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© 2006 International Monetary Fund
January 2006
IMF Country Report No. 06/22
Vietnam: 2005 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Vietnam
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2005 Article IV consultation with Vietnam, the following documents have been released and are included in this package:
the staff report for the 2005 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 17, 2005, with the officials of Vietnam on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 13, 2005. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff statement of October 7, 2005 updating information on recent developments.
A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its October 7, 2005 discussion of the staff report that concluded the Article IV consultation.
a statement by the Executive Director for Vietnam.
The document(s) listed below have been or will be separately released.
Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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INTERNATIONAL MONETARY FUND
VIETNAM
Staff Report for the 2005 Article IV Consultation
Prepared by the Staff Representatives for the 2005 Consultation with Vietnam
Approved by Masahiko Takeda and Mark Plant
September 13, 2005
A staff team visited Hanoi and Ho Chi Minh City during June 2–17, 2005 to conduct the 2005 Article IV Consultation discussions. The team comprised Mr. Molho (Head), Mmes. Baker (APD) and Al-Mashat (formerly APD) and Mr. Sakr (PDR), and was assisted by Mrs. Adams, Senior Resident Representative. Mr. Takeda (APD) joined the mission during June 13–14, and Ms. Phang (Executive Director) and Mr. Duong (OED) attended the concluding meetings.
In concluding the 2004 Article IV Consultation in November 2004, Directors noted the authorities’ success in achieving high growth and poverty reduction in recent years, and encouraged them to build on these achievements by stepping up key structural reforms in the state-owned commercial bank (SOCB) and state-owned enterprise (SOE) sectors. In addition, they cautioned that the high rate of credit growth should be reduced significantly, given the uncertain loan quality and banks’ weak balance sheets, as it could lead to mounting quasi-fiscal liabilities.
Weaknesses in the availability, timeliness, and quality of key data impede surveillance. While data provision is still adequate overall, staff’s analysis was affected by shortcomings in certain areas. At the time of the mission, monetary data and data on international reserves were available with a three-month lag. Important weaknesses also remain in the areas of public finance, the balance of payments, national accounts, and SOE and SOCB operations.
The authorities are currently working, in conjunction with LEG and MFD, to remove the three remaining exchange restrictions subject to Article VIII, sections 2, 3 and 4.
Contents
Executive Summary
I. Recent Economic Developments and Outlook
A. Economic Developments
B. Macroeconomic Outlook and Risks
II. Policy Issues
A. Monetary and Exchange Rates Policies
B. Fiscal Policy
C. Structural Reforms
D. Other Issues
III. Staff Appraisal
Boxes
1. Vietnam’s Garment Exports—Developments and Prospects
2. Monetary Policy in Vietnam—Challenges and Steps Ahead
3. Off-Budget Expenditure
Figures
1. Selected Economic Indicators, 1998-2005
2. Monetary and Financial Indicators, 1998-2005
3. Fiscal Sector Developments, 1998-2005
4. External Sector Background, 1998-2005
Tables
1. Social and Demographic Indicators
2. Selected Economic Indicators, 2000–05
3. Balance of Payments, 2000–05
4. Monetary Survey, 2000–05
5. Summary of General Government Budgetary Operations, 2000–05
6. Medium-Term Scenario, 2002–10
7. Indicators of External Vulnerability, 2000–05
8. Millennium Development Goals
Annexes
I. Fund Relations
II. Relations with the World Bank
III. Relations with the Asian Development Bank
IV. Statistical Issues
V. Debt Sustainability Analysis
Executive Summary
Background
Overall macroeconomic performance has remained strong since the conclusion of the last Article IV consultation. Despite slowing nonoil export growth, GDP growth was robust at about 7½ percent in the first half of 2005, and the current account has continued to be more than financed with ODA and FDI. However, inflation has remained high at about 7½ percent as of July, and the import cover of reserves remains low.
High credit growth in the context of weak bank balance sheets remains a cause for concern. Bank credit continued to grow at an annual rate of 40 percent as of April 2005, as the monetary effects of increases in the State Bank of Vietnam’s (SBV) policy rates have been mitigated by liquidity-injecting open market operations, and SOCB lending has continued to be aimed at helping to meet the government’s ambitious growth target of 8½ percent for 2005.
The overall fiscal deficit narrowed from 7.2 percent of GDP in 2003 to 4½ percent of GDP in 2004, but a growing program of off-budget operations has weakened fiscal transparency and heightened concerns about medium-term debt sustainability.
The government has recently taken steps to speed up structural reform. The SBV’s prudential standards were tightened in April, and banks were to provide accurate accounts by end-July to be used as a basis for their reform and recapitalization plans.
Key Issues and Staff Recommendations
The staff supports the SBV’s aim to significantly reduce credit growth. To meet this objective, all available instruments will need to be used in a concerted manner, and SOCBs should no longer be pressured to increase their lending to SOEs.
Part of the oil revenue windfall should be saved in 2005 and the overall fiscal deficit brought down to¾ percent of GDP over the medium term. The recently-augmented public investment program should be carefully reviewed and brought on budget, with emphasis placed on transparent fiscal accounting and investment quality over quantity.
The staff encourages the authorities to adopt a more flexible exchange rate policy.
SOCB reform remains key to public sector debt sustainability. Recently-adopted prudential regulations should be implemented strictly and without delay, and the SOCB reform plans finalized on the basis of reliable estimates of their capital shortfalls. Early action will also need to be taken to eliminate policy lending, improve SOCBs’ corporate governance, and strengthen the SBV’s independence and supervisory authority.
Improvements in the reliability, timeliness and dissemination of key data are urgently needed to enhance the quality of policy analysis and surveillance.
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October 7, 2005
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Public Information Notice (PIN) No. 06/5
FOR IMMEDIATE RELEASE
January 24, 2006
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
On October 7, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Vietnam.1
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October 7, 2005
