1. We would like to convey to the management and staff of the Fund the appreciation of our Vietnamese authorities for the continued support extended to Vietnam through policy dialogue, technical advice and training over the years. This has provided a conducive environment for the authorities to embark on a forward-looking economic program aimed at enhancing the country’s economic potential and strengthening its capacity, in order to attain a more sustainable and broad-based growth over the medium term. On behalf of the Vietnamese authorities, we would like to thank staff for their well-written report and selected issues paper.
2. The authorities have made significant progress in moving from a state-controlled economy towards a market economy. Under the Five year Socio-economic Development Plan (SEDP) 2001–2005, all levels of the public sector had worked with dedication and diligence to achieve solid growth with poverty eradication. They are now working hard to implement the next Five year SEDP (2006–2010) with the aim of lifting the country out of the low income situation. Cognizant of challenges ahead, the authorities are nevertheless committed to implementing reforms to raise productivity and competitiveness for sustained economic growth and poverty reduction. In this endeavour, they hope that they can count on continued cooperation and assistance from the international donor community in general and active consultations with the Fund in particular.
Recent Economic Developments
3. In 2005 and the first half of 2006, the country was faced with a plethora of adversities, including adverse weather, the outbreak of foot-and-mouth disease, the reoccurrence of avian flu with the risk of a pandemic outbreak, and significant upsurge in commodity and service prices, especially oil and gas and other key materials. However, thanks to the efforts of the authorities, sound policies and good measures for maintaining macroeconomic stability such as appropriate State-owned enterprise (SOE) reform, enhancement of enterprise competitiveness and improvement of the legal framework in line with the integration process were all effectively implemented. Thus the Vietnamese economy continued to perform well in 2005 and early 2006.
4. Real GDP growth remained strong at 8.4 percent in 2005, supported by robust growth in consumption, buoyant domestic investment, expansion in exports and a rebound in FDI in anticipation of Vietnam’s accession to the WTO. Inspite of the adverse impact of the global increase in commodity prices, the year-on-year inflation rate declined from 8.4 percent in December 2005 to 7.5 percent in August 2006. The fiscal deficit continued to be restrained and the exchange rate remained broadly stable.
5. The macroeconomic outlook for Vietnam is broadly positive with continued robust growth projected at 8.2 percent in 2006. The performance of the external sector is expected to remain favourable with strong capital inflows from emigrants’ remittances, tourism receipt, sustained ODA and FDI and export growth. The balance of payments has been generally satisfactory and external reserves have increased to about 11 weeks of imports (2005: 10.1 weeks of imports).
6. The authorities have continued to pursue a prudent fiscal policy as part of their effort to provide a strong foundation for growth. In 2005, the final year of the 2001–2005 SEDP, the authorities were faced with many difficulties and challenges in implementing the state budget to achieve the targets of the Plan. Nevertheless, official data shows that the state budget deficit in 2005 was maintained at 4.9 percent of GDP, below the 5 percent target set by the National Assembly. This ratio is projected to remain restrained in 2006.
7. On the expenditure front, improvements were made in three main areas. Firstly, action was taken to improve the linkage between economic development plans and the budget. Secondly, administrative norms were rationalised. For example, procedures for state expenditure through the treasury system were significantly improved with the removal of unnecessary formalities. Thirdly, the authorities passed the Law on Corruption Prevention and Control and the Law on Practicing Thrift and Combating Wastefulness to upgrade the quality of public investment and prevent leakage and waste. In addition, in May 2006, the government established the Vietnam Development Bank through reorganizing the Development Assistance Fund (DAF) to improve the management mechanism and credit quality, and reduce the outstanding debt of the DAF.
8. Over the past years, the government has managed the domestic and external debt prudently. However, with the recent financial innovations by SOEs and State-owned commercial banks (SOCBs), the opportunities for borrowing on domestic and international capital markets are increasing and the government recognizes the need for a coordinated and disciplined public sector borrowing strategy. As recommended by staff, the government has recently issued Decree 134 on the control and repayment of foreign loans and plans to set up a single unit to monitor all domestic and external debts.
