Hanoi, March 14, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. The government of Vietnam has adopted an economic reform program for 2001-03, which aims to increase growth closer to potential in a low inflation environment as the key plank to its poverty reduction strategy. To reach these goals, the government assures you of its determination to pursue sound macroeconomic policies and take firm actions to accelerate economic renovation, state and private sector development, and international integration. The details of the program are set out in the attached Memorandum on Economic and Financial Policies (MEFP) and Interim Poverty Reduction Strategy Paper (I-PRSP). In support of this program, we are requesting a three-year Poverty Reduction and Growth Facility (PRGF) arrangement in an amount equivalent to SDR 290 million (88 percent of quota).

2. The government will provide the Fund with information on a timely basis as might be requested in connection with the progress in implementing the PRGF-supported program.

3. The government of Vietnam believes that the policies and measures set forth in the MEFP and I-PRSP are adequate to achieve the objectives of the program, but will take any other measures as necessary for this purpose. During the period of the arrangement, the government will consult with the Managing Director, on its own initiative or at your request, concerning the adoption of appropriate measures. Under these circumstances, the government of Vietnam will conduct with the Fund the first review of the first-year PRGF-supported program to be completed no later than September 2001. Moreover, while the government of Vietnam has outstanding financial obligations to the Fund arising from loans under this arrangement, it will consult with the Fund from time to time, on its own initiative or at the request of the Managing Director on Vietnam's economic and financial policies.

4. To facilitate wider distribution of the MEFP and I-PRSP, the government of Vietnam has authorized their publication by the Fund.

Sincerely,

/s/

Memorandum on Economic and Financial Policies of
the Government of Vietnam for 2001

March 14, 2001

I.  Introduction

1. This memorandum lays out the economic and financial policies for 2001, the first year program under a three-year PRGF arrangement, and the medium-term framework covering 2001-03. This framework is consistent with the Interim Poverty Reduction Strategy Paper (I-PRSP), dated March 14, 2001.

II.  The Current Setting and Near-Term Outlook

2. A recovery has been underway since mid-1999. The rebound in activity is being led by strong export performance, and supported by expansionary fiscal and monetary policies. Real GDP growth rose moderately in 1999 and further accelerated in 2000 owing mainly to large increases in oil exports and domestic demand stimulus, but private investment, especially foreign direct investment (FDI), remained low. Nonetheless, the external current account surplus is estimated to have narrowed to 2 percent of GDP in 2000, reflecting a strong increase in imports. Gross official reserves leveled off to US$3 billion at end 2000. Despite rapidly rising consumption, the nonfood inflation rate was 2 percent in December 2000 (12-month basis).

3. The 2000 budget as implemented was supportive of recovery, and this expansionary stance was made possible by the windfall in oil revenue. Preliminary estimates suggest that total revenue exceeded the budgeted level by about 3 percentage points of GDP mainly on account of higher world oil prices. The overall budget deficit (official definition, including amortization but excluding onlending) is expected to be 4 percent of GDP, against 5 percent budgeted, as the excess revenue was partly offset by a major boost in spending, and also reflecting weak performance in non-oil revenue.¹ In addition, credit policy was eased in 2000 as part of the government's effort to stimulate demand. Credit was allowed to increase by 38 percent by end year,² double that in 1999. In response to rising demand, the exchange rate was permitted to depreciate by 3 percent, mainly in the latter part of the year.

4. The medium-term outlook, however, remains uncertain with major policy challenges ahead. We are convinced that high sustainable growth rates and lasting poverty reduction will require decisive reforms to address the underlying structural weaknesses. For such reforms to succeed, they must be backed by substantial external support. Taking account of the most recent trends and only a gradual recovery in FDI inflows, we expect a substantial financing gap to emerge during 2001-03 (see para. 29).

III.  Medium-Term Macroeconomic Framework

5. Under our medium-term framework, reform policies will aim at restoring growth closer to Vietnam's potential in a low inflation environment. These goals are central to our poverty reduction strategy. To reach them, we will pursue sound macroeconomic policies and take firm actions to accelerate economic renovation, and promote efficient state and private sector development and international integration. We will give priority to key structural areas, namely banking and state-owned enterprise (SOE) reforms, complemented by continued private sector deregulation and trade opening measures. With these policies, the program's macroeconomic framework for 2001-03 aims at GDP growth of 6-7 percent per year, keeping inflation well under 5 percent, and increasing import coverage of gross official reserves to 9¼ weeks (Table 1). The external current account deficit (including official transfers) is expected to average 2½ percent of GDP.

