Press Release: IMF Approves US$368 Million PRGF Arrangement for Vietnam
April 6, 2001
The Executive Board of the International Monetary Fund (IMF) today approved in principle1 a three-year arrangement for Vietnam under the Poverty Reduction and Growth Facility (PRGF)2 for SDR 290 million (about US$368 million). The Board also approved in principle the release of a first loan under the PRGF arrangement in an amount equivalent to SDR 41.4 million (about US$53 million).
In commenting on the Executive Board's decision, Shigemitsu Sugisaki, Deputy Managing Director, made the following statement:
"The PRGF-supported economic program seeks to build on Vietnam's recent record of positive performance and policy momentum, in order to increase economic growth further and reduce poverty. The reform agenda is appropriately centered on accelerating structural reforms to boost private investment and competitiveness of the economy. While maintaining macroeconomic stability, key policy elements include reforms of the state-owned enterprises (SOE), the state-owned commercial banks (SOCB), and liberalization of the exchange and trade regimes. Greater emphasis will also be placed on policy and data transparency to bolster investor confidence and enhance the business environment.
"To protect macroeconomic stability, a continued cautious fiscal stance and restrained credit policy will be needed. Medium-term fiscal sustainability will also hinge on improving the performance of non-oil revenue by strengthening both tax policy and administration, for which Vietnam has requested technical assistance from the Fund. Moreover, emphasis will need to be given to improving public expenditure management, including the transparency and efficiency of spending and the budget's focus on poverty reduction.
"Following the recent adoption of an overall framework for SOCB reform, top priority will now need to be given to defining and implementing the restructuring plans for each of the four large SOCBs, with adequate transparency and close oversight from the State Bank of Vietnam.
"The government's three-year SOE reform plan is a meaningful first step in the medium-term process of state enterprise restructuring. Sustained implementation of this plan, together with safeguards to strengthen SOE financial discipline and curb credit to SOEs, would advance the process of reforming the SOE sector.
"A flexible exchange rate policy will be essential, and further steps to liberalize the exchange system will also help to bolster investor confidence. The significant trade reform measures envisaged under the program complement the SOE reform. To reap their full benefits, it will be important that Vietnam firmly implement its commitments with key trading partners, and follow through with the recently announced plan to remove the majority of quantitative restrictions by the start of 2003.
"The I-PRSP has been prepared in a broad consultative process and meets the core requirements. In developing a full PRSP over the next year, attention will need to be given to defining a work program, with emphasis on the quality of the poverty reduction strategy, its links to the budget as well as data problems," Mr. Sugisaki said.
Recent Economic Developments
Since late 1999 the economy has begun to rebound, and the pace of reform has picked up. The recovery has been driven in part by a revival of domestic investment in response to recent 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 remained subdued in 2000 owing to excess capacity and a surge in imports. As a result, and in spite of strong export growth, the external current account surplus (including official transfers) narrowed and gross official reserves rose moderately to reach US$3.0 billion (8¼ weeks of prospective imports).
Domestic demand stimulus came from accommodative fiscal and monetary policies in 2000. Aided in part by the windfall in oil revenue, the overall budget deficit widened to 2 percent of GDP. Credit growth also reached 38 percent in 2000, almost exclusively in dong lending and mostly from the SOCBs.
The exchange rate policy and regime were further eased in 2000. With a greater role given to market forces, the dong depreciated by 3 percent in the last quarter of the year, in contrast to virtual stability of the exchange rate vis-à-vis the U.S. dollar in the previous two years. Of the three remaining exchange restrictions under Article VIII of the Fund's Articles of Agreement, the foreign balancing requirement for foreign-invested enterprises (FIEs) was lifted in November 2000.
The pace of key structural reforms picked up during 2000. In particular, to foster private sector development, a number of business licensing requirements were removed under the new Enterprise Law, easing entry into affected business sectors. Also, access to credit by small- and medium-scale enterprises (SMEs) improved through permitting the use of land-use rights as loan collateral. Furthermore, the Foreign Investment Law was revised to improve the climate and incentives for foreign investors. In the banking sector, the preparation of an SOCB reform framework was intensified and a comprehensive SOE reform plan was brought to near finalization, but the pace of equitization remained sluggish. In the trade area, quantitative restrictions (QRs) were removed on 8 of the 19 products subject to such restrictions, foreign trading rights were liberalized, rice export quotas were lifted, and a bilateral trade agreement with the United States (USBTA) was signed in July 2000.
