1.On behalf of the Vietnamese authorities, we would like to express their appreciation to the staff, management and the Executive Board as well as to other development partners and the donor community for their advice and continued support. The authorities would also like to thank the staff for a balanced Staff Report for the 2004 Article IV Consultation as well as the useful policy advice. The authorities also find that the Ex Post Assessment of Longer- Term Program Engagement paper is well-written and balanced, highlighting Vietnam’s various achievements during the Fund supported program.
2.The Vietnamese authorities have succeeded in laying down a conducive platform for the economic transformation from a centrally-planned to a market-based economy. A combination of favorable macroeconomic conditions and increasing integration with the world economy, facilitated by speedy trade reforms, have contributed to strong economic growth, low inflation and impressive poverty reduction in recent years. With these achievements, the Vietnamese authorities are strongly committed to acquiring WTO accession in 2005. The authorities also recognize that there remain some challenges ahead. In this respect, they are committed to continue the implementation of structural reforms to ensure the country’s sustainable development.
Recent Economic Developments and Outlook
3. Real GDP growth in 2003 continued to be strong, led by robust investment, exports, and private consumption. In the first quarter of 2004, however, agricultural production fell, mainly due to the avian flu outbreak and drought. At the same time, manufacturing and construction activities slowed, induced by higher world commodity prices, notably for steel. As a result, the consumer price index rose from a moderate rate in 2003, driven largely by these supply shocks. Following the adoption of a number of stimulus measures by the authorities, economic activity began to pick up, and the economic slowdown earlier in the year proved to be only temporary.
4. For 2004 as a whole, GDP growth is expected to remain favorable. The current account deficit that widened in 2003 due mainly to imports of machinery and intermediate products, was more than offset by strong capital inflows in the forms of both ODA and FDI. This has resulted in a generally satisfactory balance of payments in 2003, and the State Bank of Vietnam (SBV) has managed to increase its international reserves. The current account deficit ratio to GDP has begun to improve in 2004 and the gross official reserves is projected to reach over $6 billion (equivalent to around 10 weeks of imports).
5. In line with the staff’s projections, the Vietnamese medium-term outlook appears favorable with real GDP growth expected to be around 7 percent per year, supported by export expansion—notably from the manufacturing sector, presuming a successful WTO accession by end-2005. The external position is expected to remain manageable as the current account deficit is expected to decline gradually, while capital inflows are expected to increase, led by strong FDI on account of the WTO accession.
6. Recognizing the importance of and the key role played by fiscal policy in achieving macroeconomic stability, the Vietnam authorities have continued to pursue a prudent fiscal policy to ensure a favorable macroeconomic and financial environment, as a foundation for sustainable growth. The fiscal stance was loosened slightly in 2003, to focus on the long-term critical objectives including higher spending on education, increased capital spending on important transportation and irrigation projects, and net lending. However, the fiscal deficit was contained at around 4.4 percent of GDP.
7. In 2004, the issuance of Government bonds for the investment in the important transportation and irrigation projects has continued, but the above-mentioned deficit has not increased. At the same time, budget revenue has been on an upward trend, at 22-23 percent of GDP, thanks to the improved revenues from crude oil and land use, and improvements in tax administrative measures, e.g. a self-assessment process for potential and new tax payers to be completed by January 2005.
8. On the expenditure side, the Government issued a State Development Investment Credit Decree on April 1, 2004, to scale down the list of enterprises that may be eligible for on-lending, and to impose specific limits on the total state support not to exceed 85 percent of total project costs. This, along with the authorities’ long-standing efforts to bring interest rates on these projects more in line with market rates, will keep domestically financed on- lending in check, such that they would begin to decline steadily relative to GDP over the medium term.
Monetary and Exchange Rate Policy
9. The consumer price index, which was moderate in 2003, rose in the first half of 2004 as a result of temporary supply shocks. Since July, the food consumer price index has fallen rapidly, causing the annualized monthly core inflation for September to fall to 4½ percent. Given that the unexpected increase in the inflation rate did not stem from monetary policy, the authorities perceived that using this policy to contain inflation will be less effective. Instead, the authorities prefer to use more indirect instruments. To curb inflation, the authorities temporarily reduced tariffs on key commodities, in particular, petroleum and steel products. They, however, acknowledge and agree with staff that additional measures may be needed to contain inflation, as well as to safeguard against any further rise in NPLs.
10. The SBV understands the staff’s concern on the impact of the credit growth on NPLs. However, it should be noted that the growth in bank credit reflects bank financing for medium-term investment projects that would otherwise not be undertaken. In this context, due to the segmentation of the financial sector, the reserve requirement is considered to be a more effective tool than interest rate policy. Besides being unobtrusive in its implementation, an increase in the reserve requirement should have relatively milder impacts on commercial banks’ balance sheets.