6. We will aim our overall fiscal stance at protecting medium-term sustainability, giving greater focus to poverty reduction, and minimizing recourse to domestic bank financing. This stance will be underpinned by a significant effort to boost non-oil revenue, expenditure prioritization, and exceptional external concessional assistance to support structural reforms. The budget deficit (official definition) is expected to average about 5 percent of GDP during 2001-03, compared with slightly under 4 percent over the preceding three years.³ The higher deficits reflect the accommodation of the current costs of structural reform. The underlying budget position, exclusive of these costs, will remain prudent.

7. Monetary policy will be tightened in order to ensure low inflation, and to prevent a further deterioration in banks' balance sheets. Banks' lending decisions will be guided by commercial lending criteria, and policy and policy-induced lending through the state-owned commercial banks (SOCBs) will be phased out consistent with the establishment of a policy bank. Increasing reliance will be placed on the use of indirect instruments for liquidity and credit management, and interest rate policies will be made more market oriented. The exchange rate will be managed flexibly, and the government will submit to the National Assembly a proposal to eliminate the tax on profit remittances by foreign-invested enterprises (FIEs) by March 2002.

IV.  Macroeconomic Policies for 2001

8. Under the 2001 program, real GDP growth is projected to remain moderately strong, owing to robust domestic demand. Inflation is targeted at under 5 percent during this period, the external current account is expected to be broadly balanced, and gross official reserves to increase to US$3.6 billion (8¼ weeks of imports). The key macroeconomic policies consistent with these targets are described below.

9. For 2001, our fiscal policies will continue to be accommodative while also providing for structural reform costs. The budget as approved by the National Assembly envisaged the deficit to be capped at 6 percent of GDP based on conservative revenue estimates. The Assembly also decided that this deficit should be reduced by 40 percent of any central government revenue in excess of budget. Fund staff estimates based on the current WEO oil price assumption would point to a deficit of around 5 percent of GDP.⁴ We aim to keep revenue and grants at about 20 percent of GDP, through strong efforts on non-oil revenue to offset the anticipated impact of lower world oil prices. Total expenditure including amortization is projected to stay at around 25 percent of GDP. The deficit would be financed mostly from domestic nonbank sources and external concessional loans. The key policy elements are:

• Focusing tax policies on strengthening and streamlining VAT and customs collections to reverse the recent sharp decline in non-oil revenue as a percent of GDP. Domestic pricing policy for petroleum products will be guided by the need to safeguard revenue. In line with this policy, import tariffs for petroleum products were reimposed in January 2001 in response to lower world oil prices.

• Over the next two years, reducing the number of VAT rates and the scope for exemptions under the VAT and customs. To enhance non-oil revenue performance, technical assistance from the Fund for tax policy and administration is being sought.

• Ensuring funding for critical areas, while keeping expenditure restrained overall. Spending will be redirected toward key social services, especially for primary education and basic health services, and for vital social and economic infrastructure (in particular for rural development) in support of poverty reduction. To ensure funding for such spending, the 16 percent increase in government wages this year is being accompanied by a cut in administrative staff so as to contain the growth in the wage bill in the coming years, and by economies in spending as necessary. Subsidies to SOEs will be avoided.

• Enhancing expenditure management and fiscal transparency through improving fiscal reporting—including expanded publication of the annual budget (and its outturn), centralizing fiscal reporting in the Treasury, and over time bringing into the budget presentation extrabudgetary revenues (and associated expenditures).

10. The costs of banking and SOE reforms over the period 2001-03 are being finalized. Current estimates, based on costing banking reform on Vietnamese accounting standards (VAS), put the total costs at 7 percent of GDP (VND 35 trillion). (Under international accounting standards (IAS) and including debt resolution for SOEs not undergoing ownership transformation, and with the methodology and assumptions used by the Fund staff, total reform costs would be 12 percent of GDP (VND 60 trillion).) The main cost components, under VAS, are:

• The current costs of reforms (totaling VND 11 trillion), including the interest costs of government bonds and safety net costs for SOE labor redundancies (partly covered through the Enterprise Restructuring Fund).

