Public Information Notice: IMF Concludes Article IV Consultation with Vietnam

August 4, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 21, 2000, the International Monetary Fund's (IMF) Executive Board concluded the Article IV consultation with Vietnam.1


Vietnam's economic performance deteriorated sharply starting in late 1997, reflecting the adverse impact of the Asian crisis and domestic structural weaknesses. Owing to close investment and trade links with the region, Vietnam's real GDP growth fell from near double digits in the mid-1990s to an estimated 3½ percent in 19982. This was the result not only of plunging FDI, but also of stress in the state-owned enterprise (SOE) and banking sectors. Having had limited access to short-term capital, Vietnam did not experience an abrupt withdrawal of such capital that led to deep recessions in the Asian crisis economies, but it is now facing a more drawn out adjustment process because of the reduced flows of long-term capital.

The crisis revealed weaknesses in the SOE and state-owned commercial bank (SOCB) sectors as the main sources of vulnerabilities in Vietnam's economy, stemming from a strategy that relied on capital-intensive investment and import substitution. During the economic downturn, the SOE sector proved uncompetitive and incurred large losses-leading to a high level of nonperforming loans in the SOCBs-while the private (nonstate) sector was small and burdened by regulations. Moreover, the sentiment turned negative for foreign direct investment (FDI), which was the engine of growth in the mid-1990s, reflecting investors' deep concerns over the slow pace of economic reform and the poor business environment in Vietnam.

The Vietnamese economy began to rebound starting in mid-1999, led by strong export performance and supported by increasingly accommodative fiscal and monetary policies. Real GDP growth rose moderately to 4¼ percent in 1999 owing mainly to large increases in oil exports and rice production, but FDI and domestic demand remained depressed, and imports were compressed for the third consecutive year. Reflecting lower food prices and weak demand, inflation fell to near zero at year-end, with the core (non-food) inflation rate at 2½ percent. The external current account shifted from a deficit of 4 percent of GDP in 1998 to a surplus of 4½ percent in 1999, while gross official reserves rose strongly to US$2.7billion, or 9 weeks of next year's imports. In 2000, real GDP growth is projected to rise slightly to 4½ percent, driven by domestic demand, as the contribution of net exports is expected to be negative following a recovery in imports. Also, FDI is expected to remain depressed.

Monetary conditions were relaxed in 1999, in response to improvements in the external position. The ceiling on local currency lending rates was reduced throughout 1999, with the benchmark rate falling by 3 percentage points to 12 percent by year-end. Local currency deposit rates also declined, leading to a portfolio shift toward foreign currency deposits. Foreign currency deposits also rose as a result of a liberalization of regulations governing inward remittances from overseas Vietnamese and the opening of foreign currency accounts. Nonetheless, overall bank credit rose by only 19 percent (from 16 percent in 1998), most of which in support of export-oriented and agricultural-related activities, including for the government's flood relief effort.

In an effort to spur recovery, fiscal policy was eased cautiously in 1999 and the overall budget deficit (on a cash basis, excluding onlending) rose to 0.9 percent of GDP. The larger deficit reflected additional capital spending, mainly on rural projects (only partly implemented in 1999), and outlays for flood relief late in the year. In 2000, the overall budget deficit is expected to widen to 3½ percent of GDP, with the carry-over of capital expenditures and a 25 percent increase in civil service wages (partly offset by selected staff cutbacks).

Progress on structural reforms was made during 1999 and the first half of 2000, although the gap between plans and action remained wide and the pace of reform continued to be slowed by the time needed to build broad political support. Actions to promote private sector development included passage of a new Enterprise Law aimed at creating a more liberal environment for domestic private enterprises, and amendment of the Foreign Investment Law that included a relaxation of the foreign exchange balancing requirement for foreign-invested enterprises. On SOE reform, the pace of SOE equitization was sped up and a SOE reform plan was announced in May 2000. In the banking sector, the authorities continued to take action against the weakest joint-stock banks, but less progress was made on formulating SOCB restructuring plans. In the trade area and exchange area, quantitative restrictions were removed on 8 of the 19 key products subject to such restrictions, and the foreign exchange surrender requirement was reduced from 80 percent to 50 percent in August 1999.

Executive Board Assessment

Executive Directors welcomed recent signs of economic recovery based on the strength of exports and supported by accommodative macroeconomic policies. Also since mid-1999, inflation has remained subdued and the official reserve position has improved. Nonetheless, Directors noted with concern that investment remains depressed, and stressed that for the recent recovery to be sustainable, it must be accompanied by supporting structural measures to attract needed foreign direct investment. While noting that some measures have been implemented in the past year, they underscored the need to accelerate the pace of structural reform.

Directors observed that restoring the higher rates of growth necessary for generating needed employment opportunities and achieving lasting reduction in poverty will require not only faster structural reform, but also the continued maintenance of macroeconomic stability. The cautious easing of the fiscal stance in the last two years to support economic recovery was viewed by Directors as appropriate. Over the medium term, however, Directors noted that the budget faces substantial risks, given the weakened revenue performance over the last few years, the heavy debt burden and large losses of the state-owned enterprise (SOE) sector, and the high level of non-performing loans in the state-owned commercial banks (SOCBs). To reduce these risks, sustained revenue efforts and wage restraint would be essential, as well as early actions to resolve problems in the SOE and SOCB sectors to contain their potential fiscal costs. At the same time, Directors recognized the need for the authorities to increase the share of expenditure directed toward social spending.

