Dr. Le Xuan Nghia said that solving the problem of capital for the economy and supporting businesses in 2023 is actually not too difficult, just the synchronous coordination of monetary and fiscal policies can both reduce interest rates while keeping inflation under control.
The most stable exchange rate, lowest inflation and highest interest rate!
2022 can be considered a quite successful year for Vietnam when it can keep inflation low and economic growth high. What do you think are the bright spots and forecasts for 2023?
Dr. Le Xuan Nghia: The bright spot in 2022 can be said to be: The most stable exchange rate in the world; the lowest inflation rate in the world; and economic growth is among the highest in the world. But going along with that are 2 dark spots. The first is the highest interest rates in the world – unreasonably high; and secondly, the too low money supply will affect economic growth for at least the first two quarters of 2023.
Specifically, compared with the US, due to rapid inflation (about 8% in 2022), the country will quickly and sharply increase interest rates to 3.5-4%. But so the US interest rate is still negative real when inflation is higher than interest rate. As for Vietnam, inflation has only increased by 3.15% and the market interest rate is up to 13-14%, the real interest rate is positive up to 16-17%, theoretically this is inexplicable. This also shows that the currency pump has a big problem. Pure management techniques are not good because if inflation is high, then interest rates must be raised to control it, while low inflation but still raising interest rates is unreasonable.
In fact, in the context that the economy has just gone through 2 years of the epidemic, businesses are still facing many difficulties, and now continue to have to fight with too high real interest rates, which is pushing businesses into the dead end. In particular, the State Bank’s recent move to increase the credit room in the context of tight liquidity, the State Bank’s failure to increase the money supply only made the deposit interest rate race “hotter” when banks are forced to raise interest rates to “collect” money in the people.
If we say that we have to maintain high interest rates because we are afraid of inflation, tightening the currency in our country is somewhat forced, not close to reality. It should be affirmed that inflation in Vietnam in 2022 and the whole year 2023 will not be affected by monetary policy because the growth of M2 money supply in 2022 is too low. Inflation does not come from monetary factors, while monetary tightening makes not enough money in circulation which is the main cause of high interest rates.
In fact, the most important cause contributing to the fight against inflation in 2022 is the Ministry of Finance’s decision to reduce petroleum tax, thereby reducing the price of imported goods, helping to reduce the domestic gasoline price of the Ministry of Finance over the past time because petroleum accounts for a large portion of the total revenue. 60% of the total import price. In 2023, whether inflation is well controlled or not will largely depend on the decision of the Ministry of Finance whether to maintain the policy of reducing import tax for commodities, especially gasoline or not whether world goods will continue to increase, it is not whether we continue to maintain a tight monetary policy or not.
Increase money supply to lower interest rates and reduce import taxes to keep inflation
So what can be done in 2023 to lower interest rates and support growth, sir?
Dr. Le Xuan Nghia: It is necessary to recognize the fact that economic growth has decreased gradually since the fourth quarter of 2022 and will continue to decline in the first half of 2023 when the money supply in 2022 is too low. Money supply for the whole year 2022 only increased by 7% when GDP grew by more than 8%, while last year GDP growth was 2.4% but money supply was up to 11%. Money supply lags behind economic growth. So in fact, growth in the first 2 quarters of 2022 will mostly benefit from a strong increase in money supply around November 2021. Likewise, GDP growth in the first 2 quarters of 2023 will be low because the money supply in 2022 is too low.
Theoretically, too low a money supply usually leads to two consequences. One is economic growth slowing down, the other is falling inflation. But in fact, Vietnam’s inflation in 2023 will not be controlled by the money supply because inflation is mainly caused by rising import prices, and world inflation is still high. Therefore, the decrease in money supply in our country will mainly cause interest rates to rise, hitting directly on business operations, resulting in arrears, capital appropriation among businesses, and a decrease in GDP growth. no effect on inflation. In other words, tightening the money supply in 2022 and coming is like “taking a stone to our feet”. To solve the interest rate problem, it is necessary to have a more open approach from the policy-making agency, to be able to support businesses and promote economic growth.
We often talk about the expectation of public investment with hundreds of trillions of investment capital from the state budget waiting to be disbursed. However, it is necessary to look at the fact that the price of input construction materials has increased very strongly in the past time, along with the high interest rate environment, making businesses even more loss because most of the public investment is advanced capital, the contractor has to borrow a bank loan to complete the work before it is settled and the settlement process sometimes takes up to several years.
Some large construction contractors share, they are not “foolish” to speed up production and increase revenue because the more they do, the more they lose. They just try to maintain enough to pay for the workers. Some units even after clearing the ground do not want to do it because it is not profitable.
Another notable figure is that Vietnam’s unemployment rate in 2022 is very high. The situation is especially remarkable for HCMC – mainly due to the production of light industries such as leather shoes and textiles, with a large number of workers having to quit due to reduced orders. Thus, low CPI or high GDP growth no longer make sense.
In order to support businesses and promote economic growth, it is necessary to solve the current irrational problem of “low inflation, the most stable exchange rate but the highest interest rates in the world”.
To reduce interest rates, it is necessary to balance the money supply and coordinate the money supply with fiscal policy. That is, to increase the money supply to reduce interest rates, but also to use fiscal policy to reduce import taxes, help reduce commodity prices, and stabilize inflation. Coordination is needed because core inflation is currently around 5%, if the money supply increases, it will reduce interest rates on the one hand but increase inflation on the one hand, so there must be synchronization of fiscal policy to control keep inflation as in 2022.
With the above solution, reducing actual import tax is both beneficial for manufacturers importing raw materials and beneficial for production and business when interest rates are low. That is the core measure to both reduce interest rates and control inflation in 2023.