Public Information Notice: IMF Concludes Article IV Consultation with Vietnam

June 8, 1999

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 May 21, 1999, the Executive Board concluded the Article IV consultation with Vietnam1.


Vietnam sustained rapid economic growth of 9 percent per year during 1992-97, but became increasingly vulnerable to economic shocks toward the end of this period. The reforms of the late 1980s and the early 1990s facilitated the initial stages of the transition to a market oriented economy, and helped to secure strong macroeconomic performance and attract large foreign direct investment (FDI) inflows, especially from Asia. However, the reform effort slowed in the mid-1990s, and FDI inflows, mainly through joint-ventures with the state-owned enterprises (SOEs), were increasingly channeled to import-substituting and nontradable sectors. By 1997, the FDI inflows plateaued, and signs of stress in the banking, enterprise, and external sectors began to emerge.

The Asian crisis compounded the emerging domestic weaknesses, and hit the Vietnamese economy very hard in 1998. According to preliminary Fund staff estimates, growth slowed sharply to around 3½ percent, FDI inflows fell by two-thirds to $0.8 billion, and inflation accelerated to 9 percent from 3½ percent at end-1997.2 The external current account deficit was reduced slightly to 4 percent of GDP in 1998, as imports fell due to slowing domestic demand and foreign exchange shortages, while exports stagnated due to weaker regional demand and reduced competitiveness. Output growth for 1999 is projected by the Fund staff at 3½ percent, but with somewhat lower inflation than in 1998. External payments pressure, however, is expected to continue, given a further weakening in export performance in the first quarter of the year. As a result, the external current account deficit is projected by the Fund staff to increase slightly to 4½ percent of GDP in 1999.

The authorities responded to the weaker domestic environment by maintaining a restrained budgetary stance, but have eased credit policy for the SOEs. The overall budget deficit (excluding onlending of foreign aid) for 1998 was held to the target of 1 percent of GDP with no use of domestic bank financing. The 1999 budget also targets an overall deficit at 1 percent of GDP (excluding the fiscal costs of structural reforms). The growth in bank credit to SOEs accelerated to 22 percent in 1998, from 16 percent in 1997, while credit to private enterprises barely increased in real terms. With net international reserves virtually unchanged, broad money grew by 24 percent.

On the external side, the dong was depreciated three times by a total of 19 percent over the 18 months to end-1998. However, the real effective exchange rate appreciated by 5 percent in this period, and trade and exchange controls were intensified. In February 1999, a new system for setting the exchange rate was introduced, in which the value of the dong in the interbank market is allowed to depreciate by up to 0.1 percent a day, and the official rate is set as the average interbank rate of the previous day.

In the structural areas, the authorities have taken some limited steps to reform the SOE and banking sectors. Official data for 1997 suggest that 60 percent of SOEs were running losses or were only marginally profitable, despite extensive trade protection. In response, the equitization program for SOEs was given impetus, and 130 SOEs (mainly small and medium-size) were equitized (including four which were opened to foreign investors) in the 15 months through March 1999, compared with 17 enterprises during 1992–97.

In the banking sector, the slowdown in growth and the weakening financial position of the SOEs have been reflected in a rapid accumulation of nonperforming loans, a large foreign exchange exposure, weak capital base, and low profitability. Responding to these weaknesses, the authorities started in May 1998 to address the problems of the joint-stock banks, and have recently begun developing a strategy to restructure the large state-owned commercial banks. On a parallel track, efforts have been underway to strengthen bank legislation and upgrade the enabling environment for a comprehensive restructuring of the banking sector.

Executive Board Assessment

In reviewing recent economic developments, Directors expressed concern that the performance of the Vietnamese economy had deteriorated in 1998, which they attributed to the impact of the Asian crisis, given Vietnam’s extensive trade and investment links with the region, as well as to domestic structural weaknesses. Nevertheless, Directors recognized the continued progress in macroeconomic management, and commended the authorities for their record of containing inflation.

Looking ahead, Directors considered that, while Vietnam would clearly benefit from the emerging economic recovery in the region, it remained essential to take a bolder and more comprehensive approach to reform. Such an approach was needed if a lasting reduction in inflation and a higher sustainable rate of economic growth were to be achieved. A few Directors, however, continued to see some merit in a more gradual approach to reform, stressing the need to maintain social and political stability. Directors emphasized that reforms of the state-owned commercial banks, large state-owned enterprises (SOEs), and the trade system should be the main focus of the reform process, and that these would have to be accelerated considerably. In parallel with SOE reform, concrete measures to promote the private sector were also stressed. Directors also drew attention to the importance of the appropriate sequencing of these measures, underscoring in particular the need to harden SOE budget constraints early on in this process. At the same time, they recognized the crucial need to develop a more effective social safety net, so as to mitigate any adverse social impact of an intensified reform process, and to garner the necessary public support for these efforts.

Directors welcomed the financial support being provided for the reform efforts of Vietnam and other Asian countries in the context of the Miyazawa Initiative.

Directors noted that the recent reform efforts to downsize and rationalize the SOE sector, especially in the larger enterprises, had been limited. Without stronger reforms the sector would be an increasing drag on the banking system and the economy, which would frustrate Vietnam’s efforts to benefit from closer integration with the Asian region. To rationalize the SOE sector, all policy options needed to be incorporated in the reform strategy: restructuring, full or partial divestiture— including greater flexibility for joint ventures—and closures.

