflation in Vietnam” Central institute for economic management, 2008, Monetary and Fiscal policies control under high inflation in Vietnam Nguyen Thi Thu Hang (2011), “Final inflation report in Vietnam from 2000 to 2010” Nguyen Thi Thu Hang, Nguyen Duc Thanh, “Macroeconomic determinants of Vietnam’s Inflation 2000-2010, Evidence and Analysis” Nghiem Truong Son, Pham Thanh Cong, Le Bich Thuy, Bui Thi Van (2011), “Dance with Vietnam inflation 2005-2010” Do Ngoc Huynh, Ministry of Finance, Vietnam (April 18-19, 2007), “Budget Deficit and Economic Growth in developing countries: the Case of Vietnam”, Osaka Resolution 11 (2011) “On key solutions for controlling inflation, stabilizing macroeconomy, and ensuring social welfare”, Hanoi Đinh Thị Huyền - ATCB – K11 50 BANKING ACADEMY GRADUATION THESIS Le Viet Trung, Nguyen Thi Thuy Vinh, (March 14, 2011), “The impact of oil prices, real effective exchange rate and inflation on economic activity: Novel evidence for Vietnam”, Nguyen Cuong, (March 2011), “Do minimum wage increases cause inflation? Evidence from Vietnam” Tuan Khai Vu, Faculty of Economics, Seikei University,(2011), “The Causes of recent inflation in Vietnam: Evidence from a VAR with Sign Restrictions” Websites:  http://www.rateinflation.com  http://www.mbaknol.com  http://www.adb.org  http://www.moit.gov.vn  http://www.sbv.gov.vn  http://www.gso.gov.vn  http://www.imf.org  http://www.worldbank.org Đinh Thị Huyền - ATCB – K11 51