News Brief: IMF Completes Second Review of Vietnam's PRGF Program
Vietnam and the IMF
Country's Policy Intentions Documents
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Socialist Republic of Vietnam—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding
Hanoi, June 3, 2002
Mr. Horst Köhler
International Monetary Fund
Washington, D.C. 20431 U.S.A.
On November 21, 2001, the Executive Board of the IMF concluded the first review of the three-year arrangement for Vietnam under the Poverty Reduction and Growth Facility (PRGF) approved on April 13, 2001. The purpose of this letter is to inform you of the progress in implementing the first-year economic program, and to request the third loan disbursement following the completion of the second review under the arrangement.
The attached Memorandum of Economic and Financial Policies (MEFP) sets out the objectives and policies that the Government of Vietnam intends to pursue during 2002.
Vietnam's economic performance in 2001 was positive, despite the external weakness. Macroeconomic policies were prudent and progress was made in the key structural areas. As a result, the program targets for the second PRGF review have been achieved for the most part. The Government of Vietnam believes that the policies it intends to implement during 2002, as described in the MEFP, will build on this favorable performance, help lift rates of economic growth and poverty reduction, and further strengthen Vietnam's resilience to external shocks. On this basis, it requests completion of the second review under the arrangement; and waivers for the nonobservance of the end-December 2001 performance criteria on net domestic assets of the banking system, bank credit to state-owned enterprises, net claims on government by the banking system, and net international reserves, taking into account the policy measures that have been taken to address the slippages and the satisfactory performance relative to the March 2002 benchmarks.
The government believes that the policies and measures set forth in the MEFP are adequate to achieve the objectives of the program supported by the PRGF arrangement, but will take further measures if deemed necessary. During the remaining period of the arrangement, Vietnam will continue to consult with the Managing Director on the adoption of measures that may be appropriate, at the initiative of the government or whenever the Managing Director requests such a consultation. The government will continue to provide the IMF with such information as it requires to assess Vietnam's progress in implementing the economic and financial policies under the program.
The government intends to make these understandings public and authorizes the IMF to provide this letter and the attached memorandum to all interested parties that so request them, including through the IMF's external website.
We can assure you that the Government of Vietnam is determined to fully implement the program, and we hope we can count on the continued support of the IMF in our endeavors.
June 3, 2002
1. This memorandum lays out the economic and financial policies for 2002, the second-year program under the PRGF arrangement approved in April 2001, and the policy framework covering 2002-04. This framework is consistent with our Comprehensive Poverty Reduction and Growth Strategy (CPRGS) (dated May 21, 2002), which has been prepared in a broadly participatory process.
II. Performance and Policy Implementation in 2001
2. While not immune to the global downturn, Vietnam's economy performed relatively well in 2001. In line with program assumptions, real GDP growth moderated owing to a significant weakening in the external environment. Growth was supported by cautiously accommodative fiscal and monetary policies and a renewal of private investment, which buoyed domestic demand. At the same time, inflation was kept low at only 1 percent (Table 1). Reflecting the progressive slowing of export growth (to 4 percent at end year compared with 25 percent in 2000), gross reserves grew by less than programmed to US$3.4 billion, or nine weeks of prospective imports.
3. Macroeconomic policy implementation in 2001 was broadly on track. The 2001 budget was eased slightly relative to the program to better support activity. The overall budget deficit (excluding onlending and amortization, and based on GFS) is estimated at 3.5 percent of GDP, against 2.9 percent programmed. Revenue performance was much stronger than budgeted, thanks to improved collection from corporate income tax and import duties, and from higher oil prices. This permitted us to step up spending in key social and infrastructure areas. At the same time, however, wages and pensions were 0.6 percent of GDP above budget, reflecting one-time payments to war heroes, incorporation of local security forces into the state budget, and wage spending on education and health care. Nonetheless, the December performance criterion on bank credit to the government was missed marginally (Table 2).
4. Bank credit was restrained in line with the program through most of the year. Growth of credit to the economy fell from 38 percent in 2000 to 21½ percent by end year (Table 3). Credit growth was on course until December, when it rose above programmed due to overruns in credit to state-owned enterprises (SOEs). As a result, the December performance criteria on net domestic assets and on SOE credit were missed. This outcome reflects the difficulties in containing lending to SOEs through indirect means, as our interest rate and refinancing policies adhered to program commitments. Notably, the base interest rate was reduced cautiously and the State Bank of Vietnam (SBV) gross refinancing was kept at D 3.5 trillion as programmed.
