## _cr0622 ## Source details **Canonical URL:** [_cr0622](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0622.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0622.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0622.pdf.json) --- ### Executive Summary — Background and Key Findings - Macroeconomic performance remained strong with rapid poverty reduction and greater integration into the global economy. - Poverty rate: declined from 58 percent in 1993 to around 26 percent in 2004. - Transition to a market-based system remains incomplete; SOE and SOCB sectors continue substantial quasi-fiscal activities and the public sector remains dominant. - Real GDP growth: - 7.7 percent in 2004. - About 7½ percent in the first half of 2005. - Official growth target for 2005: 8½ percent; meeting it would require growth of around 9½ percent in the second half of 2005. - SEDP objective for 2006–2010: sustain annual growth in the range of 7½ to 8 percent to enable graduation from low-income status by 2010. - Inflation: - 9½ percent (yoy) at end-2004. - About 7½ percent as of July 2005. - Administered prices account for about 26 percent of the CPI basket. - Cumulative domestic gasoline price increases during the first eight months of 2005: about 34 percent (March, July, August adjustments); combined with 2004 adjustments, gasoline up 81½ percent since end-2003 and diesel up 70½ percent since end-2003. - External sector and reserves: - Current account deficit narrowed to less than 4 percent of GDP in 2004. - Gross official reserves rose by about US$700 million in 2004 and by another US$740 million during the first six months of 2005, to US$7.1 billion at end-June 2005. - Import coverage of reserves: around 8½ weeks of imports. - Credit and financial sector: - Bank credit grew at an annual rate of 40 percent as of April 2005; credit growth surged to 42 percent in 2004. - High foreign-currency borrowing encouraged by a 600 basis point differential between dong and dollar lending rates and an SBV announcement limiting exchange rate depreciation to 1 percent in 2005. - Fiscal sector: - Official budget deficit narrowed from about 2 percent of GDP in 2003 to less than 1½ percent of GDP in 2004. - Overall fiscal deficit (official budget plus off-budget investment) narrowed from 7.2 percent of GDP in 2003 to 4½ percent of GDP in 2004. - Debt stock declined slightly to 41 percent of GDP. - National Assembly augmented off-budget investment program for 2005–2010 from 68 trillion dong (9½ percent of 2004 GDP) to 110 trillion dong (15½ percent of 2004 GDP). - Sectoral/export developments: - Garment exports growth (first six months of 2005): about 0.1 percent (yoy) after averaging about 30 percent over the past three years. - Largest garment markets: U.S. (~40 percent), EU (~20 percent), Japan (~15 percent) of Vietnam’s total garment exports. - Other exports (oil, computers and electronics, furniture), tourism receipts, and remittances remained strong. ### Policy Challenges and Staff Recommendations — Monetary and Banking - Challenges: - High credit growth amid weak bank balance sheets and SOCB policy lending. - Monetary tightening limited by conflicting objectives, liquidity injections via OMOs, and SOCB non-commercial behavior. - Low import cover of reserves and exposure to exchange rate risks from heavy foreign-currency borrowing. - Staff recommendations: - Support SBV’s aim to significantly reduce credit growth; authorities’ target of 25 percent growth in credit considered broadly appropriate. - Use all available instruments in a concerted manner. - SOCBs should no longer be pressured to increase lending to SOEs; curtail policy lending and remove it from the banking sector. - Implement recently-adopted prudential regulations strictly and without delay. - Finalize SOCB reform plans based on reliable estimates of capital shortfalls; take early action to eliminate policy lending, improve SOCB corporate governance, and strengthen SBV independence and supervisory authority. - Define monetary policy objectives more narrowly and state them more clearly in the SBV’s law. ### Policy Challenges and Staff Recommendations — Fiscal Policy and Off-Budget Risks - Challenges: - Heavy reliance on off-budget operations undermining fiscal transparency and complicating public expenditure management. - Potential need to issue substantial new debt (infrastructure bonds and SOCB recapitalization) could push public debt above the notional ceiling of 50 percent of GDP under adverse scenarios. - Data deficiencies on off-budget activities and contingent liabilities. - Off-budget operations and scale: - Net on-lending through DAF: about 2–3 percent of GDP per year since 2000. - National Assembly authorized 110 trillion dong (about US$7 billion, or 15.6 percent of 2004 GDP) of education and infrastructure bonds for 2005–2010. - DAF outstanding loans: equivalent to about 12 percent of GDP, half financed through ODA. - Municipal bonds: HCMC issued 2 trillion dong (0.2 percent of GDP) and to issue another 2 trillion dong in 2005; Hanoi expected to issue about 1.5 trillion dong in 2005. - World Bank estimated arrears to the transportation sector at end-2003: about 14.4 trillion dong (2.3 percent of GDP); irrigation arrears as of end-June 2004: 1.3 trillion dong (0.2 percent of GDP). - Staff recommendations: - Save part of the oil revenue windfall in 2005. - Bring the overall fiscal deficit down to 3½ percent of GDP over the medium term. - Carefully review the augmented public investment program and bring it on budget, emphasizing transparent fiscal accounting and investment quality over quantity. - Tighten criteria for DAF lending, integrate DAF operations into the budget, and fully reflect them in government accounts. - Restrain local development funds and put plans for them to issue bonds on hold until a regulatory framework is in place. ### Macroeconomic Outlook and Risks — Near Term and Medium Term - Near-term (rest of 2005) projections: - Real GDP growth projected about 7½ percent. - Inflation projected around 7 percent by end-2005. - Reserve coverage to remain low. - Main risk: delay in adopting measures to rein in monetary and fiscal policies (continued reliance on loose monetary policy and easing fiscal stance). - Additional risks: intensifying wage pressures, weakening export demand, widespread outbreak of avian flu, disruptions from adverse weather. - Medium-term (policy adjustment scenario) projections: - If credit growth is sharply reduced, fiscal deficit kept in check, and SOCB and SOE reforms stepped up: - Growth expected in range of 7–7½ percent. - Inflation expected to fall to around 3½ percent. - Public debt burden manageable; total public debt stock could rise sharply in coming years as government covers reform costs but decline steadily relative to GDP over the longer term. - Adverse scenario: - Failure to rein in credit growth and delays in banking sector reform could lead to mounting demand pressure, weakening of balance of payments, increasing SOCB-related quasi-fiscal liabilities, threatening medium-term fiscal sustainability. - A significant fall in oil prices would reduce the windfall and could further raise the debt-to-GDP ratio absent scaling back of ambitious public investment. ### Exchange Rate Policy - Assessment: - Dong does not appear significantly misaligned; modest real effective appreciation since end-2003. - De facto fixed policy carries significant risks despite possible short-run anchoring benefits for inflation expectations. - Staff recommendations: - Adopt a more flexible exchange rate policy; make full use of flexibility in current regime and limit intervention to disorderly conditions. - Encourage incentives to manage exchange rate risks and reduce external vulnerability. ### Structural Reform Priorities — SOE and SOCB - SOCB reform and recapitalization: - Authorities plan to finalize a financial sector reform roadmap after receipt of bank reports under new prudential standards. - To minimize budget burden, plan to rely on equitization of main SOCBs to fund part of capital shortfalls. - Accompanying measures required: eliminate residual policy lending, strengthen banking governance, MF ownership role, and SBV independence/supervisory authority. - Timing/legal constraints: required changes in SBV and Credit Institutions Laws postponed until 2008; authorities see scope for significant governance improvements in the meantime. - SOE reform: - Restructuring slow but continuing: expanded auction mechanism for equitization; list of sectors reserved for state ownership narrowed. - Staff urged: accelerate equitization of larger SOEs, curb government interference in management and investment decisions, phase out administered prices, and complement price liberalization with targeted subsidies and safety nets accounted in the budget. ### Debt Sustainability Analysis — Public and External Debt (Baselines and Stress Tests) - Public debt (baseline): - Public and publicly-guaranteed debt: about 41 percent of GDP in 2005; projected to increase slightly to 42½ percent in 2009 before stabilizing. - NPV of public and publicly guaranteed debt in percent of GDP (selected): 2005: 28.0; 2006: 27.9; 2007: 28.1; 2008: 28.2; 2009: 28.3; 2010: 28.8; 2015: 29.1; 2025: 28.7. - Memo: public and publicly guaranteed debt in percent of GDP (in dong): 2005: 41.2; 2006: 41.6; 2007: 42.2; 2008: 42.5; 2009: 42.5; 2010: 42.4; 2015: 42.4; 2025: 42.3. - Banking reform contingent-liability scenarios: - Scenario 1 (high-cost provisioning): - Assumptions: losses by loan category producing overall provisioning rate 38 percent for past loans and 22 percent for off-balance sheet items. - Resulting shortfall: 20 percent of GDP. - Financing: government bond transfers to SOCBs over 2006–2007. - Debt impact: debt stock jumps to over 63 percent of GDP in 2007 before primary deficit adjustment; long-term debt just above 47 percent by 2025. - Scenario 2 (SBV Decision 493-based): - Assumptions: Decision 493 provisioning schedule with adjustments for misclassification; average provisioning and increased provisioning by 50 percent; CAR set at 8 percent. - Resulting shortfall: 8 percent of GDP. - Financing: government bond transfers to SOCBs spread over 2006–2010. - Debt impact: debt stock approaches the notional ceiling of 50 percent of GDP by 2010 and declines slowly to about 44 percent of GDP in 2025. - Staff interpretation: - Contingent liabilities from SOCB reform are the largest risk to medium-term debt sustainability. - Given uncertainty, the overall deficit target of 3½ percent of GDP should be viewed as an upper bound for a sustainable fiscal stance. - External debt: - Baseline: external debt stock rises modestly to about 40 percent of GDP by around 2015 then declines to about 32 percent in 2025. - NPV of external debt-to-exports falls from 28 percent in 2005 to 18½ percent in 2025 under baseline; debt service ratio falls from 5.3 percent in 2005 to 4.7 percent in 2025. - Staff consider Vietnam at low risk of external debt distress under baseline and standard stress tests. ### Data, Transparency, and AML/CFT - Data weaknesses: - Serious weaknesses in availability, timeliness, and quality of economic data across money and banking, fiscal coverage (off-budget activities, debt statistics, contingent liabilities), balance of payments, national accounts, SOE and SOCB operations. - Delays and discrepancies increased due to implementation of a new chart of accounts. - Staff recommendations: - Decisive measures to improve reliability, timeliness, and dissemination of economic data to meet market-based economy requirements. - Specific needs: improved money and banking statistics, coverage and reliability of off-budget activities, public debt, contingent liabilities, balance of payments, external debt, and official reserves. - AML/CFT: - Mission welcomed recently-issued AML decree and urged SBV to adopt measures for effective implementation. - Encouraged authorities to amend the criminal code to criminalize financing of terrorism and incorporate CFT requirements. ### IMF Relations, Donor Coordination, and Technical Assistance - IMF role: lead in macroeconomic policy dialogue and active engagement on structural issues with technical