Vietnam and the IMF
Country's Policy Intentions Documents
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Socialist Republic of Vietnam—Letter
of Intent, Supplementary Memorandum of Economic and Financial Policies,
Technical Memorandum of Understanding
Mr. Horst Köhler
Dear Mr. Köhler:
On April 13, 2001, the Executive Board of the IMF approved a three-year arrangement for Vietnam under the Poverty Reduction and Growth Facility (PRGF). The purpose of this letter is to inform you on the progress in implementing the first-year economic program, and to request the second loan disbursement following the completion of the first review under the arrangement.
The attached Memorandum of Economic and Financial Policies (MEFP) supplements the MEFP of March 14, 2001, and sets out the objectives and polices that the Government of Vietnam intends to pursue during the remainder of 2001 and the first half of 2002.
Vietnam's economic performance in 2001 has been positive, despite the adverse effects of the global economic slowdown. Macroeconomic policies have been prudent and progress has been made in the key structural areas. As a result, the program targets for the first PRGF review have been achieved for the most part. The Government of Vietnam believes that the policies it intends to implement in the period through June 2002, as described in the MEFP, will build on this favorable performance, help sustain economic growth and reduce poverty, and cushion the economy in an uncertain external environment. On this basis, it requests completion of the first review under the arrangement; waivers for the nonobservance of the end-June 2001 performance criteria on bank credit to state-owned enterprises (SOEs) and on net international reserves and of the end-September structural performance criterion on bank audits, taking into account the nature of the nonobservance; and modification of the end-December performance criteria on bank credit to SOEs.
The government believes that the policies and measures set forth in the MEFP are adequate to achieve the objectives of the program supported by the PRGF arrangement, but will take further measures if deemed necessary. During the remaining period of the arrangement, Vietnam will continue to consult with the Managing Director on the adoption of measures that may be appropriate, at the initiative of the government or whenever the Managing Director requests such a consultation. The government will continue to provide the IMF with such information as it requires to assess Vietnam's progress in implementing the economic and financial policies under the program.
The government intends to make these understandings public and authorizes the IMF to provide this letter and the attached memorandum to all interested parties that so request them, including through the IMF's external website.
We can assure you that the Government of Vietnam is determined to fully implement the program, and we hope we can count on the continued support of the IMF in our endeavors.
Policies of the Government of Vietnam for September 2001-June 2002
November 7, 2001
1. Vietnam's ongoing medium-term economic program is being supported by a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). Consistent with the goals set out in our Memorandum on Economic and Financial Policies (MEFP) dated March 14, 2001, this supplementary memorandum reviews the implementation of the program so far in 2001 and sets out our policies for the remainder of the first program year through June 2002.
II. Overall Progress so far in 2001
2. Economic performance has been encouraging and in line with the program, notwithstanding the global downturn. Overall economic activity has been bolstered by domestic demand, notably a revival of investment reflecting improved business sentiment. Inflation remains in check, owing mainly to restrained fiscal and credit policies, and the external position is satisfactory despite weakening demand. With exports slowing more than envisaged, real GDP growth for the year is estimated by the IMF staff to be in the range of 4½-5 percent, marginally below that programmed. Nonetheless, the targets for end-2001 for inflation (under 5 percent) and gross international reserves (US$3.6 billion) remain achievable (Table 1).
3. Macroeconomic policy implementation has been largely on track, and all but two of the performance criteria for end-June have been met.
4. Progress on the structural front has been uneven, and we are taking action to redress the slippages so far.
III. Macroeconomic framework and policies for September 2001-June 2002
5. We remain committed to implementing the reform strategy supported by the PRGF arrangement and believe that, notwithstanding weakness in Vietnam's external environment, the program's medium-term macroeconomic framework is broadly achievable. With a global upturn in 2002 and continued reform momentum in Vietnam, real GDP growth is targeted to rebound to 6-7 percent by 2003, and inflation to stay below 5 percent. The underlying external position for 2002-03 should continue to be sound, with the current account deficit in the financeable range of 2-4 percent of GDP and an increase in reserves to 9-10 weeks of import cover.
6. In the fiscal area, the overall budget deficit (excluding onlending) in 2001 is being limited to 3 percent of GDP, close to the program target. Revenue, especially non-oil, is expected to perform better than envisaged, owing in part to improved VAT collection. Expenditure will rise on account of stepped up capital spending and, to a limited extent, the introduction of interest subsidies for farm price support loans and export promotion schemes. Such special support will be temporary, as the rural sector is being assisted mainly through capital spending in economic and social infrastructure. In particular, the share of social capital expenditure will rise to 38.5 percent of total capital spending.
7. A continued cautious framework will be adopted for the 2002 budget now under preparation, aimed at stabilizing public sector debt over the medium term. Based on conservative assumptions and in the face of an uncertain external outlook, revenue would be targeted at 20-21 percent of GDP, through a strengthening of revenue administration and measures to rationalize tax policy, drawing on IMF technical assistance. The VAT law is being revised to reduce the number of VAT rates and exemptions, to be made effective in the year 2003 budget. Expenditure would be kept at around 24½ percent of GDP. Emphasis will be given to restoring better balance between capital and current expenditure, and to spending on priority social sectors to help sustain activity and, as necessary, to support SOCB and SOE reforms. Poverty-reducing expenditures will be more closely monitored, and steps will be taken to further enhance the transparency and efficiency of government operations. The overall budget deficit, originally projected at 3 percent of GDP, is targeted to be in the range of 3-4 percent of GDP, and domestic financing will be capped at D 10-15 trillion (2-3 percent of GDP). Additional fiscal provisions for the capital costs of SOCB/SOE reforms are being finalized. These and the associated financing are in line with the government's preliminary estimates originally adopted under the PRGF, and will be reviewed periodically with the IMF staff.
Monetary and external sector policies
8. In the monetary area, the priority will be to restrain credit growth to protect banks' asset quality while providing adequate credit for sustained growth. The monetary program now targets credit growth at around 10 percent in the first half of 2002. Moreover, the effectiveness of bank credit to SOEs will be further improved to strengthen their financial discipline. SBV refinancing will be limited to D 1.75 trillion for the first half of 2002, and greater reliance will be placed on indirect monetary instruments to achieve the credit program objectives. In addition, given the recent rise in foreign currency deposits (FCDs), the SBV will strive to strengthen credit risk management in banks, especially in SOCBs, and will closely supervise foreign currency loan operations and ensure the liquidity and quality of foreign assets held by banks, through tighter prudential regulations and reporting requirements in this area. In addition, the SBV will pursue appropriate interest rate and exchange rate policies to enhance confidence in the dong.
9. To this end, the government remains committed to a flexible exchange rate policy, and intervention in the exchange market will be limited to addressing disorderly conditions. Quarterly benchmarks for net international reserves have been set through June 2002, in line with the expected strengthening of the external position and maintenance of a flexible exchange rate policy. The surrender requirement will be further reduced, and will be phased out within the PRGF period. The two remaining exchange restrictions will also be removed well within the program period, so as to enable Vietnam to accept the obligations under Article VIII of the Fund's Articles of Agreement.
10. A prudent external debt management policy will continue. Government borrowing will remain mostly on concessional terms consistent with program limits, and government guarantees for nonconcessional debt contracted by SOEs will be kept within the program limits, with careful appraisal of project viability and the risk coverage confined to the minimum necessary.
A. Key Structural Reforms
11. In line with our banking reform strategy adopted under the PRGF-supported program, we will intensify efforts to restructure the four large SOCBs by:
12. As a key step for strengthening bank supervision, we will revise the criteria for loan classification under Decision 284 in accordance with international standards by end-2001. A timetable for moving provisioning onto the new classification standard within three years has also been set depending on funding sources outside of the banks. With respect to the joint-stock banks (JSBs), following closure/merger of seven banks so far (out of 48), further progress will be made to consolidate the system and strengthen the financial conditions of these banks, towards the aim of halving the number of banks through closure/merger.
Private sector development and SOE reform
13. Promotion of the private sector is a priority. We are further strengthening the implementation of the Enterprise Law. Licensing requirements will be lifted for additional business subsectors, a decree on small and medium-sized enterprises (SMEs) is being adopted, and the Land Law is expected to be amended in October. A decree transforming wholly state-owned enterprises into limited liability companies operating exclusively under the Enterprise Law has also been approved. Furthermore, a decree was issued in August to promote FDI, entailing provisions for phasing out the dual pricing system and for further streamlining the licensing and administrative procedures for foreign-invested enterprises.
14. We will take steps to accelerate SOE reform and strengthen the framework for equitization in order to achieve our three-year targets within the original timeframe adopted in April 2001. These include issuing implementation guidelines with respect to SOE debt resolution and safety nets for labor redundancies, providing the monitoring unit in the National Steering Committee for Enterprise Reform and Development (NSCERD) with enforcement power, and publishing a rephased three-year roadmap. Furthermore, to enhance the effectiveness and integrity of the equitization process, caps on shareholdings in equitized SOEs by individuals and legal entities will be removed at the latest by end-2001; and the responsibility for issuing, selling, and registering shares is also being removed from SOE management. Finally, the system to monitor debt and budget support of 200 large SOE debtors is being strengthened to ensure timely and accurate reporting from concerned SOEs, including amending the Ministry of Finance (MoF) decision in this area to clarify the quarterly reporting requirements and to introduce sanctions against late reporting.
15. Further trade reform measures are being taken in the remainder of 2001, in line with our trade reform roadmap. These include replacing QRs for three items (steel, vegetable oil, and construction glass) with tariffs, implementing the 2001 tariff reductions under AFTA, and auctioning at least at 25 percent of the garment export quota while continuing to improve the auction process.
16. We have begun work on a Comprehensive Poverty Reduction and Growth Strategy Paper (CPRGSP) to be completed by April 2002. The CPRGSP will lay out the broad policy agenda for tailoring international development goals to Vietnam's circumstances, and for linking these goals to policy actions. In addition, we have drawn up a plan for strengthening consultations and are seeking technical support from the international community for incorporating the social impact analysis of reform into the CPRGSP framework.
