With a forecast inflation rate of 18% for this year, the 5% power price hike will add burdens to people’s lives and drive up the national inflation.

EVN’s price increase sends shock waves through the economy 

The state-owned Electricity of Vietnam Group (EVN) decided to increase power prices by 5%, to an average VND1,304/kWh, excluding value added tax, starting today, December 20.

The price hike came as a shock to many people who are already struggling with rising living costs. The timing makes it especially difficult because of the upcoming Tet holiday. Many people had hoped that the price of staples, such as petrol and electricity, would be kept unchanged at least through the Tet holiday.

Another reason for the surprise is that the Minister of Finance has already mentioned plans for price increases beginning next year.

However, Pham Tien Thoa, Director of the Ministry of Finance’s Price Management Department, said the increase would not have much impact on inflation, as electricity price constitutes only 3% of consumer price index (CPI).

On the other hand, Pham Chi Lan, an economist, stated that any power price increase would hinder efforts to curb inflation and have affect both people and businesses.

The increase will be reflected in the prices of many other goods, Lan said.

According to analysts, in theory the 5% power price hike would have direct impact on the CPI, but in reality it could have a psychological effect, which would cause a rise in the price of all sorts of products. This would add to the real inflation rate.

Also, it is usual for the prices of goods to rise considerably anyway during the holiday because of increased demand. Profiteers could find in it an excuse apply unreasonable markups.

Even though EVN said that its power price increase was to help cover its losses totaling VND35 trillion (USD1.66 billion), there are many who are skeptical about this and wonder if the company is trying to cover losses from non-core investments, such as telecom.

Worries mount

Many enterprises, particularly in the manufacturing sector, are worry that they will have to increase the prices of their products, hurting business.

Pham Chi Cuong, Chairman of the Vietnam Steel Association, said the new prices would not harm the industry much because many producers have invested in technology upgrades that have improved their energy efficiency.

Still, he worried that the costs of materials and transportation might be driven up.

The 5% power price hike will directly result in a 1%-1.5% increase in the cost of fertilizer production, according to the Vietnam Fertiliser Association.

Cement producers estimate that their production costs would be increased by between 1.5% and 2%, adding to their difficulties amid high interest rates and a slowdown in the market.

Many experts forecast that the 5% power price is just a part of EVN’s planned price increases, as it has already announced an increase of between 10% and 15%. This would mean that the country is likely to see further increases in the coming year.