assistance across tax reform, SOCB restructuring and equitization, banking supervision, monetary operations, AML, statistics, debt sustainability analysis, and capital markets development. - PRGF/PRSC and donor coordination: - PRSC operations used as coordination device; PRSC 1–4 detailed with amounts and focus. - IDA program projections: Low case less than US$300 million; Base case US$580 million per year; High case about US$760 million per year. - ADB: new CSP aligned with SEDP 2006–2010; historical approvals and sectoral lending summarized. - Technical assistance and capacity building highlighted for statistics (GSO), PFM reforms (PFMRI), financial sector, and institutional strengthening. ### Executive Board and Directors’ Key Messages - Positive: welcomed Vietnam’s transition, robust growth, and poverty reduction; structural reforms increased FDI attractiveness. - Cautions/risks: - Near-term favorable outlook subject to risks from loose monetary policy and easing fiscal stance. - Ambitious short-term growth targets risk exacerbating inflation and weakening reserves. - High credit growth and weak SOCB balance sheets could generate large quasi-fiscal liabilities. - Policy priorities: - Adopt a more flexible, market-oriented policy framework centered on private sector-led growth and macro stability. - Accelerate SOE and SOCB reform and recapitalization plans. - Strengthen monetary policy framework and SBV independence with focus on price stability. - Tighten liquidity and stop encouraging state-owned banks to finance large SOE projects. - Save a portion of oil revenue windfall and contain domestically-financed investment and on-lending. - Improve tax system and administration, public expenditure rationalization, fiscal transparency, and AML/CFT regime. - Improve reliability and timeliness of economic statistics. *Source: IMF staff report content unit _cr0622.* ### Executive Summary ...................................................................................................... ### Executive Summary ### Background - Overall macroeconomic performance remained strong since the last Article IV consultation, with rapid poverty reduction and integration into the global economy. - Poverty rate declined from 58 percent in 1993 to around 26 percent in 2004. - Transition to a market-based system remains incomplete; SOE and SOCB sectors continue to have substantial quasi-fiscal activities and the public sector remains dominant. - Implementation of structural reforms has been gradual and uneven, especially in SOE and SOCB sectors. ### Key Findings: Recent Performance and Risks - Real GDP growth: - About 7½ percent in the first half of 2005. - Real GDP growth picked up to 7.7 percent in 2004. - Official growth target for 2005: 8½ percent; meeting it would require growth of around 9½ percent in the second half of 2005. - SEDP objective for 2006–2010: sustain annual growth in the range of 7½ to 8 percent to enable graduation from low-income status by 2010. - Inflation: - 9½ percent (yoy) at end-2004. - About 7½ percent as of July 2005. - Administered prices account for about 26 percent of the CPI basket. - Cumulative domestic gasoline price increases during the first eight months of 2005: about 34 percent (March, July, August adjustments); combined with 2004 adjustments, gasoline up 81½ percent since end-2003 and diesel up 70½ percent since end-2003. - External sector and reserves: - Current account deficit narrowed to less than 4 percent of GDP in 2004. - Gross official reserves rose by about US$700 million in 2004 and by another US$740 million during the first six months of 2005, to US$7.1 billion at end-June 2005. - Import coverage of reserves: around 8½ weeks of imports. - Credit and financial sector: - Bank credit grew at an annual rate of 40 percent as of April 2005; credit growth surged to 42 percent in 2004. - High foreign-currency borrowing encouraged by a 600 basis point differential between dong and dollar lending rates and an SBV announcement limiting exchange rate depreciation to 1 percent in 2005. - Weak SOCB corporate governance, policy lending, and excess liquidity have limited the effectiveness of SBV tightening measures. - Fiscal sector: - Official budget deficit narrowed from about 2 percent of GDP in 2003 to less than 1½ percent of GDP in 2004. - Overall fiscal deficit (official budget plus off-budget investment) narrowed from 7.2 percent of GDP in 2003 to 4½ percent of GDP in 2004. - Debt stock declined slightly to 41 percent of GDP. - National Assembly augmented the off-budget investment program for 2005–2010 from 68 trillion dong (9½ percent of 2004 GDP) to 110 trillion dong (15½ percent of 2004 GDP). - Concern: heavy reliance on off-budget operations has weakened fiscal transparency and raised medium-term debt sustainability concerns. - Sectoral/export developments: - Garment exports: first six months of 2005 growth decelerated sharply to about 0.1 percent (yoy), after averaging about 30 percent over the past three years. - Largest garment markets: U.S. (~40 percent), EU (~20 percent), Japan (~15 percent) of Vietnam’s total garment exports. - Other exports (oil, computers and electronics, furniture), tourism receipts, and remittances have remained strong. ### Policy Challenges Identified - High credit growth in the context of weak bank balance sheets and SOCB policy lending. - Inflationary pressures, including effects from domestic petroleum price adjustments and wage increases (civil service wage increases averaged 30 percent in October 2004). - Limited effectiveness of monetary tightening due to conflicting policy objectives, liquidity injections via OMOs, and SOCB non-commercial behavior. - Low import cover of reserves and exposure to exchange rate risks due to heavy foreign-currency borrowing by domestic banks. - Fiscal transparency erosion from large off-budget investment programs and potential need to issue substantial new debt (infrastructure bonds and SOCB recapitalization) could push public debt above the notional ceiling of 50 percent of GDP. - Data reliability, timeliness, and dissemination need urgent improvement. ### Staff Recommendations and Policy Advice - Monetary and banking sector: - Support SBV’s aim to significantly reduce credit growth. - Use all available instruments in a concerted manner. - SOCBs should no longer be pressured to increase lending to SOEs; curtail policy lending and remove it from the banking sector. - Implement recently-adopted prudential regulations strictly and without delay. - Finalize SOCB reform plans based on reliable estimates of capital shortfalls; take early action to eliminate policy lending, improve SOCB corporate governance, and strengthen SBV independence and supervisory authority. - Define monetary policy objectives more narrowly and state them more clearly in the SBV’s law. - Fiscal policy: - Save part of the oil revenue windfall in 2005. - Bring the overall fiscal deficit down to 3½ percent of GDP over the medium term. - Carefully review the recently-augmented public investment program and bring it on budget, emphasizing transparent fiscal accounting and investment quality over quantity. - Exchange rate policy: - Adopt a more flexible exchange rate policy (staff encourages). - Data and transparency: - Improve the reliability, timeliness, and dissemination of key data to enhance policy analysis and surveillance. - Structural reforms: - Speed up reforms, particularly SOCB reform, to safeguard public sector debt sustainability and facilitate effective monetary policy transmission. ### Institutional Context and Policy Process - Authorities were formulating the Five-Year Socio-Economic Development Plan (SEDP) for 2006–2010, debating tradeoffs between short-term growth and macroeconomic stability, and public vs. private investment roles. - Consensus on key policy issues was expected to culminate in approval of the SEDP by the Communist Party’s 10th Congress in May 2006. *Source: Executive Summary (IMF staff report).* ### 10. The government has recently signaled its intention to speed up the pace of ### _cr0622 - 10. The government has recently signaled its intention to speed up the pace of ### Structural reform and banking sector actions - The government signaled intention to speed up structural reform, including: - SBV’s loan classification, provisioning, and prudential standards tightened in April 2005. - Banks instructed to produce accurate financial statements based on the new standards by end-July. - Plans to develop SOCBs’ reform and recapitalization during the latter part of the year, based on these improved accounts. - As of mid-August, three of the four large SOCBs were reported to have submitted their accounts to the SBV. ### Off-Budget Expenditure (Box 3) — scale, composition, and risks - Off-budget outlays have been stepped up, motivated in part by the statutory budget deficit limit of 5 percent of GDP (Vietnamese accounting standards), directed primarily at recapitalizing SOCBs and funding large multi-year public investment projects. - Consequences: - Undermined fiscal transparency. - Complicated public expenditure management. - Made medium-term public sector debt sustainability assessment more difficult. - Main off-budget operations and financing sources: - On-lending through the Development Assistance Fund (DAF): - Net on-lending through DAF has amounted to about 2-3 percent of GDP per year since 2000. - DAF operations funded in part through ODA loans; significant domestically-financed component funded via DAF’s own bonds, loans from the Postal Savings Service Company, loans from the Social Security Fund, funds mobilized by DAF branch offices (deposits) and project bonds. - Education and infrastructure bonds: - The National Assembly authorized issuance of a total of 110 trillion dong (about US$7 billion, or 15.6 percent of 2004 GDP) of education and infrastructure bonds for the period 2005–2010. - SOCB recapitalization bonds: - In 2001 non-performing loans worth 23 trillion dong (5.2 percent of GDP as of 2000) were identified. - Four largest SOCBs received capital injections totaling 10.9 trillion dong (2.5 percent of 2000 GDP), of which 9.7 trillion was provided in the form of recapitalization bonds and the remainder in cash. - Municipal bonds: - HCMC has issued bonds in the amount of 2 trillion dong (0.2 percent of GDP), and is to issue another 2 trillion dong in 2005. - Hanoi expected to issue bonds on the order of 1.5 trillion dong in 2005. - Extra-budgetary recurrent expenditure by local governments resulting in arrears: - World Bank estimated arrears to the transportation sector at end-2003 to be about 14.4 trillion dong (2.3 percent of GDP). - Arrears to irrigation as of end-June 2004 of 1.3 trillion dong (0.2 percent of GDP and equivalent to one-quarter of annual public investment in agriculture). - Clearance reportedly financed through issuance of government bonds and special budgetary allocations. - MOF instructed local governments to cease spending outside their budgets to prevent accumulation of new arrears. ### Macroeconomic outlook and risks (rest of 2005 and medium term) - Near-term (rest of 2005): - Real GDP growth projected to be about 7½ percent. - Inflation projected to be around 7 percent by end-2005. - Reserve coverage would remain low. - Main risk: delay in adopting measures to rein in monetary and fiscal policies (continued reliance on loose monetary policy and easing fiscal stance). - Additional risks: intensifying wage pressures, weakening export demand, widespread outbreak of avian flu, disruptions from adverse weather. - Medium-term (under policy adjustment scenario): - If credit growth is sharply reduced, fiscal deficit is kept in check, and SOCB and SOE reforms are stepped up: - Growth expected to remain robust in the range of 7–7½ percent. - Inflation expected to fall to around 3½ percent. - Public debt burden would remain manageable; total public debt stock could rise sharply in coming years as government covers reform costs, but decline steadily relative to GDP over the longer term. - Adverse scenario: - Failure to rein in credit growth and delays in banking sector reform could lead to mounting demand pressure, weakening of balance of payments, increasing