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Vietnam: Selected Issues and Statistical Appendix

Author(s):
International Monetary Fund
Published Date:
January 2002
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III. Private Sector Developmentin Vietnam17

A. Introduction

35. This chapter reviews recent trends in private sector development in Vietnam. It draws upon work done by the World Bank Group and in particular the IFC, and looks ahead to areas where policies will need to be strengthened to accelerate private sector development (PSD). The government’s medium- to long-term economic development program emphasizes the commitment to creating a fair business environment for both the state and nonstate sectors. Given this and the current direction of reforms, the private sector is expected to play an increasingly important role in new business formation, employment creation, and output growth. Also, poverty reduction in Vietnam over the last decade was derived from land-based and agricultural-led growth, but there are physical limits to this pattern of growth. Thus, poverty reduction in the future will require more rapid rural and urban growth that is labor-intensive and export-led, with the private sector as the engine of growth. Removing the current impediments to PSD will also help protect macroeconomic stability, through further increasing government revenue, expanding trade opportunities, and increasing Vietnam’s resiliency to supply shocks.

B. Private Sector Development in the 1990s

36. Currently, the private sector accounts for around 40 percent of GDP in Vietnam18 (compared with 50 percent in China), but mainly in agriculture and for only one-third of industrial output. Its rapid growth in agriculture-based activity started in the late 1980s and was initially fueled by the policy of Doi Moi (or economic renewal), under which Vietnam began to make significant strides in liberalizing the agricultural sector. Prior to Doi Moi, agriculture was collectivized, and private sector activity in most other sectors was negligible, unrecorded, and/or disallowed. Under Doi Moi, most input and output prices were decontrolled, agriculture decollectivized, the exchange and trade system partially liberalized, and foreign direct investment (FDI) allowed (initially joint ventures only). Reforms were guided by new laws promoting domestic and foreign investment, as well as a commercial law.

37. Progress in PSD in the early and mid 1990s was slow because of policy ambivalence, and stalled with the onset of the Asian financial crisis in 1997. Even though FDI inflows were very large in the mid 1990s, Vietnam’s business climate was increasingly at a competitive disadvantage vis-à-vis the region, in part because of opaque and burdensome legal and administrative regimes. With the Asian crisis, FDI flows plummeted,19 and investor sentiment turned negative, given limited progress in reforming state-owned enterprises (SOEs) and the exchange and trade system. Private sector activity in Vietnam was still constrained by an entrenched bureaucracy, a non-transparent tax and regulatory framework, and an uneven playing field in terms of market access, foreign exchange and bank credit availability, and operating costs. Entry to many business sectors was prohibited or allowed only in the form of joint ventures with SOEs. Even when private sector participation was permitted, private businesses faced other administrative hurdles, which raised the costs of doing business in Vietnam.

C. Recent Measures to Foster Private Sector Development

38. Since early 2000, and in a bid to promote economic recovery, the government has taken a series of actions aimed at improving the investment climate for a more fair business environment. These actions in 2000 included notably passage of the new Enterprise Law and amended Foreign Investment Law. This was followed in March 2001 by the adoption of a three-year SOE reform framework that provides for equitization, liquidation, and merger of a significant number of small and medium-sized SOEs; and by implementation of trade opening measures, including the announcement in May 2001 of a five year import-export regime that significantly advances the removal of a number of quantitative restrictions on imports in sectors dominated by SOEs (see Chapter IV). In addition, the government is pushing ahead with financial sector reform, including liberalizing interest rates, restructuring the banking system, and establishing a stock exchange, all of which should aid PSD.

39. The key provisions of the new Enterprise Law were aimed at easing business entry. Under the new law, business licensing requirements in 145 (out of 400) sub-sectors were lifted in 2000, making establishment of private firms considerably easier. Decree 30, also issued in 2000, led to revocation of a further 61 licenses and permits. The removal or modification of business licenses in an additional 50 sub-sectors is expected by end 2001. Business registration costs also have been cut significantly and the approval process shortened from 1-2 months to 10 days on average, and even less for small enterprises and in urban areas. As a result of these changes and with effective implementation of the new law, an estimated 26,000 small and medium-sized enterprises (SMEs) were registered in the period January 2000 through August 2001 employing more than 500,000 workers (some SMEs are newly established companies, but many are household enterprises that have been upgraded or other enterprises that previously operated unofficially or illegally). This represents a 60 percent increase in registered SMEs since January 2000, when the Enterprise Law came into effect. Total registered capital is equivalent to around US$2 billion, or 6 percent of GDP. Concentration of newly registered SMEs has tended to be in urban areas and in the southern part of the country, especially in the Ho Chi Minh City region (Table III. 1). The Enterprise Law will be supplemented with a decree on SMEs by end 2001. Existing provisions in the Enterprise Law on the use of land-use rights as collateral for bank loans will also require stronger enforcement and greater transparency to case credit conditions for SMEs.