Under the PRGF-supported program, real GDP growth is projected to rise to 7 percent by 2003, with inflation staying under 5 percent. Real per capita income should rise by an average of 4½ percent a year, which together with measures to strengthen the poverty focus, should lead to a meaningful reduction in the poverty incidence and improvements in social indicators. Under the program, Vietnam's external position is also expected to strengthen with policies aimed at improving competitiveness and attracting FDI. The external current account deficit is projected to average 2-3 percent of GDP over the medium term, and gross official reserves are targeted to rise to 9¼ weeks of import cover by end 2003. The main forces for growth and employment generation are expected to come from the private SMEs and FIEs.
Macroeconomic performance is expected to remain sound in 2001, despite a likely moderation of GDP growth to 5 percent, reflecting weaker external demand. Inflation is projected to increase due to the lagged effect of rapid credit growth, but remain under 5 percent with some easing of demand pressures. The external position is also expected to weaken, owing to lower oil prices and slower growth in non-oil exports, and the current account projected to be in near balance. With a moderate recovery in FDI and donors' balance of payment support, gross official reserves are targeted to reach US$3.6 billion (8¼ months of prospective imports).
Fiscal policy will be aimed at protecting medium-term sustainability, and focusing more on poverty reduction and covering structural reform costs. The overall budget deficit is targeted to average 3 percent of GDP during 2001-03. This fiscal stance will be underpinned by efforts to expand non-oil revenue through improved tax administration and policy, and to strengthen the efficiency of spending, as well as to curb SOE losses and improve SOCB performance.
Monetary policy will be tightened, consistent with the inflation and reserves objectives, and also to safeguard the banking system. In line with the ongoing level of economic activity, credit growth is programmed at 20 percent in 2001. Credit policy will be coordinated closely with SOCB and SOE reforms, in particular to impose greater financial discipline on highly indebted SOEs. The SBV will rely increasingly on indirect instruments. At the same time, interest rate policy will be made more flexible, notably through strengthening the base interest rate system. Consistent with a more restrained monetary policy and ongoing structural reforms, the exchange rate is expected to be managed more flexibly, giving a greater role to market forces and minimizing administrative measures. During the program period, the government is committed to phasing out the foreign exchange surrender requirement.
The program provides for a targeted reform of the banking sector, aimed at enforcing better lending discipline and transparency and putting SOCBs' operations on a commercial basis, including by phasing recapitalization of the four large SOCBs over three years conditional on improvements in banks' performance. Reform plans for these banks will be finalized by mid-2001, under the overall restructuring framework approved by the government in March 2001. Moreover, each bank will undergo independent audits on international accounting standards by year end. Rationalization of the joint stock bank sector will also continue. To minimize moral hazard, only SOEs under government-approved reform measures will benefit from debt relief in the context of SOCB restructuring. Ceilings have also been set on banking system credit to SOEs and a monitoring of bank credit and budget support for a target 200 SOEs with large debt.
The government's medium-term SOE reform plan, adopted in March 2001, is aimed at curbing SOE losses and improving SOE efficiency over the period 2001-03. Reform measures in the plan (with annual targets for equitization, divestiture, and closure) will affect one-third of SOEs, accounting for 10 percent of SOE debt. This plan also includes steps to strengthen SOE financial discipline, and safety nets for labor redundancies.
To enhance Vietnam's competitiveness, the government is committed to pursuing further economic integration, through implementing commitments with key trading partners. Actions envisaged under these agreements are expected to accelerate the liberalization of Vietnam's relatively restrictive trade regime. Under the ASEAN Free Trade Area (AFTA), Vietnam is committed to reduce AFTA tariffs on the majority of tariff lines to 20 percent by 2003 and to 0-5 percent by 2006. In addition, the government recently announced plans to remove QRs on a multilateral basis on an additional six product groups at the latest by the start of 2003. Also, trading rights, which have already been liberalized for domestic firms, are to be further liberalized for FIEs through further revisions to the Foreign Investment Law.
More generally, private sector development and FDI will be promoted through an easing of barriers to entry and liberalizing the business environment, for both domestic and foreign investors, and improvements in policy transparency. Efforts to improve the scope and quality of economic and financial data, including the publication soon of a Vietnam page in International Financial Statistics, are also expected to enhance policy transparency and boost investor confidence.
1 A final decision by the IMF Executive Board is pending discussion of Vietnam's interim Poverty Reduction Strategy Paper by the Executive Board of the World Bank. The World Bank board discussion is expected to take place on April 12, 2001.
2 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was replaced by the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It was intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for Vietnam, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and a participatory process is underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½ year grace period on principal payments.