SOCB-related quasi-fiscal liabilities, threatening medium-term fiscal sustainability. - A significant fall in oil prices would reduce the windfall and could further raise the debt-to-GDP ratio absent scaling back of ambitious public investment. ### Monetary and exchange rate policy recommendations and assessments - Credit growth: - Authorities’ target of 25 percent growth in credit considered broadly appropriate. - Mission supported efforts to bring credit growth down to this level; slowing bank loans essential to limit inflation risk, shore up international reserves, and prevent unsustainable SOCB-related quasi-fiscal liabilities. - Concerns and recent developments: - Recent measures appeared to send mixed signals; prompt, concerted effort needed to slow credit growth or target may not be met by end-2005. - Increases in policy rates had limited impact on commercial bank lending behavior. - SBV conducted large liquidity-injecting OMOs in early 2005 to support SOCB lending for large SOE projects; authorities said most OMOs were short-term and likely to be unwound by year-end. - SBV could come under pressure to maintain easier stance when seasonal loan demand rises toward year-end. - Exchange rate: - Dong does not appear significantly misaligned; modest real effective appreciation since end-2003. - Fixing the exchange rate may help anchor inflation expectations but prolonged de facto fixed policy carries significant risks. - A more flexible exchange rate would: - Facilitate adjustment to structural changes and exogenous shocks. - Reduce external vulnerability. - Create incentives to manage exchange rate risks. - SBV should make full use of flexibility in current regime and limit intervention to disorderly conditions. - Authorities acknowledged importance of exchange rate flexibility and are exploring more flexible day-to-day management of the dong. ### Fiscal policy findings and recommendations - Near-term oil windfall and fiscal stance (2005): - Staff recommended saving a good part of the oil revenue windfall in 2005 to contain fiscal impulse from surging oil prices. - Goal: narrow overall fiscal deficit (including net lending and off-budget outlays) from 4½ percent of GDP in 2004 to less than 4 percent of GDP in 2005. - Achieve reduction by containing investment expenditure and domestically-financed on-lending to offset wage bill increases. - Staff urged prompt adjustments in domestic petroleum prices, especially kerosene and diesel. - Domestic oil prices were raised in July and again in August, but likely insufficient to eliminate oil subsidy payments during second half of the year. - Subsidy payments accrued through August are estimated at 0.8 percent of GDP. - Cash payments mostly from the contingency built into the budget; full-year budget impact highly uncertain due to lagged response of oil import costs and cross-subsidization by trading companies. - Budget transparency and integration: - Authorities agreed that, in principle, all capital expenditure should be brought on budget to improve fiscal transparency and expenditure management. - Scrutiny would improve quality of public expenditure, particularly provincial and local infrastructure subject to weak control. - Staff encouraged review of screening procedures for public investment projects and better integration of investment and recurrent expenditure in budgeting to limit inadequate maintenance. - Authorities noted procedural constraints (lumpiness of projects, absence of multi-year budget framework, legal constraints) made National Assembly approval of multi-year projects more efficient; multi-year budgeting framework targeted for implementation in 2008 with World Bank technical assistance. - DAF and on-lending: - Scope for streamlining significant on-lending operations; tighten criteria for DAF lending and apply uniformly, scaling down domestically-financed operations. - Recommendation to integrate DAF operations into the budget and fully reflect them in government accounts to improve fiscal data analysis. - DAF has outstanding loans equivalent to about 12 percent of GDP, half financed through ODA. - Mission cautioned local development funds should be restrained and plans for them to issue bonds put on hold until a regulatory framework is in place. - Medium-term fiscal sustainability: - To place debt-to-GDP ratio on a sustainable path, team recommended bringing overall fiscal deficit down to about 3½ percent of GDP. - Risks to revenue include decline in oil prices—necessitating reprioritization and rephasing of investment program. - Gradual decline in contribution of oil revenues into the budget from 2007 onwards implies need to put sizeable non-oil deficit on a declining path. - Authorities need to improve non-oil revenue performance via tax policy and administration reforms: - Possible measures: progressive extension of self-assessment pilot, rationalization of investment incentives, adoption of a single-rate VAT with a higher threshold. - Strong efforts required to improve quality of spending consistent with Public Expenditure Review recommendations. ### Structural reform priorities (SOE and SOCB) - SOE sector: - Restructuring remains slow, but auction mechanism for equitization expanded; shares of some larger SOEs sold to public; list of sectors reserved for state ownership narrowed. - Authorities continue efforts toward WTO accession, expediting National Assembly consideration of an ambitious legislative agenda. - SOCB sector: - Reform and recapitalization plans to be developed in latter part of the year, guided by tightened prudential standards and improved bank financial statements. - Staff warned delays in banking sector reform could produce mounting quasi-fiscal liabilities and threaten fiscal sustainability. *Source: IMF staff report content from _cr0622 - 10. The government has recently signaled its intention to speed up the pace of* ### 21. A comprehensive reform of the banking system would be key to protecting ### _cr0622 - 21. A comprehensive reform of the banking system would be key to protecting ### Banking-system reform and SOCB recapitalization - A comprehensive reform of the banking system is presented as key to protecting medium-term debt sustainability and achieving the SEDP’s broader economic and social objectives. - Authorities plan to finalize a financial sector reform roadmap, including specific plans for the reform and recapitalization of SOCBs, soon after receipt of bank financial reports based on the new prudential standards. - To minimize the burden on the budget, the authorities planned to rely on the equitization of the main SOCBs as a means to fund at least a part of their capital shortfall. - The team stressed the importance of ensuring the accuracy of banks’ reports prior to finalizing recapitalization plans. - Introduction of private capital through equitization, especially if allowing foreign strategic investors to take controlling stakes in SOCBs, could positively support commercialization. - Necessary accompanying measures: - Eliminate residual policy lending. - Strengthen overall governance of the banking system. - Ministry of Finance to assume a more active ownership role in enforcing controls on SOCBs. - Strengthen the SBV’s independence and supervisory authority through necessary legal reforms. - Timing and legal constraints: - Authorities indicated required changes in the SBV and Credit Institutions Laws would have to be postponed until 2008, owing to the National Assembly’s full agenda associated with WTO accession. - Authorities expressed confidence that the existing legal framework gave sufficient leeway to introduce significant governance improvements in the meantime. - Prudential regulations: - Recently-adopted prudential regulations for commercial banks are described as an important step and should be implemented strictly and without delay. - SOCB reform and nonperforming loan resolution plans need to be finalized based on accurate and reliable estimates of SOCBs’ capital shortfall. - Plans must be complemented by early action to eliminate policy lending, improve SOCBs’ corporate governance, and strengthen SBV independence and supervisory authority. ### SOE reform - Restructuring of the SOE sector is identified as a top priority. - The mission urged authorities to: - Push ahead with equitization plans. - Curb government interference in management and investment decisions of SOEs. - Phase out administered prices, which may undermine profitability of some key SOEs and create opportunities for rent-seeking. - Where needed, price liberalization should be supplemented with better-targeted subsidies and safety nets, explicitly accounted for in the budget to alleviate impacts on the poor. - Authorities acknowledged SOEs in strategic sectors may be instructed to adopt policies aimed at broader social objectives. - Authorities reported they are receiving comprehensive financial reports from SOEs to be used in formulating the SOE reform strategy, but were not in a position to share these reports with staff. - Staff recommendations: - Strengthen initiatives to equitize larger SOEs. - Curb government interference in SOE management and investment decisions. - Provide incentives for SOEs to operate on commercial terms. ### Trade liberalization, private sector development, and WTO accession - Authorities remain committed to international economic integration; growing trade and FDI are central to continued favorable growth. - As of mid-July 2005, bilateral WTO agreements had been concluded with 10 countries; more than a dozen agreements remained to be finalized, challenging the target accession date of end-2005. - Legislative agenda was modified to allow key laws to be discussed at the November session of the National Assembly: - New Common Investment Law (CIL). - Unified Enterprise Law (UEL). - These laws are being developed in close consultation with the private sector and foreign investor communities and are viewed as key to successful negotiations with major trading partners. - Staff encouraged credible and transparent implementation of new laws to foster private investment, including participation in infrastructure projects, to help fund large investment needs without excessive budgetary burden. - Early liberalization of administered prices is urged to remove distortions and bottlenecks in supply of key industrial inputs. - Market-determined prices, together with SOCB and SOE reforms, would limit scope for rent-seeking and complement administrative anti-corruption measures. ### Data quality, AML/CFT, and exchange regime - Serious weaknesses in availability, timeliness, and quality of economic data impede effective surveillance. - Money and banking: delays in data reporting to the Fund increased in the last year; discrepancies between individual commercial bank reports and the SBV’s monetary survey data hamper assessment. - Delays partly due to implementation of a new chart of accounts still under way. - Further improvements needed in coverage of fiscal data: off-budget activities, debt statistics, and contingent liabilities. - Weaknesses also in balance of payments, national income accounts, and SOE and SOCB operations. - Team stressed need for decisive measures to improve reliability, timeliness, and dissemination of economic data to meet data and policy transparency requirements of a market-based economy. - Anti-Money Laundering and Combating Financing of Terrorism: - Mission welcomed recently-issued Anti-Money Laundering (AML) decree and urged SBV to adopt necessary measures for effective implementation. - Encouraged authorities to amend the criminal code to criminalize the financing of terrorism and to incorporate and implement other CFT requirements. - Staff welcomes the recently-passed AML decree and urges strengthening legal and institutional framework for CFT requirements. - Exchange restrictions and Article VIII: - Authorities expressed intention to remove the three remaining exchange restrictions subject to Article VIII, sections 2, 3 and 4, and accept Article VIII of the Fund’s Articles of Agreement (Annex I). - LEG and MFD provided substantial technical assistance, including advice on drafting proposed new foreign exchange legislation. - Mission