Vietnam and the IMF
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The International Monetary Fund (IMF) today approved the second annual loan for Vietnam in an amount equivalent to SDR 120.8 million (about $178 million),under the three-year enhanced structural adjustment facility (ESAF).1 A total of SDR 362.4 million (about $535 million) was approved on November 11, 1994. The loan will support the Government's 1996 macroeconomic and structural reform program and will be disbursed in two equal semi-annual installments, the first of which is available immediately.
The Vietnamese economy has performed well under the 1994-95 program supported by the first annual ESAF loan, and economic growth has been sustained at about 9 percent a year, fueled by rapidly rising exports and growing foreign direct investment. The authorities have maintained tight financial policies. Inflation has declined, while the exchange rate has stabilized, and international reserves have strengthened. However, the implementation of structural policies has been mixed, with some delays occurring in several important areas.
The Program for 1996
Vietnam's 1996 economic program is based on an annual GDP growth rate of 9.5 percent and seeks to lower the annual rate of inflation from 13 percent in 1995 to 9 percent by year-end. The external current account deficit is expected to widen to 8.9 percent of GDP from 8 percent in the previous year primarily reflecting increased foreign aid disbursements. Financial policies are expected to remain tight. Fiscal policy will rely on a restrictive government budget that aims to reduce the overall deficit to 1.5 percent of GDP in 1996, from 1.7 percent in 1995. Current outlays and nonproductive expenditures are to be reduced, but spending in the areas of primary education and basic health care, as well as in infrastructure and human capital development, will be protected in real terms. Monetary and credit policies will also remain restrained in line with the inflation and growth objectives of the program.
To enhance the effectiveness of their program, the Vietnamese authorities are moving forward with a wide range of structural reforms. The basic strategy is to promote efficient investment through increased competition from domestic and external sources, while raising domestic savings by improving the efficiency of financial intermediation and increasing confidence in domestic financial institutions. To these ends, the structural reform agenda emphasizes exchange and trade liberalization, state enterprise and legal reforms, and financial sector reform. In addition, fiscal measures include unification of corporate income tax rates, rationalization of the personal income tax system, and preparation for the introduction, by 1998, of a value added tax.
The provision of basic health and education, which is a priority objective of the Government, focuses resources on preventive and primary health care and on primary education. The Government will continue its poverty alleviation efforts in rural areas, where over half the population lives, stressing agricultural diversification and off-farm investments. Rural infrastructure and basic education and health care will be improved and measures will be taken to promote savings mobilization and expand access to credit for the poor.
The Challenge Ahead
To secure external viability over the medium term, rescheduling of past external debt arrears on appropriately concessional terms is required. In this regard, the authorities are actively seeking to reach an early agreement with commercial bank creditors and with holders of transferable ruble debt. New external commercial borrowing will need to be strictly limited both in 1996 and over the medium term.
Vietnam joined the IMF on September 21, 1956 . Its quota2 is SDR 241.6 million (about $357 million), and its outstanding use of IMF credit currently totals SDR 254 million (about $375 million).
Sources: Vietnamese authorities; and IMF staff estimates and projections.
1. The ESAF is a concessional IMF facility for assisting eligible low-income developing members that are undertaking economic reforms to strengthen their balance of payments and foster growth. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years, with a 5 1/2-year grace period.
2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT