1. This statement provides an update on economic and policy developments since the issuance of the staff report. These developments do not change the thrust of the staff appraisal.

Macroeconomic Developments

2. Recent macroeconomic indicators point to continued strong growth and modest inflation, in line with projections in the staff report. Industrial production during the first eight months of the year was up 16 percent on 2002 levels. Twelve-month inflation through September amounted to 2.7 percent, down from 3.0 percent through July on the basis of favorable food price trends. Exports and imports continue to record strong growth (28 and 33 percent, respectively, year-on-year, during January-August), but at a somewhat slower pace than in the first half of the year.

3. The strong pace of credit growth continues, with the annual growth of 27 percent through end-July being somewhat above the SBV’s full-year target of 25 percent. Lower reserve requirements, effective August 1, and ample banking system liquidity suggest credit growth will remain strong in the coming months.

4. Net international reserves (NIR) have risen further in recent months, by some $0.5 billion between end-June and mid-September, reflecting continued purchases of foreign exchange by the State Bank of Vietnam (SBV). Gross official reserves fell by some $0.4 billion over the period, with banks reversing the large run-up in their foreign currency deposits at the SBV recorded during the first half of the year, but, at $5.2 billion (9½ weeks of imports), are still up some $1.5 billion since end-2002. The dong has depreciated marginally, by some 0.3 percent, vis-à-vis the U.S. dollar since end-June.

Safeguards Assessment

5. The safeguards assessment of the SBV, flagged in Box 3 of the staff report, is in the process of being finalized. It concludes that the SBV does not meet the requirements of the safeguards policy in several areas: (a) it does not prepare its financial statements in accordance with an established accounting framework, such as International Accounting Standards (IAS); (b) it does not have these financial statements audited independently in accordance with international standards; and (c) it does not publish these audited financial statements. Instead, the SBV prepares cash-based statutory accounts, which follow Vietnam’s state budgetary accounting rules, are audited by the State Audit of Vietnam (SAV), and are unpublished.

6. The remedial measures proposed in the safeguards assessment report are consistent with the “parallel approach” proposed by staff during the Article IV consultation mission, and reflect staff efforts to respond to concerns previously raised by the authorities (see Box 3 of the staff report). Specifically, the SBV should (a) prepare internal financial statements in accordance with IAS, commencing with the 2003 financial year, have these statements audited by an independent international accounting firm under a special purpose engagement, and provide these statements and the report of the accounting firm to Fund staff; and (b) publish its statutory accounts, beginning with the 2002 financial statements, in accordance with an existing commitment under the PRGF arrangement.

7. The authorities have responded that these recommendations cannot be implemented because they run counter to Vietnam’s prevailing legal framework, in particular the legal constraint that only the SAV can audit the SBV. The authorities argue that the existing audit and control arrangements for the SBV are appropriate and adequate, and that the SAV audit of the SBV is an external audit undertaken in accordance with international standards and without interference from the executive agencies of the government.

8. Staff are continuing to discuss with the authorities possible approaches to resolving the current impasse, so as to be able to move ahead with the third review of the PRGF arrangement. An approach being considered, which would not involve an audit by an international accounting firm, would entail: an interim package of measures to improve the quality and transparency of the SAV audit of the SBV; a review of the SBV’s NIR position by Fund staff prior to the completion of the third review; and ongoing dialogue on safeguards issues in future reviews. As part of this approach, the authorities would commit to retain future PRGF disbursements in their SDR account at the Fund until the Fund determines that the safeguards framework has been sufficiently strengthened to warrant eliminating this commitment.

Other

9. Vietnam has begun participating in the Fund’s General Data Dissemination System (GDDS), marking a significant step forward in the development of Vietnam’s statistical base. Comprehensive information on its statistical production and dissemination practices were published on the Dissemination Standards Bulletin Board on September 30, 2003.