Vietnam's Inflation Rate 15 Percent; Highest in More Than a Decade

Vietnam's inflation rate reached 15.7 percent in February, the highest in more than a decade, as the government struggled to control prices in Southeast Asia's fastest-growing economy.

The increase was driven by sharp price gains in food, housing and construction materials, the General Statistical Office said on its Web site Thursday.

A woman counts money at a branch of the Vietnam Investment and Development Bank in Hanoi. Short-term rates in Vietnam's money market have eased over the past week after the central bank added funds to offset a liquidity crunch caused in part by its tightening of policy to fight inflation. (Photo: Reuters)

Food prices were 25.2 percent higher than the same period last year, and housing and construction materials were up 16.4 percent.

"Everything is getting more expensive these days," said Nguyen Thu Huong, 31, who was buying groceries in Hanoi Thursday morning. "Life is getting much more difficult for people with low incomes."

Economists said Vietnam's inflation rate, the highest in the region, was fueled by both domestic and global forces.

Fuel and food costs are up around the world, but inflationary pressures are especially strong in Vietnam, which has been enjoying strong economic growth for several years now as the communist nation has embraced market reforms.

Foreign investment has been booming since Vietnam joined the World Trade Organization last year, when the economy grew at 8.5 percent.

Investors have also been pouring money into the red-hot real estate market and Vietnamese stocks, which enjoyed a remarkable boom last year but have recently been losing ground.

Meanwhile, strong growth in the banking sector has led to a rapid rise in lending.

Loans by Vietnam's joint stock banks were up 90 percent last year, said Jonathan Pincus, chief economist at the United Nations Development Program in Hanoi.

"Their lending grew at a really astonishing rate," Pincus said.

Vietnam's difficulties are compounded by the fact that its currency, the dong, is pegged to the very weak US dollar, Pincus said.

The country imports many construction materials from China, whose currency has been rising against the dollar, further fueling price increases here.

Meanwhile, the government has been phasing out subsidies for various commodities, including oil. It announced a 12 percent hike in gas prices this week and a 35 percent hike for diesel.

While Vietnam's inflation rate is cause for concern, the country remains an attractive investment destination, said Adam Sitkoff, director of the American Chamber of Commerce in Hanoi.

"Vietnam is still a cost-competitive place to manufacture products," Sitkoff said. "I don't think inflation will make Vietnam less appealing to investors, but it will hurt Vietnam's poor."

In an effort to curb rising prices, Vietnam's central bank has recently increased interest rates by half a percentage point. It has also ordered commercial banks to buy 20.3 trillion dong (US $1.3 billion) in treasury bills and asked commercial banks to raise their cash reserves.