Vietnam
2003 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Vietnam
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
05 Dec 2003
eISBN:
9781451840193
Language:
English
Keywords:
ISCR; CR; SAV audit of the SBV; NIR position; authority; accounting firm; PRGF; headline inflation; debt service; broad money; state enterprise; SBV official; Credit; Commercial banks
Download PDF (2.5 MB)

Vietnam's macroeconomic performance has been strong, fueled by strong export performance, poverty reduction, and domestic investment. Executive Directors welcomed this development, and stressed the need for strong monetary, exchange rate, and fiscal policies. They appreciated the prudent macroeconomic management, and the transformation from a planned to a market economy. They welcomed the passage of the new Statistics Law, and Vietnam's participation in the IMF's General Data Dissemination System, and emphasized the need to implement public administration and structural reform programs.

Abstract

Vietnam's macroeconomic performance has been strong, fueled by strong export performance, poverty reduction, and domestic investment. Executive Directors welcomed this development, and stressed the need for strong monetary, exchange rate, and fiscal policies. They appreciated the prudent macroeconomic management, and the transformation from a planned to a market economy. They welcomed the passage of the new Statistics Law, and Vietnam's participation in the IMF's General Data Dissemination System, and emphasized the need to implement public administration and structural reform programs.

I. Introduction

1. Vietnam has experienced strong economic growth and impressive poverty reduction over the past decade, aided by favorable initial conditions (education levels, oil reserves), sound macroeconomic policies, political stability, and increasing engagement in the international economy. But annual income per capita is still under $500, and the country faces significant challenges in maintaining high growth over the medium term.

2. Discussions for the 2003 Article IV consultation focused on the adequacy of macroeconomic and key structural policies for maintaining strong growth performance. The Fund has been supporting the government’s economic program under a three-year PRGF arrangement that commenced in April 2001, a program that was further elaborated in the Comprehensive Poverty Reduction and Growth Strategy (CPRGS), completed in May 2002.1 The Article IV consultation provided the opportunity for a fresh look at key elements of the strategy—a chance to “check the engine” of the Vietnamese growth machine.

II. Background

3. Vietnam has experienced solid and sustained growth since it embarked on its “doi moi” reform program in the late-1980s. Agricultural sector liberalization provided a strong growth stimulus during the early years of the reform program, with FDI inflows providing a further boost in the period prior to the onset of the East Asian crisis. After a slowdown during the regional crisis, growth has picked up again, supported in recent years by impressive export performance.

uA01fig01

Vietnam: Real GDP Growth, 1990-2002

(In percent per annum)

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Source: Fund staff estimates.

4. Vietnam’s approach to transition from a planned economy has broadly followed that of China, with early liberalization of the agricultural sector being accompanied by more gradual transformation of the role of the state in the formal sector, notably industry and finance. Vietnam has not embarked on a broad-based privatization program, preferring to retain ownership of most large and medium-sized state enterprises (SOEs) while pursuing gradual “equitization” of smaller SOEs.2 Economic performance has been stronger than in transition economies that adopted “shock therapy” approaches, at least partly reflecting Vietnam’s limited industrialization and low income levels prior to transition.

uA01fig02

Real GDP per capita

(1990=100)

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Source: WEO and IMF staff estimates.1/ For china, the years 1980-1992.

5. Inflation was high during the early stages of the reform process, but has declined to modest levels in recent years. National plans envisage inflation on the order of 5 percent per annum, but consumer price inflation has been running below this since 1999.

uA01fig03

Vietnam: Annual Price Inflation, 1991-2003

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Source: Vietnamese authorities.

6. Sustained economic growth has allowed Vietnam to achieve impressive reductions in poverty levels in a relatively short period. The share of the population classified as poor (World Bank definition) declined from 58 percent in 1993 to 29 percent in 2002, among the fastest recorded declines in poverty rates in the last 30 years (Table 1, Figure 1). Land allocation to rural households provided a major boost to poverty alleviation in the first decade of reform, as has broad-based export expansion.

Table 1.

Vietnam: Social and Demographic Indicators

article image
Sources: Vietnam: Statistical Yearbook (various years), and General Statistical Office, Vietnam Living Standards Survey 1997-1998; World Bank: Vietnam Development Report 2000: Attacking Poverty, and Vietnam Development Report 2001: Entering the 21st Century, and World Development Indicators; and staff estimates.

Preliminary estimate provided by World Bank and Vietnamese authorities (CPRGSP).

The upper poverty line is constituted by the cost of a representative food bundle yielding 2,100 calories per day, plus a representative nonfood component. The lower poverty line represents the approximate cost of this food bundle only.

For 1993 and 1998, rural population.

Figure 1.
Figure 1.

Vietnam: Selected Economic Indicators

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Sources: Data provided by the Vietnamese authorities; World Dank; and Fund staff estimates.1/ Based on the June 2001 CPI weights.
uA01fig04

Vietnam: Share of Population in Poverty, 1993-2002

(In percent)

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Sources: CSO, Household and income survey, World Bank.

7. The role of the state sector in production is declining gradually, but still remains substantial. Private domestic ownership is the norm in the agricultural and retail sectors, but the SOE share in industrial production is still sizeable.3 The significance of foreign-invested enterprises (FIEs), typically joint ventures between a foreign partner and an SOE, has risen steadily over time, and they now contribute some 40 percent of industrial production and a quarter of non-oil exports.

uA01fig05

Vietnam: Share in Total Industrial Output by Ownership

(In percent; at current prices)

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Source: CSO Statistical year book; Fund staff estimates.

8. The financial system is becoming more market-based, but state-owned commercial banks (SOCBs) continue to play a dominant role. Interest rates are now largely liberalized, the exchange rate moves within a daily trading band set by the SBV, and policy-based lending is being shifted to specialized institutions. However, the banking system remains quite segmented and dominated by four large SOCBs, which hold some 75 percent of all deposits and are only gradually being transformed into profit-focused operations. As a result, key money markets are quite thin and underdeveloped, complicating the task of monetary management through indirect instruments; banks still closely follow SBV reference rates; and the SBV continues to play an important role in smoothing movements of the dong.

9. Vietnam’s integration with the international economy has increased significantly over the past decade, aided by substantial liberalization of imports, and looks set to increase further as trade-expanding measures (AFTA, the USBTA) take full effect Exports rose by some 21 percent annually in value terms during 1990–2002, with the export/GDP ratio increasing from 22 percent to 50 percent; the composition of merchandise exports has become significantly more diversified, as has the market destination of exports.4

uA01fig06

Vietnam: Structure of Merchandise Exports

(% of total exports)

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Source: Vietnamese authorities; Ministry of Trade.

10. Budgetary management has been generally cautious, with fiscal deficits (narrowly defined) maintained in the 0–3 percent range for the past decade and the government debt stock now at manageable levels. But quasi-fiscal activity, in the form of policy-based lending through the banking system, was significant for much of the period, contributing to sizeable loan portfolio problems for SOCBs.

11. The once-sizeable burden of external debt has fallen significantly over the past decade, aided by strong output growth and export expansion and a series of debt restructuring operations, most importantly with Russia in 2000. The bulk of external debt (some 80 percent) is public or publicly-guaranteed, mostly borrowed on concessional terms from multilateral or bilateral official creditors. Vietnam has received solid sovereign ratings from international credit rating agencies (BB-from S&P and Fitch, B1 from Moodys), but has not yet undertaken a sovereign bond issue.

Vietnam: Debt Profile

(In millions of US dollars, unless otherwise indicated)

article image
Source: Vietnam authorities; and IMF staff estimates.

III. Recent Developments

12. Macroeconomic performance has been strong over the past 18 months, fueled by export growth and domestic investment. Staff estimates suggest output growth near 6 percent in 2002, with slightly faster growth projected for 2003.5 Nonoil exports have provided an important stimulus, as producers responded to improved access to the US market under the USBTA.6 Investment has also been vigorous, with imports of machinery and equipment up 38 percent in 2002 and 40 percent in S1/03 and foreign direct investment reportedly rising by around 20 percent in 2002, albeit more slowly this year (Table 2).

Table 2.

Vietnam: Selected Economic Indicators, 1999–2003

article image
Sources: Data provided by the authorities; and staff estimates and projections.

Data as of June 30, unless otherwise indicated.

Fund staff estimates. Official estimates of GDP growth are 6.8 percent (2000). 6.8 percent (2001) and 7.0 percent (2002).

March 2003.

Excluding onlending and capital costs of reform.

May 2003.

Growth rates of cumulative exports and imports for the year so far, compared with the same period last year.

For monthly data, rate of growth based on imports c.i.f.; otherwise, based on imports f.o.b.

Includes the loan component of foreign direct investment and other private sector borrowing and short-term debt.

Vietnam: Key Macroeconomic Indicators, 2001-2003

(Percent change, unless noted otherwise)

article image
Sources: CSO; Fund staff estimates.

13. Inflation picked up during 2002, but has eased slightly in recent months. Headline inflation averaged some 4 percent during 2002, after two years of mild deflation, falling back to 3 percent as of July 2003. Non-food inflation shows a distinctive trend from the headline rate, but could ease in the coming months with slower depreciation of the dong and the easing of world oil prices.7

uA01fig07

Vietnam: Consumer Price Inflation, 2002-2003

(y-o-y percent change)

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Source: GSO.

14. Stronger growth has been accompanied by a sizeable deterioration in the external current account position, notwithstanding surging exports. The current account deficit is expected to be around 3½ percent of GDP in 2003, as compared with a surplus in 2001, financed through a combination of higher long-term capital inflows and a reversal of the previously strong buildup of foreign assets by the commercial banks (Table 3, Figure 2).

Table 3.

Vietnam: Balance of Payments, 2000–07

(In millions of U.S. dollars, unless otherwise indicated)

article image
Sources: Data provided by the Vietnamese authorities; and staff estimates and projections.

For 2002, including a debt buyback in which US$ 273 million was paid for US$500 million Russian debt at face value.

Foreign assets of the State-Bank of Vietnam (SBV) excluding Treasury Deposits at the SBV in foreign currency.

Gross official reserves excluding foreign liabilities of the SBV and foreign currency deposits of deposit-money banks at the SBV.

Figure 2.
Figure 2.

Vietnam: External Sector Background

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Sources: Data provided by the Vietnamese authorities; and Fund staff estimates.1/ Monthly data based on c.i.f. imports and exports.2/ Annual data based on f.o.b. imports and exports.3/ Estimated for June 2003, July 2003, and August 2003.