5. Exchange rate management was flexible for the most part in 2001. From April through November, the dong depreciated by 4 percent against the U.S. dollar. However, in December, the exchange rate did not move due in part to inflow of remittances. The December performance criterion on the buildup in net international reserves was missed, given a large depreciation of regional currencies and a rapid weakening in exports late in the year.
6. On the structural front, good progress was made in the trade area and in promoting private sector development. As programmed, quantitative restrictions (QRs) on imports of three additional items (construction white glass, certain steel products, and vegetable oil) were removed effective January 1, 2002; this move brought to eight the total number of items whose QRs have been removed since the start of the program. Tariff reductions were also introduced in line with commitments under the ASEAN Free Trade Area (AFTA). In addition, reflecting the successful implementation of the new Enterprise Law, a further 22,000 small and medium-sized enterprises were registered during 2001.
7. State-owned commercial bank (SOCB) restructuring has also been improved,
although with some delays. The four large SOCBs started implementing their
restructuring plans, aimed at meeting milestones set under an SBV directive
(Annex I describes the status). At end-December, the criteria for loan
classification were adapted (Decision 1627) to move closer to international
standards (a structural performance criterion), and external audits for
all four SOCBs will be completed by end-June, somewhat behind schedule.
In addition, a special unit in the SBV to monitor SOCB reform was made
operational in November 2001 (a structural benchmark)
8. SOE reform has proceeded below expectations. In particular, the number of equitizations in 2001 fell well short of the target under the three-year SOE reform framework. Also, the structural benchmarks on the approval of implementation guidelines for SOE debt settlement and for safety nets and on strengthening SOE reform oversight were not observed at end-December. The December benchmark on debt and budget support for the 200 large SOEs was also missed.
III. Medium-Term Macroeconomic Framework
9. We remain committed to the medium-term reform strategy laid out in our 2001 MEFP dated March 14, 2001. To lift growth rates and reduce poverty, we will pursue sound macroeconomic policies and foster efficient state and private sector development and global integration. Priority will be given to accelerating banking and SOE reforms, complemented by private sector deregulation and trade opening measures. The macroeconomic framework for 2002–04 aims at raising GDP growth to 7 percent, keeping inflation under 5 percent, and increasing the import coverage of reserves to 9½ weeks. The external current account deficit (excluding official transfers) is projected to average 2 percent of GDP, and remains financeable given prospective support under the PRGF, the PRSC, and donor assistance.
10. Our fiscal stance will aim at protecting sustainability, focusing more on poverty reduction and minimizing domestic bank financing. This stance will be underpinned by further efforts to boost non-oil revenue, expenditure on poverty-reducing programs, and external concessional support. The budget deficit is projected to average 3½ percent of GDP during 2002–04, compared with 2½ percent during the previous three years, reflecting the current costs of structural reform; the underlying budget position, exclusive of these costs, will remain prudent. Monetary policy will be moderately tightened, the exchange rate will be managed flexibly, and exchange restrictions will be further reduced.
IV. Macroeconomic Policies for 2002
11. Under the 2002 program, real GDP growth is projected to benefit from a slight recovery in external demand and continued strength in domestic demand. Despite a sharp weakening in the first quarter, export performance is expected to improve, owing to the recent upturn in oil prices and given signs of a global rebound. In addition, policies will be geared to improving competitiveness. Inflation is targeted at 3–4 percent and the external current account is expected to be in a deficit of 2 percent of GDP, with gross reserves increasing to US$3.8 billion (9 weeks of imports).
12. Fiscal policy will stay cautiously accommodative while providing for structural reform costs. The overall deficit will be capped at 4 percent of GDP and domestic bank financing limited to D 3.5 trillion (Table 5). We are targeting revenue and grants at 21 percent of GDP and keeping expenditure under 25 percent of GDP. The key policy elements are:
13. We have approved the cost estimates of banking and SOE reforms at D 35 trillion (6 percent of GDP). These costs will be adjusted at the time of the third PRGF review, based on classification of nonperforming loans (NPLs) consistent with international standards. On this basis and including debt resolution for SOEs not undergoing ownership transformation, Fund staff have tentatively estimated total reform costs at D 70 trillion (12 percent of GDP). The main financing sources include banks' internal resources, concessional external support, and other budgetary resources, as well as through bank recapitalization bonds that will be appropriately structured and will rebuild the banks' capital in stages as planned.