11. On exchange rate policy, the authorities are committed to provide continuous support and to facilitate international trade and investment and address any effect of possible shocks, including the second-round effects of inflation. Over the longer term horizon, steps towards a more flexible exchange rate regime will be taken cautiously and gradually, if and only when the markets are perceived to be able to manage the additional risks and volatilty more on their own in an effective and sustainable manner. In the meantime, certain administrative measures will remain essential for the protection of the domestic economic and financial systems.
12. In the medium-term, as the Vietnamese economy becomes more integrated into the global and regional economies, the authorities are aware that present constraints (in particular financial sector segmentation and exchange controls) inherent in the system will need to be addressed. Nevertheless, the authorities would like to reiterate their intention that, in order to be able to accept Article VIII obligations, the authorities would like to request the Fund to continue providing technical assistance to assist the completion of the revision of current relating regulations.
13. The authorities are aware that sustained economic growth and lasting poverty reduction would hinge on the pace of structural reform, aimed at improving efficiency of the state-owned sector, ensuring public debt sustainability, and encouraging private investment. Measures implemented so far are in line with the Communist Party Plenum which was held in January 2004 which called for an acceleration in several structural reforms, including the initiative of equitizing state-owned commercial banks (SOCBs), increasing the pace of equitizing major state-owned enterprises (SOEs), securing WTO accession, and enhancing governance and transparency of policy making.
14. On the financial sector, to enhance the operations of the financial sector, the authorities issued credit manuals for SOCBs early this year, so that they will function on a more commercial basis. Furthermore, the authorities have decided to equitize the Vietcom Bank (VCB). Here, foreigners are welcome to participate through the domestic capital market within the supervisory framework of the authorities. For further steps on this front, the authorities will adopt a gradual approach to minimize social costs of reform and to pick the best timing to approach the investors.
15. The equitization plan, originally scheduled for submission to the Prime Minister by end-June 2004, has been delayed. This was due to some constraints in the prevailing legal framework, such as the lack of specific regulation suitable to the characteristics of the SOCBs in the current Decree on SOE equitization, as well as some technical difficulties. The SBV and the SOCBs concerned have actively cooperated with the relevant agencies to complete this plan for prompt submission to the Prime Minister. An important feature of the plan is the sale of shares, possibly through public auction, with the Government retaining a reasonable shareholding. In a number of cases e.g. Mekong Housing Bank, more direct involvement by foreign strategic partners are also under consideration.
16. With regard to transparency, the authorities have continued their effort in improving the reliability and timeliness of data, in a number of areas. Towards this end, a new Statistics Law was passed in January 2004 to enhance data collection by strengthening inter-agency coordination. In addition, with technical assistance given by the Fund since September 2004, the country’s national income account statistics can be further improved.
17. On NPLs, the SBV has also initiated a compilation of financial indicators on banks’ large borrowers through a survey in April 2004, as a step toward obtaining a more accurate assessment of the SOCBs’ balance sheet problems. However, due to the lack of capacity, as well as both statistical and technical difficulties, the report is yet to be completed. Once these constraints have been addressed, the survey could be replicated on a regular basis to provide an effective monitoring framework on banks’ performances.
Ex Post Assessment
18. On the Ex Post Assessment of Longer-Term Program Engagement, the authorities welcome the report as both candid and balanced. As noted by staff, despite the limitations and issues in developing and implementing the ESAF and PRGF programs, the authorities remain committed to continue the reform process.
19. On certain issues, however, a more flexible implementation of the Fund’s conditionality could have better assisted Vietnam in sustaining its reform efforts within the program context. The speed of adjustment in quota and tariff rates under the ESAF program, should be kept in line with WTO principles and consistent with other multilateral and bilateral trade agreements. The scope and schedule of SOE reforms should also give due consideration to domestic economic and political feasibility, as well as readiness.
20. Overall, the authorities greatly appreciated the Fund’s advice and technical assistance, which are useful in assisting Vietnam to achieve significant macroeconomic stabilization, creating conditions for high and sustainable economic growth, and accelerating structural reforms well beyond the PRGF program. This being the main features that attracted Vietnam to the Fund’s program in the first place. The Fund’s policy advice and technical assistance will continue to be highly valued by the authorities either within or outside the program context.
21. With continuous support from the international community as well as the authorities’ efforts to implement structural reforms and pursue sound macroeconomic policies, Vietnam has made considerable progress. Nevertheless, the authorities are also aware that some challenges remain in a number of areas such as the improvement of investment quality (ICOR), WTO accession, and the resolution of SOCBs’ NPLs. As such, the authorities are
firmly committed to pursue a sound macroeconomic policy framework and to continue reforms, particularly on SOCBs and SOEs as deemed essential for Vietnam’s strong growth path over the medium term. The Vietnamese authorities look forward to the continuation of the close and effective cooperation, as in the past, with the Fund through the communication and consultation on macroeconomic policies.