Noting the rapid growth in bank credit in the first half of 2000, Directors considered that credit policies should be more restrained, both to keep inflation in check and to avoid a further deterioration in bank asset quality, especially for the SOCBs. Credit growth to SOEs should be closely monitored and curtailed to complement SOE reform efforts. Directors recommended that the authorities move quickly to replace the current ceiling on bank lending rates with an interest rate mechanism that would give a greater role to market forces and facilitate the introduction of open market operations.

Directors welcomed the recent steps to ease exchange controls which would help bolster confidence. Directors encouraged Vietnam to increase the flexibility of its exchange rate system and further simplify exchange control procedures, with a view to removing all restrictions on payment and transfers for current account transactions as a basis for accepting the obligations under Article VIII.

Directors noted that the main challenge for banking reform was the restructuring of SOCBs to avoid further increases in quasi-fiscal costs. They stressed that, in defining the overall restructuring framework, priority should be given to concrete steps to strengthen bank management in order to halt the flow of bad loans, and to sharply curtailing directed lending. Furthermore, recapitalization of SOCBs should be phased and conditional on improved management as verified by external audits, and the scope of the proposed asset management company should be confined by absorbing only collateralized loans acquired from banks at market prices. Directors considered that the regulations for loan classification and provisioning would need to be moved closer to international standards to allow for a more realistic assessment of the stock of non-performing loans.

Directors commended the authorities for the work undertaken since the last consultation in developing a medium-term SOE reform plan, noting that efforts in consensus-building had strengthened ownership and the prospects for successful implementation. Directors stressed, however, that an effective reform program would require a strong administrative mechanism, appropriate safety nets for affected workers, and a resolution of the SOE debt problem. Directors also noted that for SOE reform to be fully effective, non-viable loss-making SOEs would need to be targeted for closure or liquidation, and reform measures to stem the losses of SOEs should apply not only to smaller SOEs but also to larger ones.

Directors welcomed the recent progress at opening further the Vietnamese economy to external competition, especially with the removal of quantitative restrictions (QRs) on significant items, and the recent signing of a trade agreement with the United States. Building on this progress toward global integration, Directors urged vigorous implementation of commitments under the ASEAN Free Trade Area (AFTA), especially for the three-year period to 2003, which would imply a further removal of QRs and reduction in tariff rates.

Further improvements in the quality and dissemination of statistics and in policy transparency were considered essential to improve the business environment, increase the credibility of the government's reform efforts, and enhance surveillance by the Fund. The authorities were encouraged to proceed soon with the publication of a Vietnam page in IFS, and to make further improvements in the compilation of the national accounts and the balance of payments statistics, as well as in the coverage and quality of published monetary and fiscal data.

Directors noted the progress made so far in the design of a broad-based reform program and considered that policies along the lines outlined above could pave the way for Fund support under a PRGF arrangement. In view of the reform momentum that appears to be building, they urged the staff and the authorities to work to this end. Directors welcomed the close collaboration between the World Bank and the IMF in supporting Vietnam's reform efforts.

Vietnam: Selected Economic Indicators, 1996-2000

  1996 1997 1998 1999Est. 2000Proj.

Output and prices (Annual percentage change)
Real GDP 9.3 8.2 3.5 4.2 4.5
CPI, period average 5.6 3.1 7.9 4.1 0.5
CPI, end period 4.4 3.6 9.2 -0.2 5.0
Government budget (In percent of GDP)
Total revenue 22.4 20.0 19.6 18.2 18.3
Grants 0.6 0.8 0.6 0.5 0.4
Total expenditure (excluding onlending) 23.1 22.6 20.7 19.6 22.2
Of which: current expenditure 17.4 16.3 15.0 13.2 14.8
Overall fiscal balance (including grants, excluding onlending) -0.2 -1.7 -0.5 -0.9 -3.5
Money and credit (end of period) (Annual percentage change)
Broad money 22.7 26.1 25.6 39.3 25.0
Credit to the economy 20.1 22.6 16.4 19.2 22.0
External sector (Annual percentage change)
Current account balance (in millions of U.S. dollars) -2,431 -1,664 -1,067 -1,252 637
(in percent of GDP) -9.9 -6.2 -3.9 4.4 2.1
Exports of goods, U.S. dollar terms 41.2 24.6 2.4 23.2 12.0
Imports of goods, U.S. dollar terms 25.5 -0.2 -1.1 1.1 15.2
Gross official reserves (in millions of U.S. dollars) 2/ 1,673 1,857 1,765 2,711 3,279
(in weeks of next year's imports of goods and services) 6.4 7.2 6.7 9.1 9.7
External debt (In percent of GDP)
Total convertible currency, including short-term 36.6 38.6 38.1 37.1 37.0
Exchange rate (end of period)
Dong per U.S. dollar 11,150 12,292 13,896 14,028 ...
Real effective exchange rate (annual percentage change) 3.7 12.6 -9.3 -3.2 ...

Sources: Data provided by the authorities; and staff estimates and projections.

1/ According to official estimates, real GDP growth was estimated at 5.8 percent and 4.8 percent in 1998 and 1999 respectively, and is projected at 5.5-6 percent for 2000.
2/ Excludes the foreign currency counterpart of government foreign currency deposits at the State Bank of Vietnam.
3/ Excludes the potential impact on convertible currency debt following the finalization of the debt rescheduling agreement with Russia expected in 2000.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
2 The estimates for economic growth and FDI inflows in 1998-2000 are lower than the official estimates.


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