IMF cautions Vietnam over rising inflation pressure

By Duc Minh   April 24, 2022 | 06:31 am PT
IMF cautions Vietnam over rising inflation pressure
Containers undergo sorting at Cai Lai Port in Ho Chi Minh City, December 2021. Photo by VnExpress/Thanh Nguyen
Vietnam's economy is recovering, but the International Monetary Fund (IMF) warns that inflation and financial risks may also be increasing.

In consultations held with top Vietnam officials recently, Era Dabla-Norris, Mission Chief to Vietnam and Division Chief in the IMF's Asia and Pacific Department, said the conflict in Ukraine was likely to have a moderate impact on the pace of recovery and inflation in Vietnam.

Despite the rise in the prices of goods and raw materials, IMF believes that inflation is still under control, which also demonstrates that economic activity is still moderate.

The IMF expects Vietnam's inflation to reach 3.9 percent by the end of the year, which is close to Vietnam's control target. GDP is expected to grow by 6 percent in 2022 and 7.2 percent in 2023.

"The near-term outlook is fraught with significant risks," Dabla-Norris said, adding that many factors can cause growth to slow and inflation to rise.

Immediate risks include an increase in geopolitical tensions and a slowing of China's growth. Risks are also posed by tightening global financial conditions as well as developments in the real estate and corporate bond markets.

Standard Chartered has also warned of rising inflationary pressures in Vietnam, citing commodity supply and geopolitical tensions. The bank believes that the consumer price index will exceed 4 percent in 2022 and even reach 5.5 percent in 2023.

The IMF representative said that in order to have Vietnam's economy to grow and control inflation at the same time, policy formulation should be quick, and the size and structure of the policy support package should be flexible and adjusted according to the pace of economic recovery.

Fiscal policy will play an important role, especially if growth deceleration risks materialize, because room for further monetary easing is limited as long as inflation risks persist, she added.

"The timely and effective implementation of the Socio-Economic Development and Recovery Program will be critical in fostering growth. The program prioritizes the health and recovery sectors and focuses on medium-term growth prospects," she said.

In the future, fiscal policy must strike a balance between providing temporary assistance on the one hand and promoting economic transition on the other. In 2022, the overall fiscal deficit is expected to rise moderately, she added.

With regard to monetary policy, the IMF advises Vietnam to be wary of rising inflationary pressures. If persistent inflationary pressures emerge, the State Bank of Vietnam should tighten monetary policy and clearly communicate the factors that led to this decision in order to help control inflation.

The IMF also believes that in the future, credit growth policies should strike a reasonable balance between promoting economic recovery and ensuring financial stability.

"The delegation appreciates recent steps to increase exchange rate flexibility and modernize the monetary policy framework," Dabla-Norris said.

It is also critical to strengthen the banking sector's resilience in order to sustainably support growth in the medium term. As its recovery strengthens, Vietnam should stop relaxing regulations on debt classification and provisioning.

Regulations allowing debt restructuring while keeping the debt group unchanged should not be extended beyond the June 2022 deadline, as this would delay and possibly aggravate the recognition of bad assets.

Strengthen banking resilience

According to the IMF, financial sector regulation and supervision should be strengthened in order to address emerging risks and build a more resilient banking system. It believes that a "macro-prudential framework" can help ensure financial stability. To facilitate bad debt resolution, institutional and bankruptcy frameworks should be strengthened, the IMF advised.

In conclusion, Dabla-Norris said that Vietnam requires more drastic structural reforms as well as improvements to the business environment and labor quality. Policies should take into account the implications for income and wealth inequality, she said, adding that increased inequality has been seen to reduce growth, internationally.

"Simultaneously, as we move toward emerging-economy norms, efforts should be made to strengthen governance and close data gaps," she said.

The State Bank of Vietnam targets inflation of not more than 4 percent this year.

Vietnam's economy grew by 2.6 percent last year, well below its pre-pandemic trend of 7 percent.

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