Hundreds of people at a filling station in Hanoi several minutes before the petrol price increases

VietNamNet Bridge – The increased price of gas in Vietnam is not a big surprise because it was predicted long ago when the price of crude oil hovered around $150 per barrel. However, the sharp increase – up by 31% - while the government had just stated it would maintain the prices of essential commodities till the end of 2008 once again poses a challenge for the government in keeping the faith of the people and persuading them to work with the government to overcome this difficult period.

Approaching gas price in the region

At markets, on streets, at shops and offices, everyone was buzzing about the decision to raise the petrol price by 31%, from VND14,500 to VND19,000 per litre in the morning on July 21.

Dr. Le Dang Doanh said the adjustment of the petrol price was “understandable”, especially as neighbouring countries had raised it already (China 18.6%, Malaysia 48% and Indonesia 28%).

The new prices of petrol in Vietnam are nearly the same as in regional countries (Cambodia VND23,253/l, Thailand VND20,220/l, Laos VND19,040/l).

“The increase of the price of petrol was unavoidable because we suffered big losses for a long time and we couldn’t hold out any more,” said former Trade Minister Truong Dinh Tuyen.

According to data released by Finance Minister Vu Van Ninh at a press conference on July 21, if Vietnam hadn’t raised the petrol price, the government would have had to compensate gas importers an additional VND44.772 trillion (over $2.63 billion) in the second half of 2008, raising its total losses to VND59.519 trillion ($3.5 billion). The loss it incurred in the first half of 2008 was VND14.525 trillion ($854.4 million). Meanwhile the government isn’t seeking compensation for the loss it incurred in 2007 – VND7.4 trillion ($462.5 million).

But the question could be asked: Why didn’t the government gradually raise the price?

“We need to understand the government’s difficulties. If the government increases the price a little, it will have to still pay a lot in compensation so it will have to raise the price again very soon. Each time the government raises the petrol price there follows the increase of the prices of other goods and it is more difficult for the people’s lives,” explained Truong Dinh Tuyen.

Tuyen said, at this price, Vietnam is at a break-even level compared to the gas price in the world market in June, not the average price of the first half of 2008.

When the government decided to increase the petrol price on July 17, the planned price in Vietnam was lower than the real price in the international market at that time – $139/barrel.

“The government delayed increasing the price of petrol for a long time and that was a great effort,” he said.

In addition, as the petrol price in Vietnam was VND7,000 to VND8,000 lower than in neighbouring Cambodia, the smuggling of petrol across the border was rampant.

“Vietnam couldn’t import petrol at a high price to sell at a low price to smugglers,” Tuyen added.

Tran Duc Nguyen, former head of the Prime Minister’s research board, said whenever the gap between prices is abolished, cross-border smuggling of petrol is stopped.

Dr. Nguyen Quang A said the adjustment of the petrol price in accordance with the market is correct and necessary but the government ought to have adjusted the price several years ago, when the economic situation was bright.

“In this circumstance, the adjustment of the price of an essential product like petrol must be done prudently. The price increase would have been better done when inflation was curbed. Regretfully, inflation is not in control at this moment, despite good signs in term of macro-economic indexes,” he said.

However, another economist said that the petrol price must increase because the government couldn’t use administrative and non-market measures to restrain the price. The longer the price is restrained, the greater the impacts when the price is adjusted.

Many international experts previously criticised the Vietnamese government for holding the prices of some essential goods for a long time.

Professor David Dapice of Harvard University told VietNamNet two weeks ago that Vietnam should gradually loosen the petrol price, but not float it. The prices of food and some other commodities have begun to decline so Vietnam can step by step raise the petrol price, he said.

Thailand and many other countries in the region floated the petrol price when they realised that subsidised petrol prices distort the market and don’t encourage consumers to change their consumption habits and conserve energy.

“If the state doesn’t want to raise the petrol price, it has to subsidise petrol. This affects the capital sources which Vietnam can use to improve education and other fields. Vietnam must make a decision to subsidise energy or invest in education and health care,” Prof. Dapice said.

Between subsidising petrol and social welfare programmes, Finance Minister Vu Van Ninh said the government chooses social welfare.

“If Vietnam continues to restrain the petrol price, the state budget will be in a difficult situation because the entire benefit from crude oil (around VND40 trillion) is used to compensate petrol importers and Vietnam will not have capital for social welfare,” Ninh explained.

Trust and information transparency

A big question for this period with the higher petrol price is will the prices of other products increase and how will the money that is saved by not compensating petrol importers any more be used for social welfare targets?

According to Dr. Quang A, at this moment psychology and trust are decisive in determining the prices of commodities and the government’s inflation control goal.

“The government should give clear explanations for its recent move to save and strengthen the faith of the people, businesses and consumers, whose trust was recently eroded by the government’s incompetent policies,” he said.

He said the government should make clear how the increase of the petrol price by 31% will influence transport fees, the prices of food and other products, using specific calculation methods and numbers.

“Information transparency is the first and the most important factor to maintain people’s faith,” he said.

The state also needs to introduce policies and mechanisms that support the poor and the disadvantaged to help them overcome this difficult time.

Tuyen confirmed that assistance for the disadvantaged is a policy of the state but it is important to instruct localities in how to implement this policy.

At that time, people and businesses will sympathise and accept difficulties and work with the government to ride out the storm.

Phuong Loan