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Vietnam and the IMF
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On November 21, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Vietnam.1
Economic performance has been positive so far in 2001, against the backdrop of a three-year Poverty Reduction and Growth Facility (PRGF) arrangement for SDR 290 million approved by the Executive Board of the Fund on April 13, 2001. The PRGF supported program is aimed at restoring Vietnam's growth closer to potential and reducing poverty, through boosting private investment and competitiveness of the economy. Key program elements include maintenance of macroeconomic stability, accelerated reforms of state-owned commercial banks (SOCBs) and enterprises (SOEs), promotion of private sector development, and liberalization of the exchange and trade regimes. Vietnam's reform effort is also being supported by the World Bank's Poverty Reduction Support Credit (PRSC) of SDR 197.2 million approved in June 2001.
Starting in late 1999, the economy began to rebound and the pace of reform picked up. The recovery was driven in part by a revival of domestic investment in response to policy initiatives aimed at addressing structural weaknesses and strengthening competitiveness. Real GDP growth is estimated to have risen from 4¼ percent in 1999 to 5½ percent in 2000, spurred by strong domestic demand. Despite this, inflation was subdued in 2000 owing to excess capacity and a surge in imports. As a result, the external current account surplus (including official transfers) narrowed to 2 percent of GDP and gross official reserves rose moderately to reach US$3.0 billion at end 2000 (8½ weeks of prospective imports).
Under the first year PRGF-supported program, real GDP growth in 2001 was expected to remain relatively robust, inflation subdued, and the external position strengthened. Performance so far, has been in line with these expectations. Based on developments in the first nine months of the year, real GDP growth is now expected to be moderated to around 4¾ percent in 2001 owing to the weaker external environment, which has led to a slowing in exports. Inflation should be well below the target of 5 percent, and the external current account surplus should narrow only slightly. Gross official reserves are targeted to rise to US$3.6 billion (9½ weeks of prospective imports). External debt remains at a sustainable level, aided by the completion of a restructuring agreement in September 2000 under the Paris Club framework with the Russian Federation.
Macroeconomic policy implementation has been broadly on track, characterized by a prudent fiscal stance, credit restraint-including for the 200 large SOE debtors, and a more flexible exchange rate management. The overall government deficit (excluding onlending) was lower than expected in the first half of 2001 and, despite a likely significant boost in spending in the remainder of the year, should stay below 3 percent of GDP for the year. The credit stance was also tightened in the first part of 2001, with year-on-year credit growth at 29 percent in July 2001, compared with 38 percent in December 2000. Further credit restraint is programmed for the remainder of the year, even though inflation is subdued, to help stem banks' nonperforming loans. This credit stance will also be critical for strengthening the medium-term fiscal position.
Interest rate policy has been further rationalized with the introduction of the base rate mechanism in August 2000 and removal of caps on foreign currency lending rates in June 2001. These steps should provide banks with adequate flexibility in the current low inflation and interest rate environment and allow them to better price risks. Since May 2001, exchange rate management has also been made more flexible, with the dong depreciating by 3½ percent against the U.S. dollar since the beginning of the year. Moreover, to boost confidence, the foreign exchange surrender requirement was reduced in May from 50 to 40 percent. Continued flexibility in exchange rate policy should help to accommodate external shocks.
Progress has been made in structural policy implementation. Effective steps have been taken to ease entry for the private sector through sound implementation of the new Enterprise Law and amended Foreign Investment Law. Moreover, trade reform measures have been more ambitious than envisaged. Under the five-year trade regime announced by the government in April 2001, the removal of quantitative restrictions (QRs) on five items was completed ahead of schedule in May, and the timetable for QR removal on another five items was advanced significantly. However, there have been delays in banking and SOE reform. In the banking area, operating licenses of four problem joint-stock banks were withdrawn as planned in June 2001, but the restructuring plans for the four large SOCBs were only finalized and approved by the government in October-somewhat behind schedule. Each of these SOCBs is currently being audited on international audit and accounting standards, which is expected to advance the restructuring process, including an envisaged phased recapitalization of the SOCBs based on measured improvements in bank performance. Delays have also been experienced in implementing the three-year SOE reform plan adopted by the government in March 2001. At the same time, however, bank credit and budget support to the targeted 200 large SOE debtors has been curbed in line with program targets.