• The capital costs (VND 24 trillion) for absorption of reformed SOEs' nonperforming debt and the resolution of other nonperforming debt through banks' debt recovery efforts, recapitalization of the SOCBs, and the restructuring of joint-stock banks (JSBs). These capital costs will be treated as an extraordinary outlay and financing item, and will be shown in a separate calculation of an expanded measure of the overall fiscal deficit.

The main financing sources comprise banks' internal resources, including loan recoveries and strengthened profitability, nonnegotiable government bonds, bank bonds sold to the public, concessional external support, and other budgetary resources.

11. Tentative estimates based on preliminary data suggest the reform costs in 2001 will be about VND 11 trillion, or 2½ percent of GDP. We are prepared to prudently meet these costs, including through the mobilization of external support, our own resources, and expenditure savings. Reform costs will be assessed periodically, including at the time of the first PRGF review.

12. Monetary policy will be tightened, consistent with the inflation and reserves objectives, and also to safeguard the banking system. In line with the ongoing level of economic activity, credit growth is to be in the range of 20-25 percent year-on-year by end 2001 (Table 2). Credit will be provided only to efficient projects of creditworthy borrowers—state and nonstate—in line with the monetary program under the PRGF. As a result, the rate of expansion of total liquidity in 2001 is projected at 23 percent. Consistent with these targets, the performance criterion for net domestic assets of the banking system for end-June 2001 and benchmarks for end-September and end-December 2001 are set out in Table 3. To achieve these targets, the State Bank of Vietnam (SBV) will limit its gross refinancing to banks to no more than VND 3.5 trillion, and will, if necessary, impose bank-by-bank credit ceilings. It will also rely increasingly on indirect instruments, including through a more active use of the discount rate and more effective conduct of open market operations. At the same time, interest rate policy will be made more flexible, notably through strengthening the base interest rate system. Credit and monetary developments and policies will be reviewed by the SBV on a quarterly basis in consultation with the Fund staff.

13. In support of structural reforms and in view of the current reserves position, the SBV will manage the exchange rate more flexibly, giving a greater role to market forces and minimizing administrative measures. It will also take steps to further deepen the interbank foreign exchange market. During the program period, the SBV will limit its intervention in the interbank market to meeting its international reserves target. The foreign balancing requirement for FIEs was removed in 2000. The surrender requirement, which was lowered from 80 percent to 50 percent in 1999, will be phased out as and when economic circumstances permit and at the latest by the end of the PRGF arrangement. Subject to the acceptance by the National Assembly of the proposal on the tax on profit remittances of FIEs, all remaining exchange restrictions on current international transfers and payments will be removed by end 2002 in order to pave the way for acceptance of the obligations under Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreement.

V.  Structural Policies

14. Decisive structural reforms are vital for putting Vietnam on a sustainable high growth path necessary for a reduction in poverty. We will gear structural reforms toward strengthening competitiveness, opening up the economy, and attracting investment, both domestic and foreign. Our medium-term strategy is therefore to reform the banking and SOE sectors and to strengthen efficiency, in order to accelerate the transition toward a market-based economy and to promote private sector activity. The I-PRSP and its policy matrix outline the envisaged reforms over the PRGF arrangement's period.

A. Banking Sector Reform

15. In the banking sector, our reform strategy aims at restoring soundness to the system and improving the efficiency of financial intermediation. We have adopted a reform approach designed to minimize the potential fiscal costs of reform, avoid moral hazard, and maintain systemic stability, consistent with the program's medium-term macroeconomic framework. Central to this approach are strong efforts to stem the flow of bad loans, phase out policy lending, and put bank operations on a commercial basis.

16. Reform measures are being concentrated on resolving deep-seated problems at the SOCBs through adoption, in March 2001, of a restructuring framework in coordination with SOE reform. With World Bank technical assistance, a medium-term plan has been adopted for Vietcombank (VCB) (representing 10 percent of domestic bank credit) and restructuring plans for the other three banks (Incombank (ICB), Bank for Agricultural and Rural Development (VBARD), and Bank for Investment and Development (BIDV), representing 60 percent of domestic bank credit) will be formulated at the latest by mid-2001. In addition, by end 2003, the government will seek to secure, for one of the SOCBs, strategic equity participation with a reputable foreign partner.