15. The SBV recorded a modest increase in its foreign reserves during 2002, followed by sharp growth in GIR during the first half of 2003. The jump in GIR this year reflects both sizeable intervention by the SBV and a large shift in foreign currency assets of the commercial banks from offshore to the SBV, at least partly reflecting a modest increase in the rate of remuneration paid by the SBV.

Vietnam: Official Reserves, 2002-2003

(In millions of U.S. dollars)

article image
Source: SBV.

As of end-June.

16. The monetary aggregates have been growing at a rapid pace, reflecting the pace of economic expansion, ongoing monetization of the economy, and strong credit demand. Broad money rose by some 18 percent in 2002 and the first months of 2003; credit growth continues at rates in excess of 20 percent per annum, with faster growth in credit to the non-SOE sector (30 percent) and in foreign currency credits (40 percent through April, from a low base). The SBV has adopted an accommodative stance, with the sizeable purchases of foreign currency during 2003 being largely unsterilized. Interest rates have shown little movement (Table 4, Figure 3).

Table 4.

Vietnam: Monetary Survey, 2000–2003 1/ 2/

article image
Sources: State Bank of Vietnam; and staff estimates and projections.

Currently comprising the State Bank of Vietnam (SBV), six state-owned commercial banks, and 78 nonstate-owned credit institutions.

Estimates at current exchange rates, unless indicated otherwise. The program exchange rate for 2001 is D 14,501 per U.S. dollar and for 2002 it is D 15,070 per U.S. dollar.

At program monitoring exchange rates.

Excludes nonnegotiable government bonds for recapitalization of SOCBs.

Figure 3.
Figure 3.

Vietnam: Monetary and Financial Indicators, 1998-2003

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Sources; Data provided by the Vietnamese authorities; and Fund staff estimates.1/ Monetary survey compromising of State Bank of Vietnam (SBV), four large state owned commercial bank (SOCBs), and 24 non-state banks.2/ Monetary survey compromising of SBV, four large and two small SOCBs, and 78 non-stats banks.3/ Adjusted for nonfood inflation.

17. The dong continues to depreciate slowly against the U.S. dollar, with the SBV intervening more heavily this year to prevent appreciation and build up reserves. The daily trading band within which the rate is allowed to fluctuate was widened to ± 0.25 percent in July 2002 (from ± 0.1 percent); realized daily movements have, in practice been much narrower than this, exceeding 0.1 percent only once during the past year. The SBV reduced the foreign exchange surrender requirement from 30 to 0 percent in April 2003.

uA01fig08

Vietnam: Exchange Rate Developments, 2000-2003

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Source: Vietnamese authorities; and staff estimates.

18. Budget performance in 2002 was strong, aided by good non-oil revenue collections and public sector wage restraint, with the core fiscal deficit amounting to 2 percent of GDP.8 Revenue collections to date suggest the higher tax/GDP ratio can be at least maintained in 2003, but a sizeable (38 percent) increase in civil service wages and pensions is putting some pressure on the expenditure side of the budget. Onlending operations are on a rising trend, and could reach 3 percent of GDP this year;9 extra-budgetary debt creation from reform costs (mainly SOCB recapitalization) could be around E percent of GDP (Table 5, Figure 4).

Table 5.

Vietnam: Summary of General Government Budgetary Operations, 1999-2004 1/

article image

Includes DAF operations.

Includes debt issues for bank recapitalization, SOE debt assumption, and saftey net costs.

Includes DAF debt.

Self-financed expenditures undertaken by government administrative units, which are excluded from the above budget presentation.

Staff estimate based on (i) current expenditure on education, training, health, and family planning and (ii) capital expenditure on education, training, health, and poverty-related projects in the agriculture, transportation, electricity, and water sectors.

Figure 4.
Figure 4.

Vietnam: Fiscal Sector Developments, 1998-2003

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Sources: Data provided by the Vietnamese authorities; and Fund staff estimates.

19. Important tax reform measures have been taken, or are underway. A tax package approved by the National Assembly in May 2003, effective January 2004, will reduce the number of VAT tax rates and exemptions, unify corporate tax rates and incentives for local firms and FIEs, and eliminate a tax on profit remittances by FIEs.10 Efforts to implement self assessment-based tax administration for large tax payers on a pilot basis are proceeding well, with ongoing TA support from FAD.

20. There has been progress in the areas of private sector development and trade policy reform. Registration of private firms has increased rapidly since the passage of the Enterprise Law in 2000, with strong growth in employment in small and medium-sized enterprises. Quantitative restrictions on imports were further scaled back in 2002, AFTA tariff reductions are proceeding as scheduled, and a wide-ranging trade agreement with the US took effect in December 2001.11

21. Reform implementation has proven more difficult in the state-controlled sector. The equitization program fell behind schedule in 2002 and 2003, and a revised roadmap for reform in 2003-05 has just been finalized. Limits on financial support to 200 significantly-indebted enterprises, agreed under the PRGF, were exceeded by a sizeable margin in 2002. The SOCBs have missed targets for NPL resolution during 2002–03, reflecting mainly the difficulties involved in SOE restructuring, and internal reform efforts at the banks are behind schedule (Box 1).

IV. Economic Outlook

22. The near-term economic outlook is favorable, with most observers expecting the solid performance of the last twelve months to be maintained into next year. Exports could be affected by quota and other restrictions in importing countries, but this should not derail the underlying momentum for export expansion.

23. The staff’s medium-term scenario envisages growth averaging 7 percent per annum, supported by continued strong export expansion (notably of manufactures) and investment. Inflation remains at modest levels (3-4 percent), while the real exchange rate, currently towards the lower end of the range in which it has moved since 1996, shows little change. The external position remains manageable, with current account deficits declining somewhat from the present level (3½ percent of GDP), and continuing to be financed by a mix of FDI inflows and medium-long term borrowings (still primarily ODA) (Table 6).

Table 6.

Vietnam: Medium-Term Macroeconomic Framework, 2000-2007 1/

(In percent of GDP, unless otherwise indicated)

article image

Staff estimates of national accounts.

Excluding onlending and capital costs of reform.

London Club rescheduling was concluded in 1998. Restructuring of the Russian debt was concluded in September 2000 on comparable terms to the 1993 Paris Club rescheduling.

Vietnam: Issues in Banking Reform

The banking system has been growing rapidly in recent years, and plays a dominant role in financial intermediation. The ratio of total bank credit to GDP rose from 19 percent in 1995 to near 45 percent in 2002, and there are now some 80 credit institutions, including some 26 foreign bank branches and over 30 semi-private joint-stock banks.

The banking system is segmented, consisting of (a) 4 large SOCBs that collectively account for three-quarters of bank credit and deposits, (b) a group of small private domestic banks and two smaller SOCBs that originally served niche markets, many of whom are now seeking to expand from a regional base, and (c) subsidiaries and branches of foreign banks, who are restricted in the range of activities they can undertake.

Vietnam - Banking Indicators

article image
Source: SBV.

March 2003.

The 4 SOCBs have weak balance sheets, reflecting the legacy of directed lending to state-supported projects. By end-2000, these banks had accumulated NPLs totaling D 23 trillion (on generous accounting standards), equivalent to about twice their capital, 5 percent of GDP, and 15 percent of all credit to the economy.

The authorities initiated a PRGF-supported banking reform program in early 2001, focused on strengthening the 4 SOCBs. The reform program envisaged: (i) phased recapitalization with public funds, conditional on banks’ meeting bank-specific operational and financial reform targets; (ii) the phasing out of directed lending; and (iii) improved accounting and disclosure standards.

Progress with implementation has been uneven, and sluggish in areas that directly affect SOCBs’ relation with SOEs. Resolution of uncollateralized NPLs (typically to SOEs) has stalled, reflecting delays in SOE restructuring and a lack of mandate for SOCBs to actively pursue loan workouts. The SBV has sought to move loan classification closer to international standards, subjected SOCBs to continued IAS audits, and adopted plans for phasing-in loan loss provisioning. But implementation of new loan classification standards has been problematic, and a plan to address key audit qualifications has not been carried out.

uA01fig09

Vietnam: Cumulative NPL resolution of four large SOCBs through 2003

(In billions of Dong)

Citation: IMF Staff Country Reports 2003, 380; 10.5089/9781451840193.002.A001

Source: SBV (Monitoring Unit) and SOCBs.

Despite mixed results, all SOCBs have received initial tranches of public recapitalization funds. To provide incentives for reform, staff has called for strict and transparent enforcement of eligibility criteria for recapitalization, focused on performance in improving lending practices and resolving NPLs. Work on new credit manuals at SOCBs is to be completed by end-year, with retraining of credit officers likely to be an important challenge. New guidelines for NPL resolution are needed to provide SOCBs with a clear mandate and more effective mechanisms, emphasizing time-bound resolution processes that are triggered by the banks and linked to SOE orperational restructuring.

24. Staff projections of public and external debt levels do not point to significant sustainability concerns in the base case. Public debt projections show a significant increase in debt levels during the next few years, reflecting sizeable onlending operations and debt-issuance in support of SOE/SOCB reform, but this burden can be handled if onlending is repaid and restructuring costs are contained at current (staff-projected) levels (Box 2, Annex V). External debt and debt service projections point to continued gradual decline in debt/GDP and debt service/export ratios,12 with conventional stress tests flagging sluggish export performance as a significant risk factor. The authorities have expressed a desire to exit formally from the HIPC initiative; a report assessing external debt sustainability is being prepared by IDA and IMF staff, and will be circulated to the Boards of the two institutions later this year.

25. This base case scenario of steady growth is subject to significant risks. Foremost among these is the risk of significant investment misallocation in the government-controlled financial intermediation process, impairing growth performance (through a higher ICOR) and the fiscal position (through bailout costs for SOEs and SOCBs). Commercially unsound lending decisions by the SOCBs or government lending institutions (notably the DAF) would be the key driver in this misallocation process—which, if sufficiently severe, would undermine the manageable fiscal scenario envisaged above. Vietnam’s still-partial transformation to a market economy, with potentially weak checks and balances on SOEs and SOCBs, leaves it particularly vulnerable to investment misallocation. It is difficult to quantify the current severity of this problem and how it is affecting the growth trajectory, given the poor quality of data on NPLs, SOE finances, and national accounts. The base case scenario assumes investment misallocation costs are significantly contained, looking ahead.13

26. Other significant risk factors to the growth outlook are: (a) a slowdown in private sector investment, both domestic and foreign, if weaknesses in the business climate, including infrastructure limitations and bureaucratic inefficiencies and excess regulation, are not adequately addressed; and (b) weaker-than-anticipated export demand, stemming from some mix of a weak global economic environment, intensified competition in export markets,14 or impaired market access conditions for Vietnam (a non-WTO member).