14. Monetary policy will continue to be restrained, consistent with the inflation and reserves objectives, and also to safeguard the banking system. Credit growth will be contained at 20.5 percent year-on-year by end 2002, and will be provided only to efficient projects of creditworthy borrowers—state and nonstate—in line with the monetary program under the PRGF. Consistent with these targets, the performance criteria for net domestic assets of the banking system for end-June and end-December 2002 are set out in Table 5. To achieve these targets, the SBV will limit its additional gross refinancing to banks to no more than D 3.5 trillion in 2002. It will also further move to indirect instruments, and will further rationalize interest rate policy, with the first step taken on May 30, 2002 by promulgating a decision to remove the margins on lending rates for dong loans.
15. The SBV will manage the exchange rate more flexibly, giving a greater role to market forces and minimizing administrative measures. In particular, the band for the maximum movement of the daily interbank exchange rate will be widened. The SBV will intervene in the interbank market only to stem disorderly conditions, and will gear its foreign exchange sales toward meeting the quarterly reserve targets agreed under the program. Furthermore, the surrender requirement was lowered from 40 percent to 30 percent effective May 2002, and will be phased out as and when economic circumstances permit and at the latest by the end of the PRGF arrangement. Also, to limit external vulnerability, the SBV will closely monitor the quality and liquidity of foreign assets held by banks, given the potential volatility of foreign currency deposits. With respect to the exchange system, we intend to submit to the National Assembly at the latest by September 2002 a proposal to remove the tax on profit remittances of foreign-invested enterprises (FIEs). This is later than initially programmed but consistent with our ongoing efforts to harmonize tax treatment between foreign-invested and domestic enterprises. All remaining restrictions on current international transfers and payments will be removed, subject to National Assembly approval, by end 2002 in order to pave the way for acceptance of the obligations under Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreement.
16. We will continue our prudent external debt management policy, focusing government borrowing primarily on concessional terms. In view of improved market sentiment for Vietnam and the need for foreign capital for investment, we are considering issuing our first and only international bond in 2002. In order to keep our debt service within sustainable limits and to contain fiscal risks, we will cautiously structure the scale and terms of the bond issue and will institute appropriate safeguards for the use of its proceeds. In line with this, we will transfer the proceeds into a separate account to effectively track their usage. Furthermore, in order to minimize risks, these proceeds (i) will not be used for budgetary purposes, (ii) will be onlent only to projects that have been carefully appraised by our authorities according to the government regulation on investment project appraisal, and (iii) will be concentrated on projects that generate foreign exchange. The Ministry of Finance (MoF) will be responsible for putting together the list of eligible projects based on commercial criteria.
V. Structural Policies
17. Our structural reform agenda is centered on strengthening competitiveness across all sectors, opening up the economy, and attracting investment, both domestic and foreign. The CPRGS and its policy matrix spell out the envisaged reforms over the rest of the PRGF arrangement period.
18. We are resolved to advance our trade agenda, giving top priority to successful implementation of the bilateral trade agreement with the United States (USBTA) and active preparations for earliest possible accession to the WTO. In line with this policy, we have adopted a timetable to establish the proper legal framework to implement the USBTA. Preparations for bilateral negotiations for WTO accession have also begun. With respect to trade in goods, QRs on three out of five remaining items1 will be removed by end-December 2002 (cement, motorcycles, and passenger vehicles up to nine seats). We also intend to effect tariff reductions already announced under the AFTA roadmap. In addition, timely implementation of commitments under the USBTA regarding services and intellectual property rights will be important, since many of these meet WTO norms and can be applied on a multilateral basis. To facilitate this process, we will assess the potential impact of global integration on the most vulnerable sectors, drawing on donor technical assistance.
19. We recognize the private sector as an important component of Vietnam's economy, and are taking steps to further boost domestic and foreign investment. The business climate will be made more open, fair, and predictable. In particular, and in advance of the timeframes under the USBTA, we are preparing regulations to further open to foreign investors areas in the services (including most retail sales and distribution), agribusiness, and fishery sectors. The dual pricing system for FIEs will be phased out by 2003 for almost all charges and fees, except those for power, which will be removed by 2004. Performance requirements for FIEs will also be phased out. In addition, tax incentives for FIEs will be streamlined and rationalized relative to domestic enterprises.