17. To start the bank restructuring process, Decision 284 will be amended before end 2001, to bring loan classification and loan-loss provisioning in line with international standards. In the interim, in order to assess the true financial positions of these banks, we plan to complete as soon as possible audits on IAS for the financial accounts of fiscal year 2000 for VCB and ICB, and in any case at the latest by end 2001. In addition, IAS audits for VBARD and BIDV will be conducted under the terms of the World Bank's Rural Credit 2 Project, at the latest by early 2002. Furthermore, the SOCB plans will adhere to the following principles:

• Strengthen management accountability and corporate governance in order to increase bank independence, profitability, and commercial orientation. At the same time, the government will eliminate policy lending by the SOCBs except under limited and explicitly identified circumstances with government guarantees.

• Set up an asset management company (AMC) to absorb only collateralized nonperforming loans (NPLs) of banks at market value.

• Resolve NPLs through the AMCs and loan workout units of banks. The debt resolution process will include loan reductions and write-offs only for SOEs that are subject to liquidation, divestiture, or equitization under the SOE reform program.

• Phase recapitalization of each SOCB over three years, with the pace conditioned on each bank's ability to meet specified conditions on financial performance, verified by external audits on international standards. These performance indicators will include, among others, annual targets for the recoveries of NPLs.

Implementation of SOCB reform will be monitored jointly by the SBV and the Ministry of Finance (MoF), and technical assistance is being sought from the Fund. Progress in implementing this reform will be assessed in consultation with the World Bank by the first PRGF review.

18. We will continue to restructure and strengthen the JSBs. The SBV has completed its financial assessment of the 48 JSBs and has approved restructuring plans for all of them. Restructuring efforts will be accelerated, and we are prepared to revoke licenses of and/or merge banks now under special control/supervision by October 2001. Improvements will be made to mechanisms for rehabilitating marginally capitalized but viable banks and for addressing insolvent ones. Over the medium term, we envisage the JSB system to be rationalized with a substantially smaller number of banks.

19. Continued efforts will be made to strengthen the regulatory framework and supervisory oversight of all banks. Regulations have been adopted to upgrade the legal and prudential framework for, and supervision of, the banking system. The legal framework for creditor rights will be strengthened, especially with respect to the foreclosure of collateral, liquidation of assets on a market basis, and transfer of land-use rights. The SBV will develop and implement policies and procedures required for a risk-based approach to banking supervision. On-site and off-site bank supervision will also be reinforced. During the PRGF arrangement's period, accounting standards governing the financial sector will be moved further towards international practices.

B. State-Owned Enterprise Reform

20. In tandem with SOCB reform, we have adopted and will announce soon a medium-term SOE reform program covering 2001–03. This program is designed to curb SOE losses and improve the efficiency and competitiveness of the enterprise sector. Over the period 2001-03, we are aiming at subjecting 1,800 out of 5,571 SOEs to reform measures (including 1,411 equitizations, 142 divestitures, and 219 closures/liquidations), and a further 197 SOEs would be merged. This program will cover around 10 percent of SOEs' debt, according to preliminary figures. As a necessary adjunct to SOCB reform, we aim to reinforce this program over time by including additional nonviable loss-making SOEs for closure/liquidation, and highly leveraged, larger SOEs in the list of enterprises subject to reform.

21. To implement this reform plan, we are taking concrete measures to promote equitization/divestiture and ease the transition of affected workers. We are developing a program, to be funded from our own and concessional external resources, to give priority to resolving debt of the above reforming SOEs. Debt of other SOEs will be resolved only after a satisfactory restructuring plan involving labor redundancies has been approved by the MoF, and such resolution will be subject to financing availability. To streamline the equitization process, the implementing decree will soon be revised to expand capital and security markets, to remove the caps on the size of shareholdings, and to improve the transparency of the process. Social safety nets will be provided through the newly-established Enterprise Restructuring Fund.

22. In order to strengthen the financial discipline on SOEs, a monitoring system has been put in place, on a quarterly basis, for a targeted group of 200 large SOEs' outstanding debt to banks and to the government and other budget support.