Vietnam: Public Debt Dynamics, 2002–2008

Gross debt of the general government is projected to increase from 36 percent of GDP in 2002 to about 51 percent of GDP in 2007, declining thereafter. The projection allows for a budget deficit of 2½ percent of GDP over the medium term, debt creation of some 7 percent of GDP to recapitalize SOCBs and restructure SOEs, and new lending via the DAF averaging 2½ percent of GDP annually.

Vietnam: Public Debt Dynamics

article image
Source: MoF, DAF, and Fund staff estimates.

Nominal value of onlending portfolio.

The main driver of gross debt stocks in this projection is lending by the DAF, through which ODA-financed onlending is routed and which also undertakes lending financed (outside the budgetary framework) by domestic borrowing. The budgetary burden of these lending operations will depend crucially on the quality of the lending and whether final borrowers can service their debts. With full repayment on post-2002 loans, DAF assets of some 12 percent of GDP in 2008 would fully service the corresponding debt; with zero repayment, this debt burden would fall fully on the budget.

The second determinant is the assumed cost of SOCB recapitalization and SOE restructuring, some 7 percent of GDP in these projections. Staff estimates of SOCB recapitalization costs are based on 2000 audits of the main SOCBs, plus assumptions on the pace (15 percent annually) and quality (5 percent loan loss provisioning) of new credit extension and a capital-adequacy target of 5 percent; estimates of SOE reform costs, such as for redundancy payments, are official estimates, made in 2001. With a doubling of SOE/SOCB reform costs, the peak in debt levels would exceed the baseline by some 6½ points of GDP.

The staff scenario assumes lending quality problems are significantly contained, ensuring that the pressures of maintaining a 2½ percent budget deficit are manageable; in “worse case scenarios”, where the budget has to finance the bulk of DAF debt service, and reform costs rise sharply because of bad loans (SOCBs) and soft budget constraints (SOEs), this assumption would not be tenable.

V. Policy Discussions

27. Against a backdrop of solid performance, discussions for the consultation focused on exploring potential weak links in the policy framework and identifying reform priorities for maintaining strong growth over the medium term. Officials were in broad agreement with the staff’s assessment of the medium-term outlook and the key risks identified, while arguing that the government’s reform program, already well underway, was addressing some of the key risks involved. Many key elements of the policy dialogue had also featured in the Article IV consultations in 2000 and 2001.

28. Officials were encouraged by the current strength of economic activity, which was broadly in line with targets for 2001–05 set by the National Assembly. Investment and exports were doing well; modest inflation was not a concern, and might be better than the mild deflation experienced in 2000–01. The strength of imports was something of a surprise, but partly reflected temporary effects such as big ticket import items and stock-building ahead of the conflict in Iraq. There was no serious concern about overheating at this juncture, but the balance of payments would need to be kept under review.

A. Fiscal Issues

29. Officials noted that implementation of the 2003 Budget was proceeding on track, and were confident that the budget deficit would not breach the target level of 2.8 percent of GDP. Revenues would come in somewhat above target, and the practice was that about half of any revenue overperformance would be allocated to capital expenditures and emergency relief outlays, with the remainder reflected in a lower deficit. Looking ahead, officials noted that preparation for Budget 2004 was in its early stages: continued revenue buoyancy seemed assured, given strong growth, but revenue projections would, as in the past, be conservative. Pressures for higher expenditures on education and health would need to be accommodated, but the aggregate thrust of fiscal policy, while still to be determined by the government, would likely be similar to that in the 2003 budget.

30. Staff pressed the case for setting annual budget targets within the context of a medium-term projection of the public finances. Illustrative projections of the public debt, factoring in onlending operations, the costs of SOE/SOCB reform, and a core budget deficit maintained at current levels of around 2½ percent of GDP, would yield a sizeable increase in the debt burden in the next few years. Staff argued that this would be manageable, and sustainable over the longer-term, if onlending was to financially sound projects (and hence repaid) and some of the costs of SOE/SOCB reform were recouped through eventual equitization. Officials agreed on the need to factor in reform costs into the fiscal picture, but were reluctant to revisit official estimates that staff now believe are outdated.

31. Staff pointed to pressures on budgetary revenues over the medium term, which would need to be addressed through adjustments in tax policy and administration. Oil revenues would decline in relation to GDP, economic activity would gradually shift from the SOE sector to the harder-to-tax private sector, and trade liberalization would adversely affect tariff revenues. Officials agreed that these factors would be important, but noted, as mitigating factors, that the oil production outlook for the next 15–20 years was quite robust and that the revenue impact of tariff reductions already committed in trade agreements should be modest. They underscored their commitment to strengthen tax administration and reduce tax evasion, including by promoting greater use of the banking system for transactions; and were seeking to press ahead with the implementation of the FAD-assisted self-assessment project for large taxpayers as an important tool to modernize tax administration. They also envisaged a gradual shift from direct to indirect taxation over time, and were currently seeking to flesh out a tax reform agenda for the period through 2010.

32. With government expenditures rising significantly in recent years, staff underscored the need to strengthen public expenditure management and press ahead with administrative reform.15 There was a pressing need for better integration of capital budgeting (done by MPI) and recurrent budgeting (done by MoF) and for systematic cost-benefit appraisal of investment projects, including their impact on poverty alleviation. Public administration reform, a master plan for which was approved in September 2001, needed to be pursued more vigorously, while further public sector wage increases, in the wake of the large increases granted in January, should be tied directly to administrative reforms and reduction in unnecessary personnel. Officials explained that the recent wage increases had been from low absolute levels, and had followed a period of some restraint; staff noted the upward drift in the budgetary wage bill over time, which had limited resource availability for other purposes.

33. Staff queried the upward trend in on-lending activity, a rising portion of which was now being undertaken outside the budget by the DAF. Officials explained the ODA-financed onlending was agreed in dialogue with ODA partners, and carried concessional terms. Servicing of DAF loans by debtors had generally been good, although many projects were still in grace periods. Staff underscored the need for DAF loans, the bulk of which go to SOEs, to be subject to rigorous cost-benefit analysis to limit future NPLs.

B. Monetary and Exchange Rate Policies

34. Monetary policy formulation faces sizeable challenges in Vietnam, given weak transmission mechanisms, macroeconomic data of uneven quality, and growing monetization of the economy. The SBV is tasked to provide broad support for the achievement of economic targets set by the National Assembly, rather than a more narrowly focused objective such as price stability.

35. SBV officials viewed maintenance of growth as a priority over the near term, with inflation expected to remain subdued as compared with the plan target of 5 percent. They viewed annual credit growth on the order of 25 percent as being appropriate in this context, with interest rate increases likely to impair growth.16

36. The staff accepted that inflation risks appeared modest in the near term, but needed to be kept under review given strong demand. An important concern was that the pace of credit expansion was overwhelming the banks’ ability to adequately evaluate credit risk. This created significant risks for the quality of loan portfolios of banks (state and private) that are still inexperienced at credit risk management.17 Comparison with other Asian countries during high growth periods supported the view that the pace of credit expansion in Vietnam was unusually high.

Vietnam: Credit Growth and Macroeconomic Performance: A Regional Comparison

article image
Sources: Fund staff estimates.

Based on WEO estimates of GDP at constant prices.

Based on WEO estimates of percentage change in CPI.

Real credit growth, Based on IFS Data.

37. The staff therefore called for some reining in of the pace of credit growth, through a combination of liquidity tightening and guidance to the main banks, focused on those with the weakest credit management skills. With foreign currency lending increasing rapidly, the SBV needed to closely monitor compliance with regulations limiting bank open positions and restricting foreign currency lending to projects with assured foreign currency receipts. SBV officials agreed on the need for vigorous supervision, but were more sanguine on the quality of bank lending.

38. Staff welcomed the liberalization of most interest rates by mid-2002, as an important step towards a market-based financial system. A priority now would be to develop money markets and reduce segmentation of the banking system, through the issuance on a regular basis of short-term treasury bills or the more active use of SBV paper as a liquidity management tool. SBV officials agreed that this would be desirable, but cautioned that it would take time, given the structure of the banking system and weaknesses in the payment system, and would need significant coordination with the MoF. They would welcome further TA from the Fund in this area, building on assistance provided in 2000.

39. The SBV remains committed to allowing gradual movement of the exchange rate, but has been taking advantage of the relative strength of the dong in 2003 to build reserves. Staff argued that the SBV could allow larger daily movements in the exchange rate without creating concerns about undue volatility; and should allow more movement in the rate over time, rather than adhering to a pre-determined rate of “crawl”. Staff underscored the merits of a flexible exchange rate in an economy undergoing structural change.

40. Staff welcomed the build-up in NIR in recent months, and saw merit in a further gradual buildup over time, at a minimum to maintain net reserve coverage vis-à-vis the rapidly growing annual import bill. The growth in bank deposits at the SBV, which had driven much of the recent surge in GIR, was less clearly beneficial, and suggested that the SBV was providing an overly high remuneration on these deposits. SBV officials agreed, and the SBV has since set the relevant interest rate at the level of the federal funds rate (a drop of 35 basis points).

C. Enterprise Sector Issues

41. The government’s strategy for promoting efficiency in the SOE sector is to equitize smaller ‘non-strategic’ enterprises and move towards more accountability and autonomous decision-making in strategic enterprises that remain within state control. This would result in a significant decline in the number of SOEs, while maintaining a strategic role for SOEs in the economy in the longer term.

42. Officials noted that the equitization program had been lagging behind schedule, reflecting difficulties in valuing enterprises (including resolving the debts they owe and the value of the land use rights they hold) and resistance from managers and other affected agencies and parties. They expected that the new SOE reform road map, which listed each firm targeted for equitization, would re-focus efforts, noting that MoF decrees provided guidelines for debt resolution and that land valuation issues were under discussion in the National Assembly. Staff expressed concern that the drawn-out process of equitization left many firms with uncertain futures and weak incentives to perform efficiently; and noted that the SOE debt resolution framework had significant weaknesses (Box 1).

