Hanoi (AsiaNews/Agencies) –Vietnam continues to try to attract foreign investments in order to carry on its economic development, but is faced with an 11 per cent inflation rate, a currency that is depreciating every day and a paralysed government waiting for next month’s Communist Party congress. Many analysts believe the country must change model of economic development if it wants to avoid a major economic crisis.
Vietnam’s economy grew at an average of more than 7 per cent a year over the past decade. After a blip due to the global financial crisis, it is expected to continue growing at about this rate this year.
The government has followed a development strategy based on the Chinese model. Foreign investments are attracted by low taxes and cheap wages. However, this has led to high inflation, and a weak dong, Vietnam’s currency.
Double-digit inflation has dogged the country for years, reaching a 28 per cent peak in August 2008. For 2010, the government set a target of 8 per cent but by September, inflation was rising by 1 per cent a month. Last month, it stood at 11 per cent annually.
The cost of basic items like food has risen rapidly, despite government threats to set a ceiling. The cost of sugar and some other items jumped by up to 80 per cent over the past year, driven by rising global prices and a declining dong. Summer floods in central Vietnam that wiped large areas of cropland made matters worse. Economists now expect further increases before the Lunar New Year, in February 2011.
Meanwhile, the dong is slipping in value. Other Southeast Asian currencies such as the Thai baht and the Singapore dollar have been appreciating against the US dollar this year as hot money flowed into their economies. By contrast, Vietnam’s central bank has devalued the dong three times against the dollar since November 2009. This has favoured economic growth but raised concerns about the country’s macroeconomic stability and confidence in its economic policies.
On the black market, the dong was trading at 21,500 to the US dollar, more than 10 per cent below the official exchange rate. And yet, ordinary Vietnamese and firms are snapping up dollars and gold.
The government appears reluctant to tighten credit ahead of a Communist party congress in January for fear that the growth rate might slip or cumbersome state-owned enterprises start to collapse.
However, this is impoverishing many in the population even if it attracts investments with local manufacturers churning out low cost export goods.
The situation is looking up for foreign investors and small business, but is bad news for the development of large domestic companies. Economists and some government officials think the whole approach to economic development should be reviewed.
"Reducing the fiscal deficit and tightening monetary policy are necessary now to take pressure off the currency in the short term and reduce expectations of inflation," said Jonathan Pincus, head of the Fulbright Economics Teaching Programme in Ho Chi Minh City and a former UN economist.
Without a quick action, he said, the national economy could collapse under the weight of rapid inflation, a weak currency, a large trade deficit and limited foreign currency reserves.