23. We are strengthening the implementation mechanism for SOE reform, but substantial technical assistance will be required. In particular, the National Steering Committee for Enterprise Reform and Development has been upgraded and is being chaired by the First Deputy Prime Minister. Technical assistance is being provided by the World Bank and other donors concerning social safety nets, pilot restructuring of three general corporations, and the implementation of equitization and divestiture.

C. Other Structural Areas

24. We will continue to vigorously pursue international integration as a means to strengthen competitiveness. Our trade policy is being built on the implementation of commitments under the ASEAN Free Trade Area (AFTA) and the recently concluded bilateral trade agreement with the United States. In particular:

• We have adopted and will publish by end-March an import-export regime for 2001-05, including a timetable for a phased removal, on a multilateral basis, of quantitative restrictions (QRs), which will be replaced by tariffs and completed by the start of 2003 at the latest for six products (cement and clinker, remaining steel products, paper, construction white glass, vegetable oil, and granite and ceramic tiles). Accordingly, at the start of 2003, QRs will only remain on five products (motor cars, motorcycles, sugar, alcohol, and petroleum products), and other currently banned imports as stipulated in the attachment to the above mentioned import-export regime.

• AFTA tariffs on the majority of tariff lines of products subject to the tariff reduction roadmap of AFTA, will be reduced to at most 20 percent by the start of 2003, and further to 0–5 percent by the start of 2006.

• Trading rights for domestic firms have been fully liberalized, permitting all business-registered domestic firms to import any goods, in line with enterprise and commercial laws. Trading rights for foreign-invested firms will be liberalized through further amendments to the Foreign Investment Law.

• Rice export quotas were removed starting 2001; restrictions on enterprises permitted to export rice and rice export licensing will also be lifted, and a more liberal regime adopted.

• The government will cease granting any new and phase out all existing ad hoc (case-by-case) exemptions on import tariffs during 2001–03.

25. We have adopted a broad range of measures to promote the private sector, by easing barriers to entry and leveling the playing field vis-à-vis the state sector. In addition to the other sectoral measures, a significant number of implementing regulations for the new Enterprise Law have been issued that sharply reduce the number of sectors requiring business licensing and make business registration virtually automatic. Furthermore, access to bank credit by the private sector has been improved by allowing the use of land use rights and other fixed assets as collateral. We have removed the approval requirements for establishing foreign investment in a number of exporting activities. We have also increased the flexibility for forming 100 percent foreign-owned enterprises, and have begun phasing out the dual pricing system for labor costs and utility rates for FIEs. Further liberalization of the environment for foreign investment will be undertaken during the PRGF arrangement's period.

VI.  Statistical Issues and Policy Transparency

26. We are taking steps to improve data quality, transparency, and timeliness of data publication. Efforts will be made to strengthen the quality of data on the national accounts and balance of payments, in particular FDI; technical assistance is being sought from the Fund. To better inform the public of the intentions and outcomes of economic policy and to bolster investor confidence, we have begun publishing the annual state budgets, and a Vietnam page is now included in the Government Finance Statistics Yearbook. In addition, we will expand the range of published fiscal data, and finalize a Vietnam page in International Financial Statistics by March 2001.

27. Regarding reporting of data, we will reduce the reporting lag for monetary and external sector data, and improve the timeliness and frequency of the reporting to the Fund for certain financial sector data. Furthermore, we will accelerate preparation for Vietnam's participation in the Fund's General Data Dissemination System.

28. In connection with assessments to safeguard the use of Fund resources, we intend to conduct an external audit of the financial statements of the SBV in line with the Law on State Bank of Vietnam by June 2002.

VII.  Program Financing

29. With the policies described above and in the I-PRSP, the external current account deficit is projected to widen to an average of about US$0.9 billion per year (2½ percent of GDP) during 2001-03. Vietnam's capacity to secure external financing will depend critically on maintaining macroeconomic stability and timely implementation of reforms. Currently, the external financing gap is projected to total about US$1.2 billion during 2001-03. In addition to PRGF support, this gap would be covered by program lending from the World Bank (including under the parallel programmatic Poverty Reduction Support Credit (PRSC)), and other multilateral and bilateral assistance on concessional terms.

