Government must not allow epidemic to open Pandora’s box


Saigon Investment ran a series of articles recently by well-known economists on loosening of monetary policy in view of the current Covid-19 crisis, which drew comments and varied opinions from many experts.

Illustrative photo.

Illustrative photo.

Following is an analysis by Dr. Vu Dinh Anh, who believes strongly that the Government in the present scenario must focus solely on all efforts to prevent the virus from spreading, rather than go into discussions of how to adjust macro-economic indicators or loosen monetary and fiscal policies.

Dr. Vu Dinh Anh feels that all proposals and discussions on current monetary policies are not lucid because they don’t have comprehensive and grounded assessment to real life. And we cannot have a clear enough understanding until the end of the first quarter of 2020. From now on, he feels we should develop an analytical framework to assess the situation of the prevailing epidemic and cope rapidly with developing scenarios with adequate ready measures, and not allow the epidemic to turn into a “Pandora's Box”*, from where it will be even more difficult to extract ourselves.

Features affected by epidemic

First and most importantly, we must consider the negative impact the sudden burst and spread of the Covid-19 epidemic has had on the services industry, in particular the tourism industry and all forms of air and sea transport. Trade of goods and essential food supplies have been massively disrupted across the entire country.

Hence, it is imperative that we analyse this situation and collect all data to help us thoroughly analyze the many indicators that led to the disruption of both domestic and foreign tourism, retail sales and distribution of consumer goods, movement of traffic, and hold up of cargo in several ports. Based on these indicators, we must then clearly assess the targeted impact of Covid-19 on those areas. Besides this, we must consider the impact of service-related fields, such as tourism real estate, commercial infrastructure, labor in the services industries, and investment of capital and further investment projects.

Secondly, although the Covid-19 epidemic does not directly affect the industrial and agricultural sectors, the negative effects are undeniable. As China's production is now stagnating, it has caused a serious slowdown in the global supply chain, and no one can predict when it will be restored back to normal. As a result, global trade and production in general and Vietnam's economy in particular have all been affected in an unprecedented way, and in many ways comparable to the Asian crisis of 1997-1999 or the global recession of 2008-2009.

China is Vietnam's leading trade partner, and the Covid-19 epidemic is proving to be a harsh test for Vietnamese industrial and agricultural producers. Massive fluctuation in both input and output will be revealed in actuality as soon as businesses and farming households run out of all supplies, stocks and production materials, or have fulfilled all existing pending contract orders. Therefore, an analysis and accurate evaluation of all these factors that are set to affect the economy must be done on a priority basis.

Thirdly, though there have been only 16 reported cases of Covid-19 in Vietnam, which are now completely cured, the resources and costs for preventing an epidemic cannot be separate from the overall balance of allocation of human and material resources in the country for 2020. The balance of the State budget estimated in 2020 should also be considered and adjusted accordingly, both the expenditure as well as the revenue, especially when the epidemic in the world and in Vietnam is still very complex and unpredictable.

Fourthly, the basic content of each socio-economic development scenario in response to Covid-19 is not how much GDP has grown, or about rise in inflation, or increase or decrease in import-export turnover, but rather a policy to minimize the damage caused by the epidemic, restore businesses and production as soon as possible, and save people's lives. Such policies need to ensure efficiency, effectiveness and have concrete results. Consistency and synchronization should be thorough from credit, currency, fiscal, exchange rate policy, to trade and investment policies.

Lessons learnt

Hence, in view of the present crisis, proposals to loosen the monetary policy seem hasty and unfounded. Although the average CPI in 2019 only increased by 2.79% compared to the average in 2018, alarm bells were raised from December 2019, when the CPI exceeded the set threshold since 2014 of 5%. Compared to the previous month, CPI in January 2020 reached 1.23% after peaking at 1.4% in December 2019. Inflation is not only the result of the movement or management of the price markets, it is also an indispensable consequence of macro-economic policies, especially monetary policy.

Currently, Vietnam is more interested in tackling price inflation than monetary policy inflation. Core inflation in December 2019 increased by 0.68% over the previous month and by 2.78% over the same period in 2018, and the average inflation in 2019 increased by 2.01% compared to the average in 2018. By January 2020, core inflation continued to increase by 0.76% compared to December 2019 and by 3.25% over the same period last year. The basic inflation fluctuation in 2019 showed that after a period of calm for many months, starting in November, especially from December 2019, monetary inflation showed signs of a strong increase.

However, prudent credit monetary policy has contributed positively to inflation control in 2019. Therefore, any proposal to loosen monetary policy in 2020 to stimulate growth may be a double-edged sword when the currency goes together with price inflation like pork price. For example, there is a risk of losing control of inflation and losing what has been achieved in 2018-2019 due to the maintenance of a proactive and prudent credit monetary policy to control inflation and stabilize the macro economy.

In addition to maintaining a stable interest rate level, the stability of the exchange rate is also an important factor in controlling inflation in 2019, as the total import-export turnover continues to increase with the trade balance of goods which had a surplus record of nearly USD 10 bn. Remittance flows to Vietnam also reached a record level of USD 16.7 bn and foreign exchange reserves also reached the highest level ever. USD price index in December 2019 decreased by 0.19% compared to the previous month and decreased by 0.77% over the same period in 2018. The average USD price in 2019 increased by 0.99% compared to 2018.

Thus, the Vietnamese dong only depreciated by 1% compared to the US dollar in 2019, even increasing slightly by the end of the year. If compared to the same period earlier, Vietnam has sufficiently succeeded in stabilizing the exchange rate, maintaining an external value of the Vietnamese dong in line with an average annual inflation level equivalent to that of some industrialized countries.

The effective and efficient control of inflation in 2019 has left many useful lessons for years to come. However, signs of a hot inflation coming back from the end of 2019 due to market and monetary factors, forces us to be very careful in implementing monetary policy.

*Pandora's box is an artifact in Greek mythology connected with the myth of Pandora in Hesiod's Works and Days. In modern times an idiom has grown from it meaning "Any source of great and unexpected troubles", or alternatively "A present which seems valuable but which in reality is a curse".
Translated by Francis

Dr. Vu Dinh Anh

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