Table III.1.Vietnam: Registered Enterprises Under New Enterprise Law by Region 1/
Number of enterpriseAmount of registered capitalShare in 1999 of:
Industrial outputIndustrial establishments 2/Total population
(In percent of total)
Total
Red River Delta24.029.520.737.822.0
North East6.09.95.79.611.6
North West0.60.30.31.62.9
North Central Coast5.33.63.317.713.1
South Central Coast5.97.55.18.28.5
Central Highlands1.91.01.02.95.3
North East South46.642.553.78.815.4
of which: Ho Chi Minn City36.028.327.44.36.6
Mekong River Delta9.85.710.313.521.1
Sources: Ministry of Planning and Investment and General Statistical Office Statistical Yearbook 2000.

Through August 2001.

Local business establishments (excluding agriculture and service sectors), including state-owned and foreign invested enterprises.

Sources: Ministry of Planning and Investment and General Statistical Office Statistical Yearbook 2000.

Through August 2001.

Local business establishments (excluding agriculture and service sectors), including state-owned and foreign invested enterprises.

40. Amendments to the Foreign Investment Law sought to improve the climate for Foreign Invested Enterprises (FIEs) by mainly streamlining previously complex FDI procedures and leveling the playing field vis-à-vis the SOEs. The key provisions allow: the automatic registration of export-oriented FIEs, purchase of foreign exchange by FIEs to make payments within certain limits, mortgaging of land by foreign bank branches, and the provision of government guarantees on certain types of infrastructure projects and encouragement of investment by overseas Vietnamese.20 These guarantees, in particular, aided the conclusion of contracts for large oil and gas projects, the negotiations of which had been protracted. Furthermore, the dual pricing system, which largely discriminates against FIEs, has been rolled backed recently with a reduction in price gaps most notably on telecommunication and electricity tariffs.

41. A resolution, adopted by the Central Committee of the Party in August 2001, calls for an accelerated phase out of the dual pricing system (much of which was originally authorized to take place 1999), as well as further streamlining of licensing and administrative procedures for FIEs. The resolution also notes the need for a common and simplified legal framework and tax system for domestic and foreign investors. The number of sectors permitting FDI would be expanded and include import and domestic distribution services. In addition, land clearance procedures for FIEs would be simplified, land-use right certificates issued to FTEs operating in industrial parks or export processing zones, and, on an experimental basis, land-use rights made transferable to certain foreign investors. More generally, revisions to the Land Law, which will come into effect soon, are aimed at easing local government control over allocating land and granting land-use certificates to households and enterprises, giving overseas Vietnamese the right to buy houses with attached land-use rights, and aligning compensation for nationalized lands with market value.

42. In view of the poor financial conditions and inefficiencies of many SOEs, the government adopted a five-year SOE reform plan in March 2001, with annual targets specified for 2001–03. Final approval of the reform framework was given by the Central Committee in August 2001. The objectives of the plan are to reduce losses and improve competitiveness. Around 1,800 out of the more than 5,500 SOEs will be subject to enterprise-specific reform measures, mostly through equitization (1,400), divestiture (140), or liquidation/closure (220). An additional 200 enterprises will face merger/consolidation. The focus of this reform is on equitization of small to medium-sized SOEs in terms of state capital (11 percent of total) and SOE debt (10 percent of total). However, these SOEs are estimated to account for 31 percent of total SOE employment, as more capital intensive, heavy industry sectors will remain under state dominance (Table III.2).