43. Officials explained that the issue of improving governance in SOEs was under active debate, and a new law on SOEs would likely be approved by year-end. Public utilities would remain closely supervised by line ministries; economic enterprises would be granted greater autonomy, and would likely be converted into single owner limited liability companies with a Board of Directors and Management held responsible for performance, thereby improving accountability. The appropriate roles for holding companies (owning a cluster of SOEs), line ministries, and other agencies, was also being discussed. Staff argued that strong performance by SOEs would be best assured through simple channels of control and profit-focused mandates, hard budget constraints (including commercial-only access to credit), and explicit transparent accounting of any budgetary support.

44. Staff argued for reconsidering plans to retain SOEs in many sectors delegated to private enterprises in market economies, a strategy that could entail sizeable efficiency costs given weak governance structures. Consideration should be given to equitizing larger enterprises via the stock exchange and to bring in strategic equity partners to contribute capital, technology, and management skills. This could be conducted on a gradual basis, to acquire expertise in protecting state interests during sales processes.

45. Staff expressed concern at the limited data available on SOE finances, which itself reflected weaknesses in governance arrangements, and at the failure to use the monitoring system created under PRGF auspices to track bank debt and budget support for 200 large indebted SOEs as a tool for triggering tighter control over problem enterprises. MoF officials explained that the monitoring system had been established outside the existing bureaucratic processes, and had not received the requested external technical assistance; also, there were no mechanisms in place to force SOEs to limit credit demand.

46. Officials noted that many key impediments to development of the private sector, both domestic and foreign, had been removed over time, and there had been significant efforts to simplify bureaucratic procedures and regulations. Staff agreed that substantial progress had been made, notably with the passage of the 2000 Enterprise Law, but the formal domestic private sector was still very small and faced sizeable barriers in terms of access to land and capital and still-complex bureaucratic and licensing procedures. Reform priorities should include measures to: (a) improve the workings of the land market (completion of the issuance of land-use right certificates, maintenance of a registry of issuances and transfers), and (b) further scale back bureaucratic regulation and discretion (thereby reducing the burden of hidden costs and the scope for rent-seeking behavior by officials and businesses).

D. Banking Sector Issues18

47. The banking system is growing rapidly, with the bulk of funds still being intermediated through the major SOCBs. These banks face significant challenges in strengthening weak balance sheets and improving loan collections, while rapidly expanding their business operations.

48. Staff noted that efforts to modernize the SOCBs, and strengthen their credit, treasury, and risk management skills were showing some results, but that much work remained to be done. The process of drafting credit manuals was behind schedule; the quality of financial reports was poor, with uneven implementation of more realistic standards for loan classification and banks making little progress in removing the qualifications from the 2000 IAS audits. SBV officials agreed on the need for institutional strengthening of the SOCBs, but noted that it took time to transform large institutions and equip employees with new skills; technical assistance needs for upgrading credit manuals and processes, IT systems, and employee training were substantial, and remained largely unmet.

49. Staff argued that priority in SOCB reform efforts should be given to improving credit-making decisions, by ensuring that banks conduct adequate loan appraisal of new credits. Lending to long-standing SOE customers should not be automatic, nor should lending to government-endorsed projects that do not carry a formal guarantee. Officials agreed, noting that much had changed already in SOCB lending behavior and that banks no longer received, and were instructed to ignore, directions from officials to lend to particular enterprises. Staff argued that the SOCBs would need clear guidance in this regard if the lending culture were to be fully transformed.

50. Officials explained that policy-based (or directed) lending is now being channeled through specialist institutions, the Development Assistance Fund and the Social Policy Bank (SPB). Staff welcomed the clear institutional split between directed and commercial lending, but emphasized that: (a) interest subsidy mechanisms in policy-based lending should be transparent and routed through the state budget (as appears to be the case for the DAF); and (b) credit-worthiness and ability to repay should be given prime weight in lending decisions if the specialist institutions are to avoid insolvency.

51. Staff argued that efforts to resolve bad loans—to tidy up the past—needed to be strengthened, as progress had been slow. Previous missions had offered proposals on how to accelerate the resolution process for NPLs, emphasizing a time-bound process for resolving disputes where the SOE and its creditors cannot agree on a restructuring plan that ensures operational and financial viability. Officials saw merit in these proposals, but explained that the issue was under discussion within the government, with some questioning the merits of a pro-creditor shift in resolution mechanisms.

52. SBV officials and staff agreed fully on the importance of strengthening SBV supervision of the banking system, including shifting the focus of supervision from narrow compliance reviews to understanding and identifying risks in banks’ operations and the corrective measures needed. Officials stressed the SBV’s commitment to strengthen its capabilities in this area, but underscored the sizeable organizational and human resource challenges involved. They would strongly welcome TA from the Fund in this endeavor, with development of risk-based capital adequacy regulations being a current priority for the SBV.

E. Other Issues

53. Officials emphasized Vietnam’s commitment to achieve early membership in the WTO. Staff supported this objective, while noting that the government’s target for entry in 2005 was ambitious and would require concerted effort by many agencies within the government to implement the requisite reforms.19

54. Staff supported the recent abolition of the profit remittance taxes on FIEs, which constitutes an important step toward Vietnam’s acceptance of the obligations under Article VIII, Section 2, 3, and 4. The existing exchange restrictions maintained by Vietnam are described in Annex I, Section VIII. Staffs of MFD and LEG are currently conducting a comprehensive review of Vietnam’s exchange regime to clarify the remaining obstacles to acceptance of Article VIII obligations, and a mission is envisaged for later in the year.

55. Existing governance and regulatory structures, providing extensive discretionary powers to officials and enterprise managers, create opportunities for corrupt practices.20 Staff noted that the scope for abuses would be limited by pressing ahead with the public administration reform program, a key component of the CPRGS, and with further deregulation measures and enhanced transparency.

56. Vietnam’s statistical base has important weaknesses for surveillance purposes, notably in regard to the national income accounts, balance of payments, and enterprise statistics. Also, fiscal data need substantial improvement to allow monitoring of budgetary expenditure composition, extra-budgetary funds, and public debt levels. STA has been providing TA to help improve national accounts and price statistics; there has been reasonable progress, although efforts to strengthen price statistics have been impaired by staffing constraints in the GSO. The passage in May 2003 of a new Statistics Law, placing emphasis on improving data quality and ensuring wider accessibility to information, is an important measure for strengthening the statistical base.

57. Vietnam subscribed to GDDS in July 2002 but has not been formally recognized as a participant, pending provision of the metadata for review by STA. GSO officials noted the coordination challenges involved in getting the relevant agencies to complete the metadata, but hoped that this task would be completed in the next few months.

58. The SBV’s response to the staff questionnaire on AML issues is being reviewed by departments. The government is to issue a new anti-AML decree by end-year.

VI. The Status of the PRGF

59. The current PRGF arrangement, approved in April 2001, supports a reform program centered on sound macroeconomic policies, gradual reform of SOEs and SOCBs, and further deregulation of private sector activity and external trade. Discussions for the third review commenced in September 2002, but have not yet been completed.

60. Macroeconomic performance has been broadly in line with original program targets. While quantitative targets agreed during the second review were broadly complied with, targets relating to financial support for SOEs and NPL resolution were missed by substantial margins, the NDA target by a modest margin (Table 8).

Table 7.

Vietnam: Fund Position and Indicators of Fund Credit, 2002-07 1/

article image
Sources: International Monetary Fund, Finance Department; and staff projections.

Assumes disbursement of four remaining PRGF tranches in December 2003, May and November 2004, and May 2005.

Table 8.

Vietnam: Quantitative Performance Criteria and Indicative Targets for 2002 1/ 2/

article image
Sources: Vietnamese authorities; and staff estimates and projections.

The measurement and reporting requirements of indicative targets and performance criteria are described in the Annex II (Technical Memorandum of Understanding) of the Memorandum on Economic and Financial Policies of the Government of Vietnam for 2002.

Performance criteria for end-June 2002, and end-December 2002; and indicative target otherwise, except for (i) credit from the banking system and from the budget and budget support to 200 targeted large SOEs, which is an indicative target for end-June 2002, and end-December 2002; and (ii) external payments arrears, which is a continuous performance criterion through December 2002.

At program monitoring exchange rates.

Excludes non-negotiable government bonds for state-owned commercial bank reform.

Ministry of Finance estimate.

Represent outstanding arrears to Algeria; a rescheduling agreement is currently under discussion between the Vietnamese and Algerian authorities.

Actual performance measured on the basis of program monitoring exchange rates for non-U.S. dollar-denominated foreign assets and liabilities of the State Bank of Vietnam, as described in Annex II.

At program monitoring exchange rates for 2001.

Vietnam: Macroeconomic Performance Under the PRGF-Supported Program

article image
Sources: Fund staff estimates.

March 2001 (EBS/01/43)

61. Progress in implementing structural reforms has been uneven. Most structural policy undertakings for the third review are in place by now, but staff believe further actions are needed to bring NPL resolution back on track, to strengthen budget constraints on heavily-indebted SOEs, and to move forward the process of transforming the credit culture in the SOCBs (Table 9). Agreement is also needed on an appropriate pace for credit growth.

Table 9.

Vietnam: Structural Policy Undertakings for the Third PROF Review

article image

For definition of “resolve,” see the MEFP Annex on milestones for SOCBs (EBS/02/101).

62. In addition, agreement is needed on remedial measures that would bring Vietnam into compliance with the Fund’s safeguards policy. Staff is reviewing the formal response of the SBV to a draft safeguards assessment report (Box 3). A summary of the assessment will be made available to the Executive Board once the report has been finalized.

Vietnam: Background on the Safeguards Issue

A FIN mission conducted an on-site safeguards assessment of the SBV in September 2002. The mission identified important weaknesses in several areas covered under the safeguards framework, including the external audit mechanism, the financial reporting framework, and internal controls at the SBV, and called for substantial remedial measures.

The staff’s “phased approach” to addressing safeguards concerns was outlined to the Board during an informal country matters discussion on January 15. The approach was to entail:

  • A confidential review, by Fund staff, of the SBV’s (SBV) net international reserve position.

