Public Information Notice: IMF Concludes Article IV Consultation with Vietnam
IMF News, June 8, 1999
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- Published: June 8, 1999
Background
- Executive Board concluded the Article IV consultation with Vietnam on May 21, 1999.
- 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.
- Reforms of the late 1980s and early 1990s facilitated transition to a market oriented economy and attracted large foreign direct investment (FDI) inflows, especially from Asia.
- Reform effort slowed in the mid-1990s; FDI inflows were increasingly channeled to import-substituting and nontradable sectors via joint-ventures with state-owned enterprises (SOEs).
- By 1997 FDI inflows plateaued and signs of stress in the banking, enterprise, and external sectors began to emerge.
Economic performance and projections (1997–1999)
- 1998 impact of Asian crisis and domestic weaknesses:
- Growth slowed sharply to around 3½ percent (1998, preliminary Fund staff estimates).
- FDI inflows fell by two-thirds to $0.8 billion (1998, preliminary Fund staff estimates).
- Inflation accelerated to 9 percent (end-1998) from 3½ percent (end-1997).
- External current account deficit reduced slightly to 4 percent of GDP in 1998.
- 1999 Fund staff projections:
- Output growth for 1999 projected at 3½ percent.
- Inflation projected to be somewhat lower than in 1998.
- External current account deficit projected to increase slightly to 4½ percent of GDP in 1999.
- External developments:
- Imports fell due to slowing domestic demand and foreign exchange shortages.
- Exports stagnated due to weaker regional demand and reduced competitiveness.
- Exchange rate developments:
- Dong depreciated three times by a total of 19 percent over the 18 months to end-1998.
- Real effective exchange rate appreciated by 5 percent over the same period.
- February 1999: new system introduced allowing interbank market depreciation of up to 0.1 percent a day; official rate set as average interbank rate of previous day.
Policy responses and structural developments
- Fiscal and monetary stance:
- Authorities maintained a restrained budgetary stance and eased credit policy for SOEs.
- Overall budget deficit (excluding onlending of foreign aid) for 1998 held to target of 1 percent of GDP with no use of domestic bank financing.
- 1999 budget targets overall deficit at 1 percent of GDP (excluding fiscal costs of structural reforms).
- Broad money grew by 24 percent in 1998 with net international reserves virtually unchanged.
- Credit and banking:
- Growth in bank credit to SOEs accelerated to 22 percent in 1998, from 16 percent in 1997.
- Credit to private enterprises barely increased in real terms in 1998.
- Banking sector weaknesses: rapid accumulation of nonperforming loans, large foreign exchange exposure, weak capital base, low profitability.
- May 1998: authorities began addressing joint-stock bank problems and developing restructuring strategy for large state-owned commercial banks.
- Efforts underway to strengthen bank legislation and enabling environment for comprehensive restructuring.
- SOE reform and equitization:
- Official 1997 data suggest 60 percent of SOEs were running losses or only marginally profitable.
- Equitization program: 130 SOEs (mainly small and medium-size) equitized in the 15 months through March 1999, compared with 17 enterprises during 1992–97; four of the equitized enterprises were opened to foreign investors.
Executive Board assessment and recommendations
- Directors’ diagnosis:
- Performance deteriorated in 1998 due to Asian crisis and domestic structural weaknesses.
- Recognition of continued progress in macroeconomic management and containment of inflation.
- Reform strategy urged:
- Need for a bolder and more comprehensive approach to reform to achieve lasting reduction in inflation and higher sustainable growth.
- Some Directors favored a more gradual approach to preserve social and political stability.
- Priorities for reform (directors emphasized):
- Reform of state-owned commercial banks, large SOEs, and the trade system—these must be accelerated considerably.
- Hardening SOE budget constraints early in reform process.
- Promote the private sector in parallel with SOE reform; level playing field vis-à-vis nonstate sector and foreign joint ventures; reduce barriers to entry and regulatory burden.
- Greater transparency and openness in domestic regulation and data to foster private sector development and recovery in FDI.
- Banking sector recommendations:
- Action plans for each state-owned commercial bank to improve governance, management, operational efficiency, and to restructure nonperforming loan portfolios.
- Phase out policy lending by state-owned commercial banks.
- Allow domestic and foreign private investment in state-owned banks.
- Improve prudential regulation and bank supervision.
- Concern noted about significant share of foreign currency loans in total credit to SOEs.
- SOE sector recommendations:
- Use all policy options: restructuring, full or partial divestiture (including greater flexibility for joint ventures), and closures.
- Promote domestic and foreign private sector role to absorb unemployment from SOE reform.
- Trade reform recommendations:
- Remove nontariff barriers over a relatively short time frame, using transitional tariffs if necessary.