Table III.2.Vietnam: Sectors to be Controlled by Government Ownership
1. Business Oriented State-Owned Enterprises (SOEs)2. Public Utility SOEs
State monopoly SOEsState monopoly SOEs
Explosive materialsPrinting of money and value papers
Toxic chemicalsFlight control
Radioactive materialsMaritime control
National power transmission gridRadio frequency management and distribution
International and national communications backboneMilitary hardware and weaponry for national defense
CigarettesEnterprises entrusted with special national defense tasks
Enterprises operating in strategic locations and combining economic operations and national defense tasks in accordance with government decisions
Full or controlling state ownership of SOEs
Food wholesale trading
Petrol and oil wholesale tradingFull or controlling state ownership of SOEs
Power generation
Mining of important mineralsTechnical inspection of large transport vehicles
Production of some mechanical and electronic productsPublication of academic books
Information technology productsPolitical papers and books
Ferrous and non-ferrous metal productionCurrent event and documentary films
Basic chemicalsManagement and maintenance of the national railways and airports
FertilizersManagement of watershed irrigation system
Plant protection productsPlanting and protection of watershed forests
CementWater drainage in large cities
Construction industriesRoad management and maintenance
Important consumer goods and foodstuffs productionBus and coach stations
Pharmaceutical chemicals and medicinesImportant waterways
Air transportProduction and supplies of other products and services as provided for by the government
Railways
Ocean shipping
Monetary trading
Insurance
Lottery
Basic telecommunications
Source: Government Resolution No. 05-NQ-TW on the Continuation of the Restructuring, Reforming, Developing and Improving the Efficiency of State-Owned Enterprises (September 24, 2001).
Source: Government Resolution No. 05-NQ-TW on the Continuation of the Restructuring, Reforming, Developing and Improving the Efficiency of State-Owned Enterprises (September 24, 2001).

43. Recent financial sector reforms should also ease some of the constraints faced by the private sector in terms of accessing bank credit, securing foreign exchange, and, eventually, raising new capital.

  • Availability of bank credit: The joint stock bank (JSB) sector, where operations have been geared toward serving the private sector, is gradually undergoing a period of consolidation.21 Since 1999, eight JSBs have been either merged, consolidated, or liquidated. Under current plans, the number of banks will be halved over the next two years to fewer than 25. By then, the JSB system should be financially sounder and better supervised, and more capable of meeting credit needs of viable SMEs. Because of the ongoing bank restructuring and owing to tighter credit risk management, credit growth from the nonstate banks (the JSBs, as well as joint venture banks, foreign bank branches, financial companies, and the Central People’s Credit Fund) has been significantly lower than from the banking system as a whole.22 Over time, however, effective banking reform should help to make more credit available at lower interest rates.

  • Access to credit under market-related interest rates: Interest rate caps have been wholly or partially lifted—for foreign currency loans, the caps were removed in June 2001 and for dong loans, the margins above the base lending rates, which came into effect a year earlier, appear to offer banks adequate flexibility to price risk and SMEs better access to credit. Under the current structure, the bands above the dong base rates are 4 percent (on an annualized basis) for short-term loans and 6½ percent for long term loans. Allowing land use-rights for collateral should also help make credit accessible to SMEs, and requiring SOEs to undergo bank credit risk assessments (like other borrowers) should also make room for credit to SMEs.

  • Access to foreign exchange through liberalization of the exchange system: The foreign exchange surrender requirement was reduced from 80 percent to 50 percent in August 1999 and to 40 percent in May 2001. As part of the amended Foreign Investment Law, the foreign exchange balance requirement for FIEs was lifted in May 2000 (previously, FIEs were required to balance payments and receipts in foreign exchange, unless they were granted special exemptions). Under the same set of amendments, the tax on profit remittances of FIEs was reduced from 10 percent to 7 percent.23 Under the current PRGF-supported program, the authorities have agreed to submit a recommendation to the National Assembly to eliminate the tax for FIEs by March 2002.

  • Vietnam’s stock exchange was established in Ho Chi Minh City in July 2001: Currently, only seven companies are listed on the exchange.24 As of end-August 2001, total market capitalization was USS20 million (0.1 percent of GDP) and daily trading volume was under USS0.5 million. Larger companies would like to list on the exchange, but at present cannot meet the main requirement of disclosing audited financial statements on international standards. Currently, FIEs cannot list on the exchange, but the government has recently called for regulations allowing transformation of these enterprises into joint-stock companies on an experimental basis, creating conditions for them to be eventually listed.

44. Plans are also underway to give local authorities greater autonomy in business regulation. A draft government decree is being considered that would grant greater autonomy to the Ho Chi Minh City People’s Committee in terms of business investment licenses and procedures, land price determination, and provincial budget execution. Already, business registration procedures operated by the local planning and investment service have been streamlined and automated, with licenses to domestic private enterprises granted in as little as one day.

