Consultative Group Meeting for Vietnam: Statement by Shogo Ishii, Division Chief, IMF Asia and Pacific Department
December 2, 2004
Consultative Group Meeting For Vietnam
Statement by Mr. Shogo Ishii
Division Chief, Asia and Pacific Department, IMF Hanoi, December 1-2, 2004
1. I am pleased to have the opportunity to participate in this discussion of Vietnam's progress in meeting the objectives of the government's Comprehensive Poverty Reduction and Growth Strategy (CPRGS) and of the next Five-Year Socio-Economic Development Plan for 2006-2010.
2. The IMF recently completed an assessment of Vietnam's macroeconomic situation in the context of the 2004 Article IV Consultation. My remarks here are based on this assessment, paying particular attention to Vietnam's economic outlook and the policy challenges that need to be addressed to sustain growth and poverty reduction over the medium term.
Recent Economic and Policy Developments
3. Vietnam's economy has performed well in recent years. Real GDP grew by 7¼ percent in 2003, led by strong investment and export growth. Growth slowed in the first quarter of 2004 due to the impact of the avian flu outbreak and droughts on agricultural production, but began to rebound in the following months. Inflation was modest at 3 percent in 2003 but rose to 10 percent in October 2004 (both year-on-year), owing mainly to a jump in food prices, which represent 48 percent of the CPI basket. Since July, however, annualized monthly inflation has declined, falling below 5 percent (seasonally adjusted) in October. Notwithstanding a widening of the external current account deficit driven by strong import demand, Vietnam significantly increased its international reserves, which reached US$5.6 billion (about 9 weeks of imports) at end-2003. A further modest increase has been recorded so far in 2004.
4. Nonetheless, the recent sharp acceleration in credit growth is a cause for concern, given uncertain loan quality and its implications for bank balance sheets. Credit growth accelerated from 28 percent at end-2003 to 36 percent by July 2004, led by loans to state enterprises. Broad money growth rose to 25 percent in 2003 and stayed at the same level in the first seven months of 2004, partly reflecting the ongoing monetization. Short-term dong deposit and lending rates rose only slightly in recent months.
5. In response to rising inflation and higher credit growth, the authorities have taken a series of measures. They have substantially increased reserve requirements, and lowered the tariffs on a number of items, including petroleum and steel products. In August 2004, a Prime Minister's directive called for a cut in government expenditure and lending by state-owned banks, a strengthening of enterprises' efforts to reduce production and distribution costs, and a tightening of price control enforcement.
6. For 2004 as a whole, economic growth and the external current account are likely to be broadly unchanged from 2003, with inflation falling toward the end of the year and the budget deficit narrowing. Real GDP growth in 2004 is likely to be at 7-7½ percent. Inflation is expected to fall to 9½ percent (year on year). The current account deficit is projected to be at 4½ percent of GDP, financed by a combination of ODA inflows and FDI inflows. Other capital inflows look set to decline, however, yielding a much smaller accumulation of international reserves compared to 2003. The fiscal stance, which was slightly loosened in 2003, has been tightened in 2004, reflecting more stringent project eligibility requirements for domestically-financed on-lending and reduced expenditure.
7. Implementation of structural reforms has been mixed. While significant progress has been made in trade liberalization, reforms in the areas of state-owned commercial banks (SOCBs) and state-owned enterprises (SOEs) have moved slowly. The Communist Party Plenum held in January 2004 called for acceleration in key structural reforms, including initiating the equitization of one of the four large SOCBs and increasing the pace of equitizing major SOEs. Nevertheless, reforms in these sectors remain slow.
Outlook and Key Challenges Ahead
8. The 2005 economic outlook appears generally favorable, provided that the authorities can contain inflationary expectations. Real GDP growth is projected to be broadly unchanged, with inflation expected to decline to about 5-6 percent. Although export growth is likely to decline, the external current account deficit can continue to be financed by ODA and FDI inflows. The expected lower export growth reflects the elimination of textile quotas for existing WTO members, which will expose Vietnam to greater market competition. Achievement of this outlook, however, depends on whether the authorities can contain second-round inflationary effects from the supply-side price shocks. The State Bank of Vietnam should tighten monetary conditions further if the monetary policy actions and administrative and fiscal measures taken so far prove to be insufficient.
9. Sustaining strong growth and poverty reduction over the medium term hinges not only on continued prudent macroeconomic management but also structural reforms. The latter includes: (i) restructuring state-owned banks and enterprises, which is critical for public debt sustainability; (ii) further developing the private sector; (iii) securing WTO accession, which is key to sustained strong export growth; and (iv) enhancing governance and the transparency of policy making. In the area of state-owned bank and enterprise reforms, the equitization of major state-owned banks and enterprises-if designed appropriately to increase commercial incentives and improve performance-is a step in the right direction, along with improvements in the legal and competitive environment.
10. Vietnam has a strong record of success in achieving high growth and significant poverty reduction over the past years, prudent macroeconomic management, and rapid integration into the global economy. Vietnam can build on its remarkable achievements thus far and sustain the momentum of strong growth and poverty reduction over the medium term.
11. Despite the expiration of the PRGF program in April 2004, the Fund and the government of Vietnam remain committed to a fruitful policy dialogue. Towards this goal, the Fund maintains a regular policy dialogue with the government, and provides analysis and policy assessments on macroeconomic and financial sector issues. This advisory role has been supplemented by an active technical assistance program in the Fund's areas of expertise, including financial sector reform, public financial management, statistics and data transparency.
12. Going forward, the IMF fully supports the government of Vietnam in its efforts to implement the CPRGS and the next Five-Year Socio-Economic Development Plan for 2006-2010. The IMF will continue to cooperate closely with other international financial institutions, and contribute actively to the broader dialogue between the government and its development partners in the Consultative Group process.