  • Fund-provided technical assistance to the State Audit of Vietnam (SAV) as it conducted its audit of the SBV’s 2002 financial statements.

  • The 2003 audit of the SBV to be conducted by the SAV, operating with a pairing arrangement with an international audit firm.

  • Publication of the SBV’s audited financial statements for 2003 and ensuing years, and adoption of a financial reporting framework for the SBV based on Vietnamese Accounting Standards, which are being brought into line with International Accounting Standards (IAS).

The Vietnamese authorities indicated that this “phased approach” was unacceptable because the NIR review would violate state secrecy laws, and the pairing of the SAV with an international audit firm would contradict the SBV law (specifying that the SBV is to be audited by the SAV). They agreed that there would be merit in adopting an IAS-based accounting framework for the SBV, although this would need agreement from the MoF (which determines accounting standards for government agencies); and agreed to publish the statutory audited financial statements beginning with the 2002 financial statements.

In an effort to accommodate the legal constraints, while ensuring compliance with the safeguards policy, staff proposed a “parallel approach” during the June 2003 mission, under which the SBV would follow two parallel tracks in its financial reporting as an interim arrangement. In addition to its obligations under existing laws, the SBV would:

  • Prepare internal financial statements on a full IAS basis, including explanatory notes, commencing with the 2003 financial statements;

  • Contract an independent international accounting firm to verify the internal financial statements under a special purpose engagement.

  • Publish its statutory audited financial statements, starting with the 2002 financial statements.

  • Provide the internal financial statements and the report of the independent accounting firm to IMF staff.

A draft safeguards assessment report was sent to the SBV following the mission; a response was received on August 15, 2003, and is now being reviewed. Staff will provide an update ahead of the Board meeting.

VII. Staff Appraisal

63. The Vietnamese economy is gradually being transformed, delivering rising living standards and rapid poverty reduction in the process. The track record to date has been encouraging but, as the authorities are aware, does not of itself guarantee future success.

64. Vietnam has opted for a gradual path of ownership transformation from a planned to a market economy, while also envisaging a sizeable role for the state in industry and finance over the longer-term. This approach may help maintain social and economic stability during a development process that will inevitably be lengthy—but it has important pitfalls if corporate governance in and commercial discipline on the state-controlled sector are weak, and scarce resources are misdirected.

65. Key challenges in sustaining growth are to ensure that the sizeable funds being intermediated through the government and government-controlled institutions are soundly allocated and that the business environment, which has been challenging for investors in the past, is fully supportive of private investment, domestic and foreign. Maintaining external market access will also be important, and WTO membership would provide valuable protections in this regard.

66. The near-term macroeconomic outlook appears favorable, with solid growth, modest inflation, and a manageable external position. But the rapid pace of credit growth raises important concerns about credit quality, and the associated risks that investment will be wasted and SOCB (and DAF) solvency will be impaired. Intensified supervision might be a sufficient response in a well-developed financial system; more direct restraint, including moral suasion and some liquidity tightening, seems appropriate in a Vietnamese context, combined with close monitoring of banks’ open positions and foreign currency lending.

67. The fiscal position appears manageable, provided the off-budget liabilities stemming from state-controlled financial intermediation are tightly controlled. There are medium-term risks to the revenue position, which will require a policy response that encompasses both tax policy reforms and enhanced administration. FAD technical assistance has been productive in the area of tax administration, and further assistance on tax policy design is also likely warranted.

68. Improving financial markets is a priority, with development of money markets and market infrastructure and commercialization of SOCBs being complementary instruments in this regard. Strengthened treasury operations in the SOCBs will promote market efficiency; deepening of the markets in short-term government paper (or SBV paper) will also be important in promoting alternative tools for liquidity management.

69. The exchange rate regime—formally, a managed float—is appropriate to Vietnam’s circumstances but can be implemented with greater flexibility, allowing more movement in the rate, both intra-day and over time. The SBV has been appropriately building reserves during the recent period of sizeable foreign exchange inflows, but should be moving more actively to sterilize the impact of its purchases on bank liquidity.

70. Policy for the SOE sector needs substantial fleshing out, with SOEs being given simpler channels of control, profit-focused mandates, and hard budget constraints. The current approach is characterized by multiple mandates and non-transparent structures of accountability, providing significant scope for unsound investment decisions and mismanagement. Equitization programs need re-thinking, with more emphasis being given to auction-based mechanisms rather than accounting-based mechanisms in determining enterprise valuations, following a clear determination of enterprise assets and liabilities.

71. Employment growth over the medium-term will rely heavily on private sector expansion, and hence a conducive environment for investors, both domestic and foreign. Strengthening the operation of key markets (notably for land), simplifying regulations, and reducing bureaucratic discretion are the priorities for improving the business environment – along with the provision of competitively-priced infrastructure services.

72. Financial intermediation is growing rapidly, primarily through the SOCBs and the DAF. As the gate-keeper of large volumes of resources, it is imperative that these state-controlled institutions conduct effective appraisal and financial assessment of the projects to which they are committing resources—thereby imposing hard budget constraints on borrowers and assuring their own long-term solvency. Transformation of the credit culture of the SOCBs is underway, but needs to be pushed ahead. Strengthening the oversight and supervisory capabilities of the SBV is an important supporting measure, and merits full support from providers of technical assistance.

73. Cleaning up the balance sheets of the SOCBs has made slow progress, and needs to be reinvigorated. Guidelines that would impose a time-bound process for agreeing on financial and operational restructuring of problem SOEs are needed.

74. Vietnam’s objective of early WTO membership is strategically sound and will help sustain growth over the medium-term, but will require substantial focused efforts to bring domestic regulations, practices, and laws into compliance with WTO practice. Acceptance of Article VIII obligations would be a welcome signal of the authorities’ commitment to integration into the international economy.

75. Improving governance in Vietnam will require vigorous implementation of the public administration reform program, coupled with further measures to simplify the regulatory environment and enhance the transparency of decision-making.

76. Passage of the new Statistics Law, emphasizing the principle of wider public accessibility of statistical information, is a welcome move, but will need to be supported with adequate resource provision and improved inter-agency coordination. Publication of more disaggregated data on fiscal operations, including extra-budgetary operations such as the DAF, is also warranted.

77. It is recommended that the next Article IV consultation with Vietnam be held in accordance with the provisions of Board Decision No. 12793-(02-76) approved on July 15, 2002.

Table 10.

Vietnam: Indicators of External Vulnerability, 1998-2003

article image
Sources: Vietnamese authorities, and Fund staff estimates and projections.

Excludes domestic debt and unguaranteed external debt of state-owned enterprises.

Restructuring of nonconvertible Russian debt was concluded in September 2000.

Starting in 2000, based on expanded monetary survey (currently comprising the State Bank of Vietnam (SBV) and 84 credit institutions); for previous periods, based on original monetary survey (SBV and 28 credit institutions).

May.

March.

April.

Foreign and foreign currency denominated assets minus foreign and foreign currency denominated liabilities.

Excludes errors and omissions.

Includes net external position of banking system and portfolio investment.

Official mid-rate, which comprises the previous day’s average interbank buying and selling rates.

Accrual basis.

ANNEX I Vietnam—Fund Relations

(As of April 30, 2003)

I. Membership Status: Joined 9/21/1956; Article XIV

II. General Resources Account:

article image

III. SDR Department:

article image

IV. Outstanding Purchases and Loans:

article image

V. Financial Arrangements:

article image

VI. Projected Obligations to Fund (in SDR Million; based on existing use of resources and present holdings of SDRs):

article image

VII. Safeguards Assessment:

Under the Fund’s safeguards assessment policy, the State Bank of Vietnam (SBV) is subject to a full safeguards assessment with respect to the PRGF arrangement, which was approved on April 13, 2001, and is scheduled to expire on April 12, 2004. An on-site assessment of the SBV was completed on September 20, 2002, following a previous off-site assessment that had concluded on preliminary remedial measures. The on-site assessment confirmed that high risks exist in almost all the areas under the safeguards framework. The proposed remedial measures and the alternatives offered have yet to be accepted by the Vietnamese authorities.

VIII. Exchange Rate Arrangement and Exchange Restrictions:

On February 25, 1999 the State Bank of Vietnam (SBV) revised the operation of the interbank foreign exchange market. Under this de facto managed floating regime, the SBV allows interbank foreign exchange market rates to fluctuate by a maximum of ±0.25 percent a day (effective July 2002) from the previous day’s average interbank market rate.

Vietnam currently maintains the following exchange restrictions subject to Fund jurisdiction under Article VIII: (i) a restriction arising from the limits on availability of foreign exchange for payments for imports of certain commodities, and (ii) a multiple currency practice arising from the tax on profit remittances by foreign investors.

IX. Article IV and XIV Consultations:

Vietnam is currently on a 24-month consultation cycle, subject to provisions of Board Decision No. 12794-(02-76) of July 15, 2002.

Vietnam continues to maintain restrictions on the making of payments and transfers for current international transactions under the transitional arrangements of Article XIV, Section 2, as described in EBS/01/184. The Fund encourages Vietnam to eliminate these restrictions as soon as circumstances permit.

X. Technical Assistance:

Missions:

  • Tax self-assessment pilot projects (FAD), June-July 2002, November-December 2002, March-April 2003, May 2003, and August 2003.

  • State-owned commercial bank (SOCB) restructuring (MFD), September 2002, November 2002, and June 2003.

  • National income accounts statistics (STA) November–December 2001, August-September 2002, and May-June 2003.

  • SOCB restructuring and foreign reserve management (MFD), August-September 2001.

  • Tax policy and administration reform (FAD), August 2001, February–March 2002, July 2002, November 2002, and May-June 2003.

  • Multisector statistics/GDDS (STA), July 2001.

  • Liquidity management and open market operations (MFD), August 2000.

  • Participation in Public Expenditure Review (FAD/APD), January 2000.

  • Monetary and exchange operations and markets (MFD), November 1999.

  • Tariff policy and customs administration reform (FAD) May 1999.

  • State-owned enterprise reform (World Bank/APD), April 1999.

  • Bank restructuring, banking supervision, and monetary and exchange reforms (MFD), March 1999.

  • Bank insolvency law reform (LEG), March 1999.

  • Tax policy (FAD), December 1998.

  • Banking system restructuring (World Bank/APD), October 1998.

  • Fiscal transparency (FAD), September 1998.