D. Challenges Ahead

45. Despite the recent improvements, private sector development still faces remaining impediments in Vietnam. The government’s ten-year socioeconomic development strategy (2001–10), which was endorsed by the Ninth Party Congress in April 2001, envisages a more level playing field for the private sector. However, it still calls for a leading role for the state sector, including continued state protection of and investment in certain key industries. In China, a change in leadership attitude that led to an explicit recognition of the private sector as an important component of the economy (at the Fifteenth Party Congress in 1997), along with earlier steps in clarifying the legal framework, have been seen as key in fostering rapid expansion of private registered firms in the 1990s (from 100,000 in 1991 to more than 1.3 million today).

46. Access to bank credit by the private sector remains an issue. Interest rates have been substantially decontrolled. However, credit risk management by banks needs to be strengthened, which is a key element of the government’s banking reform strategy, in particular by the four large state-owned commercial banks. In addition, a more vigorous effort will be needed to meet targets set by the government in consolidating the JSBs. Lending to the private sector should also benefit from steps being taken to further simplifying the use of land-use rights as collateral. Crowding out by the state sector is also expected to diminish, as policy-based lending is being supplanted by explicit government guarantees or direct budget support (e.g., through the Development Support Fund). For SMEs, however, access to bank credit will also require that many of them strengthen corporate governance by clarifying their ownership, adopting stronger accounting methods, and disclosing more fully and accurately business practices.

47. In addition, SOE reform needs to be accelerated. SOE reform is critical to PSD, as a number of small to medium-sized SOEs are to be equitized and the sector as a whole is operated on a more commercial basis. However, this reform needs to deepen, in particular for large enterprises. With recent approval of the reform framework by the Central Committee, the government has instructed to relevant ministries and agencies to proceed with full implementation of the SOE reform plan. The legal changes are expected to speed up the equitization process, which thus far has lagged considerably in terms of the reform plan’s first-year targets. Critical to this effort will be clarifying of guidelines for resolving bad debt and handling labor redundancies arising from individual SOE restructuring. The equitization process itself is expected to be strengthened by end year through the planned removal of caps on shareholdings in equitized SOEs by individuals and legal entities; in addition, the responsibility for issuing, selling, and registering shares is being removed from SOE management. The government is also committed to publishing a detailed roadmap of SOE reforms.

48. The legal and administrative framework is unclear and governance is a concern. As the authority of ministries and agencies and of central and local governments is often overlapping or ill-defined, government decrees issued by competing bodies at times are inconsistent, which invites selective interpretation and enforcement. New and amended laws often await implementation guidelines, which slows reforms. These problems tend to further complicate an already weak court system and lead to bureaucratic entanglements. The extent of corruption is thought to be widespread, raising the costs of doing business. Stronger institutions are needed that have clear cut authority to promote business development and to enforce the rule of law. Also, less discretion should be taken by the bureaucracy in implementing policies. In a recently finalized draft program for administrative reform (2001-10), the government notes that the biggest challenge to developing a clean, stable, and efficient administrative regime is to tackle longstanding problems of excess bureaucracy, red tape, and corruption. Under the reform program, plans are being formulated to streamline central and local government operations, strengthen personnel training and management, and more clearly delineate tasks and responsibilities, including on the issuance of legal and administrative directives.

Prepared by David Cowen.

This measurement comprises mainly the domestic private sector (household enterprises and farms and small and medium-sized enterprises). It also includes a portion of the mixed (i.e., joint ventures with ownership from more than one sector) and foreign invested sectors.

Staff estimates show total nonstatc investment declining from around 20 percent of GDP in 1996 to 14 percent in 1999, then rising to 16 percent in 2000. FDI is estimated to have fallen from 7½ percent of GDP in 1996 to 2½ percent in 1999 and 2000.

The original decree was approved in 1998.

Based on official estimates as of end 1998, loans to the nonstate sector by the state-owned commercial banks (SOCBs) were about three times those by the JSBs. However, they represented only about 40 percent of the SOCBs’ total outstanding loans, compared with 70 percent of the JSBs’ loans. More recent data broken down by type of borrower from each sector of the banking system are unavailable.

In 2000, nonstate bank credit and total bank credit expanded by 14¾ percent and 38 percent, respectively; during the first eight months of 2001, the trend continued, at 4½ percent and 14½ percent, respectively.

For overseas Vietnamese who invest in Vietnam under the Foreign Investment Law, the tax rate is 3 percent, and for a small class of foreign investors, the rate is 5 percent (see Summary of the Tax System).

The stock exchange has also floated several special treasury and bank bond issues.

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