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Vietnam and the IMF

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Consultative Group Meeting for Vietnam
Statement by Seán Nolan
Division Chief, IMF Asia and Pacific Department
Hanoi, December 2-3, 2003

1. I welcome the opportunity to participate in this discussion of Vietnam's economic performance during 2001-03 and the key challenges ahead in meeting the objectives of the government's Comprehensive Poverty Reduction and Growth Strategy (CPRGS).

2. The IMF recently completed an assessment of Vietnam's macroeconomic situation, in the context of the 2003 Article IV Consultation. The conclusions of the IMF Executive Board's deliberations on Vietnam, held on October 3, are contained in a Press Information Notice, available this week on the IMF's webpage, www.imf.org; the staff report and the background papers for the consultation are also being issued on this webpage.

3. In my remarks here, I will review the main themes of this assessment, paying particular attention to the policy challenges that need to be addressed if Vietnam's impressive success with growth and poverty reduction are to be maintained over the medium-term.

Achievements during 2001-03

4. Vietnam has recorded strong macroeconomic performance in recent years. Output has been growing rapidly, helped by rising domestic investment and vigorous export growth, notably to the US. Inflation has picked up, following mild deflation in 2001, but remains at moderate levels of some 3-4 percent. Strong domestic demand has been accompanied by a deterioration in the external current account position, but this has, to date, been financed through capital flows, mainly medium-long term borrowings and foreign direct investment, and the State Bank of Vietnam (SBV) has been able to strengthen its external reserve position.

5. Macroeconomic policies have supported growth, but the rapid pace of credit expansion is a cause for concern. Budget performance has been encouraging in 2002-03, with the deficit level this year (excluding onlending) expected to be around 2½ percent of GDP. But onlending operations are on a rising trend, reflecting the expansion of the Development Assistance Fund (DAF), while banking sector credit is growing rapidly (some 27 percent through August), at a pace that could overwhelm banks' still limited credit risk management capacities and further impair bank balance sheets.

6. Implementation of the government's structural reform program has been uneven. There has been significant progress in improving the environment for private sector activity, notably with the implementation of the Enterprise Law, and in liberalizing external trade, through implementation of multilateral and bilateral trade agreements. But reforms in the state-owned sector, which are key to ensuring fiscal sustainability, maintaining growth, and facilitating an orderly global integration, have moved more slowly. The equitization program for state-owned enterprises (SOEs) has fallen behind schedule, and has had to be re-calibrated; and limits on financial support to significantly-indebted SOEs have been breached, pointing to underlying commercial weaknesses in these firms. Efforts to strengthen the operational and financial performance of the state-owned commercial banks (SOCBs) — in such areas as credit decisions, NPL resolution, transparent financial reporting — are also taking longer than planned.

Outlook and Key Challenges Ahead

7. The near-term economic outlook is favorable, with growth likely to be fueled by continued export growth and investment demand. Against this backdrop, macroeconomic policies should be "leaning against the wind", with monetary tightening being the most flexible tool to deploy for demand management purposes.

8. Vietnam's medium term prospects are good, implying significant potential for further poverty reduction given the appropriate policy settings. The IMF staff's base case scenario, which is predicated on substantial structural reform and cautious macroeconomic management, envisages growth of some 7 percent per annum over the medium term, as Vietnam continues to expand its export base, following the path already taken by many emerging market economies in East Asia.

9. The outlook is, however, subject to significant risks, among which I would flag: i) the potential for significant investment misallocation in the government-controlled financial intermediation process, impairing growth and the fiscal position; ii) the risk of a slowdown in private sector investment, if weaknesses in the business environment are not adequately addressed; and iii) threats to Vietnam's exports from protectionism and/or intensified competition from other exporting countries.

10. Priority measures to manage these risks, and maintain the current strong growth trajectory, include:

    · Improving the quality of state-controlled financial intermediation, focusing on the SOCBs and the DAF. As the gate-keepers of large volumes of resources, it is imperative that these institutions conduct effective appraisal and financial assessment of the projects to which they commit resources—thus 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. Cleaning up the balance sheets of the SOCBs has made slow progress, and needs to be reinvigorated, including through guidelines that ensure a time-bound process for financial and operational restructuring of problem SOEs.

    · Accelerating reforms in the SOE sector, 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 and share listings; renewed efforts are needed to fully delineate the assets and liabilities that are owned by the enterprises to be sold.

    · Improving the environment for private sector investment, both domestic and foreign. Strengthening the operation of key markets (notably for land), simplifying regulations, and reducing bureaucratic discretion are key measures in this context — along with the provision of competitively-priced infrastructure services.

    · Maintaining the momentum for Vietnam's further integration in the world economy. Vietnam's objective of WTO membership is strategically sound and will help sustain growth over the medium-term, but will require focused efforts to bring domestic regulations, practices, and laws into compliance with WTO norms.

The Status of the PRGF

11. The IMF has been supporting Vietnam's development under its Poverty Reduction and Growth Facility (PRGF), with a $415 million loan program that began in April 2001. Completion of the third review under this program has been delayed for a year by ongoing dialogue on measures that would allow Vietnam to meet the IMF's general policy in regard to audit and accounting arrangements for central banks of borrowing member countries.1 Other issues on which agreement is needed to continue support under the PRGF include (a) measures to take forward the bank restructuring process; (b) improved enforcement of financial discipline on problem SOE debtors; and (c) a macroeconomic policy framework for 2004. Further discussion on PRGF issues is expected in the coming months.

Concluding Remarks

12. Vietnam has recorded strong economic performance in recent years. But much remains to be done to ensure rapid growth and poverty reduction in the years ahead — as is fully recognized in the government's CPRGS. The IMF remains closely engaged in helping advance the authorities' policy agenda in the macroeconomic and structural areas critical to financial stability and growth. The continued backing of the international community is vital to move this agenda forward across a broader front. With steadfast reform and donor support, Vietnam is well placed to continue its good track record of raising the living standards of its people and fulfilling its economic potential.


1 The IMF's safeguards policy requires central banks to prepare financial statements in accordance with an established accounting framework, such as IAS; to have these statements audited independently, in accordance with international standards; and to publish these financial statements.




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