  • Banking system soundness, monetary and foreign exchange operations, banking supervision, and central bank accounting and auditing (MFD/APD), April–May 1998.

  • Money and banking statistics (STA), February–March 1998.

Resident Advisor:

Tax Computerization (FAD) through April 1998

XI. Resident Representative

Mrs. Susan Adams has been the Senior Resident Representative since August 2001.

ANNEX II Vietnam—World Bank-IMF Relations1

Partnership in Vietnam’s Development Strategy

The government of Vietnam’s development strategy is set forth in its Comprehensive Poverty Reduction and Growth Strategy (CPRGS). The CPRGS focuses on: (i) high growth through a transition to a market economy, (ii) an equitable, socially inclusive, and sustainable path of growth, and (iii) the adoption of a modern public administration, legal, and governance system. A Joint Staff Assessment of the CPRGS was discussed by the Boards of the IMF and the World Bank in June and July 2002, respectively.

The IMF is supporting Vietnam’s growth and poverty reduction efforts in the context of a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). The IMF has taken the lead in the policy dialogue on macroeconomic policies and has been active regarding a set of structural issues, especially on trade and banking reform and related SOE reform.

The World Bank has taken the lead in supporting the Government’s structural and institutional reforms in a number of sectors, and has backed the reform program through a series of Poverty Reduction Support Credit (PRSCs). The first PRSC, for US$250 million, included measures to: (i) liberalize foreign trade; (ii) restructure or divest SOEs; (iii) strengthen the banking system; (iv) create a better climate for the development of the domestic formal private sector; and (v) improve the efficiency, equity, and transparency of public spending. The final tranche was disbursed in December 2002. This PRSC was co-financed by the UK, Netherlands, Denmark, and Sweden.

The second PRSC, signed in August 2003, was broader in scope. It extended beyond the structural reform agenda and included measures related to socially inclusive development and to modern governance. This second PRSC translated the development vision of CPRGS into a series of concrete policy measures, and laid the foundation for a series of annual PRSCs, until the revision of CPRGS, currently expected in 2006. It also established a series of triggers to assess the pace of policy reform, and linked this to the size of subsequent budget-support operations. The second PRSC, for US$100 million, was co-financed by the UK, Netherlands and Sweden.

World Bank Group Strategy and Lending

The World Bank Group is combining all of its instruments of assistance to support the objectives laid out by the CPRGS. Those instruments include analytical and advisory activities, IDA project support, IFC, Mekong Project Development Facility (MPDF) and MIGA activities, a series of PRSCs, and partnerships and ODA coordination. A Country Assistance Strategy, presented to the World Bank Board in August 2002, sets out the planned support of the CPRGS objectives during the Bank’s FY03-05.

Support for Vietnam’s transition to a market economy will shift in focus from “design” to “implementation” of the policy reform agenda. The planned work will deal with financial sector development, the reform of SOEs, support for the domestic private sector, corporate governance, and private participation in infrastructure. IFC, MPDF, and MIGA will expand their work to improve the climate for domestic and foreign investment. Virtually all IDA credits will support policy, institutional and infrastructure support for Vietnam’s ongoing transition, with the planned series of PRSCs being used as vehicles for the policy dialogue.

Several priorities are identified by the CPRGS to enhance equitable, inclusive, and sustainable development. They refer to disadvantaged and lagging areas, to the living standards of ethnic minorities, to gender equality, to access and affordability of social services for the poor, to the mitigation of impacts from natural disasters, and to enhancing environmental management. The World Bank favors a sector-wide approach for two projects supporting this agenda, Rural Roads III and Education for All. Sectoral budget support requires significant progress in the preparation of medium term expenditure frameworks, as well as improved transparency and financial management.

Efforts to improve governance will focus on public financial management, information and transparency, and legal development. Major technical assistance will be provided by the World Bank in each of these areas, and IDA projects will be undertaken in Public Financial Management, Customs Modernization, e-Government and, if requested, Legal Development. So far, AsDB, UNDP, and a number of donors have taken the lead on public administration and civil service reform, whereas the World Bank plays the leading role in public financial management.

The scale of the lending program depends on the pace of the policy and institutional reform agendas, as well as on progress in project preparation and implementation. Over the next three years, the IDA program will range from less than US$300 million in the low case, to about US$760 million in the high case, with a base case of US$580 million per year. The IFC and MIGA programs are also expected to grow significantly as the investment climate improves. Today Vietnam is the largest IDA-only borrower, and the second largest user of IDA resources in the world after India.

In addition to its lending program, the World Bank will work in capacity-building and knowledge-sharing in key areas of emphasis. A complete set of core diagnostics was prepared, and new round of economic and sector work will be undertaken during the next few years. A Banking Sector Review was recently completed. A new household survey, the 2002 Vietnam Household Living Standards Survey, will serve as the basis for a Poverty Assessment in FY04. An integrated Public Expenditure Review will also be launched in FY04. Annual Vietnam Development Reports will summarize the accumulated knowledge and foster the policy and institutional reform agenda.

IMF-World Bank Collaboration in Specific Areas

Collaboration between the World Bank and the IMF was essential to launch the PRSC-PRGF program in 2001. The process leading to this program spanned four years, starting at the onset of the East Asian crisis. The overall framework for this collaboration was laid out in 1998, in preparation for what was then expected to be the second Structural Adjustment Credit for Vietnam. The lead agency in each policy area was identified in the Policy Framework Paper, and particularly in the Structural and Sectoral Policy Matrix for 1999-2001. The direct involvement of the IMF in some of the structural areas such as financial sector reform, SOE reform and trade reform was justified because of their potential impact on macroeconomic stability.

As a result of this overall framework, the World Bank supports policy reforms in collaboration with the IMF in several areas, including external debt management, financial sector reform, SOE reform, and public expenditure management. In some of these areas, the World Bank and the IMF have identified complementary sets of policy triggers for the PRSC and the PRGF programs respectively. In others, cooperation between the two institutions has taken place in the context of specific tasks, not directly related to lending.

Trade reform has been an integral part of the Government’s reform strategy, as evidenced by considerable trade liberalization through the 1990s. The World Bank has supported the following trade liberalization measures: (i) removal of quantitative restrictions on the imports a series of products; (ii) increases in the share of garment export quotas to be auctioned; (iii) further liberalization of rice exports; and (iv) reduction of tariffs on imports from ASEAN countries in the context of the ASEAN free trade agreement (AFTA). Progress in each of these areas has been achieved since early 2001. In parallel to these steps, the Government successfully completed a Bilateral Trade Agreement with the US and is currently aiming at securing accession to the WTO by 2005.

The PRSC-PRGF represented a breakthrough. It also led to a program with several atypical features, including initially retaining a relatively large share of the public sector in the economy, and a plan to restructure, rather than immediately privatize, large SOEs.

The World Bank has worked closely with the Ministry of Finance, the National Steering Committee on Enterprise Reform and Development and the Ministry of Labor, Invalids and Social Affairs in all areas of the SOE reform program. It has mobilized resources from various donors, especially in the area of transparency of SOE information and accountability. Among the measures being supported in this area are the monitoring of 200 highly indebted SOEs, the strengthening of recording and reporting of systematic data on SOE performance and a series of in-depth audits of SOEs in specific sectors. The World Bank plays a key role in the monitoring of ownership transformation (especially equitizations, sales and liquidations) and SOE creation. A series of diagnostic audits of large troubled enterprise groupings in four protected sectors are being implemented with the objective of assessing SOE viability. Restructuring three large General Corporations (SOE holding companies) in sectors where Vietnam has comparative advantage in world markets is also a priority. The design and implementation of the social safety net for redundant SOE workers has been an integral part of the World Bank’s work program.

In the area of public expenditure management, key remaining challenges include: (i) integrating formulation of the recurrent and capital budgets within a medium-term expenditure framework; (ii) improving budgetary data and increasing the transparency of data and information flows; and (iii) ensuring an effective process for prioritizing and reallocating public expenditures to improve sector outcomes, reduce poverty and limit the prospective increase in inequality. To meet these challenges, the Government launched the Public Financial Management Reform Initiative (PFMRI), a medium-term program for strengthening public financial management. This overarching program deals with reforms in five areas: public expenditure management (including state budget management, investment planning, and financial management information); public debt management; revenue management; SOE fiscal risk management; and public asset management.

The PFMRI is a Government-led initiative and donors are coordinating their financial and technical support for the program. The IMF takes the lead in revenue management while the World Bank takes the lead in public expenditure management. Currently, the IMF is providing technical assistance to help develop a comprehensive program for reforming the tax system and tax administration. The World Bank is leading the work in developing an integrated financial management information system, through a Public Financial Management credit for US$54 million, approved in May 2003. The credit also supports the preparation of medium-term expenditure frameworks in four sectors and four provinces, and the development of a database of public debts. The credit was co-financed by the UK.

Jointly with other donors, the World Bank is also supporting an effort to modernize planning and budgeting processes at the provincial level. This effort is part of a broader attempt by the Government of Vietnam to “roll out” CPRGS to the provinces. The goal of the exercise is for local policy makers to identify monitorable targets related to growth and poverty reduction, to align resources to the attainment of those targets, and to introduce mechanisms for consultation with the local population.

The World Bank, which has had a long-term role in the modernization of the financial sector, has taken the lead in the effort to strengthen the banking system. It has worked closely with the State Bank of Vietnam (SBV) who has been the primary government contact for the sector, but a relationship has also been maintained with the Ministry of Finance (MoF). Input has been provided by way of direct technical assistance and policy dialogue, with the aim of rationalizing the Joint Stock Banks, strengthening of State-Owned Commercial Banks (SOCBs), improving the supervision of the system, and modernizing the infrastructure for banking. The areas of work with the SOCBs have included the resolution of Non-Performing Loans (NPLs), provisioning for loan loss, re-capitalizing banks as they meet their restructuring targets, introducing internal auditing, and developing a viable payments system. Current efforts aim at improving the regulatory framework for policy lending, and at developing more effective mechanisms for NPL resolution.

The IMF has assumed responsibility for advising on the monetary policy functions of the SBV. It has also been directly and intensely involved in the central area of SOCB reform because of its fiscal and macroeconomic implications, in particular NPL resolution and the resulting recapitalization. Also included in this has been work on minimizing directed lending, interest rate liberalization and the process and timing of the recapitalization of SOCBs.