20. Banking reform remains central to our strategy. Our reform approach has been designed to minimize fiscal costs, avoid moral hazard, and maintain systemic stability. Strong efforts will be made to stem the flow of bad loans, phase out policy lending from commercial banks, and put commercial bank operations on a commercial basis. Success here will depend on coordinating SOCB reform with SOE reform.
21. To allow a realistic assessment of NPLs, guidelines were issued in April 2002, which apply Decision 1627 to all loans, except policy loans. We will issue a supplementary guideline to apply this decision to policy loans by July 1, 2002, and will resolve these loans within SOCBs. The new classification standards under this decision will be phased in starting in July 2002 and be completed by year-end. To facilitate this, banks will provide monthly information under the guidelines to the SBV starting in June. Loan provisioning will be brought fully onto the new standards in stages, starting in December 2002, and will be completed by 2003 subject to the availability of funding resources.
22. The four large SOCBs are implementing individual restructuring plans, striving to meet milestones agreed with the SBV in order to qualify for phased recapitalization (Annex I describes these milestones). In particular:
23. Further progress will be made in bank restructuring in line with the agreed quarterly milestones. Specifically:
24. With respect to the JSBs, following the closure/merger of 11 banks so far (remaining total of 38), further progress will be made to consolidate the system and strengthen the financial conditions of these banks, toward the aim of reducing by about 50 percent their number.
25. SOE reform will be reinvigorated, in order to make up for slippages so far. To this end, we will rephase our original three-year roadmap and will soon announce an SOE reform program covering 2002–04. In consultation with Bank staff, our agenda of actions is as follows:
26. Further progress will be made to strengthen the financial discipline on SOEs through the quarterly monitoring system for a targeted group of 200 large SOEs on their outstanding debt to banks and to the government and other budget support. The MoF will work more closely with provincial financial offices to enforce reporting requirements, including sanctions, so as to reduce delays. In addition, we will make fuller use of such data and will take appropriate measures to contain risks posed by excessive leveraging among these enterprises.
VI. Statistical Issues and Policy Transparency
27. To strengthen policy transparency and data quality, we are continuing to upgrade the statistical system, drawing on Fund technical assistance. In particular, we intend to participate in the GDDS by July 2002. We also will embark on a work program to further strengthen national account statistics within two years, and will improve budget data in line with GFS standards as a key element of strengthening expenditure management, including the monitoring of pro-poor spending. We are committed to further policy transparency by providing additional information on the website for the MoF, and by initiating a website for the SBV. Publication of IMF staff reports for Vietnam will continue.
28. With respect to the Fund's safeguards assessment, we remain committed to completing by the state auditor an audit of the SBV 2001 financial statements by June 2002, to restating these audited financial statements in accordance with IAS by June 2002 for internal use, and to publishing all future audited financial statements of the SBV on an IAS basis. At the latest by the third PRGF review, we will agree with the Fund staff an appropriate timeframe for adapting the SBV's accounting framework permanently onto international accounting standards; we will seek Fund technical assistance for this purpose. Before completion of the second PRGF review, we will provide the Fund staff with a progress report from the State Auditor on the external audit of the SBV to ensure its completion by June 2002.
VII. Program Monitoring
29. Prior actions for the IMF Executive Board consideration of the second PRGF review are summarized in Table 6. Table 5 contains quantitative performance criteria for end-June and end-December 2002 and quantitative benchmarks for end-September 2002; key structural policy undertakings are in Table 6. Program monitoring and reporting requirements are detailed in the Technical Memorandum of Understanding (Annex II). The third review under the PRGF arrangement will be completed by November 2002, which will focus on progress in implementing the second-year program under the PRGF arrangement and progress in accelerating SOCB and SOE reforms. To help strengthen program implementation, technical assistance is being sought from the IMF and the World Bank in bank restructuring and supervision, and from the IMF in tax policy and administration and statistics.
1Besides other currently banned imports as stipulated in Decision 46/2001/QD-TTg, dated April 4, 2001.
Vietnam—Milestones for State-Owned Commercial Banks in 2002
(Adopted on June 3, 2002)1
The "Milestones for SOCBs" listed below are the minimum conditions in the context of the first and second PRGF reviews, as agreed by the State Bank of Vietnam (SBV) with the staffs of the International Monetary Fund and the World Bank, for the purpose of recapitalization of the four large state-owned commercial banks (SOCBs). Bank-specific milestones are expected to be developed consistent with these overall milestones and issued as a directive by the SBV.