30. In view of our limited debt servicing capacity, external borrowing will be kept in check and closely monitored to ensure a sustainable debt burden. The rescheduling agreement on transferable ruble debt to Russia was finalized in September 2000. As regards the contracting or guaranteeing by the public sector of new nonconcessional loans, the government will observe the external debt ceilings for the first-year program. The government will also not incur any arrears on external payments during the period of the PRGF program.

VIII.  Program Monitoring

31. The period for the first-year PRGF program is the calendar year 2001. The first review under the PRGF arrangement will be undertaken with the Fund by September 2001 to assess implementation of macroeconomic policies and progress in banking and SOE reforms. The second review will be undertaken by March 2002. Quantitative performance criteria and benchmarks are summarized in Table 3. The prior actions for approval of the PRGF arrangement and structural performance criteria and benchmarks are in Table 4. Their measurement and monitoring, as well as other program reporting requirements, are described in the attached Technical Memorandum of Understanding on program monitoring (Annex).

32. The government believes that the policies described above are adequate to achieve the objectives of the program and, on this basis, hereby requests approval of the PRGF arrangement. The government stands ready to take any additional steps that may be necessary and will consult the Fund on this matter in line with established Fund procedures.

Attachments (Use the free Adobe Acrobat Reader to view the Tables listed below).

Table 1. Vietnam: Medium-Term Macroeconomic Framework, 1999-2003

Table 2. Vietnam: Monetary Program, 1999–2001

Table 3. Vietnam: Quantitative Performance Criteria and Benchmarks Under the First-Year PRGF Program

Table 4. Vietnam: Key Structural Policy Actions Under the First-Year PRGF Program

Annex. Technical Memorandum of Understanding

This memorandum sets out (i) the definitions of quantitative performance criteria and benchmarks for the first-year PRGF-supported program (Table 3), and (ii) related reporting requirements to the Fund's Asia and Pacific Department (Table 5).

I.  Definitions¹

Item 1: Net domestic assets (NDA) of the banking system

• Defined as total liquidity minus net foreign assets of the banking system.

• Total liquidity is defined as the sum of dong liquidity (currency outside the banks, deposits, and deposit substitutes) and foreign currency deposits with the banking system; deposits are defined to exclude government deposits.

• Net foreign assets of the of the banking system are the sum of net foreign assets of the SBV and net foreign assets of the deposit money banks (DMBs).

• Net foreign assets of the DMBs are defined as foreign assets minus foreign liabilities. Foreign assets comprise gold, foreign currency holdings, and claims on nonresidents. Foreign liabilities comprise all liabilities to nonresidents.

Item 2: Net claims on the government of the banking system

• Defined as the claims on government minus deposits of the government with the banking system.

• Claims comprise advances to the state budget, investment in government securities, and any other forms of credit to the state budget.

• Government securities will be measured at the transaction price. Repayments of government securities will exclude interest payments, either as coupon interest or the discount.

• Government onlending funds financed by ODA are excluded from government deposits.

Item 3: Credit to the state-owned enterprises from the banking system

• Defined as the sum of all claims on the state-owned enterprises (SOEs) by the banking system.

• SOEs are defined as wholly state-owned enterprises.

Item 4: Credit from the banking system and from the budget and budget support to the 200 targeted large SOEs

• Credit from the banking system is defined as under Reporting Form 2 of the Ministry of Finance (MoF) as specified in the Decision on the Promulgation of the Regulation on the Debt Monitoring System for 200 SOEs.

• Credit from the budget and budget support is defined as under Reporting Form 3 of the MoF as specified in the above mentioned regulation.

• The list of targeted large SOEs is given in Table 6.

Item 5: Nonconcessional publicly contracted or guaranteed foreign currency loans or other external debt to nonresidents

• Defined as the sum of all new foreign currency loans or other external debt to nonresidents contracted or guaranteed by the central government (including the SBV), that have a grant element of less than 35 percent of the overall value of the loan's original principal. Local governments and agencies cannot contract external debt, and SOEs cannot guarantee such debt.

• The grant element is to be calculated by using the currency-specific discount rates reported by the OECD as Commercial Interest Reference Rates (CIRR) as of December 31, 2000; for maturities of less than 15 years, the grant element will be calculated based on six-month averages of the commercial interest rates, and for maturities of 15 years or longer, the grant element will be calculated based on 10-year averages. Maturity will be determined on the basis of the original loan contract.

