Vietnam should be vigilant on inflation risk: WB hinh anh 1Illustration. (Photo: VNA)

Hanoi (VNA) – Vietnamese authorities should be vigilant about inflation risks associated with the continuing rise in the price of fuel and imports, which may dampen the ongoing recovery of domestic demand, according to the World Bank's (WB) monthly report on Vietnam, released on June 13.

Economic recovery remained strong despite heightened global uncertainties related to the protracted war in Ukraine, higher commodity prices, supply chain disruptions caused by health-related lockdowns in China, and tightening global financial conditions, said the June 2021 Vietnam Macro Monitoring report of June.

Industrial production continued a robust expansion with 10.4% year-on-year (YoY) growth, a rate comparable to pre-pandemic times. The Manufacturing PMI jumped from 51.7 in April to a 12-month high of 54.7 in May, indicating strengthening expansion in manufacturing.

Machinery manufacturing slowed down from 26.6% YoY in March, to 6.1% YoY in April, and only 3.7% YoY in May. This slowdown could be related to supply chain disruptions and a shortage of imported input materials caused by the health-related lockdowns in China. Imports of machinery dropped in the last three months compared to a year ago.

Export growth also moderated, from 25.2% YoY in April to 18.0% YoY in May, after three months of acceleration while import growth remained relatively flat at 14.6% YoY in May, compared to 16.5% YoY in April.

Retail sales increased by a record 22.6% YoY in May, compared to the 12.7% YoY rate in April. This acceleration is partly due to a low-base effect as sales had dropped by 2.1% in May 2021 following the April 2021 COVID-19 outbreak and subsequent mobility restrictions.

To a larger extent, however, this growth in sales reflected the shoring up of domestic private consumption and the return of international tourists after the government opened the borders in late March.

About 173,000 international visitors arrived in Vietnam last month, around 70% higher than in April and the highest figure since April 2020, yet still less than 16% of pre-pandemic levels.

Sales of consumer services, which were hit harder than the sales of goods last year, experienced a stronger rebound (41% YoY compared to 18.3% YoY, respectively).

The rebound was due to the booming accommodation and catering services, which increased by nearly 70% and were 12.4% higher than the pre-pandemic level three years ago. Travelling also tripled compared to a year ago, although it was about 60% lower than its pre-pandemic level.

FDI commitments were 879 million USD in May, the lowest level since September 2020, and nearly 50% lower than a year ago. This is the fourth consecutive month of decline, reflecting the heightened economic uncertainties caused by the protracted war in Ukraine and the Chinese lockdown.

On the other hand, FDI disbursement remained strong in May, up 8.5% YoY, marking a six-month expanding streak.

CPI inflation edged up from 2.6% in April to 2.9% in May driven by a rise in gasoline and diesel prices, which were 54.5% higher in May than a year ago. Producer price inflation showed signs of easing in May, with both input costs and output prices rising at the slowest rates in three months.

Credit growth remained strong at 16.9% YoY, while overnight interbank interest rates dropped sharply from 1.73% in April to 0.33% as of the end of May.

Thanks to strengthening domestic demand, total revenue collection increased by an estimated 29.4% YoY in May, keeping the overall budget in surplus for the fifth consecutive month.

The WB recommended that temporary support, including targeted transfers, should be considered to help poor households weather price surges.

As commodity price shock appears to be mainly affecting oil and fuels, with pass-through to transport costs, temporary targeted subsidies for main gasoline and fuel users (such as truckers) could also be considered to alleviate hardship and blunt the inflationary pressures.

Investing in alternative energy production would reduce the economy’s dependence on imported fuels in the medium term and promote greener growth./.

VNA