welcomed plan to remove remaining exchange restrictions and encouraged acceptance of Article VIII as soon as possible, taking full advantage of LEG and MFD advice. ### Staff appraisal: macro framework, fiscal stance, and policy recommendations - Recent performance: - Vietnam achieved sustained robust growth, contributing to significant decline in poverty and making Vietnam an attractive destination for FDI. - Progress supported by increased international integration and movement toward a more market-based system. - Policy framework: - A more flexible policy framework needed under the new Five-Year Plan for 2006-2010. - Decisive action required to ensure macroeconomic stability, protect debt sustainability, and enable private sector to become primary engine of growth. - Near-term outlook and cautions: - Outlook for 2005 remains positive but needs a more prudent mix of macroeconomic policies. - Growth in the first half of 2005 remained robust, yet somewhat lower than the authorities’ target of 8½ percent for the year. - Inflation has been significantly higher than in recent years; reserve coverage remains low. - Staff cautions against stepping up public investment in projects of uncertain quality to meet official growth target; urges focus on quality rather than quantity of investment and growth. - Credit and monetary policy: - Staff supports authorities’ aim to slow credit growth substantially and urges all necessary steps to meet this objective. - Slower credit growth is essential to prevent unsustainable build-up of SOCB-related quasi-fiscal liabilities, contain inflationary pressures, and shore up international reserves. - SBV will need to use all available instruments in a concerted way; SOCBs should no longer be pressured to provide directed lending to SOEs. - Exchange rate policy: - Staff encourages adoption of a more flexible exchange rate policy. - While exchange rate as a monetary anchor could help curb inflation in short run, continued vulnerability to external shocks and increasing exposure to foreign competition call for more flexibility. - Staff urges authorities to limit intervention to addressing disorderly market conditions and make full use of flexibility embedded in current exchange rate system. - Fiscal policy and oil revenue: - Given near-term risks to inflation, staff recommends that a good part of the projected sizable oil revenue windfall be saved in 2005. - This should help limit short-term fiscal impulse from higher oil prices while reducing overall fiscal deficit to less than 4 percent of GDP. - Investment expenditure and domestically-financed on-lending should be scaled back to offset increases in the wage bill. - Authorities should consider further increases in domestic oil prices to avoid additional sizable oil subsidy payments if prices remain at current levels. - Staff urges movement toward best practices in fiscal transparency and public expenditure management by adopting an integrated system of fiscal accounting and reporting. - Medium-term fiscal sustainability: - Need to bring overall fiscal deficit down to around 3½ percent of GDP to protect debt sustainability. - In light of significant oil revenue windfall over the medium term, authorities should be ready to reconsider their investment program if oil prices drop sharply. - Expected decline in oil-related receipts from 2007 onwards and pressures from SOCB and SOE quasi-fiscal liabilities heighten importance of a prudent fiscal stance. - Achieving the objective will require bold measures to reform tax policy and administration, rationalize expenditure, improve screening of investment projects, and make all public investment subject to same level of scrutiny as central government expenditures. - Data and external statistics: - Staff urges prompt measures to improve reliability, timeliness, and dissemination of economic data. - Improvements urgently required in money and banking statistics, coverage and reliability of data on off-budget activities, public debt, and contingent liabilities. - Strong effort warranted to improve quality and dissemination of balance of payments, external debt, and official reserve data to enhance surveillance and consolidate Vietnam’s attractiveness for FDI. *Source: IMF staff report content unit _cr0622 - 21. A comprehensive reform of the banking system would be key to protecting* ### 40. It is recommended that the next Article IV consultation with Vietnam take place ### _cr0622 - 40. It is recommended that the next Article IV consultation with Vietnam take place ### Recommendation on Article IV Consultation - It is recommended that the next Article IV consultation with Vietnam take place on the standard 12-month cycle. ### Real Economy and Growth - Real GDP (annual percentage change): 2000: 6.8; 2001: 6.9; 2002: 7.1; 2003: 7.3; 2004: 7.7; 2005 (Prel./Proj.): 7.5. - Industrial output (level/changes): 2000: 18.4; 2001: 13.7; 2002: 18.8; 2003: 16.9; 2004: 16.0; 2005: 15.6. - Saving–investment balance (in percent of GDP): 2000: 2.1; 2001: 2.1; 2002: -1.2; 2003: -4.9; 2004: -3.8; 2005: -4.4. - Gross national saving: 2000: 31.7; 2001: 33.2; 2002: 32.0; 2003: 29.7; 2004: 31.7; 2005: 32.2. - Gross investment: 2000: 29.6; 2001: 31.2; 2002: 33.2; 2003: 34.6; 2004: 35.5; 2005: 36.6. - ICOR: 2002–10 projections around 4.4–4.6 (Table 6: ICOR 4.4–4.6 across years). ### Inflation and Prices - Inflation (annual percentage change, period average): 2000: -1.6; 2001: -0.4; 2002: 4.0; 2003: 3.2; 2004: 7.7; 2005: 9.2; 2005 (end of period): 7.6; 2004 (end of period): 9.5. - CPI end of period: 2000: -0.5; 2001: 0.7; 2002: 4.0; 2003: 2.9; 2004: 9.5; 2005: 7.6. ### Fiscal Sector and Public Finances - Total revenue and grants (percent of GDP): 2000: 20.5; 2001: 21.6; 2002: 22.7; 2003: 23.1; 2004: 23.4; 2005 (Prel./Proj./Staff): 22.7/24.5. - Oil revenue (percent of GDP): 2000: 6.5; 2001: 7.4; 2002: 6.8; 2003: 6.4; 2004: 6.4; 2005 (Staff): 7.6. - Total expenditure and net lending (percent of GDP): 2000: 25.5; 2001: 26.6; 2002: 26.6; 2003: 28.0; 2004: 26.7; 2005 (Staff): 27.1. - Current expenditure (percent of GDP): 2000: 15.9; 2001: 16.0; 2002: 15.7; 2003: 16.8; 2004: 16.5; 2005: 17.7. - Capital expenditure (percent of GDP): 2000: 7.4; 2001: 8.4; 2002: 8.4; 2003: 8.3; 2004: 8.3; 2005: 7.6. - Net lending (percent of GDP): 2000: 2.2; 2001: 2.2; 2002: 2.4; 2003: 2.9; 2004: 1.9; 2005: 1.8. - Overall fiscal balance including off-budget expenditure (percent of GDP): 2000: -5.0; 2001: -5.0; 2002: -4.5; 2003: -7.2; 2004: -4.5; 2005 (Staff): -3.8. - Non-oil overall fiscal deficit (percent of GDP): 2000: -11.4; 2001: -12.4; 2002: -11.3; 2003: -13.6; 2004: -10.9; 2005 (Staff): -11.4. - Fiscal financing composition (percent of GDP, 2004–05 highlights): Domestic (net) financing and foreign (net) financing noted: Financing 2005: 3.8; Domestic (net) 1.2; Foreign (net) 2.6. ### Monetary and Financial Sector - Broad money (M2) annual percentage change: 2000: 39.0; 2001: 25.5; 2002: 17.6; 2003: 24.9; 2004: 30.4; 2005 (Proj.): 26.7. - Credit to the economy (annual percentage change): 2000: 38.1; 2001: 21.4; 2002: 22.2; 2003: 28.4; 2004: 41.7; 2005: 39.9. - Foreign currency deposits (in millions of U.S. dollars): 2000: 4,854; 2001: 5,884; 2002: 6,093; 2003: 6,220; 2004: 6,670; 2005 data show increases toward 10,402 (Table 4 series). - Interest rates (end of period, three-month deposits household): 2000: 4.3; 2001: 5.9; 2002: 7.0; 2003: 6.3; 2004: 6.7; 2005: 7.4. - Short-term lending (less than one year) rates (end of period): 2000: 9.8; 2001: 8.8; 2002: 8.9; 2003: 10.0; 2004: 10.7; 2005: 11.1. - Monetary survey coverage: expanded in 2000 to include SBV and 84 credit institutions (note distinctions between small and large surveys in figures). ### External Sector and Balance of Payments - Current account balance (in millions of U.S. dollars): 2000: 642; 2001: 670; 2002: -419; 2003: -1,946; 2004: -1,700; 2005 (Prel./Proj.): -2,246. - Current account (percent of GDP): 2000: 2.1; 2001: 2.1; 2002: -1.2; 2003: -4.9; 2004: -3.8; 2005: -4.4. - Trade balance (in millions of U.S. dollars): 2000: 378; 2001: 627; 2002: -876; 2003: -2,593; 2004: -2,368; 2005: -3,405. - Exports f.o.b. (U.S. dollar terms, annual % change): 2000: 25.2; 2001: 4.0; 2002: 11.2; 2003: 20.4; 2004: 29.3; 2005: 16.2. - Imports f.o.b. (U.S. dollar terms, annual % change): 2000: 34.5; 2001: 2.3; 2002: 22.1; 2003: 29.1; 2004: 25.0; 2005: 18.5. - Gross official reserves (including gold, end of period, millions of U.S. dollars): 2000: 3,030; 2001: 3,387; 2002: 3,692; 2003: 5,620; 2004: 6,314; 2005: 7,730. - Gross official reserves (in weeks of next year's imports of GNFS): 2000: 8.9; 2001: 8.3; 2002: 7.2; 2003: 8.9; 2004: 8.1; 2005: 8.6. - External debt (percent of GDP): 2000: 38.6; 2001: 37.9; 2002: 34.9; 2003: 33.6; 2004: 34.2; 2005: 34.2. - Debt service due (percent of exports of goods and nonfactor services): 2000: 10.5; 2001: 10.6; 2002: 8.6; 2003: 7.9; 2004: 6.2; 2005: 5.2. - Capital account highlights: Gross foreign direct investment inflows (in US$ billion): 2000: 1.101; 2001: 1.252; 2002: 2.023; 2003: 1.894; 2004: 1.763; 2005: 2.337. - Overall balance and SBV NFA changes reported: Overall balance 2000–05 varying from positive balances in some years to overall draws, with change in SBV's NFA reflecting financing needs (Table 3). ### Medium-Term Projections and Vulnerabilities - Medium-Term Scenario (2002–10): Real GDP growth projected in Table 6: 2002: 7.1; 2003: 7.3; 2004: 7.7; 2005: 7.5; and steady growth through 2010 around 7.3–7.5. - Nominal GDP projections (in trillions of dong): 2002: 535.8; 2003: 613.4; 2004: 713.4; 2005: 806.9; 2006–10 rising to 1,321.5 by 2010. - Current account balance (percent of GDP, including official transfers) projected around -4.0 percent in medium term (Table 6/Medium-Term Scenario). - Reserve indicators (Table 7): Gross official reserves including gold (US$ billion) 2000: 3.03; 2001: 3.43; 2002: 3.75; 2003: 5.66; 2004: 6.37; 2005: 7.7. - External vulnerability indicators include total external debt to exports and debt service ratios shown in Table 7 series (e.g., total debt service to exports around 10.3–5.2 percent across 2000–05). ### Social and Demographic Indicators - Nominal GDP (2004): US$45.3 billion; GDP per capita (2004): US$552; Population (2004): 82.0 million; Fund quota: SDR 329.1 million. - Poverty and welfare (selected historical data): Upper poverty line (thousand dong) 1985: 1,160; 1993: 1,790; percent of population below upper poverty line varied (e.g., 1985: 58; 1993: 37; 1998: 37; 1999: 32; 2000: 29). - Food poverty line (thousand dong): 1985: 750; 1993: 1,287; percent below food poverty line fell from 25 (1985) to 10 (2000). - Health indicators (selected): Infant mortality (per thousand live births): 1985: 63; 1993: 36; 1998: 30; 1999: 28; 2000: 23; 2002: 20; Under-5 mortality and other health/immunization statistics reported in Table 1. - Education indicators (selected): Net primary enrollment ratios generally high (primary net enrollment: 1998 around 103.0 gross); literacy and pupil–teacher ratios and secondary enrollment series reported in Table 1. - Millennium Development Goals: indicators provided (e.g., under-5 mortality reduced from 53.0 (1990) to 23.0 (2003); GNI per capita rises from 130.0 (1990) to 480.0 (2003) in Table 8 series). ### IMF Relations, Exchange-Rate Policy, and Technical Assistance - Membership status: Joined 09/21/1956; Article XIV. - Fund quota: 329.10 (SDR million) representing 100.00 percent of quota. - PRGF arrangements outstanding: PRGF arrangements outstanding SDR 160.44 million (48.75 percent of quota). - Financial arrangements: PRGF approved 04/13/2001–04/12/2004 Amount Approved 290.00 SDR million; Amount Drawn 124.20 SDR million. - Projected obligations to Fund (SDR million): 2005 Principal 18.12; Charges/Interest 0.98; Total 19.10. 2006 Principal 22.26; Charges/Interest 1.86; Total 24.12. 2007 Principal 16.56; Charges/Interest 1.76; Total 18.32. 2008 Principal 24.84; Charges/Interest 1.66; Total 26.50. 