9. On the revenue front, the Government explored all means to broaden the tax base to mobilize more resources for socio-economic development. The government made continuous efforts to strengthen the tax administration. Main taxes such as VAT, special consumption tax, and business income tax were further supplemented and amended in line with international best practices. Taxes were adjusted in the spirit of simplifying tax-paying procedures, reducing tax rates as well as creating favorable conditions for monitoring and prevention of tax evasion and fraud. Since 2003, the authorities have moved the budget revenue structure in the direction of increasing the proportion of stable revenues from domestic production. Besides tax innovations, many other policies have been adopted to improve revenue, including those relating to land and residential property, particularly revenues from assigning land use rights. Higher revenue from increased domestic activity and higher crude oil prices provided an additional source of financing for the investment and development of the national economy. It should be noted that though customs duties accounted for the third biggest share of total tax revenue, the share of fees and charges has decreased continuously since 2002 in line with Vietnam’s international commitment.
Monetary and Exchange Rate Policy
10. In the past year, monetary activities were flexibly managed to curb inflation while supporting economic development. In order to control inflation, in line with staff’s recommendation, the authorities have raised some key interest rates, including the refinancing rate, rediscount interest rate and the interest rate cap on deposits in foreign currencies. The credit institutions were instructed to improve credit quality and assess credit risk provisioning capacity to ensure the safety of the system. Consequently, the year-on-year inflation rate was contained to 8.4 percent by late 2005 and 7.5 percent in August 2006, while the rate of credit growth continued to decline to 23 percent in March 2006 and 21.5 percent in June. However, the present situation may have changed. While the policy rates have remained unchanged, the domestic interest rates have increased in line with the increase in global interest rates. The situation of excess liquidity in the banking system is temporary and differs between the state owned commercial banks, foreign bank branches and joint stock commercial banks while the interbank money market is not yet well developed. The authorities are concerned that the prolonged use of a tight monetary policy to control inflation may also dampen economic growth.
11. After nearly six years of dormant existence, the stock market has become more active in 2006. This would help to mobilize capital for economic development. However, it also poses a new potential risk associated with stock market-related lending. Sharing staff’s concern about this issue, the authorities have launched an investigation and have recently issued new regulations to tighten the monitoring and control of lending for the purchase of shares.
12. The use of a managed floating exchange rate regime has helped to keep the Dong-US Dollar exchange rate broadly stable in recent years and to contain inflation and facilitate investment and international trade. However, in line with staff’s advice, the authorities are exploring the option of exchange rate flexibility in the medium-term period. While maintaining some essential administrative measures to protect the domestic and financial system, the authorities have been looking into ways to introduce broad reforms in the foreign exchange management mechanism which are consistent with the development of an open and internationally integrated economy.
13. The authorities have issued an amendment to Decree 63/1998/ND-CP on Foreign Exchange Management to confirm liberalization of the current account, to allow payments and transfers for current account transactions to be conducted freely within the territory of Vietnam. With the issuance of this amended Decree and the Ordinance on Foreign Exchange, the Fund has accredited Vietnam as being in full compliance with paragraphs 2, 3, and 4 of Article VIII of the IMF Articles of Agreement.
14. The authorities recognize the importance of intensifying structural reforms in order to encourage private investment, and sustain economic growth and poverty reduction. The structural reforms are ongoing in a wide range of areas include improving the efficiency of public sector financial management, accelerating reforms in the SOE and SOCB sectors, addressing the weaknesses in competition and investment regimes, ensuring public debt sustainability and encouraging foreign investment.
