Vietnam inflation at 12-year high

Vietnam's inflation rate jumped to 15.7% in February, its highest rate in 12 years, highlighting the difficulties the communist authorities face in trying to rein in inflation without sacrificing the country's growth prospects. The sharp rise in prices was pushed by a 25.2% increase in the cost of foodstuffs and a 16.4% rise in housing and building materials driven by the -construction boom. Authorities have become increasingly worried about the impact of inflation, which has fuelled unrest among factory workers who complain they can scarcely make ends meet on their minimum wage salaries.

Prices in Vietnam have historically risen faster around the Tet holiday, the recent new year celebrations, than at any other season, as families splurge on lavish meals and gifts. But economists say the surging inflation rate, up from 14.1 per cent in January, reflects the challenges facing Vietnam's policy-makers as they struggle to cope with the economic impact on global currency realignments and an estimated $14bn in capital inflows in 2007.

Jonathan Pincus, chief economist for the United Nations Development Programme in Hanoi, says Vietnam has been hit particularly by the appreciation of the Chinese renminbi against the dollar, since the US is its biggest export market and China is its biggest supplier. "When the Chinese currency began to revalue against the dollar it created a conundrum for the Vietnamese", he said. "Do you follow the US dollar down to remain competitive on exports? But if you do that, the price of your imports becomes more expensive, so that generates inflation."

Hanoi decided to "track the dollar down, which means they imported inflation from China", he says. Inflation has been fuelled further by the surge in credit growth on rapid lending by commercial banks. The State Bank of Vietnam, the country's central bank, has unveiled a number of shock measures to curb inflation by trying to drain liquidity from the financial system, including raising both commercial banks' reserve requirements and interest rates.

In another bid to soak up liquidity, the bank announced that 41 large banks and credit organisations would be required to buy a total of $1.27bn (€839m, £637m) of one-year treasury bills with an interest rate of 7.8 per cent. The banks have protested against a move that would erode their margins.