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SCMP Reporter

SURGING inflation could spark instability in rural Vietnam in the coming year if the government loses control of rising prices, a senior official has warned.

   Pham Van Trong , Vice-Minister for Finance, said that the fight against inflation would be Vietnam's toughest economic challenge next year.

  Despite failed targets this year, the government still believes it can keep price rises down to single-digits in the next 12 months.

  'I do fear we will face instability . . . we consider the inflation rate as one of the most important factors for the stabilisation of society, not to mention the economy,' Mr Trong said.

  'We still believe we can keep the figure within single digits, particularly if we watch expenditure closely.'   The worst floods in more than 30 years in the Mekong delta - Vietnam's ricebowl - and better than expected growth topping 8.5 per cent has pushed prices well above the single-digit target for this year.

  Paper, electricity and fertiliser prices and civil service salaries have also risen.

  Mr Trong put the final year-end inflation figure at between 10 and 12 per cent, but some domestic reports have put it as high as 14 per cent, with much higher rates outside of the cities.

  Some areas reliant on flood-affected produce have seen prices rise 25 per cent, scaring a government already struggling to spread growth between Hanoi and Ho Chi Minh City and about 65 million people who farm the countryside.

   Last year's figure of 5.2 per cent has already been written off by the administration as a fluke, reflecting a plain lack of purchasing power.

  The recent control of inflation - down to a manageable level after rates above 1,000 per cent into the 1990s - has buoyed many nervous foreign investors and provided faith in the economy.

  However, many fear this year's results reveal that Vietnam could face more problems with inflation because of sustained growth - not just a 'one-off' event such as the floods.

  'In other places it would be easy to forget about the effect of inflation as your economy starts to boom,' one foreign banker said.

  'But here such a large proportion of people are living in complete poverty in rural areas, so you've got to curb inflation.

   'People in the cities can cope, but it can destroy you overnight in the country.'   Mr Trong, however, said he was optimistic the government could meet such a severe target, largely through firm control of the budget deficit.

  He said that despite increases of up to 30 per cent in spending on infrastructure, the military, social welfare and administration, the government had kept the deficit to within three per cent of gross domestic product.

  Similar increases could be expected in the coming year, but increased export revenues and a wider, more intensive tax take would keep the deficit to a similar figure, he said.

  The deficit is a vital tool for control of the economy in Vietnam, because the government has little real control of the money supply, with up to US$2 billion in gold and dollars flowing outside the system.

    Meanwhile, Mr Trong said improving accounting standards within government and state-owned enterprises would be a key target in the next few months as the ministry sought to accelerate Vietnam's progress towards a market economy.



War against rising prices is priority for government