Mid-Year Consultative Group Meeting for VietnamStatement by Susan J. Adams
Senior Resident Representative, IMF Hanoi Office
Ho Chi Minh City, May 23-24, 2002
1. The IMF is pleased to report on the status of Vietnam's progress in implementing its reform program, with the support of a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). In November 2001, the IMF Executive Board completed the first semi-annual review under this arrangement, and disbursed the second tranche of the program in December. Two missions have visited Hanoi, in March and May, to assess progress for a second PRGF review, and discussions are continuing. Against this background, this statement summarizes the current situation under the PRGF-supported program, the macroeconomic outlook, and the upcoming challenges.
Achievements under the PRGF
2. Under the first year PRGF, Vietnam's economic performance was relatively strong and in line with program expectations, despite weak external demand.
Real GDP growth slowed in 2001 only slightly to 5 percent, due to robust domestic demand, particularly private investment, as business sentiment picked up.
Inflation was very low, with nonfood prices virtually unchanged during the year.
Export growth (in U.S. dollar terms) fell sharply to 4 percent (from an average of 24 percent the previous two years), owing to weak manufactured exports and depressed non-oil commodity prices. Nonetheless, the external current account remained in surplus, at 2¼ percent of GDP, as imports also slowed.
3. The Fiscal stance was more expansionary than envisaged, with the overall budget deficit (excluding onlending) estimated at 3.5 percent of GDP, compared with the target of 2.9 percent. Revenue performance was nearly as expected, but expenditure overruns were due to higher-than-programmed spending on the civil service wage bill and war veterans' pensions. Social and infrastructure spending increased in line with program expectations, with annual outlays for education and health increasing by about one-half percent of GDP.
4. Credit policy remained broadly restrained as expected; nevertheless, several performance criteria related to monetary policy targets were missed at end-December. Owing to a further moderation in credit growth as programmed in 2002, the March monetary aggregates were closer to program benchmarks.
5. Exchange rate management was flexible during most of 2001.However, the exchange rate was largely unchanged in December when exports were falling, and the program criterion on net international reserves was missed.
6. On the structural front, progress has been better than programmed in liberalizing the trade regime and promoting private sector development. Banking reform has stayed broadly on course, but delays have been experienced in state-owned enterprise (SOE) reform. The recent approval of guidelines for SOE labor redundancies and issuance of a new equitization decree are hopeful signs that SOE reform can regain its momentum.
Macroeconomic Outlook and Upcoming Risks/Challenges
7. The strategy for putting Vietnam on a higher growth path remains centered on improving competitiveness and spurring investment. The cornerstones to a high growth strategy are accelerated structural reforms, focusing on trade reform, improving the business environment, and decisive banking and SOE reforms. Such high growth is also a key element of the Government's CPRGS.
8. Barring exogenous shocks, the macroeconomic outlook for 2002 is slightly more favorable than in 2001, with GDP growth projected to rise to 5¼ percent. Despite poor export performance, falling by an estimated9 percent in the first four months of 2002, there should be a gradual pick-up in light of recent signs of a global recovery. Inflation, which spiked in early 2002 due to a sharp increase in rice prices, is targeted at 3-4 percent for the year. Gross official reserves should remain at about 9 weeks of import cover.
9. To preserve macroeconomic stability and fiscal sustainability, the following policy elements will be important:
The fiscal stance in 2002 will need to be cautiously accommodative, limiting the overall fiscal deficit to 4 percent of GDP. This is consistent with increasing resources for poverty reduction and covering the costs of structural reforms, but at the same time stabilizing public debt over the medium term.
While taking into account the possibility of slightly lower oil prices, the authorities will need to take measures to strengthen tax revenue performance, particularly VAT policy and administration. Besides reducing the number of VAT rates and exemptions effective in the 2003 budget, the Government is availing itself of IMF technical assistance to set up pilot self-assessment programs for large taxpayers in Ho Chi Minh City and Quang Ninh province by end-2002.
On the expenditure side, the authorities will need to exercise greater restraint in 2002, by containing the wage bill to the budgeted level. They will need to work to increase budget transparency and improve expenditure management, in order to strengthen the pro-poor focus of the budget. Fund technical assistance will be provided in the context of the World Bank's Public Sector Financial Management Project to develop a medium-term expenditure framework, moving Treasury reporting standards to GFS, bringing extrabudgetary items into the budget, and better classifying and monitoring poverty-reducing spending.
10. Medium-term fiscal soundness also requires concomitant monetary policy and banking and SOEs reforms.
Monetary policy in 2002 will need to be geared towards moderate credit restraint, to keep inflation low and to stem new non-performing loans (NPLs), while ensuring sufficient credit to the productive sectors of the economy. The SBV is expected to continue to rely on indirect instruments to manage liquidity, and the base lending rate, which remained unchanged in the first five months of 2002, will be adjusted as necessary.
In banking reform, the focus will need to remain on strengthening credit risk management and resolving existing NPLs at the state-owned commercial banks (SOCBs), in order to reduce fiscal risks. Stronger efforts by SOCBs and closer monitoring by the SBV will be critical to meeting financial and operational targets as milestones for a phased recapitalization. An ongoing process of external audits for the SOCBs is also planned.
The authorities will need to revitalize and deepen SOE reform as a critical complement to SOCB reform and also to contain medium-term fiscal risks. The pace of equitizations needs to step up to make up for slippages under the first year of the SOE reform framework. In this context, the government is expected to publish soon a revised three-year roadmap. Budgetary resources will be used only for restructured SOEs and government monitoring of the SOE reform process will be strengthened.
11. External sector policies are also a crucial accompaniment to structural policies to improve competitiveness and reduce external vulnerability. More flexible management of the exchange system is an important step in this direction, including recently the reduction in the foreign exchange surrender requirement to 30 percent. With respect to the trade regime and private sector development to enable foreign competition, further advances are envisaged during 2002, which should be aided by timely issuance of implementation guidelines on the USBTA and active preparation for earliest possible accession to the WTO. Aside from this, the authorities will need to adhere to prudent external debt management, focusing financing primarily on concessional sources.
12. To successfully advance this policy agenda, the Government will need the active support and fruitful collaboration of all its development partners. The CPRGS represents a credible strategy, centered on growth for poverty reduction, and has been prepared in a commendable participatory process. To facilitate implementation of this strategy, the IMF staff stands ready to assist, inter alia, in improving the quality of the statistical base in order to better monitor economic trends and to determine policy adjustments. This in turn should serve to better inform donors and investors. More generally, the IMF staff will maintain a close dialogue with the authorities with a view to completing the second PRGF review.