Overall, macroeconomic performance has remained strong since the conclusion of the last Article IV Consultation. The authorities have introduced market-opening legislation in line with WTO requirements, but state-owned commercial banks (SOCBs) and state-owned enterprise (SOE) reforms remained uneven. The short-term outlook is broadly positive, but medium-term prospects are subject to risks. IMF staff supports the State Bank of Vietnam’s (SBV’s) plan to establish a more flexible exchange rate regime. The balance of payments has remained in surplus.
The information provided below has become available since the issuance of the staff report. The thrust of the staff appraisal remains unchanged.
1. On October 9, the Government of Vietnam issued the action plan to implement the Socio-Economic Development Plan (SEDP) for 2006–2010. The new SEDP, which is also the government's new Poverty Reduction Strategy Paper, will soon be issued to the Board, together with a Joint Staff Advisory Note, for information.
2. Real GDP is estimated to have risen by 7.8 percent (year-on-year (yoy)) during the first nine months of 2006, in line with the staff report's projections. While inflation declined to 6.9 percent (yoy) as of September, and the pass-through of recent decreases in international oil prices should serve to moderate cost-push pressures in the short run, average inflation is still projected at around 7½ percent in 2006. The coming into effect of the increase in the common minimum wage (by 28½ percent) on October 1, 2006, together with strong seasonal demand and a possible pick-up in credit growth (see below), can be expected to restrain the disinflationary impact of falling oil prices in the period ahead. Gasoline prices have been reduced in two steps by a cumulative 12½ percent since end-August, compared with a 20 percent decline in international oil prices. As the profit margins of oil traders were restored, import tariffs on gasoline, which had been reduced from 5 percent to zero in April 2006, were reinstated in late-August and have since been raised to 20 percent. The domestic prices of diesel and kerosene, which had not been fully adjusted to reflect the earlier increases in world prices, have remained unchanged, and applicable import tariffs kept at zero. Following the recent decline in international oil prices, the subsidy element has been largely eliminated.
3. The revised outlook for oil prices implies a significant reduction in the oil revenue windfall for the budget. Oil revenues under the new WEO oil price baseline are now projected to fall short of the staff report's projections by 0.5–1 percent of GDP over the medium term. During 2006-07, the net effect on the fiscal balance should be largely offset by a faster-than-projected decline in subsidies to oil traders, together with the increase in import duty receipts resulting from the above-mentioned reinstatement of gasoline import tariffs. The overall deficit is now projected to increase by 0.1 and 0.3 percent in 2006 and 2007 respectively, compared to the staff report's projections. However, the increase in the deficit could be a little higher (0.6–0.7 percent of GDP) in 2008–10 (since the authorities' announced plan to eliminate oil subsidies by 2008 were already factored into the staff's baseline scenario). These developments reinforce the need for measures to rein in the growth of public expenditure, so as to save a good part of the oil revenue windfall.
4. The growth of credit to the economy edged down to 21.3 percent (yoy) in July, but the recent pattern of slowing credit growth may be difficult to sustain in the period ahead. The growth of credit extended by state-owned commercial banks (SOCBs) fell to 13.4 percent (yoy) in July, more than offsetting a pick-up in the growth of lending by joint-stock banks (to 40.8 percent). While the State Bank of Vietnam (SBV) has kept its policy rates unchanged, open market operations (OMO) rates have fallen to 1–1½ percent in recent months, as excess bank liquidity was boosted by a further increase in official reserves—to US$11.2 billion as of end-August. Following recent instructions from the Prime Minister, the SBV Governor issued several official letters in August and September, which instructed SOCBs to provide financing for a number of large SOE projects without requiring project evaluation. In addition, the SBV has provided SOCBs with exemptions from the single-borrower limit of 15 percent of equity for lending to selected SOEs. While data on the size and likely phasing of the new SOCB loans are not available, their aggregate amount could be significant, and could lead to a pick-up in credit growth in the coming months.
5. On the structural front, continued progress has been made towards strengthening the regulatory and legal framework, and the authorities have announced plans to step up market-oriented reforms in the period ahead. In the banking system, SOCBs have been required to conduct annual audits in accordance with International Accounting Standards, with their first such reports for 2005 to be submitted to the SBV by October 31, 2006, and their equitization is to be completed on an accelerated schedule by 2008. On October 17, in his opening statement to the National Assembly's fall session, the Prime Minister indicated that the government will reduce its intervention in pricing in 2007, including by liberalizing the prices of cement, steel and fertilizer and reducing state subsidies for petroleum, coal and electricity production and trading. The Prime Minister also reiterated the government's plan to restructure all SOEs, including by allowing most of them to be partly equitized during 2006–2010. As regards the legal framework, all implementing decrees for the Unified Enterprise Law and the Common Investment Law were issued in August and September 2006, with a view to complying with Vietnam's WTO agreements. The government has also established an inter-agency task force to address potential difficulties in implementation, which could arise from possible inconsistencies between the two laws and the implementing regulations.
6. The 14th session of multilateral negotiations on Vietnam's accession to the WTO was completed on October 10, 2006. The working party on Vietnam will meet again on October 26 in Geneva to address any outstanding issues. If all goes smoothly, agreement on Vietnam's WTO membership could be finalized in time for accession by the end of this year.