As a consequence of the many challenges facing the financial sector in its transition from a Government directed and managed system to a market-based one, assistance from the World Bank, IMF, AsDB, and other donors has been sought. The World Bank has led the effort of donor coordination in the financial sector. It hosts regular financial sector donor coordination meetings which have been recently supplemented by the IMF-hosted donor meetings specific to assistance to the SBV.

Thus far there has been cooperation and assistance between the two organizations. The conditionality of the PRSC and PRGF has been complementary. A single-voice approach has been taken on many difficult issues. Looking ahead, it will be important to avoid confusion and duplication. The resolution of NPLs, the operation of debts and assets trading companies, the recapitalization of the banking system and the regulatory framework for policy lending by the Government are all areas where continued collaboration is needed.

The IMF and the World Bank currently collaborate to strengthen the capacity of the General Statistics Office in the area of economic statistics. The IMF focuses on improving balance of payments, national accounts, and price statistics while the World Bank concentrates on issues related to the production of high-quality household and enterprise surveys, and to access to data.

ANNEX III Vietnam—Relations With the Asian Development Bank

The Asian Development Bank (AsDB) resumed its operations in Vietnam in October 1993. The new Country Strategy and Program (CSP), endorsed in January 2002, proposes a focus on four pillars to align AsDB operations in Vietnam to the overarching objective of poverty reduction: (i) sustainable growth through rural development and private sector development, with a focus on small and medium enterprise development; (ii) inclusive social development, by mainstreaming poverty, gender, and ethnic dimensions in AsDB operations, with an emphasis on human capital development through secondary education and health; (iii) good governance, with special emphasis on public administration and civil service reform; and (iv) geographic focus on the impoverished central region.

From October 1993 to September 2002, the AsDB approved 34 loans totaling about US$2.2 billion from the concessional Asian Development Fund (ADF) and US$40 million from Ordinary Capital Resources (OCR). Disbursements in 2001 totaled US$176 million, and in the first seven months of 2002, US$79 million. Since December 1998, Vietnam has been classified as a B-l country by the AsDB, which makes it eligible to supplement borrowing at ADF terms with limited amounts of borrowing at nonconcessional OCR terms. Loans have been provided for (i) rehabilitating physical infrastructure in the agricultural, energy, and transport sectors; (ii) financial sector and state-owned enterprise (SOE) reforms and corporate governance; and (iii) social, environmental, and cross-cutting concerns. In addition, the AsDB has extended technical assistance amounting to US$84.4 million for 124 projects.

Support for policy and structural reforms to improve public sector efficiency and to encourage the development of the private sector is a vital component of AsDB operations in Vietnam. So far, the AsDB has approved three policy-based program loans in the agricultural sector (US$80 million in 1994), the financial sector (US$90 million in 1996), and for SOE reform and corporate governance (US$100 million in 1999, of which US$40 million was from OCR). In addition to program lending, policy dialogue is an important feature in all of the AsDB’s loan projects in Vietnam. This includes support for increased efficiency of state-owned utilities through reforming their rate structure and other measures to increase cost recovery and to strengthen financial management, policy analysis, and planning.

The AsDB has been reorganized as of January 2002, and Vietnam now belongs to the Mekong Department, along with Cambodia, Laos, Myanmar, and Thailand. The resident mission has been strengthened and has been performing programming functions. During the past year, the AsDB has helped the government organize regional consultations and analyze Vietnam’s achievements against development targets in the areas of health and governance as part of the process of formulating the national poverty reduction and growth strategy. AsDB and Fund staff work closely together to support the process of economic reforms in Vietnam. AsDB staff participate in Fund missions, exchange information, and consult on policy matters. The resident missions of the two institutions also cooperate closely.

Table 1.

Vietnam: Public Sector Lending, by Sector, October 1993–September 2002

(In millions of U.S. dollars)

article image
Source: AsDB.
Table 2.

Vietnam: Loan Approvals and Disbursements, 1997–2002

(In millions of U.S. dollars)

article image
Source: AsDB.

As of September 30, 2002.

For 1999, includes the Vietnam component of Greater Mekong Subregion: East–West Corridor.

ANNEX IV Vietnam—Statistical Issues

The reliability and coverage of macroeconomic statistics have significant deficiencies. The methodology for compilation and dissemination of these statistics continues to need substantial improvement, so that data properly reflect economic developments and assist policy formulation, implementation, and monitoring. The authorities are cooperating with the Fund, but work is hampered in some areas by the lack of authorization to release data. Vietnam has few official statistical publications that provide coverage beyond the real sector. A Vietnam page was introduced in the GFS Yearbook in 1999 and in IFS in 2001.

Fund technical assistance has contributed to improvements in a number of statistical areas. Most recently, a STA multisector statistics/General Data Dissemination System (GDDS) mission in July 2001 reviewed statistical practices and developments in the areas of national accounts, prices, external trade, fiscal, monetary, balance of payments, and sociodemographic data. It found a number of deficiencies and recommended improvements in an action plan. A follow up STA mission took place in December 2001 to begin to address weaknesses in national accounts statistics (discussed below). The mission agreed on a program to improve national accounts and price statistics and a STA peripatetic expert has been assisting the GSO under a five-year project that commenced in January 2002. In November 2002, Vietnam nominated a GDDS coordinator and committed to use the GDDS as a framework to develop and improve the country’s statistical system. Nonetheless, STA has not yet received the required methodological descriptions (metadata) for posting on the DSBB, which would permit to formally recognize Vietnam as a GDDS participant. A follow up mission will be undertaken in May-June 2003 as part of a multiyear project to improve real sector statistics.

National accounts

The General Statistical Office (GSO) provides quarterly and annual data on gross domestic product (GDP) by type of economic activity and by expenditure (both in current and constant prices), and monthly and annual data on external trade, industrial output, agricultural production, retail sales, and prices. While the methodology for producing national accounts is broadly consistent with the System of National Accounts 1993, the compilation process suffers from poor data collection practices and a lack of coordination and communication between data collection agencies.

Estimates of GDP by expenditure have been produced since 1998, but they are in highly aggregated form, and further work is needed to develop a set of expenditure deflators. Although coverage has been broadened recently, the available evidence suggests that the level of GDP may be understated in the official statistics, and that the authorities need to focus on improving data collection from the nonstate sector (including non-observed activities), which remains quite weak. In addition, much of the data on national accounts are compiled before the end of the reference period, requiring data providers to resort to forecasting data in the remaining period in order to derive relevant estimates.

Under the current project the peripatetic expert will assist the GSO in the following areas: promoting the effective use of enterprise and economic census data in compiling the national accounts statistics; improving estimates of GDP at constant prices; improving estimates of household final consumption expenditure; improving estimates of quarterly GDP; further development of foreign trade and producer price indices; and developing wage indices. The consultant has noted steady progress by the GSO in these areas.

Prices

The GSO has compiled and published a monthly consumer price index (CPI) in line with international standards since January 1996. The new series was phased in over a two-year period and is now reported with minimal lags. Effective July 2001, the GSO changed the CPI to reflect a larger nonfood weight and broader consumption basket. The introduction of a producer price index was planned in late 2001, but has been delayed for technical reasons. Trade price indices are also compiled, but are not used in the national accounts by the GSO because the sample size is deemed too small.

Government finance statistics

The Ministry of Finance’s (MoF) State Budget Department produces provisional monthly, quarterly, and annual fiscal data on government operations shortly after the end of the reference period; final data for the fiscal (calendar) year are produced after an extended delay of about six months. These data reflect the consolidated operations of the state budget, which covers all four levels of government: central, provincial, district, and commune. They exclude data on quasi-fiscal activities of SOEs and extrabudgetary funds, among which are the Social Security Fund, Enterprise Restructuring Fund, National Development Support Fund, Export Support Fund, and Sinking Fund (for repayment of onlent funds), for which no regularly reported data are currently compiled.

The time of recording data is mainly on a cash basis for final annual data, but varies for provisional data depending on their source. As a result, government financing data, in particular domestic bank financing, cannot be reconciled as reported in the fiscal and monetary accounts. Like the national accounts, provisional data are compiled before the end of the reference period and thus involve a forecasted component. The quarterly data are only revised when data are compiled for the same quarter of the following year. The MoF’s External Finance Department maintains a centralized record of all general government external debt. The MoF, with support from the UNDP, aims to strengthen the external debt management system, particularly the recording of disbursements and multiple currency loans.

Despite these shortcomings, the authorities have made progress in a number of other areas related to fiscal transparency, including implementation of an improved budget management law and adoption of a 1986 GFS-consistent budget classification at all levels of government. The authorities published for the first time in late 1998 the fiscal outturn for 1997 and the approved budget for 1999, although both in highly aggregated form. Starting in late 2001, the MoF began posting annual budget outturns and plans on its external website, including by major revenue and expenditure items. However, considerable actions remain to be taken to improve the coverage of fiscal data as recommended in the 1998 Bank-Fund report on fiscal transparency, the 2000 Public Expenditure Review, and, most recently, the STA multisector statistics mission.

In this context, the government continues to work toward gazetteing and publishing the annual national budget, as well as having commune-level budgets, implementing the GFS-based functional budget classification system, initiating work on revising government accounting standards, and introducing an integrated financial management system (IFMS) for improving treasury management and fiscal reporting. The STA mission found that the functional classification had not yet been fully aligned with internationally recognized classification standards, which might hamper formulation, execution, and monitoring of fiscal policy. The IFMS will allow a detailed classification of provisional budget data (as well as final accounts). In addition, it will incorporate data on extrabudgetary funds into the Treasury database.

Monetary and financial statistics

The State Bank of Vietnam (SBV) regularly reports monetary and financial data to the Fund, including: (i) the monetary survey and the central bank balance sheet (both on a monthly basis and typically with a six-week lag); (ii) detailed consolidated balance sheets (“derivation tables”) for six state-owned and 78 nonstate deposit money banks and individual balance sheets for the four large state-owned commercial banks (SOCBs) (since the beginning of 2001 on a monthly basis and typically with an eight-week lag); and (iii) deposit and lending rates of the large SOCBs (on a monthly basis and for various maturities). Data on foreign reserves (gross and net official international reserves and net foreign assets of the banking system) are derived from the monetary survey. In addition, under the PRGF-supported program, data on official reserves are reported to the Fund at mid- and end-month with a 10-day lag.

