Vietnam lifts fuel prices, raises inflation risk

HANOI, July 21 (Reuters) – Vietnam raised domestic fuel prices by as much as 36 percent on Monday, the first hike in five months, raising the spectre of even higher inflation, more interest rate rises and slower economic growth.

The steep increase in the price of petrol and diesel came as a shock to consumers, many of whom were seen thronging gas stations before the new prices came into effect at 0300 GMT.

Less than two weeks ago, the government had ruled out rises in fuel prices for the rest of this year, suggesting it preferred to bear the cost of subsiding gasoline rather than pushing consumer prices any higher.

But retail gasoline prices were raised by 31 percent on Monday. A litre of the popular 92-octane gasoline grade now retails at 19,000 dong ($1.15) per litre, up from 14,500 dong per litre previously, an official from top importer and retailer Petrolimex said.

Petrolimex also raised retail prices of diesel by 14.3 percent to 15,950 dong ($0.97) per litre and the price for fuel oil by 36.8 percent to 13,000 dong ($0.79).

“When international oil prices are this high, the principle of community responsibility must be implemented to share the hardship between the government, organisations and consumers,” the Finance Ministry said in a statement.

It estimated the government would have to cover a loss of $3.2 billion this year even after Monday’s fuel price rises if world crude prices stayed above $145 per barrel.

Vietnam’s retail gasoline prices are still below those in other parts of Asia, such as Singapore and Sri Lanka. Still, people on the street were dismayed.

“We are not getting any support for the petrol price hike from the company,” a taxi driver said as he tried to move his car hopelessly in the noisy crowd in front of a petrol station in Hanoi that had brought traffic to a standstill.

The driver failed to reach the petrol pump before Petrolimex staff changed their selling prices at 0300 GMT.

STRAINS ON ECONOMY

Vietnam, which has been severely strained by double-digit inflation for eight consecutive months and a widening trade deficit, had subsidised fuel consumption by keeping prices unchanged since February as it sought to rein in inflation.

“It makes sense for fuel prices to go up in line with world oil prices but as a result inflation will remain on the rise,” Tai Hui, an economist at Standard Chartered in Singapore said.

Vietnam’s inflation raced to multi-year highs this year, hitting an annual rate of 26.8 percent in June as food prices soared, forcing the government to cut its 2008 growth target to 7 percent from 8.5-9 percent.

Irvin Seah, an economist with DBS Bank, said it was likely inflation will rise beyond 30 percent in August, and there would be another 2 percentage point rise in Vietnam’s base lending rate for banks, now at 14 percent. Seah also forecast GDP growth in 2008 would fall to 6.4 percent.

Vietnam, which relies almost entirely on oil product imports as it lacks major refineries, paid nearly $5.9 billion for imported fuel in the first half of this year, or 69 percent more than the same period last year, as crude oil raced to a record high over $147 a barrel on July 11.

For a FACTBOX on state-regulated fuel prices in Asia, click on [ID:nSP37494].

For a FACTBOX on subsidies offered by different countries on oil, click on [ID:nSP186344] ($1=16,500 dong) (Reporting by Ho Binh Minh and Nguyen Nhat Lam, editing by Vidya Ranganathan and Ben Tan)

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