15. On financial sector reform, the authorities have implemented measures to accelerate the process of restructuring commercial banks to enhance the financial capacity and competitiveness of the banking system. In line with international best practices on debt classification, risk provisioning and capital adequacy, the State Bank of Vietnam (SBV) has issued legal documents on loan classification, making and using of provisions to settle credit risks in banking operations of credit institutions and on prudential ratios applied to credit institutions. All SOCBs’ total debt outstanding incurred as at December 31, 2000 have been basically settled and they have been recapitalized by the state budget while all commercial banks have formulated their plans for NPL resolution and loan classification in accordance with the new prudential standard issued by SBV. It should be noted that the authorities have recently approved the government’s Banking Sector Reform Roadmap, under which the SBV will be developed into a modern central bank; the commercial banks will be restructured and all SOCBs will be gradually equitized while international prudential standards will be in place by 2010. As part of this Reform, the government had previously decided to equitize the first two SOCBs, namely the Bank for Foreign Trade of Vietnam (VIETCOMBANK) and the Mekong Housing Bank (MHB), in 2007. As of now, these two banks are in the process of asset revaluation and financial settlement before hiring international consultants on equitization. The equitization of these two banks will provide momentum for the reform of the sector.
16. Being cognizant that SOE reform is essential for the development of a competitive and efficient economy, the authorities have made substantial progress on SOE reform in accordance with the Master Plan for SOE transformation, including the implementation of performance-based rating exercise and the establishment of the State Corporation of Investment Capital (SCIC) to manage the government’s stake in equitized SOEs. The government has issued a new directive to step up SOE equitization. There have been welcome revisions to the legal documents required for improving the equitization process, extending equitization to larger enterprises and listing equitized SOEs on the stock market. It should be noted that by August 2006, 4,447 SOEs have been transformed, of which 3,060 SOEs have been equitized and 61 equitized SOEs have been listed on the stock market.
17. The government has continued to create a more supportive environment for private and foreign enterprises. In order to create a level playing field and to meet the requirement for WTO accession, the authorities, in close consultation with private sector and foreign investor communities, have developed the Unified Enterprise Law and Common Investment Law. Under the Unified Enterprise Law, which was effective from July 1, 2006, domestic and foreign enterprises, regardless of ownership, are governed by the same corporate legislation and are free to choose the form of corporate entity (previously, foreign enterprises were allowed to operate only as limited liability companies). The Common Investment Law introduces a common investment regime for domestic and foreign investors alike so that a wider range of sectors is now open for foreign investment, in line with Vietnam’s current and prospective international commitments. In addition, the authorities have made substantial progress on efforts to secure early accession to the WTO. Vietnam is already in compliance with tariff reduction schedules on regional trade agreements and the adoption of international codes for classification of imports and exports. In addition, all bilateral and multilateral negotiations have been completed in preparation for Vietnam’s accession to the WTO.
18. The authorities have taken steps to improve transparency, and reduce bureaucracy and red tape over the past year. The administrative reforms have been implemented under very comprehensive civil service reforms. The Prime Minister has instructed ministries, government agencies and provinces to conduct a review of administrative procedures with a view toward simplifying them. Progress has been made in areas such as residential registration permits, business registration, land use rights certificates, and customs and tax procedures. The government also introduced new regulations to strengthen the delivery of public services through improved monitoring of service quality, introducing user feedback, and limiting the use of proceeds from service fees to fund salary expenditure.
19. In addition, recognizing the need to tackle the systemic causes of corruption, the National Assembly has passed the law on the prevention of corruption. The Prime Minister has issued an action plan delineating the roles of various ministries and agencies in ensuring effective implementation. The authorities will be issuing the regulations for implementing the Anti-Money Laundering Law and moving forward in drafting an amendment to the criminal code on Combating the Financing of Terrorism.
20. While the road ahead is fraught with many challenges, the authorities would like to reaffirm their determination to overcome those challenges, by continuing to pursue prudent economic policies as well as enhancing reform implementation in a progressive and steady manner. This will have to take into account economic considerations, capacity constraints, and more importantly, the aspirations and hence the ownership of the people of Vietnam, which will be strengthened with further improvements in economic growth and poverty reduction.