- Phase down tariffs and reduce the number of tariff rates to reduce protection.
- Macro policy mix for recovery:
- Some adaptation appropriate: ease budgetary stance and tighten and redirect credit policy.
- Given low domestic debt burden and prospective donor support, allow budget deficit to widen to accommodate temporary costs of well-designed social safety nets for retrenched workers.
- Slow growth in credit to SOEs; confine credit to viable SOEs with enhanced monitoring of SOE performance; provide more room to support private sector activity.
- External sector and debt policy:
- Adopt a more market-based exchange and trade system to improve business climate and foreign exchange availability for private sector.
- Adopt a cautious external debt policy and closely monitor external borrowing, including loans contracted as part of FDI.
- Data transparency:
- Welcome commitment to publish a country page in International Financial Statistics.
- Much more needs to be done to improve data quality and dissemination toward international standards.
- Coverage of recently published budget information needs to be substantially broadened.
- Publication of financial sector data recommended to increase banking system transparency.
- Fund support and cooperation:
- Strong commitment to the recommended policies essential for Fund support under an ESAF arrangement.
- Directors welcomed enhanced Bank-Fund collaboration in supporting Vietnam’s reform efforts.
- Timing:
- Next Article IV consultation expected to be held on the standard 12-month cycle.
Selected economic indicators, 1995–99 (key figures as presented)
- Output and prices (Annual percentage change)
- Real GDP: 1995: 9.5; 1996: 9.3; 1997: 8.2; 1998: 3.5; 1999 (Est./Proj.): (1999 column header indicated "Est. Proj." but table entries proceed as shown)
- Consumer prices, period average: 1995: 17.0; 1996: 5.8; 1997: 3.2; 1998: 7.7; 1999: 7.8
- Consumer prices, end period: 1995: 13.1; 1996: 4.4; 1997: 3.6; 1998: 9.2; 1999: 7.0
- Budgetary operations (As percent of GDP)
- Total revenue (including grants): 1995: 23.1; 1996: 24.1; 1997: 22.4; 1998: 20.7; 1999: 18.6
- Total expenditure (excluding onlending): 1995: 23.6; 1996: 24.3; 1997: 23.3; 1998: 21.2; 1999: 19.7
- Current expenditure: 1995: 18.4; 1996: 18.3; 1997: 17.2; 1998: 15.5; 1999: 13.4
- Capital expenditure: 1995: 5.2; 1996: 6.0; 1997: 6.1; 1998: 5.7; 1999: 6.3
- Overall balance (incl. grants, excl. onlending): 1995: -0.5; 1996: -0.2; 1997: -0.9; 1998: -1.1
- Money and credit, end of year
- Broad money: 1995: 22.6; 1996: 22.7; 1997: 26.1; 1998: 24.0
- Credit to state enterprises: 1995: 17.7; 1996: 11.3; 1997: 15.6; 1998: 21.7; 1999: 16.0
- Credit to nonstate sectors: 1995: 41.4; 1996: 31.7; 1997: 30.5; 1998: 11.2; 1999: 17.1
- External sector
- Exports of goods, U.S. dollar terms (percent change): 1995: 28.2; 1996: 41.2; 1997: 24.6; 1998: 2.4; 1999: 3.0
- Imports of goods, U.S. dollar terms (percent change): 1995: 41.1; 1996: 25.5; 1997: 3.1
- Current account (in millions of U.S. dollars): 1995: -2,648; 1996: -2,431; 1997: -1,664; 1998: -1,067; 1999: -1,142
- Current account (In percent of GDP): 1995: -13.1; 1996: -10.4; 1997: -6.5; 1998: -4.2; 1999: -4.5
- Gross official reserves: 1995: 1,376; 1996: 1,797; 1997: 2,085; 1998: 2,098
- Gross official reserves (In weeks of merchandise imports): 1995: 8.6; 1996: 10.4; 1997: 10.6; 1998: 10.2
- Medium- and long-term external debt (Percent of GDP)
- Convertible currency: 1995: 31.3; 1996: 33.0; 1997: 35.9; 1998: 36.6; 1999: 46.7
- Nonconvertible currency: 1995: 52.5; 1996: 43.6; 1997: 43.1; 1998: 43.4; 1999: ...
- Exchange rate
- Dong per US$ (end-period): 1995: 11,015; 1996: 11,150; 1997: 12,292; 1998: 13,896
- Real effective exchange rate (percent change, end-period; (-) depreciation): 1995: 8.8; 1996: 3.9; 1997: 12.7
Public Information Notice: IMF Concludes Article IV Consultation with Vietnam — June 8, 1999. IMF EXTERNAL RELATIONS DEPARTMENT, Public Affairs, Media Relations.