2009 Principal 24.84; Charges/Interest 1.53; Total 26.37. - Exchange rate arrangement: While officially a managed floating regime, de facto pegged to the U.S. dollar since August 2004. Announcements limiting annual depreciation to one percent (dong depreciated 1 percent in 2004 and 0.6 percent during first eight months of 2005). Fund classification: conventional fixed peg. - Exchange restrictions subject to Article VIII jurisdiction maintained: (i) requirements for proof of payment of taxes other than those specifically due on the underlying transaction; (ii) absolute limits of USD5,000 on foreign exchange available for certain current international transactions by individuals; (iii) restrictions on amounts which nonresidents can re-exchange to exclude re-exchange of recent proceeds of current international transactions. Staff does not recommend approval of these three exchange restrictions. - Technical assistance (2001–2005): Extensive TA and in-country training across tax administration and policy, SOCB restructuring and equitization, banking supervision strengthening, monetary and exchange operations, anti-money laundering, statistics (national accounts, CPI, monetary), debt sustainability analysis, capital markets development, and others. Resident advisor and training activities listed; Resident Representative succession: Mrs. Susan Adams (Aug 2001–Aug 2005) succeeded by Mr. Il Houng Lee. ### Key Tables and Figures (content highlights) - Figure 1–4: Selected economic indicators (1998–2005) covering real GDP growth, domestic investment and savings, industrial production, inflation, monetary aggregates, foreign currency deposits and loans, nominal interest rates, revenue and grants breakdown, expenditure composition, budget financing, external balance, effective exchange rates, external reserves and nominal exchange rates. - Table 1: Social and Demographic Indicators (historical series across multiple years). - Table 2: Selected Economic Indicators, 2000–05 (real GDP, investment, saving, inflation, fiscal, money and credit, interest rates, current account by US$ levels and percent of GDP). - Table 3: Balance of Payments, 2000–05 (current account, trade balance, exports/imports, services, investment income, transfers, capital account, FDI, reserves). - Table 4: Monetary Survey, 2000–2005 (M2, net foreign assets, net domestic assets, domestic credit, components, foreign currency deposits in US$ levels). - Table 5: Summary of General Government Budgetary Operations, 2000–2005 (revenue, expenditure, fiscal balances, financing, public debt stock). - Table 6: Medium-Term Scenario, 2002–10 (growth, inflation, saving–investment balance, external and debt indicators). - Table 7: Indicators of External Vulnerability, 2000–05. - Table 8: Millennium Development Goals indicators and progress. *Source: _cr0622 - 40. It is recommended that the next Article IV consultation with Vietnam take place (IMF staff report content provided).* ### 2004. The IMF has taken the lead in the policy dialogue on macroeconomic policies and has been ### _cr0622 - 2004. The IMF has taken the lead in the policy dialogue on macroeconomic policies and has been ### IMF role and rationale - The IMF has taken the lead in the policy dialogue on macroeconomic policies and has been active on a set of structural issues, especially on trade and banking reform and related SOE reform. - The direct involvement of the IMF in these structural areas is justified because of their potential impact on macroeconomic stability. - Since the expiration of the PRGF in April 2004 the IMF has provided Letters of Assessment in support of the PRSC 3 and PRSC 4 operations. - The IMF takes the lead in revenue management and provides technical assistance to help develop a comprehensive program for reforming the tax system and tax administration. - The IMF advises on the monetary policy functions of the SBV and has been directly and intensely involved in SOCB reform because of its fiscal and macroeconomic implications (in particular NPL resolution and recapitalization, minimizing directed lending, interest rate liberalization, timing of recapitalization). ### World Bank Group strategy and PRSC cycle - The World Bank Group combines analytical and advisory activities, IDA project support, IFC, Mekong Project Development Facility (MPDF) and MIGA activities, a series of PRSCs, and donor partnerships and ODA coordination to support CPRGS objectives. - The current PRSC cycle (PRSCs 1 to 5) covers a five-year period, much the same as the CPRGS and the last Socio-Economic Development Plan. - With the CPRGS approach being integrated into the preparation of the next SEDP (2006-10), future PRSCs are proposed to be aligned to the implementation of this forthcoming five-year plan. - Virtually all IDA credits will provide policy, institutional and infrastructure support for Vietnam’s ongoing transition, with the series of PRSCs being used as vehicles for the policy dialogue. ### PRSC operations: focus, amounts and chronology - PRSC 1: two-tranche operation for US$250 million; approved by the Board in June 2001; based on an Interim Poverty Reduction Strategy Paper (I-PRSP). Focus: liberalizing trade, reforming SOEs, strengthening the banking sector, enabling private sector, improving management and transparency of public finances. - PRSC 2: one-tranche operation for US$100 million; approved by the Board in June 2003; based on the CPRGS. Broadened reforms to include education, health, environmental sustainability, land management, legal development, and public financial management. - PRSC 3: one-tranche operation for US$100 million; approved by the Board in June 2004. Deepened reforms from PRSC 2. - PRSC 4: one-tranche operation for US$100 million; approved by the Board in June 2005. Further deepened reforms. - PRSC operations provide resources directly to the government’s budget and serve as an effective coordination device supported by an increasingly large number of donors. ### Donor coordination and co-financing - The Steering Committee for PRSCs is led by the Deputy Prime Minister in charge of economic reforms and brings together representatives from 24 line ministries and Government agencies. - Donor participation growth: - PRSC 1: 4 donors participated. - PRSC 3: 7 donors participated. - PRSC 4: 11 donors participated. - As many as 15 bilateral and multilateral donors could co-finance PRSC 5. - Co-financing and grant contributions: - Three bilateral donors (Denmark, the Netherlands, and the United Kingdom) have co-financed all PRSC operations. - "These co‑financiers together with Sweden contributed a total of US$43 million to PRSC 1." - For PRSC 2, Denmark, the Netherlands, and the United Kingdom contributed a total of US$ 31 million as grant finance. - PRSC 3: ADB, Canada, the EC and Japan supported PRSC 3, mobilizing the equivalent of US$122 million. - ADB and Japan contributed through parallel lending for PRSC 3; all other co-financiers provided grants. - France, Ireland, Spain and Sweden might be in a position to co-finance PRSC 4. ### IDA lending program scale and IDA portfolio statistics - Over the next two years, the IDA program projections: - Low case: less than US$300 million. - Base case: US$580 million per year. - High case: about US$760 million. - As of May 31, 2005 the original principal of approved IDA credits amounted to US$5.45 billion out of which US$2.86 billion had been disbursed. - Vietnam is the largest IDA-only borrower, and the second largest user of IDA resources in the world after India. ### Selected recent IDA credits and grants (project name — Original Amount (US$ equivalent) — Effective Date) - HIV/AIDS Prevention (Grant) — 35.0 — Aug-05 - 2nd Payments System and Bank Modernization Project — 105.0 — Approved Mar-05 - Forest Sector Development Project — 39.5 — Jul-05 - Water Resources Assistance Project — 157.8 — Dec-04 - Avian Influenza Emergency Recovery Project — 5.0 — Nov-04 - Road Network Improvement Project — 225.3 — Oct-04 - Poverty Reduction Support Credit III — 100.0 — Oct-04 - Urban Upgrading Project — 222.5 — Oct-04 - Poverty Reduction Support Credit II — 100.0 — Dec-03 - Primary Education for Disadvantaged Children Project — 138.8 — Oct-03 - Public Financial Management Reform Project — 54.3 — Sep-03 - Second Rural Finance Project — 200.0 — Apr-03 - System Efficiency Improvement, Equitization and Renewables (Energy Sector) — 225.0 — Feb-03 - Regional Blood Transfusion Centers — 38.2 — Sep-02 - Primary Teacher Development Project — 19.8 — Aug-02 - Community Based Rural Infrastructure Project — 102.8 — Mar-02 - Northern Mountains Poverty Reduction Project — 110.0 — Mar-02 - Ho Chi Minh City Environmental Sanitation — 166.3 — Feb-02 - Mekong Transportation and Flood Protection Project — 110.0 — Oct-01 - Poverty Reduction Support Credit I — 250.0 — Oct-01 - Rural Energy Project — 150.0 — Nov-00 - Coastal Wetlands Protection and Development Project — 31.8 — May-00 - Second Rural Transport Project — 103.9 — May-00 - Three Cities Sanitation Project — 80.5 — Jan-00 ### Sectoral priorities and programmatic approaches - CPRGS-identified priorities to enhance equitable, inclusive, and sustainable development: - Disadvantaged and lagging areas. - Living standards of ethnic minorities. - Gender equality. - Access and affordability of social services for the poor. - Mitigation of impacts from natural disasters. - Enhancing environmental management. - The World Bank favors a sector-wide approach for two projects supporting this agenda: Rural Roads III and Education for All. - Sectoral budget support in the education sector (approved by the Board in June 2005) has been facilitated by progress in piloting a medium term expenditure framework and improved financial management. ### Public financial management (PFM) reforms and PFMRI - Key remaining challenges in public expenditure management: - Integrating formulation of the recurrent and capital budgets within a medium-term expenditure framework. - Improving budgetary data and increasing the transparency of data and information flows. - Ensuring an effective process for prioritizing and reallocating public expenditures to improve sector outcomes, reduce poverty and limit the prospective increase in inequality. - The Government launched the Public Financial Management Reform Initiative (PFMRI), a medium-term program for strengthening public financial management covering five areas: - Public expenditure management (including state budget management, investment planning, and financial management information). - Public debt management. - Revenue management. - SOE fiscal risk management. - Public asset management. - A Government-led Public Expenditure Review-Integrated Fiduciary Assessment (PER-IFA) was conducted in 2005 jointly with the World Bank and other donors; the PER-IFA set forth a series of recommendations which have been endorsed by the Prime Minister and plans to implement these recommendations are under preparation. - The World Bank leads work in developing an integrated financial management information system through a Public Financial Management credit for US$54 million, approved in May 2003; the credit was co-financed by the UK’s DFID and also supports preparation of medium-term expenditure frameworks in four sectors and four provinces and development of a database of public debts. - Joint donor coordination supports modernization of planning and budgeting at the provincial level to roll out CPRGS to provinces. ### SOE reform, privatization strategy and social safety nets - The PRSC-PRGF program retained a relatively large share of the public sector initially and planned to restructure, rather than immediately privatize, large SOEs. - World Bank-supported measures in SOE reform: - Monitoring of 200 highly indebted SOEs. - Strengthening the recording and reporting of systematic data on SOE performance. - Monitoring of ownership transformations (equitizations, sales and liquidations) and SOE creation. - Diagnostic audits of 42 large SOEs to assess SOE viability. - Restructuring three large General Corporations (SOE holding companies) in priority sectors. - Design and implementation of a social safety net for redundant SOE workers. ### Financial sector reform and donor coordination - World Bank leads donor coordination in the financial sector; it hosts regular financial sector donor coordination meetings, supplemented by IMF-hosted donor meetings specific to assistance to the SBV. - World Bank inputs: technical