Public Information Notices
Vietnam and the IMF
Free Email Notification
On October 3, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Vietnam.1
Macroeconomic performance has been strong over the past 18 months, fueled by strong export performance and domestic investment. Staff estimates suggest output growth near 6 percent in 2002, with slightly faster growth projected for 2003. Nonoil exports have provided an important stimulus, rising by 24 percent (year-on-year) during the second half of 2002 and 32 percent during the first half of 2003, as producers responded to improved access to the US market under the United States Bilateral Trade Agreement. Investment has also been vigorous, with imports of machinery and equipment up 38 percent in 2002 and 40 percent in the first six months of 2003.
Inflation picked up during 2002, but has eased slightly in recent months. Headline inflation averaged some 4 percent during 2002, after two years of mild deflation, falling back to 3 percent as of July 2003. Non-food inflation shows a distinctive trend from the headline rate, but could ease in the coming months with slower depreciation of the dong and the easing of world oil prices.
Stronger growth has been accompanied by a sizeable deterioration in the external current account position, notwithstanding surging exports. The current account deficit is expected to be around 3½ percent of GDP in 2003, as compared with a surplus in 2001, financed through a combination of higher long-term capital inflows and a reversal of the previously strong build-up of foreign assets by the commercial banks.
The State Bank of Vietnam (SBV) recorded a modest increase in its foreign reserves during 2002, followed by sharp growth in gross international reserves (GIR) during the first half of 2003. The jump in GIR this year reflects both sizeable foreign currency purchases by the SBV and a large shift in foreign currency assets of the commercial banks from offshore to the SBV. The dong continues to depreciate slowly against the US dollar, at a more modest pace in recent months. The daily trading band within which the rate is allowed to fluctuate was widened to ± 0.25 percent in July 2002 (from ± 0.1 percent).
The monetary aggregates have been growing at a rapid pace, reflecting the pace of economic expansion, ongoing monetization of the economy, and strong credit demand. Broad money rose by some 18 percent in 2002 and the first months of 2003, albeit with foreign currency deposits stagnating; credit growth continues at rates in excess of 20 percent per annum, with faster growth in credit to the non-SOE sector (30 percent) and in foreign currency credits (40 percent through April, from a low base). The SBV has adopted a largely accommodative stance, with the sizeable purchases of foreign currency during 2003 being largely unsterilized. Interest rates have shown little movement.
Budget performance was strong in 2002, aided by good non-oil revenue collections and public sector wage restraint, with the core fiscal deficit amounting to 2 percent of GDP. Revenue collections to date suggest the higher tax/GDP ratio can be at least maintained in 2003, but a sizeable (38 percent) increase in civil service wages and pensions is putting some pressure on the expenditure side of the budget. Onlending operations are on a rising trend, and could reach 3 percent of GDP this year while extra-budgetary debt creation arising from reform costs (mainly State Owned Commercial Bank recapitalization) is likely to be around 1 percent of GDP.
There has been continued progress in the areas of private sector development and trade policy reform. Registration of private firms has increased rapidly since the passage of the Enterprise Law in 2000, with strong growth in employment in small and medium-sized enterprises. Quantitative restrictions on imports were further scaled back in 2002, ASEAN Free Trade Area tariff reductions are proceeding as scheduled, and a wide-ranging Bilateral Trade Agreement with the US took effect in December 2001.
Reform implementation has proven more difficult in the state-owned sector. The equitization program fell behind schedule in 2002 and 2003, necessitating the preparation of a revised roadmap for reform in 2003-05 that has just been finalized.
The banking system is growing rapidly, with the bulk of funds still being intermediated through the major state-owned commercial banks. These banks face significant challenges in strengthening weak balance sheets and improving loan collections, while rapidly expanding their balance sheets. The SBV also faces important challenges in strengthening its supervisory capabilities to effectively monitor the expanding system.
The staff's medium-term scenario envisages growth averaging 7 percent per annum, supported by continued strong export expansion and investment. Inflation remains at modest levels (3-4 percent), while the real exchange rate, currently towards the lower end of the range in which it has moved since 1996, shows little change. The external position remains manageable, with current account deficits declining somewhat from the present level (3½ percent of GDP), and continuing to be financed by a mix of FDI inflows and medium-long term borrowings (still primarily ODA flows).
