IMF Executive Board Concludes 2011 Article IV Consultation with VietnamPublic Information Notice (PIN) No. 11/81
June 23, 2011
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On April 29, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Vietnam.1
Vietnam has weathered the global crisis well: GDP growth for 2010 is estimated at 6¾ percent, higher than the government’s target. But macroeconomic risks stemming from expansionary policies adopted during the global crisis have materialized. Even as most fiscal stimulus measures expired end-2009, monetary policy has remained accommodative, contributing to continued strong credit growth (35 percent y/y in February), rising inflation (17.5 percent y/y in April), and downward pressures on the exchange rate as residents hoard foreign currency and gold outside the financial system. International reserves declined from already low levels.
In contrast to the emphasis on growth in the past few years, the authorities’ priority is now shifting to restoring macroeconomic stability. Key policy interest rates were raised in several steps since late 2010 and reached 13 percent by late April, with a further rise to 14 percent effective May 1. In February the dong was devalued by 8.5 percent to narrow the gap between the official rate and unofficial rates. In late February, the government announced a comprehensive stabilization package which lists measures such as a reduction of credit growth in 2011 to below 20 percent, compared to the previous target of 23 percent, a proactive use of policy interest rates, and a reduction of the budget deficit by around ¼ percentage point of GDP
from the budget plan approved in November. In addition, 10 percent of nonwage recurrent spending is to be frozen until the second half of the year, investments by the state and the state-owned enterprises (SOEs) are to be reviewed, reprioritized, and in some cases cut. The authorities have also announced plans to ban trading of gold bars to curb gold hoarding. To address financial sector risks, elevated by the recent high credit growth, the authorities have introduced new prudential regulations, and are preparing a limit on the credit-to-deposit ratio. They have also requested an assessment under the IMF-World Bank Financial Sector Assessment Program (FSAP).
As for the economic outlook, output growth in 2011 is expected to slow somewhat, to around 6¼ percent. With lower demand and favorable base effects, and assuming no further rise in international commodity prices, inflation is projected to rise to about 13¾ percent y/y by end-2011 before declining to 6¼ percent by end-2012. The current account deficit is projected to widen slightly, but remains more than covered by continued strong direct investment inflows. Reserves are expected to recover somewhat but remain low. However, this scenario depends on steadfast implementation of stabilization policies and, if necessary, stepped-up measures to restore confidence in the dong. Fiscal consolidation is being accelerated, but a more rapid reduction of the fiscal deficit and build-up of fiscal cushions are feasible if the bulk of the anticipated revenue overperformance is saved. Over the medium term, the foundations for sustained growth remain solid, provided sound macroeconomic policies are maintained.
Executive Board Assessment
Executive Directors commended the authorities on the economy’s strong growth performance during the global crisis. However, the stimulus measures taken during the crisis are now posing overheating and external stability risks, as evidenced by high credit growth and rising inflation. Directors, therefore, supported the recent shift of the authorities’ policy stance towards stabilization.
Directors welcomed the tightening of monetary policy over the past few months and the announcement of a comprehensive monetary and fiscal stabilization package to rein in inflation and stabilize the exchange rate. They stressed that rapid implementation is essential to maintain momentum and restore confidence in macroeconomic management. They recommended sustaining stabilization measures until lower inflation expectations are firmly established and reserves rebuilt, and to be ready to take additional steps if necessary.
Directors considered that monetary tightening should be achieved mainly through market-based instruments. In the short term, administrative measures could play a supportive role, but they should be compatible with increasing confidence in the dong. Directors also considered that strengthening the autonomy of the State Bank of Vietnam would support achieving inflation targets. They observed that maintaining stability in the foreign exchange market will require disciplined monetary policy. In the next few years, it would be desirable to simplify the exchange regime with steps towards a more market-determined exchange rate.
Directors supported the planned fiscal consolidation measures and urged the authorities to implement them in full. In view of high public and publicly guaranteed debt and sizable contingent liabilities, and to support the stabilization effort, Directors recommended acceleration of fiscal consolidation by saving the bulk of anticipated revenue overperformance in 2011. Over the medium term, fiscal deficits need to be reduced further to close to pre-crisis levels.
Directors noted the increasing risks in the financial sector and stressed the need for timely action to help safeguard financial stability in the wake of rapid credit growth and potential vulnerabilities from connected lending. They urged the authorities to increase buffers in the financial system while steadfastly enforcing existing regulations. Weak banks should be restructured or merged with stronger entities, while protecting small depositors and taking care to avoid system-wide repercussions. Directors encouraged efforts to improve coordination among supervisory agencies, set up an effective crisis management framework, and prepare contingency plans. They also encouraged addressing longstanding safeguards assessment issues and AML/CFT deficiencies. Directors welcomed the authorities’ request for an FSAP.
Directors observed that greater efforts to meet international standards regarding the quality, timeliness, and coverage of data collection and publication, and to improve communications with markets will help reduce uncertainty and enhance Vietnam’s economic potential.