assistance and policy dialogue to rationalize Joint Stock Banks, strengthen State-Owned Commercial Banks (SOCBs), improve supervision, and modernize banking infrastructure. - SOCB-related work areas: - Resolution of Non-Performing Loans (NPLs). - Provisioning for loan loss. - Re-capitalizing banks as they meet restructuring targets. - Introducing internal auditing. - Developing a viable payments system. - Improving regulatory framework for policy lending and developing mechanisms for NPL resolution. - Areas requiring continued collaboration to avoid duplication: - Resolution of NPLs. - Operation of Debts and Assets Trading Company and the State Capital Investment Corporation. - Equitization of SOCBs. - Regulatory framework for policy lending. - Management of fiscal risks by the Government. ### IMF–World Bank collaboration in specific technical areas - Collaboration between the World Bank and the IMF was essential to launch the PRSC-PRGF program in 2001; the process spanned four years, starting at the onset of the East Asian crisis. - The lead agency in each policy area was identified in the Policy Framework Paper and the Structural and Sectoral Policy Matrix for 1999-2001. - World Bank–IMF joint or complementary engagement areas: - External debt management. - Financial sector reform. - SOE reform. - Public expenditure management. - The IMF and the World Bank currently collaborate to strengthen the capacity of the General Statistics Office: - IMF focus: improving balance of payments, national accounts, and price statistics. - World Bank focus: production of high-quality household and enterprise surveys, and access to data. ### Analytics, knowledge products and capacity-building - A Banking Sector Review was completed in 2002. - The 2002 Vietnam Household Living Standards Survey underpinned the Vietnam Development Report (VDR) titled “Poverty” in FY04. - The VDR for 2005 titled “Governance” covered modernizing planning, improving budget allocation, decentralization, strengthening service delivery, managing public assets, administrative reform, fighting corruption, and aid effectiveness. - The next VDR will focus on the private sector. - A Public Expenditure Review-Integrated Fiduciary Assessment was completed in FY05. ### Relations with the Asian Development Bank (ADB) - ADB resumed operations in Vietnam in October 1993. - The latest Country Strategy and Program (CSP), endorsed in January 2002, focuses on four pillars: - Sustainable growth through rural development and private sector development with emphasis on small and medium enterprise development. - Inclusive social development by mainstreaming poverty, gender, and ethnic dimensions with emphasis on secondary education and health. - Good governance with special emphasis on public administration and civil service reform. - Geographic focus on the impoverished central region. - A new CSP (2007–2009) is currently under preparation and scheduled to be approved in *Source: _cr0622 (2004) — IMF/World Bank annex material provided in the supplied content.* ### 2006. The new CSP will be aligned with the Government’s five-year socioeconomic ### _cr0622 - 2006. The new CSP will be aligned with the Government’s five-year socioeconomic ### ADB assistance, lending, and program focus - ADB engagement and modalities - The new CSP will be aligned with the Government’s five-year socioeconomic development plan (2006–2010). - CSP will be results-based with indicators for development outcomes and impacts as developed by the Government. - CSP will be jointly processed with other development partners like the World Bank. - ADB will continue to provide Asian Development Fund (ADF) resources, following Performance Based Allocation, and Ordinary Capital Resource (OCR) for public and private sector operations. - Historical approvals and disbursements (October 1993–end-2004) - ADB approved 49 public sector loans, totaling about US$2.941 billion (ADF) and US$160 million (OCR). - Disbursements in 2004 amounted to US$182.350 million. - ADB provided 162 technical assistance grants amounting to US$108 million. - As of end-2004, three GMS projects for transportation and tourism infrastructure development have been financed. - Sectoral lending (October 1993–December 2004, in millions of U.S. dollars) - Lending total: 49 approvals; Approval Amount: 2,941.57 - Agriculture and Natural Resources: Number 10; Approval Amount 596.70 - Education: Number 5; Approval Amount 239.00 - Energy: Number 3; Approval Amount 299.98 - Finance: Number 6; Approval Amount 335.00 - Health, Nutrition and Social Protection: Number 3; Approval Amount 131.30 - Industry and Trade: Number 2; Approval Amount 68.50 - Law, Economic Management and Public Policy: Number 4; Approval Amount 151.40 - Multisector: Number 4; Approval Amount 220.69 - Transport and Communications: Number 7; Approval Amount 595.00 - Water Supply, Sanitation and Waste Management: Number 5; Approval Amount 304.00 - Program lending and policy support - Ten policy-based program loans approved across sectors including agriculture, financial sector, SOE reform and corporate governance, SME development, public administration reform, and poverty reduction. - Examples and amounts: agriculture US$80 million (1994) and US$60 million (2002); financial sector US$90 million (1996), US$50 million (2002), US$35 million (2004); SOE reform and corporate governance US$100 million (1999; US$40 million OCR); SME development US$60 million (2004); public administration reform US$45 million (2003); poverty reduction US$6.4 million (2004). - Emphasis on policy dialogue across projects to support private sector development and increase efficiency and cost recovery of state-owned utilities. ### Institutional arrangements and cooperation - ADB reorganization and Vietnam Resident Mission (VRM) - ADB reorganized in 2002; Vietnam belongs to the Mekong Department (Cambodia, Lao PDR, Myanmar, Thailand). - VRM strengthened and performing programming functions; as of end-2004, 12 out of 32 on-going projects administered by VRM. - Cooperation with IMF - ADB and Fund staff work closely: ADB staff participate in Fund missions, exchange information, and consult on macroeconomic developments and policy matters; resident missions cooperate closely. ### Macroeconomic and statistical issues (coverage, quality, and TA) - General deficiencies and GDDS participation - Reliability and coverage of macroeconomic statistics have significant deficiencies; methodology and compilation need substantial improvement. - Vietnam is a GDDS participant with metadata published on the Fund’s Dissemination Standards Bulletin Board since September 30, 2003. - National accounts - GSO provides quarterly and annual GDP by type of economic activity and annual GDP by expenditure (both current and constant prices); monthly/annual external trade, industrial output, retail sales, and prices. - New GDP methodology introduced in 2001; two handbooks on sources and methods published in 2003 in Vietnamese and being translated to English. - May 2005 release: annual 2004 enterprise survey results used for GDP estimates at constant 1994 prices. - STA peripatetic expert assisting GSO since January 2002 on enterprise and census data use, GDP at constant prices, household final consumption expenditure estimates, quarterly GDP, foreign trade and producer price indices, and wage indices. - Prices - CPI compiled monthly since January 1996 in line with international standards. - Effective July 2001, CPI rebased to 2000 with larger nonfood weight using 1998 VHLSS; weights planned to be revised when 2004 VHLSS results are available. - Producer price index introduction planned in late 2001 delayed for technical reasons. - Government finance statistics - MoF State Budget Department produces provisional monthly, quarterly, and annual fiscal data; final fiscal year data produced after about six months. - Consolidated state budget covers central, provincial, district, and commune levels; excludes quasi-fiscal activities of SOEs and extrabudgetary funds (Social Security Fund, Enterprise Restructuring Fund, Development Assistance Fund, Export Support Fund, Sinking Fund). - Basis of recording mainly cash for final annual data; provisional data vary by source and include forecast components. - Progress made: improved budget management law, adoption of a 1986 GFS-consistent budget classification, posting of annual budget outturns and plans on MoF website since late 2001. - Ongoing reforms: gazetting and publishing the annual national budget, preparing commune-level budgets, implementing GFS-based functional classification, revising government accounting standards, introducing an integrated financial management system (IFMS). - Monetary and financial statistics - SBV reports monetary survey and central bank balance sheet monthly (typically six-week lag); consolidated balance sheets for six state-owned and 78 non-state deposit money banks and individual balance sheets for four large SOCBs monthly (typically eight-week lag). - Recent submission lags and discrepancies due to new chart of accounts; data on foreign reserves received with substantial lags. - New SBV reporting forms and STA recommendations aim to improve sectorization of bank credit, reclassification of on-lending funds, and compilation of Fund accounts in monetary statistics; follow-up mission April 14-28, 2005. - External sector statistics - SBV compiles quarterly and annual BOP with one- to two-month lag; data published to Fund less timely (IFS July 2005 issue includes data for 2002). - Commodity breakdown unknown for approximately 17 percent of exports and 22 percent of imports in 2004. - Invisibles largely based on banking records; improvements needed for tourism revenue and workers’ remittances. - FDI statistics compiled by SBV from enterprise surveys supplemented by SBV branches; MPI also collects administrative FDI data. Problems remain with survey response rates and distinguishing head office/nonresident liabilities. - Overlapping responsibilities for debt statistics across SBV, MoF, MPI have caused coverage gaps (e.g., leasing arrangements, foreign grants). ### Debt Sustainability Analysis — Public sector (DSA) - Framework and approach - DSA carried out in two stages: baseline that abstracts from contingent liabilities and two scenarios with alternative assumptions about fiscal cost of SOCB reform. - Baseline aims to stabilize debt-to-GDP ratio near current level; alternative scenarios explore contingent liabilities from SOCB recapitalization. - Baseline scenario (key assumptions and projections) - Public and publicly-guaranteed debt increases slightly from about 41 percent of GDP in 2005 to 42½ percent in 2009, before stabilizing. - NPV terms: debt increases from 28 percent of GDP in 2005 to about 29 percent of GDP and stabilizes at that level over the long term. - Baseline assumptions: - real GDP growth of 7–7½ percent; - a fiscal deficit, including net-lending and off-budget investment expenditure, of 3½ percent of GDP starting in 2006, based on official budget balance narrowing from 1½ percent of GDP in 2004 to less than 1 percent of GDP over the medium term, net lending reduced from about 2 percent of GDP in 2004 to less than 1½ percent of GDP by 2010, and only 70 percent of the authorities’ planned infrastructure spending program of 110 trillion dong is executed over 2005–2010; - decreasing reliance on ODA from 2010 onward. - Baseline projection (select values, NPV of public and publicly guaranteed debt in percent of GDP): - 2005: 28.0 - 2006: 27.9 - 2007: 28.1 - 2008: 28.2 - 2009: 28.3 - 2010: 28.8 - 2015: 29.1 - 2025: 28.7 - Memo: public and publicly guaranteed debt in percent of GDP (in dong): - 2005: 41.2 - 2006: 41.6 - 2007: 42.2 - 2008: 42.5 - 2009: 42.5 - 2010: 42.4 - 2015: 42.4 - 2025: 42.3 - Alternative scenarios and stress tests (summary) - Risks to baseline include permanently lower growth and higher primary deficit; full implementation of authorities’ infrastructure spending program under average oil price US$58.70 per barrel would modestly increase NPV (scenario A4); full implementation with oil prices 20 percent lower than WEO baseline over 2006–2010 would lead to continual increase in NPV (scenario A5). - Memo