Executive Board Assessment
Executive Directors agreed with the thrust of the staff appraisal. They welcomed Vietnam's continued track record of sound macroeconomic management and progress in implementing key structural reforms, which have contributed to favorable economic performance under the government's reform program. Despite slowing exports, economic growth in 2001 is likely to remain relatively robust, with continuing low inflation and a strengthening of the external position. The recovery in investment, following the implementation of measures to promote private sector development and to open up the economy, is particularly encouraging.
Directors noted that the government's reform agenda has experienced slippages in some key areas. They stressed that firm and steady implementation of this agenda, together with continued sound macroeconomic policies, remain critical for returning Vietnam to its growth potential, accelerating poverty reduction, and helping the economy to weather the current uncertain external prospects.
While commending the authorities' prudent fiscal policies, Directors underscored that the continued fragility of the fiscal position will require sustained efforts to improve revenue and expenditure performance. Given the current difficult environment, Directors considered that there is room for cautious fiscal easing to support economic activity, while protecting the targeted budget deficit. Directors underscored the importance of adhering to the medium-term objective of stabilizing the ratio of public sector debt to GDP, and cautioned that the current fiscal stance and the government's budget framework for 2002 should remain consistent with it. Achieving this goal will require a strengthening of tax policy and administration to ensure adequate funding for needed structural reforms and associated safety nets and support for critical social and infrastructure sectors. In this context, Directors welcomed the authorities' intention to simplify the VAT law and to reduce distortionary exemptions. On the expenditure side, they suggested that additional measures should be considered, building on the recent strengthening of expenditure management, to track poverty-reducing expenditures, improve the transparency and efficiency of government operations, and contain the recent strong rise in the public wage bill. Directors stressed, in particular, that achievement of medium-term fiscal sustainability will require not only a cautious budgetary stance, but also accelerated reforms in the SOCB and enterprise SOE sectors.
Directors supported the tightening of credit policy in 2001. Even though inflationary risks appear benign, they agreed that continued credit restraint will be essential to help stem nonperforming loans at SOCBs and to strengthen the financial discipline of SOEs. Some Directors considered that, given high money and credit growth rates, underlying price developments will need to be carefully monitored in the period ahead. Directors noted that a restrained credit stance, coupled with a more effective monitoring of the debt of, and budget support to, the large SOEs will be key to strengthening the medium-term fiscal position. They also urged close prudential supervision of banks' foreign currency operations to limit the credit and liquidity risks stemming from the potential volatility of foreign currency deposits.
Directors welcomed the more flexible management of the exchange rate, which has helped protect Vietnam's competitiveness and external viability. They encouraged the authorities to further liberalize the exchange regime by phasing out the foreign exchange surrender requirement and the remaining exchange restrictions as soon as possible. They also supported the maintenance of a prudent external debt management policy, which will help keep medium-term external debt indicators within a sustainable range.
Directors commended the authorities for the recent bold decisions to liberalize trade, noting that firm and steady implementation of these decisions will help position Vietnam to benefit fully from a global upturn. They encouraged further efforts to promote private sector activity and foreign direct investment, noting that increased job opportunities in the private sector will be critical to offset the needed rationalization of the state-owned economic sector.
Directors welcomed the restructuring plans of the four large SOCBs, but noted that vigorous implementation of the plans with close oversight by the State Bank of Vietnam (SBV) will be critical to return these banks to health. They agreed that the SOCBs need to work toward substantially strengthening their credit risk management and make best efforts to resolve nonperforming loans based on international classification standards, in line with conditions set down by the SBV for a phased and orderly recapitalization. Directors also urged the authorities to accelerate the reform of SOEs by rephasing the reform timetable to make up for the delays so far in order to achieve the original three-year targets.
Directors commended the authorities for recent steps to strengthen policy transparency and encouraged further efforts to better inform the public of economic performance and policies, as this would improve investor confidence. Noting the weaknesses identified by recent Fund technical assistance, they also saw a further upgrading of Vietnam's statistical base as important for strengthening policy formulation and Fund surveillance. Directors welcomed the priority given to improvements in compiling the national accounts, and looked forward to a timely decision on Vietnam's participation in the General Data Dissemination Standards.
It is expected that the next Article IV consultation with Vietnam will be held on the standard 12-month cycle.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.
IMF EXTERNAL RELATIONS DEPARTMENT