Directors noted that the reform of the SOE sector should be complemented by decisive steps to promote the role of the private sector, both domestic and foreign. A dynamic private sector would not only make the environment for SOEs more competitive, but also help absorb any unemployment resulting from SOE reform. In particular, Directors stressed that actions were urgently needed to level the playing field vis-à-vis the nonstate sector and foreign joint ventures companies, and to reduce barriers to entry and the regulatory burden for private enterprises. Greater transparency and openness with respect to domestic regulation and data are also needed for private sector development and a recovery in foreign direct investment.

Directors welcomed the initiation of a restructuring program for joint stock banks, but emphasized that strong actions needed to be taken with respect to the state-ownedcommercial banks in view of their weak financial condition and importance for the economy. Action plans for each of these banks need to be put in place to improve their governance, management, and operational efficiency, and to restructure the nonperforming loan portfolio. They also recommended that policy lending by the state-owned commercial banks be phased out. Some Directors expressed concern about the plan to set up policy banks to provide directed lending to enterprises, but a few others supported this as a transitional measure in the process of state bank restructuring. Directors considered that it would be important to allow domestic and foreign private investment in the state-owned banks. Separately, further efforts would be needed to improve prudential regulation and bank supervision. In this regard, some concern was expressed about the significant share of foreign currency loans in total credit intermediated by the banking system to SOEs.

Directors expressed concern about the continued slow progress in trade liberalization. Stronger liberalization measures will be essential to develop a more competitive domestic sector and to foster a more outward-oriented economy. The main focus of trade reform should be on the removal of nontariff barriers over a relatively short time frame, with the use of transitional tariffs, if necessary. Tariffs should also be phased down and the number of tariff rates reduced to contribute to the reduction in protection.

To support well-designed structural reforms and foster recovery, Directors considered that some adaptation in the mix of macroeconomic policies would be appropriate, by easing the budgetary stance and by tightening and redirecting credit policy. In the face of the projected weakness in revenue performance, they noted the efforts of the authorities to maintain a prudent budget stance in 1999, with some expenditure cuts to provide adequate funding for the most critical economic and social sectors. Within the framework of an effective approach to structural reforms, however, and in light of the currently low domestic debt burden and prospective donor support, Directors generally considered that the budget deficit should be permitted to widen to accommodate the temporary costs of well-designed social safety nets for retrenched workers. At the same time, the growth in credit to the SOE sector would need to be slowed and credit confined to viable SOEs, with a mechanism for enhanced monitoring of SOE performance, while making more room to support private sector activity.

Directors considered that a more market-based exchange and trade system would help to improve the business climate, make more foreign exchange available for the private sector, and facilitate the relaxation of exchange and trade controls. They stressed that to ensure a sustainable external debt burden, Vietnam should adopt a cautious debt policy, including loans contracted as part of foreign direct investment, and monitor closely and comprehensively external borrowing.

Directors welcomed the steps to improve data and policy transparency, including the commitment to publish a country page in International Financial Statistics, but they considered that much more needs to be done to improve data quality and dissemination to move Vietnam closer to international standards. The coverage of recently published budget information needsto be substantially broadened to permit meaningful analysis. Also, the publication of financial sector data would make the performance and activities of the banking system more transparent.

Directors noted that a strong commitment to the policies noted above would be essential for Fund support under an ESAF arrangement, and they encouraged the authorities and staff to work expeditiously to this end. Directors welcomed the enhanced Bank-Fund collaboration in supporting Vietnam’s reform efforts.

It is expected that the next Article IV consultation with Vietnam will be held on the standard 12-month cycle.

Vietnam: Selected Economic Indicators, 1995–99

Est. Proj.
1995 1996 1997 1998 1999

Output and prices (Annual percentage change)
Real GDP 9.5 9.3 8.2 3.5 3.5
Consumer prices
Period average 17.0 5.8 3.2 7.7 7.8
End period 13.1 4.4 3.6 9.2 7.0
Budgetary operations (As percent of GDP)
Total revenue (including grants) 23.1 24.1 22.4 20.7 18.6
Total expenditure (excluding onlending) 23.6 24.3 23.3 21.2 19.7
Current expenditure 18.4 18.3 17.2 15.5 13.4
Capital expenditure 5.2 6.0 6.1 5.7 6.3
Overall balance (incl. grants, excl. onlending) -0.5 -0.2 -0.9 -0.5 -1.1
Money and credit, end of year (Annual percentage change)
Broad money 22.6 22.7 26.1 24.0 15.5
Credit to state enterprises 17.7 11.3 15.6 21.7 16.0
Credit to nonstate sectors 41.4 31.7 30.5 11.2 17.1
External sector (Annual percentage change)
Exports of goods, U.S. dollar terms 28.2 41.2 24.6 2.4 3.0
Imports of goods, U.S. dollar terms 41.1 25.5 -0.2 -1.1 3.1
Current account (in millions of U.S. dollars) -2,648 -2,431 -1,664 -1,067 -1,142
(In percent of GDP) -13.1 -10.4 -6.5 -4.2 -4.5
Gross official reserves 1,376 1,797 2,085 2,098 2,098
(In weeks of merchandise imports) 8.6 8.6 10.4 10.6 10.2
Medium- and long-term external debt (Percent of GDP)
Convertible currency 31.3 33.0 35.9 36.6 46.7
Nonconvertible currency 52.5 43.6 43.1 43.4 ...
Exchange rate
Dong per US$ (end-period) 11,015 11,150 12,292 13,896 ...
Real effective exchange rate
(percent change, end-period; (-) depreciation) 8.8 3.9 12.7 10.4 ...

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

1Under 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.

2These estimates are lower than official estimates for economic growth and FDI inflows.


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