items: - Real GDP growth: 7.5 7.4 7.4 7.4 7.3 7.3 7.0 7.0 (presented as a series across projection years) - Overall fiscal deficit including off-budget investment expenditure: -3.8 -3.5 -3.5 -3.5 -3.5 -3.5 -3.5 -3.5 - Non-oil fiscal balance: -11.4 -11.8 -11.1 -10.4 -9.8 -9.2 -8.2 -6.2 - Primary balance (Baseline): 3.0 2.2 2.1 2.1 2.0 2.0 1.9 1.4 - Banking reform / contingent liability scenarios - Scenario 1 (high-cost provisioning approach) - Methodology: incorporates provisioning assumptions based on international experience; assumes losses of 33 percent on outstanding loans, 40 percent on concessional and ODA loans, 50 percent on directed loans, 100 percent on frozen and debt recovery loans, 50 percent on letters of credit, 30 percent on loan guarantees, and 40 percent on performance guarantees and other off-balance sheet items; overall provisioning rate 38 percent for past loans and 22 percent for off-balance sheet items. - Resulting shortfall: 20 percent of GDP. - Financing assumption: shortfall filled by government bond transfers to SOCBs, spread over two years (2006–2007), bringing banks to solvency (CAR set at zero). - Debt impact: debt stock jumps to over 63 percent of GDP in 2007 before primary deficit adjustment; long term debt around just above 47 percent by 2025. - Scenario 2 (SBV Decision 493 based approach) - Methodology: provisioning per Decision 493 loan classification: 5 percent for loans up to 90 days overdue, 20 percent for 90–180 days, 50 percent for up to 360 days, 100 percent above that threshold; loans with insufficient information placed in highest risk category; average provisioning 13.3 percent applied to off-balance sheet items; provisioning increased by 50 percent to account for misclassification; CAR set at 8 percent of assets. - Resulting shortfall: 8 percent of GDP. - Financing assumption: shortfall filled by government bond transfers to SOCBs, spread over five years (2006–2010). - Debt impact: debt stock approaches the government’s notional ceiling of 50 percent of GDP by 2010 and declines slowly to about 44 percent of GDP in 2025. - Staff interpretation and policy implication - Contingent liabilities from SOCB reform are the largest risk to medium-term debt sustainability. - Public debt dynamics are highly sensitive to contingent liability size, pace of banking reform, credit growth control, fiscal consolidation, and investment quality. - Given uncertainty, the overall deficit target of 3½ percent of GDP should be viewed as an upper bound for a sustainable fiscal stance. - Staff consider Vietnam at low risk of external debt distress but note public debt dynamics could deteriorate under stress scenarios and require close monitoring. ### Debt Sustainability Analysis — External debt (baseline and stress) - Baseline external debt outlook (selected projections and indicators) - Total external debt stock would rise modestly to about 40 percent of GDP by around 2015 before declining to about 32 percent in 2025 (baseline assumptions tied to narrowing current account deficit, slight increase then decline in ODA in U.S. dollar terms, increase in FDI and commercial borrowing). - NPV of debt-to-exports ratio falls from 28 percent in 2005 to 18½ percent in 2025. - Debt service ratio falls from 5.3 percent in 2005 to 4.7 percent in 2025. - Table highlights (selected baseline values) - External debt (nominal) (percent of GDP): 2005: 34.2; 2006: 35.9; 2007: 37.7; 2008: 38.7; 2009: 39.4; 2010: 39.5; 2015: 41.8; 2025: 31.4 (table contains full time series). - NPV of external debt (percent of GDP) (select): 2005: 19.3; 2006: 19.5; 2007: 20.9; 2008: 22.3; 2009: 23.1; 2010: 24.1; 2015: 24.9; 2025: 29.3; (Note: staff simulations provide full series). - Sensitivity and bound tests - Stress scenarios include adverse changes in GDP growth, export performance, financing terms, one-time real depreciation, and increases in other debt-creating flows. - Table 3b and figures present sensitivity of NPV of debt-to-GDP, NPV of debt-to-exports, and debt service ratios under alternative scenarios and most extreme stress tests. - Staff assessment - Staff consider Vietnam at low risk of external debt distress; external debt ratios are well below applicable policy-based thresholds under baseline and standard stress tests. - Main external risk factors: significant deterioration in terms of external financing, and significantly weaker than projected export performance. *IMF staff report content (excerpts) as provided in the source document.* ### 41. Recently-released data point to continued buoyant activity during the third ### 41. Recently-released data point to continued buoyant activity during the third ### Economic activity and inflation - Real GDP growth: - Picked up to 8.1 percent year-on-year (yoy) during the first nine months of 2005. - Staff report projection for full-year 2005: 7½ percent. - Earlier projection in PIN: Real GDP growth projected to be about 7½ percent for the rest of 2005. - Medium-term growth expectation (assuming appropriate policies): in the range of 7 – 7½ percent. - Inflation: - Picked up to 7¾ percent in September (yoy). - Seasonal factors and the 20.7 percent increase in the common minimum wage (effective October 1, 2005) expected to keep inflationary pressures strong in Q4 2005. - Preliminary SBV projection of full-year inflation: about 8 percent. - Staff report projection of full-year inflation: 7 percent. - PIN projection: inflation would remain higher than in recent years, at around 7 percent by end-2005. - Medium-term inflation expectation (assuming appropriate policies): around 3½ percent. ### Minimum wage increase and fiscal implications - Minimum wage change: - Common minimum wage increase: 20.7 percent, effective October 1, 2005. - Affects incomes of about 11 million salaried workers. - Previous minimum wage raise: January 2003 (by 38 percent). - Average civil service wages were increased by another 30 percent in October 2004. - Fiscal and macroeconomic effects: - The minimum wage increase can be expected to add to consumption demand in 2006 and depress profitability of state-owned and domestic private enterprises. - Government’s wage and pension bill is projected to increase by at least 1 percentage point of GDP in 2006. - Short-run buffering: large oil revenue windfall may buffer impact on the overall budget deficit in the short run. - Policy trade-off: increased burden of adjustment on investment and nonwage recurrent spending. ### Monetary and credit developments - Credit and money growth (reported series and timing): - Rate of growth of credit to the economy: fell marginally to 38 percent (yoy) in June. - Broad money growth: remained unchanged at around 26½ percent. - Total bank deposits: expanded at about 30 percent. - Reserve money growth: slowed from 15½ percent in May to 11½ percent in June. - Earlier reports: credit growth surged to 42 percent in 2004, and remained high at 39 percent as of May 2005. - Broad money growth rose to 30 percent in 2004, before edging down to a rate of 27 percent (yoy) in May 2005. - Policy stance and risks: - SBV maintained a broadly accommodative monetary policy. - SBV Governor letter on August 25, 2005 encouraged commercial banks to actively consider granting loans to big government projects to support government growth target. - Continuation of recent policy stance would likely lead to a significant overshooting of the SBV’s official credit growth objective for 2005. - Directors urged a more concerted effort to tighten liquidity and to discontinue encouraging state-owned banks to finance large state-owned enterprise projects. - Directors stressed strengthening the monetary policy framework, including greater central bank independence and focus on price stability. ### Banking sector reform and equitization - Vietnam Bank for Foreign Trade (VCB) equitization decision (Prime Minister, September 21, 2005): - Pilot equitization with the state maintaining majority share. - First phase in 2006: shares sold in stages, each stage limited to 10 percent of equity for recapitalization; state ownership maintained at no less than 70 percent of VCB’s total equity. - Sales to continue during 2007-2010; state guaranteed to retain at least 51 percent of shares by end-2010. - Ownership limits among eligible buyers: - Each legal entity: up to 10 percent of the equity. - Each individual: up to 5 percent. - Each foreign investor: up to 10 percent. - Total foreign investor holdings limited to 30 percent. - Assessment: envisaged ownership limits would make it difficult for any foreign strategic investors to make an important contribution to corporate governance improvements. - Broader banking reform measures and Director recommendations: - SBV tightened loan classification, provisioning, and prudential standards in April 2005. - Directors supported plans to strengthen banking supervision, liberalize the banking sector, improve governance, and develop a financial sector reform roadmap. - Directors emphasized equitization should be accompanied by elimination of residual policy lending, improved commercial incentives, and strengthened SBV supervisory authority. - Some Directors encouraged allowing strategic investors to take over bank management to improve governance and efficiency. - Concern that uncertain loan quality and weak SOCB balance sheets, combined with high credit growth, could give rise to large quasi-fiscal liabilities threatening medium-term debt sustainability. ### Fiscal position, off-budget risks, and public debt - Fiscal indicators and developments: - Official budget deficit narrowed from about 2 percent of GDP in 2003 to less than 1½ percent of GDP in 2004. - Overall fiscal deficit (official budget + off-budget investment expenditure) narrowed from 7.2 percent of GDP in 2003 to 4½ percent of GDP in 2004. - Improvement clouded by augmentation of government’s off-budget investment program for 2005-2010 to 110 trillion dong (15½ percent of 2004 GDP). - Directors urged continued fiscal consolidation to curb inflation and ensure public debt sustainability. - Given projected gradual decline in oil-related receipts from 2007 onwards, Directors called for urgent action to reduce the non-oil fiscal deficit. - Directors suggested saving a good portion of the oil revenue windfall and containing investment and domestically-financed on-lending in light of sharp increase in public wages. - Directors stressed reform priorities: improve tax system, strengthen tax administration, rationalize public expenditure, improve project selection, better integrate capital and recurrent budgets, and adopt integrated accounting and reporting for all budget and off-budget operations and public debt and contingent liabilities. - Warning: public debt stock could rise sharply over the next few years as government covers costs of recapitalization and reform in SOCB and SOE sectors. ### External sector and reserves - External balances and reserves: - Gross international reserves: rose from US$6.3 billion at end-2004 to US$7.1 billion as of end-June 2005 (PIN table shows Gross official reserves, including gold: 6,314 in 2004 and 7,730 in 2005). - Import cover of reserves: about 8½ weeks of imports (end-June 2005). - Current account balance (including official transfers): in millions of U.S. dollars: -2,246 (2005 proj. in table); in percent of GDP: -4.4 (2005 proj. in table). - Exports and imports growth (U.S. dollar terms): exports 21.3 percent (2005 proj.), imports 23.2 percent (2005 proj.). - Directors noted reserve coverage is low and cautioned that loose monetary and fiscal policies could weaken external reserve position. - Directors recommended exploring ways to introduce more flexible exchange rate management and limiting exchange market intervention to addressing disorderly market conditions. ### Structural reforms, trade integration, and governance - State-owned enterprise (SOE) reform: - SOE reform moving forward through share auctions and narrowing of the list of sectors reserved for the state. - Directors urged stepped-up restructuring of SOEs, including equitization, curbing government interference in management and investment decisions, and providing incentives to operate on a commercial basis. - WTO accession and openness: - Authorities continue efforts toward WTO accession. - Directors supported Vietnam’s objective of achieving WTO membership and urged passage and implementation of legislation to create a level playing field and a more liberal and transparent investment regime. - Liberalization of administered prices deemed essential to remove distortions and production bottlenecks and to support anti-corruption efforts. - Anti-money-laundering and terrorism financing: - Directors welcomed the recently-issued anti-money-laundering decree and encouraged pursuit of full membership in the Asia Pacific Group on Money Laundering. - Directors stressed strengthening the regime for combating financing of terrorism, including amending the criminal code to criminalize terrorism financing. - Data and transparency: - Directors urged authorities to improve reliability, timeliness and dissemination of economic data, especially money and banking statistics, off-budget fiscal activities, and public debt and contingent liabilities. - Directors recommended adoption of best practices in fiscal transparency and integrated accounting and reporting. ### Executive Board assessment: key messages and recommendations - Positive appraisal: - Directors welcomed Vietnam’s continuing transition toward a market economy, robust growth, and significant poverty reduction. - Structural reforms and prudent macroeconomic policies have increased attractiveness for foreign direct investment. - Risks and cautions: - Near-term outlook favourable but subject to risks from loose monetary policy and easing fiscal stance. - Pursuit of ambitious short-term growth targets likely to exacerbate inflationary pressures and weaken external reserves. - High credit growth and weak SOCB balance sheets could generate large quasi-fiscal liabilities. - Policy priorities recommended by Directors: - Adopt a more flexible, market-oriented policy framework centered on private sector-led growth, macroeconomic stability, and improved quality of public investment. - Implement more prudent macroeconomic policies and improved public sector financial management. - Accelerate SOE and SOCB reform and recapitalization plans. - Strengthen monetary policy framework and SBV independence with focus on price stability. - Tighten liquidity and stop encouraging state-owned banks to finance large SOE projects. - Explore greater exchange rate flexibility and limit interventions to disorderly market conditions. - Save a portion of oil revenue windfall and contain domestically-financed investment and on-lending. - Improve tax system, tax administration, public expenditure rationalization, and fiscal transparency. - Strengthen anti-money-laundering and terrorism financing regimes. - Improve reliability and timeliness of economic statistics. ### Selected numeric indicators (as presented) - Real GDP (annual percentage change): 2004: 7.7; 2005 Proj.: 7.5 - Industrial output (2004): 16.0 - Saving-investment balance (percent of GDP): 2005 Proj.: -4.4 - Gross national saving (2005 Proj.): 32.2 - Gross investment (2005 Proj.): 36.6 - Inflation (period average): 2004: 7.7; 2005 Proj.: 8.0 - Inflation (end of period): 2004: 9.5; 2005 Proj.: 7.0 - GDP deflator (2005 Proj.): 5.3 - General government total revenue and grants (2005 Proj.): 24.5 - of which: oil revenue (2005 Proj.): 7.6 - Total Expenditure and net lending (2005 Proj.): 27.1 - Current expenditure (2005 Proj.): 17.7 - Capital expenditure (2005 Proj.): 7.6 - Net lending (2005 Proj.): 1.8 - Off-budget expenditure (2005 Proj.): 1.1 - Overall fiscal balance including off-budget expenditure (2005 Proj.): -3.8 - Non-oil overall fiscal deficit (2005 Proj.): -11.4 - Broad money (annual % change): 2004: 30.4 - Credit to the economy (annual % change): 2004: 41.7 - Three-month deposits (households, end of period): 2004: 6.7 - Short-term lending (less than one year, end of period): 2004: 10.7 - Current account balance (in millions of U.S. dollars, 2005 Proj.): -2,246 - Exports f.o.b (annual % change, U.S. dollar terms, 2005 Proj.): 21.3 - Imports f.o.b. (annual % change, U.S. dollar terms, 2005 Proj.): 23.2 - Gross official reserves, including gold (millions of U.S. dollars): 2004: 6,314; 2005 Proj.: 7,730 - Reserve cover (weeks of next year's imports): 2004: 8.3; 2005 Proj.: 8.6 - External debt (percent of GDP, 2005 Proj.): 34.2 - Debt service due (percent of exports of goods and nonfactor services, 2005 Proj.): 5.2 - Exchange rate (dong per U.S. dollar, period average): 2004: 15,745 - GDP (in trillions of dong at current market prices, 2005 Proj.): 806.9 - Memorandum: public off-budget investment program for 2005-2010: 110 trillion dong (15½ percent of 2004 GDP) *IMF Executive Board discussion and Public Information Notice material as presented in the source document.* ### 1. We are pleased to convey to the management and staff of the Fund the authorities’ ### 1. We are pleased to convey to the management and staff of the Fund the authorities’ appreciation for the continued support extended to Vietnam through policy dialogue, technical advice and training over the years. ### Recent Economic Developments - Vietnamese economy transitioning from a centrally planned economy to a state-managed market economy with favorable macroeconomic conditions, socio-economic stability and increasing integration with the world economy. - Performance indicators (2005): - Real GDP growth: 8.1 percent (first nine months of 2005). - Inflation: 7.75 percent (yoy) in September 2005. - Official reserves: US$ 7.1 billion as at end-June 2005. - Macroeconomic outlook: growth remaining robust at more than 7 percent. - External and domestic shocks in the first half of 2005: - Domestic: widespread drought and avian flu causing losses in tourism, agricultural production and decline in hydroelectric power generation. - External: sharp rise in price of key imported commodities and petrol, removal of quotas on textile exports by WTO members, difficulties in seafood exports. - Current account deficit improved since 2004, remained manageable and fully financed by capital inflows from ODA and FDI. - WTO accession by year-end is a key near-term objective supporting FDI rebound and export prospects. ### Fiscal Policy - Government budget deficit developments: - Budget deficit declined from 1.8 percent of GDP in 2003 to 1.7 percent in 2004 and is estimated to have remained restrained in 2005. - Off-budget financing (2002–2004): - Off-budget outlays financed through issuance of infrastructure, education, bank reform and municipal bonds totaled VND 26 trillion. - Overall general government deficit, including off-budget operations but excluding on-lending through the Development Assistance Fund (DAF), was 4.3 percent of GDP in 2003 and declined to 2.6 percent in 2004. - Policy actions to improve fiscal management: - Use of the Medium Term Expenditure Framework to improve expenditure planning and link budgets to outcomes. - Tightened eligibility criteria for DAF lending. - Revenue gains from high oil prices and land user fees contributed to a moderate decline in the fiscal deficit in 2005. - Strengthening tax administration (unifying the corporate tax, modifying personal income tax, launching a pilot VAT self assessment). - Civil service reforms and systematic cost-benefit analysis for projects. - Noted that deeper SOE reform would have a positive fiscal impact. ### Monetary and Exchange Rate Policies - Growth targets and risk management: - Targeted real GDP growth of 8.6 percent in 2005 (to achieve the average growth target of 7.5 percent set out in the 2001-05 five-year plan) viewed as indicative and not to be pursued blindly due to inflation, overheating, and reserve risks. - Credit growth and banking sector risks: - Year-on-year credit growth tightened from 41 percent of GDP in 2004 to 25 percent in 2005 through policy measures. - Measures implemented include increasing policy interest rates (rediscount and refinancing rates), raising reserve requirements, and tightening prudential standards. - SBV introduced new loan classification and provisioning rules and will strictly implement new regulations to strengthen banking supervision. - Concern that rapid credit growth could lead to accumulation of nonperforming loans, fiscal burdens, and threaten medium-term debt sustainability. - Exchange rate policy: - Managed float has kept the Dong-US Dollar exchange rate broadly stable over the past two years, aiding inflation containment and supporting investment and trade. - Authorities exploring gradual introduction of more exchange rate flexibility in the medium-term while using administrative measures to protect domestic and financial systems. - External liberalization: - Authorities agreed to accept the obligations of Article VIII of the IMF’s Articles of Agreement and received Fund advice to draft new foreign exchange legislation, scheduled for approval by the National Assembly in November 2005. ### Structural Reforms - Reform priorities: improve efficiency of public sector financial management; accelerate SOE and SOCB reforms; maintain open and fair trade and investment regimes; ensure public debt sustainability; encourage private investment. - Financial sector reforms: - Roadmap developed for reform and recapitalization of main SOCBs. - SBV issued new regulations on asset classification, provisioning, capital adequacy, and other prudential regulations including liquidity mismatches. - Strengthened banking supervision and regulation to reduce non-performing loans and quasi-fiscal liabilities. - Equitization of Vietcom Bank identified as an important pilot initiative to commercialize operations and provide reform momentum. - SOE reforms: - Master Plan for SOE transformations implemented, including auction mechanisms, SOE rating exercises, strict budget controls and corporate governance improvements. - Legal revisions to improve equitization, extend equitization to larger enterprises and list equitized SOEs on the stock market. - By September 2004, about 55 percent of planned transformations were completed. - Authorities plan to transform an additional 1,154 SOEs – about 25 percent of total SOEs listed in 2001 – in 2005 and the first half of 2006. - Private sector and FDI: - Supportive measures for private enterprises: Common Investment Law and Unified Enterprise Law; commitment to streamline business registration. - New private businesses registered: 37,230 in 2004 and 10,993 in the first four months of 2005. - FDI: in the first four months of 2005, 177 investment projects were licensed with total committed investment of US$ 1,450 million. - Progress on international integration and compliance with tariff reduction schedules and international codes for import/export classification to meet WTO accession requirements. ### Other Issues - Transparency and administrative reform: - Steps taken to improve transparency, particularly in budget publication. - Administration reforms implemented under comprehensive civil service reform. - Grassroots democracy regulations and One Stop Shop implementation at local level improved accessibility to administrative services, transparency on fees, service quality and procedure streamlining. - Anti-corruption and AML/CFT: - Emphasis shifted toward systemic measures in the fight against corruption. - New law on anti-corruption drafted by the Government Inspectorate scheduled for approval by the National Assembly in 2005. - Anti-Money Laundering decree issued. - Authorities intend to amend the criminal code to criminalize the financing of terrorism and to incorporate and implement other requirements for Combating the Financing of Terrorism. ### Conclusion - Vietnam made considerable progress in 2005 through structural reforms and sound macroeconomic policies with ongoing support from the international community. - Authorities reaffirm determination to continue prudent macroeconomic policies and progressive, steady reform implementation. - Authorities look forward to continued close and effective cooperation with the Fund through constructive communication and effective consultation on macroeconomic policies. *Conveyed to the management and staff of the Fund by the authorities.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0622.pdf_