Milestones for end-March 2002:
Status: Credit risk management and internal audit committees have been set up, but three of the four SOCBs have not yet submitted manuals of procedures for those committees to the SBV for review. There are some legal issues concerning the independence of the audit committee. Technical assistance from the Bank and the Fund is being sought.
Status: Two of the four large SOCBs submitted reports on NPL resolution as of end-March 2002 as required under Decree 01/2002/CT-NHNN. A third one submitted a report as of end-February 2002.
Milestones for end-June 2002:
Status: Signing of contracts for IAS audits of 2001 financial statements by international auditing firm moved to end-July.
Milestones for end-September 2002:
Milestones for end-December 2002:
Future milestones will be specified on the basis of experience with the implementation of earlier milestones and developments in SOCB conditions. The SOCBs will continuously improve performance against these milestones over three years, in addition to meeting these first-year milestones.
Technical Notes and Definitions Related to the Milestones2
Potentially recoverable loans are defined as: all collateralized loans + commercial noncollateralized loans to active borrowers + directed loans to active borrowers. The amount of resolved loans is the sum of:
1. Payments received from borrowers (after payment of any past due interest).
2. For all collateralized loans the sum of (1) proceeds from the sale or lease of collateral, and (2) the loss written-off after the sale or other disposal of all collateral.
3. For collateralized loans to active borrowers and noncollateralized loans to active non-SOE borrowers, the amount of the loan that is restructured, if the active borrower negotiates with the SOCB a restructuring of business operations to improve debt-servicing capability.
4. For noncollateralized loans to active SOEs—the amount of the loan that is restructured if an approved SOE restructuring plan with appropriate conditions exists or provisions are made against the loan after an active SOE is closed.
5. Proceeds from the sale of debt (or another asset for which the debt was exchanged) to third parties.
6. For all loans—the amount of provisions made against the loan, if they are matched by "independent" capital injections, i.e., sources other than the government, the IMF, or the World Bank.
1Italics indicate status
of milestones or amended milestones relative to those agreed at the first
PRGF review in November 2001.
Vietnam—Technical Memorandum of Understanding
June 3, 2002
1. This memorandum sets out (i) the definitions of quantitative performance criteria and benchmarks for the second-year PRGF-supported program (Table 5), and (ii) related reporting requirements to the Fund's Asia and Pacific Department (Table 7).
Item 1: Net domestic assets (NDA) of the banking system
Item 2: Net claims on the government of the banking system
Item 3: Credit to the state-owned enterprises from the banking system
Item 4: Credit from the banking system and from the budget and budget support to the 200 targeted large SOEs
Item 5: Contracting or guaranteeing of nonconcessional external debt by the government
Item 6: External payments arrears
Item 7: Net official international reserves (NIR)
II. Program monitoring exchange rates
30. Foreign assets and liabilities and all other elements of the items defined above that are denominated in foreign currency will be valued at the program monitoring exchange rates, unless specified otherwise.
VIII. Performance Criteria and Benchmarks
31. Performance criteria include Items 1 to 3 and 5 to 7 as defined above. For external payments arrears (Item 6), the performance criterion will be measured on a continuous basis throughout 2002. The other performance criteria will be measured on the last day of June 2002 and December 2002. Quantitative benchmarks include Items 1 to 5 and 7 as defined above. They will be measured on the last day of September 2002. Item 4 is also a quantitative benchmark to be measured on the last day of June 2002 and December 2002.
IX. Monitoring and Reporting Requirements
32. For the purposes of program monitoring, the following information, including any revisions to historical data, will be provided by the SBV, unless specified otherwise, to the Asia and Pacific Department of the Fund, through the office of the Senior Resident Representative of the IMF in Vietnam, as set out in Table 5.
1These definitions, except Items 4, 5, and 6, adhere to the existing classification schemes used for the monetary derivation tables of the State Bank of Vietnam (SBV) covering 84 credit institutions and the SBV, and the associated monetary survey tables. More specifically, the banking system is defined as the SBV and the deposit money banks (DMBs), which consist of six state-owned commercial banks (SOCBs), 42 joint stock banks, 4 joint venture banks, 26 foreign bank branches, 5 finance companies, and the Central People's Credit Fund.