Executive Board Assessment
Executive Directors welcomed the opportunity to assess Vietnam's economic performance, and commended the authorities for their strong record of success in achieving high growth and poverty reduction in recent years. They noted that prudent macroeconomic management had provided an environment conducive to growth, and that the transition to a more market-oriented economy and increasing integration into the global economy had been key to poverty alleviation. Directors considered, however, that the transition process was still incomplete, and that the authorities faced important challenges, especially in the area of structural reform, in sustaining high growth over the medium term.
Directors welcomed the strong fiscal performance in 2002, attributable in part to buoyant oil revenues. They welcomed the authorities' intention to allocate one-half of any revenue overperformance in 2003 to deficit reduction. They recognized the need for public sector wages to remain competitive with those in the private sector but cautioned against further sharp increases in public sector wages. They encouraged the authorities to undertake a fuller assessment of the net benefits of public investments.
Directors considered that the medium-term fiscal position was manageable, provided that on-lending and off-budget liabilities are tightly controlled, and the risks to the revenue position, especially through a drop in oil prices and a reduction in import tariffs, are addressed through both tax policy reforms and improved tax administration. They welcomed the progress being made with the Fund-assisted program to introduce self-assessment by large taxpayers.
Directors welcomed the movement towards a market-based financial system, including the liberalization of most interest rates in 2002. They expressed concern, however, that the rapid pace of credit growth, including foreign exchange credits-which has supported economic growth-could overwhelm banks' still limited credit risk management capacities, and could lead to further impairment of already-weak bank balance sheets. In view of the added possibility of this credit growth contributing to inflationary pressures, which are moderate at present, they favored some liquidity tightening to slow its pace.
Directors agreed that a managed floating exchange rate regime was appropriate to Vietnam's circumstances, but argued that the policy could be implemented more flexibly over time, allowing larger movements in the rate. They noted the build-up of the State Bank of Vietnam's reserves during 2003 would help strengthen the external position. They also welcomed the removal of the foreign exchange surrender requirement.
Directors underscored the need for state-owned commercial banks and the Development Assistance Fund to conduct effective loan appraisal, which would help assure the long-term solvency of these state-controlled institutions. In this regard, they considered that strengthening the supervisory capabilities of the State Bank of Vietnam was an important supporting measure, and merited technical assistance from donors and the Fund. They emphasized the importance of accelerating the process of cleaning up the balance sheets of the state-owned commercial banks, and called for passage of guidelines that would impose a time-bound process for restructuring of financially distressed state-owned enterprises. Finally, they urged the passage of an effective anti-money laundering decree by year-end, followed by rigorous implementation.
Directors took the view that the government needed to develop more fully its strategy for the sizeable state-owned enterprise sector. They supported giving state-owned enterprises simpler channels of control, profit-focused mandates, and hard budget constraints, if they were to operate efficiently. In addition, they called for vigorous implementation of the equitization program for small and medium-sized enterprises, with greater reliance on auction-based pricing mechanisms.
Directors observed that employment growth over the medium-term would rely primarily on private sector expansion, supported by domestic and foreign investment. They emphasized that priorities for strengthening the business environment include improving transparency and governance, simplifying regulations and reducing bureaucratic discretion, strengthening the operation of key markets, notably for land, and ensuring the provision of competitively-priced infrastructure services.
Directors supported Vietnam's objective of achieving early WTO membership, while noting that it would require focused efforts to bring domestic regulations, practices, and laws into compliance with WTO norms. They encouraged the Vietnamese authorities to move towards acceptance of Article VIII obligations.
Directors welcomed the passage of the new Statistics Law and Vietnam's participation in the Fund's General Data Dissemination System. They commented, however, that Vietnam's macroeconomic statistics had significant weaknesses, and supported the provision of Fund technical assistance to improve the statistical base. They also pointed to the need for adequate resource provision to statistics-producing agencies and for effective inter-agency coordination.
Directors regretted the delays in completing the third review under the PRGF arrangement. In this regard, they noted the findings of the safeguards assessment and the remedial measures suggested in the staff report. They also noted the authorities' reservations about aspects of both the assessment and its recommendations, including the authorities' view that the safeguards measures should be in accordance with Vietnam's prevailing legal framework. Most Directors supported efforts to reach a compromise solution that would satisfy the safeguards policy within the existing framework during the period of the PRGF, while some others insisted on applying the Fund's policy on safeguard assessments vigorously and emphasized in this regard the importance of an independent external audit of the central bank in accordance with internationally accepted standards.
1 Under 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 Executive Directors, and this summary is transmitted to the country's authorities.
IMF EXTERNAL RELATIONS DEPARTMENT