• This performance criterion will apply to all current (not contingent) liabilities that are created under a contractual arrangement (including loans, supplier's credits and leases) through the provision of value in the form of assets (including currency) or services, and which require the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time to discharge the principal and/or interest liabilities incurred under the contract.

• For maturities of up to one year, the ceiling will apply to the amount of the stock of foreign currency loans or other external debt to nonresidents contracted or guaranteed by the government or the SOCBs.

• Excluded from the limits are changes in indebtedness resulting from rescheduling operations (including the deferral of interest on commercial debt) and normal import related credits, and credits extended by the IMF.

• Debt falling within the limit of this definition shall be valued in U.S. dollars at the bilateral market exchange rate prevailing at the time the contract or guarantee becomes effective.

Item 6: External payments arrears

• Defined as the stock of overdue payments (interest and principal payments) on short-term debt in convertible currencies with an original maturity of up to and including one year (spot, money market, letters of credit, and others) and medium- and long-term debt contracted or guaranteed by the government (including the SBV).

• The limit excludes those overdue payments that relate to debts which are subject to rescheduling or a stock-of-debt operation.

• As of end-December 2000, there were no reported external arrears, except for arrears totaling US$57.3 million with Algeria currently under negotiation.

Item 7: Net official international reserves (NIR)

• Defined as foreign assets minus foreign liabilities of the SBV, expressed in U.S. dollars and valued at the program monitoring exchange rates (see Section II).

• Foreign assets comprise gold, foreign currency holdings, and claims on nonresidents. As such, these assets must be readily available, i.e. sellable at any time and free of any pledges or encumbrances, and directly and exclusively controlled by the SBV. These assets will exclude holdings of nonconvertible currencies, claims on nonresident financial institutions denominated in nonconvertible currencies, holdings of foreign exchange of government ministries, the foreign currency counterpart of banks' reserves held at the SBV to meet reserve requirements on foreign currency deposits, and such other claims that are not readily available.

• Foreign liabilities are liabilities to nonresidents contracted by the SBV, including deposits of foreign governments, foreign central banks, foreign DMBs, and international organizations, irrespective of their maturity. They also include IMF purchases and disbursements.

II.  Program monitoring exchange rates

Foreign assets and liabilities and all other elements of the items defined above that are denominated in foreign currency will be valued at the program monitoring exchange rates, unless specified otherwise.

• Holdings in gold will be valued at Vietnamese dong (VND) 480,000 per Vietnamese chi (equivalent to 3.75 grams).

• Assets and liabilities denominated in SDRs, including the SDR value of gold holdings and assets and liabilities resulting from transactions with the IMF will be converted at the rate of US$1.302 per SDR.

• Assets and liabilities denominated in currencies other than the U.S. dollar will be converted into U.S. dollars at the market rates of the respective currencies prevailing on December 29, 2000, as published in International Financial Statistics (IFS).

• The U.S. dollar value of assets and liabilities will be converted into Vietnamese dong at the official rate of the SBV on December 29, 2000, which was VND 14,501 per U.S. dollar.

III.  Performance Criteria and Benchmarks

Performance criteria include Items 1 to 3 and 5 to 7 as defined above. For external payments arrears (Item 5), the performance criterion will be measured on a continuous basis throughout 2001. The other criteria will be measured on the last days of June and December 2001, except for NDA of the banking system (Item 1), which will be measured as a performance criterion on the last day of June 2001 only. Quantitative benchmarks include Items 1 to 5 and 7 as defined above. They will be measured on the last days of March and September 2001; for NDA of the banking system (Item 1) also on the last day of December 2001; and for credit from the banking system and from the budget and budget support to the 200 targeted large SOEs (Item 4) also on the last days of June and December 2001.

VI.  Monitoring and Reporting Requirements

For the purposes of program monitoring, the following information, including any revisions to historical data, will be provided by the SBV, unless specified otherwise, to the Asia and Pacific Department of the Fund, through the office of the Senior Resident Representative of the IMF in Vietnam, as set out in Table 5.

Attachments (Use the free Adobe Acrobat Reader to view the Tables listed below).

Table 5. Vietnam: Monitoring and Reporting Requirements

Table 6. Vietnam: List of 200 Large Debt State-Owned Enterprises in the Debt