Vietnam money supply must increase to avoid stagflation

Vietnam's central bank should pump more money into the economy, while taking care to ensure it doesn't fuel inflation, a senior Vietnamese government advisor said.

Money supply expanded at 2.45 percent in the first six months of the year, well below the government's 16 percent annual target, which has also led to slowing credit growth in the country.

"Money supply has been too tight in the last six months. Money should be supplied equally throughout the year," Le Xuan Nghia, vice chairman of the National Financial Supervisory Committee said.

"Raising money supply doesn't mean loosening monetary policy," he said on the sidelines of a meeting on Friday.

Overly tight money supply could also reduce production of goods and therefore raise inflation, he said. "We need to avoid stagflation," Nghia said.

July's consumer price index hit 22.16 percent year on year.

"The central bank is going to accelerate anti-dollarization measures," Nghia said, referring to the practice of making dollar loans less attractive by raising banks' foreign currency reserve ratio, increasing demand for dong loans.

By June 20, dong-denominated loans have risen by a mere 2,76 percent this year, compared with 23,47 percent growth in dollar loans, central bank data shows.

The other fallout of the faster jump in dollar loans is the pressure on the exchange rate at the time of repayment, Nghia warned.

"This could create huge demand for foreign currency at the end of the year when dollars loans are due and if dollars supply from the export market is difficult at the same time it would cause tension to build in foreign currency market," he said.

"We have been informing the government to come up with measures right now to avoid that risk."