In January 1999, the SBV and commercial banks began implementing new charts of accounts for compiling money and banking data, developed with STA assistance. The new charts of accounts were formally adopted in April 1999. However, they do not adequately sectorize credit for monetary programming purposes, in particular failing to distinguish between bank credit to state-owned enterprises (SOEs) and to other nonstate sectors of the economy. Therefore, in addition to its regular monthly reports, the SBV has designed a new monthly report form for the four large SOCBs for submitting sectorized credit data to the central bank. For program monitoring purposes, bank credit to the SOEs is being estimated based on a combination of these statistical reports and estimates for the other credit institutions. Given the SOCBs dominance in bank lending to SOEs, the overall margin of error of these estimates is believed to be below 5 percent. However, the STA mission in July 2001 encouraged the SBV to develop a reporting scheme for a comprehensive breakdown of banks’ credit to the economy by borrowing sectors, subsectors, and ownership of enterprises.

External sector statistics

The SBV compiles quarterly and annual balance of payments (BOP) data with a one- to two-month lag, although the data reported to the Fund for publication are less timely – the data published in the August 2003 issue of the IFS are for the third quarter of 2002. Since 1995, monthly and annual trade data have been compiled using customs reports, but the coverage and accuracy of these data need to be improved. In particular, the commodity breakdown of a large share of monthly reported exports (approximately 30 percent) is unknown. Published trade data, however, contain a number of adjustments to the customs reports, which have been difficult to reconcile, as the staff is only provided data at a relatively high level of aggregation. Data on invisibles continue to be based largely on banking records, which provide incomplete coverage and identification of the types of transactions. Improvements in BOP statistics, in particular foreign direct investment (FDI), also continue to be hampered by interagency coordination problems.

Data on FDI are now compiled by the SBV based on quarterly and semi-annual survey reports received from foreign-invested enterprises operating in Vietnam and supplemented by reports from SBV branches. The Ministry of Planning and Investment (MPI) also collects administrative data on FDI. However, at the September 2000 ASEAN Workshop on Improving the Quality of FDI Data, the Vietnamese authorities indicated that problems persisted with the survey response rate, as not all FDI enterprises were providing the requested information. Moreover, the 2001 STA GDDS mission noted that no effort was made to distinguish head office and other nonresident liabilities in the reported data.

Data on contracting of commercial debt (by SOEs and privately owned firms) are maintained by the SBV. Some loans are reported only after an extended delay, and the reporting of disbursements and repayments remains poor. Data on contracting, disbursement, and service of official debt are maintained by the MoF. The MPI also reports the loan obligations of foreign investors. The STA mission found that the overlapping responsibility for debt statistics has at times resulted in some deficiencies in coverage, including the lack of monitoring certain leasing arrangements (e.g., for aircraft).

Vietnam: Core Statistical Indicators 1/

(As of July 31, 2003)

article image

The codes are as given below:

Frequency of data and reporting: D-daily, M-monthly, Q-quarterly, A-annual, O-irregular (when changed).

Source of data: A-direct reporting by the authorities, C-commercial electronic data provider, N-official publication.

Mode of reporting: E-electronic data transfer, C-cable or facsimile, V-irregularly in conjunction with staff visits.

Confidentiality: A-staff only, B-staff and Board, C-public.

Frequency of publication: D-daily, M-monthly, Q-quarterly, A-annual, O-irregular, N-not published.

Initial source is commercial electronic data provider, which is later verified by direct reporting by the authorities

ANNEX V Vietnam—Debt Sustainability Analysis

1. Under the baseline scenario public debt would increase from some 35½ percent of GDP in 2002 to 51 percent of GDP in 2007 and fall thereafter.1 The exercise assumes (i) a budget deficit at current levels of 2½ percent over the medium to long term, (ii) the recognition of SOCB/SOE contingent liabilities equivalent to some 10 percent of 2003 GDP, and (iii) onlending to private and state-owned enterprises, including DAF’s off-budget onlending activities. The core budget deficit and the bulk of reform costs are envisaged to be increasingly funded domestically, with the share of foreign debt in total public debt decreasing from ¾ to ½ between 2002 and 2007.

2. The pronounced increase in the debt level is mainly driven by onlending and SOE/SOCB reform costs; excluding onlending, the debt level would peak at 41 percent of GDP in 2005. Abstracting from liabilities created by onlending may be warranted on the grounds that, if undertaken prudently, they would create assets of about equal magnitude. Conventional stress tests point to significant risks to debt sustainability: permanent shocks like a slump in growth (stress test 4) or the oil price (stress test 8) without any corrective actions would yield a surge in the debt-to-GDP ratio by 2015. Risks from poor-quality lending decisions by the DAF and SOCB, are discussed in Box 2.

3. Vietnam’s external debt level is deemed sustainable under the baseline scenario, with a steadily declining trajectory envisaged over the medium term. As of end 2002, it is estimated that Vietnam’s external debt is around 38 percent of GDP, or a NPV of external debt to exports ratio of 49 percent. These ratios are projected to decline gradually to about 32 and 37 percent, respectively, by 2007. The external debt build-up over the medium term is mainly contributed by a sizable external trade deficit, a large part of which, however, is envisaged to be offset by strong net current transfers (i.e., private remittances). The debt accumulation is also expected to be mitigated by sustained net FDI inflows.

4. Risk factors that would produce at least a transitory increase in the debt and debt service ratios include: (a) a sharp slowdown in export growth (stress test 2) or large deterioration in the current account position (stress test 3); and (b) a sizeable real exchange rate depreciation (stress test 5) – but the debt levels recorded by 2007 in these scenarios are not unmanageable by comparison with 2002 levels.

Vietnam: External Debt Sustainability Framework 1/

(in percent of GDP, unless otherwise indicated)

article image
Source: Authorities; and staff estimates, projections and simulations.

Includes both public and private sector debt.

Based, on three-year backward-looking average of exports of goods and services.

Derived as [r - g - ρ (1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S. dollar terms.

Includes change in arrears, exceptional financing, change in gross foreign assets, and valuation adjustments.

Based on three-year backward-looking average of exports of goods and services.

Historical averages are for period 1997-2002.

Based on current year exports of goods and services.

Historical averages and standard deviations are for the period of 1997-2002.

Vietnam: General Government Debt Sustainability Framework, 2002-2015

(In percent of GDP, unless otherwise indicated)

article image

Debt is defined as general government gross debt.

Derived as rd/ (l+g), where r = average real interest rate, d = previous period debt ratio, and g = real GDP growth rate.

Derived as -gd/ (1+g), where the variables are defined as in footnote 2.

Derived as aed (l +rf), where a = the share of debt denominated in foreign currency in the previous period and c = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar) and other variables are defined as in footnote 2.

Derived as nominal interest expenditure divided by previous period debt stock.

Derived as r = (i -π)/(l+π), where i = the nominal interest rate and π = the inflation rate.

Real depreciation is defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
1

A CPRGS progress report is being prepared for presentation to a Consultative Group meeting in December.

2

Equitization involves sale of state capital in an enterprise at prices based on book value of assets, with preferential terms for managers and employees of the enterprise.

3

Background papers examine the role of the state in production and the reform program for SOEs.

4

The trade regime and export performance are discussed in a background paper.

5

National accounts data have significant limitations; GDP growth numbers are staff estimates.

6

The extension of MFN status to Vietnam under the BTA, effective December 2001, is estimated to have yielded a drop in average US tariffs on Vietnamese imports from 40 percent to about 4 percent.

7

The background papers include an analysis of inflation dynamics.

8

The budgetary accounting structure employed by the staff is laid out in Table 5; the core fiscal deficit does not include onlending operations.

9

Onlending takes two forms: ODA-funded onlending to projects, recorded in the budget and administered by the Development Assistance Fund (DAF), and domestically-funded lending to projects, not recorded in the budget and financed and approved by the DAF.

10

Revenue mobilization issues are reviewed in a background paper.

11

There are still significant restrictions stemming from bans on selected imports and limitations on trading rights.

12

Debt service to the Fund would remain at modest levels (Table 7).

13

See Box 2 for discussion of key assumptions.

14

The elimination of quotas in 2005 under the WTO Agreement on Textiles and Clothing may create difficulties for Vietnam, given the likelihood of intensified competition in key markets. Vietnam aims to join the WTO in 2005.

15

See World Bank, Vietnam Development Report 2003, Chapters 12–14, for further discussion.

16

The SBV has since reduced its refinancing rate from 6 percent to 5 percent.

17

Data on the sectoral breakdown of credit is not available.

18

Banking sector issues are reviewed in a background paper.

19

At the sixth WTO Working Party meeting on Vietnam in May 2003, the chairperson noted that there would need to be a “quantum jump” in efforts if Vietnam were to meet its goal of joining by 2005. Areas where WTO members are seeking reform include technical barriers to trade, customs valuation, intellectual property protection, and investment policies and subsidies.

20

A donor-assisted study of corruption and how it can be minimized is now underway, but will take time to complete and yield conclusions.

1

Contact person: Mr. Vipul Tandon (202-473-1903).

1

Public debt is defined on a gross basis and excludes direct or government guaranteed debt by SOEs. It includes extra-budgetary borrowing by the DAF and costs of SOE/SOCB reform.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Vietnam: 2003 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Vietnam
Author:
International Monetary Fund
Volume/Issue:
Volume 2003: Issue 380
Publisher:
International Monetary Fund
ISBN:
9781451840193
ISSN:
1934-7685
Pages:
70
DOI:
https://doi.org/10.5089/9781451840193.002

Vietnam: Real GDP Growth, 1990-2002

(In percent per annum)

Real GDP per capita

(1990=100)

Vietnam: Annual Price Inflation, 1991-2003
Figure 1.

Vietnam: Selected Economic Indicators

Vietnam: Share of Population in Poverty, 1993-2002

(In percent)

Vietnam: Share in Total Industrial Output by Ownership

(In percent; at current prices)

Vietnam: Structure of Merchandise Exports

(% of total exports)

Vietnam: Consumer Price Inflation, 2002-2003

(y-o-y percent change)
Figure 2.

Vietnam: External Sector Background
Figure 3.

Vietnam: Monetary and Financial Indicators, 1998-2003

Vietnam: Exchange Rate Developments, 2000-2003
Figure 4.

Vietnam: Fiscal Sector Developments, 1998-2003

Vietnam: Cumulative NPL resolution of four large SOCBs through 2003

(In billions of Dong)