(Reuters) - Vietnam's economy faces "significant challenges" and authorities need to raise policy interest rates further to cope with an upward trend in inflation, the International Monetary Fund said on Thursday.The government could also do more to reduce the fiscal deficit in support of tighter monetary policy, the Fund said in a statement at a donors' meeting with government in Vietnam.
Inflation in Vietnam has been among the highest in the world, accelerating to 19.8 percent in May over the same month last year, and is still accelerating.
In the face of soaring prices authorities have increased policy interest rates several times, lowered credit growth and money supply targets and made commitments to cut spending and boost state revenues.
But economists say the measures have yet to bite on inflation.
"The immediate challenge will be to respond to the upward trend in inflation, and prevent it from feeding into higher inflation expectations and putting pressure on the dong. This requires further increases in policy rates," the Fund said in a report prepared for the meeting.
Confidence in the government's policies was "fragile", it said, and it was essential that the government send "a strong signal" that it will remain committed to macro-stabilising measures beyond 2011.
The World Bank echoed that sentiment in a report released on Thursday in Vietnam, saying efforts to stabilise the economy were only half done.
"The authorities need to remain vigilant against premature withdrawal of stabilisation measures," it said.
The government has lowered its gross domestic product growth target and increased its full-year inflation target twice so far this year in an acknowledgement of the economic difficulties. After a cabinet meeting last week it said it now expected GDP growth of 6 percent and inflation to end the year at 15 percent.
GDP growth in the first half of this year may quicken to an annual rate of 5.6 percent, after 5.43 percent in the first quarter, the government said on Friday.
The IMF noted that the Vietnamese currency has been trading within its band, and said foreign exchange reserves had started to rise, and were $13.5 billion in May.
But it said expectations that the dong will again come under pressure remained "entrenched".
On Feb. 11 the State Bank of Vietnam devalued the dong by 8.5 percent, narrowed its trading band against the dollar and later enacted a set of administrative measures to try to fight "dollarisation" of the economy.
The beleaguered currency, which had shed more than 20 percent of its value in the three years leading up to the latest devaluation, has been largely recently.
The State Bank of Vietnam, meanwhile, re-affirmed its vigilance in the face of what it called "management challenges".
"In the coming time, the SBV will continue to implement well-structured and cautious monetary policies... (and) manage flexibly the policy rate, in line with the market developments and macroeconomic objectives," Deputy Governor Nguyen Van Binh said in prepared remarks.
The Vietnamese economy grew 5.3 percent in 2009 and 6.8 percent last year. (Editing by Kim Coghill)
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