IV. Program Monitoring And Policy Transparency
17. The government will undertake a number of prior actions ahead of the IMF Executive Board consideration of the first PRGF review, in order to keep the program on a solid footing (Table 3). Table 4 contains quantitative performance criteria for end-December 2001 and quantitative benchmarks for end-March and end-June 2002; structural policy undertakings are summarized in Table 3. A second review under the PRGF arrangement will be completed by April 2002, which will focus on the economic program for the second-year PRGF arrangement and progress in accelerating SOCB and SOE reforms.
18. To help strengthen program implementation, technical assistance will continue to be sought from the IMF in bank restructuring and supervision, tax policy and administration, and statistics. In particular, in the statistical system, we intend to take steps to address deficiencies identified by IMF staff, beginning in the national accounts area, and to make a timely decision on Vietnam's participation in the General Data Dissemination System.
19. We are committed to furthering policy transparency, building on recent progress. Additional information will be posted on the newly introduced website for the MoF, and websites for financial and economic information will be considered, including for the SBV. Publication of IMF staff reports for Vietnam will continue. In addition, in connection with the IMF's safeguards assessment for Vietnam, an external audit of the SBV's 2001 financial statements will be conducted by the state auditor for completion by June 2002. We plan to conduct this audit in accordance with international standards and to publish post-audit financial statements.
The "Milestones for SOCBs" listed below are the minimum conditions in the context of the PRGF review, as agreed by the SBV with the staffs of the International Monetary Fund and the World Bank, for the purpose of recapitalization of the four large state-owned commercial banks (SOCBs). Bank-specific milestones are expected to be developed consistent with these overall milestones and issued as a directive by the SBV.
Milestones for end-March 2002:
Milestones for end-June 2002:
Milestones for end-September 2002:
Milestones for end-December 2002:
Future milestones will be specified on the basis of experience with the implementation of earlier milestones and developments in SOCB conditions. The SOCBs will continuously improve performance against these milestones over three years, in addition to meeting these first-year milestones. SOCBs will also phase in provisioning over three years, subject to availability of financing, following revised Decisions 284 and 488.
Technical Notes and Definitions Related to the Milestones
Potentially recoverable loans are defined as: all collateralized loans + commercial noncollateralized loans to active borrowers + directed loans to active borrowers. Potentially recoverable loans refer to NPLs as of an end-2000 base date.
Loans are considered "resolved" under any of the following conditions:
1. For all collateralized loans - actions are taken to gain possession of collateral (e.g., a claim is made in court), and if possession is achieved, actions are taken to recover value (e.g., the collateral asset is successfully sold or put at auction, even if not successfully bid, or a notice of sale offer is made or a different kind of marketable asset for which the collateral asset was previously swapped is successfully sold), or
2. For collateralized loans to active borrowers and noncollateralized loans to active non-SOE borrowers - the loan is restructured, if the active borrower negotiates with the SOCB a restructuring of business operations to improve debt-servicing capability, or
3. For noncollateralized loans to active SOEs—the loan is restructured if an approved SOE restructuring plan with appropriate conditions exists or provisions are made against the loan after an active SOE is closed, or
4. For all loans—provisions are made against the loan, if they are matched by "independent" capital injections, i.e., sources other than the government, the IMF, or the World Bank.
1. This memorandum sets out (i) the definitions of quantitative performance criteria and benchmarks for the first-year PRGF-supported program (Table 4), and (ii) related reporting requirements to the Fund's Asia and Pacific Department (Table 5).
I. Definitions 1
Item 1: Net domestic assets (NDA) of the banking system
Item 2: Net claims on the government of the banking system
Item 3: Credit to the state-owned enterprises from the banking system
Item 4: Credit from the banking system and from the budget and budget support to the 200 targeted large SOEs
Item 5: Contracting or guaranteeing of nonconcessional external debt by the government
Item 6: External payments arrears
Item 7: Net official international reserves (NIR)
II. Program monitoring exchange rates
2. 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.
III. Performance Criteria and Benchmarks
3. Performance criteria include Items 1 to 3 and 5 to 7 as defined above. For external payments arrears (Item 6), the performance criterion will be measured on a continuous basis throughout 2001 and first half of 2002. The other performance criteria will be measured on the last day of December 2001. Quantitative benchmarks include Items 1 to 5 and 7 as defined above. They will be measured on the last days of September 2001, as well as March and June 2002.
IV. Monitoring and Reporting Requirements
4. 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.
1 These definitions, except Items 4, 5, and 6, adhere to the existing classification schemes used for the monetary derivation tables of the State Bank of Vietnam (SBV) covering 89 credit institutions and the SBV, and the associated monetary survey tables. More specifically, the banking system is defined as the SBV and the deposit money banks (DMBs), which consist of six state-owned commercial banks (SOCBs), 46 joint stock banks, 4 joint venture banks, 26 foreign bank branches, 6 finance companies, and the Central People's Credit Fund.