Information about Asia and the Pacific Asia y el Pacífico
Journal Issue

Statement by Perry Warjiyo, Executive Director for Vietnam and Narayanan Raman, Advisor to Executive Director

International Monetary Fund
Published Date:
December 2007
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Information about Asia and the Pacific Asia y el Pacífico
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1. On behalf of the Vietnamese authorities, we would like to thank staff for constructive and productive discussions and the excellent set of papers. As the report notes, there is substantial concurrence between staff and authorities on the outlook, and many of the issues flagged in it are also key policy concerns for the authorities. Our statement will mainly seek to highlight recent developments in and the outlook for the Vietnamese economy; and outline what the authorities see as the key challenges going forward. In this respect, we will highlight key policy actions undertaken and the rationale for those actions.

Latest Economic Developments and Policy Stance

2. The Vietnamese economy grew rapidly by 8.2 percent in the first nine months of 2007, with growth in the third quarter being the fastest in 10 years. With real GDP traditionally growing more rapidly in the fourth quarter, the Vietnamese authorities expect to achieve a growth rate of 8.4-8.5 percent for the year, exceeding the 8.2 percent growth experienced in 2006 and consistent with their projections. Vietnam achieved this sustained growth by pursuing an outward-oriented development strategy, centred on WTO ascension. As a result of this outward orientation, both foreign direct investment and official development assistance reached record highs in 2007. In this respect, the authorities’ commitment to reform has proven wholehearted and durable, and its success has made it possible to build broad support for its key elements.

3. The strong growth in 2007 continues to be supported by broad-based expansion in all sectors of the economy, most notably industry and services. For the authorities, the recovery in agriculture following the difficulties experienced due to disease in the early part of the year is particularly gratifying. This is not only due to the success of their prompt and decisive actions in dealing with difficulties, but also because agriculture remains a major sector in the economy. Improvements in agricultural production are important in Vietnam’s overall strategy to reduce poverty and ensure the fruits of liberalization and growth are spread as widely as possible.

4. The performance of the external sector is a key facet of recent growth and development. Export turnover as of September 2007 increased of 19.4% compared to the same period a year ago. Similarly, foreign capital inflows also set new records. Foreign direct investment increased to US$9.6 billion, while the commitment for official development assistance rose to US$4.5 billion. In addition, there were record inflows of other private capital flows, including portfolio capital. Greater activity in Vietnam’s capital markets, driven by the on-going process of listing state-owned enterprises (SOEs) and other private firms, attracted US$6.2 billion in investment funds in 2007.

5. To be sure, macroeconomic management in an environment of sustained strong growth and rapid structural change has been challenging. Strong domestic demand conditions, coupled with higher prices for key commodities, most notably energy, had put some upward pressure on prices in 2007. To this end, monetary policy has responded flexibly, firmly and through market-based mechanisms, in line with the authorities’ guiding principles. The evolution of the monetary policy stance in Vietnam reflects this. In the first five months of the year, the central bank, the State Bank of Vietnam (SBV), maintained its reserve requirement ratio in order to stabilize the money market. However, as credit growth accelerated in an environment of ample liquidity, the SBV moved decisively in June to double the ratio. In addition, the SBV stepped up its efforts to sterilize large capital inflows, particularly those related to short-term funds attracted by the strong performance of the domestic equity market. The authorities are also keen to stress the close coordination between monetary and fiscal policy as an important aspect in their macroeconomic management.

6. However, the authorities also note that constraints in supply have also been a source of price pressures. To this end, the authorities have moved decisively to increase supply by reducing import tariffs, and have taken action to reduce supply bottlenecks through improvements in infrastructure. Given that inflation in Vietnam is driven by a variety of factors, the authorities believe that targeted solutions would achieve better results than broad actions, including monetary tightening. Monetary tightening and fiscal restraint do have important roles to play, but in the case of a developing country like Vietnam, alleviating supply-driven constraints must also be part of the policy mix. To the extent price increases reflect supply-side constraints, tighter monetary and fiscal policies would certainly not suffice. In the same vein, it is also clear that sequencing structural reforms will need to be flexible in order to manage short-term challenges. Therefore, while the authorities remain committed to progressively removing administrative controls on prices, timing is an issue in an environment supply-driven price pressures.

7. Monetary management in Vietnam, which has to cope with a dynamic and fast-evolving financial system and strong credit growth, is challenging. Credit growth remains strong as lending for activities, including for investment in the equity markets, has increased significantly in the last two years. Some of the growth is also related to funds needed to complete government projects, but this demand will subside as projects are completed. In addition, it is equally clear that the growing sophistication of the financial sector and the monetisation of the economy will continue to drive rapid structural change. On one hand, these developments are welcome, as they would make monetary policy more effective. However, in the short-term, the challenges of such rapid structural change means caution in judgment is needed to achieve the goals of policy without unduly constraining growth.

8. To this end, Vietnam continues to seek technical assistance from the Fund. In particular, the authorities have proposed additional work on developing the tools for successfully adopting and implementing an inflation-targeting framework. The authorities wish to inform the Board that they see the Fund playing a key role in providing assessments and feedback on the proposed core inflation measures the SBV has developed; communicating these assessments to the Vietnamese and international public; and providing guidance on communicating the SBV’s monetary stance effectively. The thoughtful and comprehensive plan developed by the SBV, and the high degree of ownership exhibited by the authorities demonstrates a strong commitment to upgrade the quality of macroeconomic management, a commitment that the Fund is a unique position to foster.

9. On fiscal policy, the authorities continue to feel that staff assessments are too pessimistic, particularly the judgment that the fiscal stance in 2007 will be eased. On the contrary, the performance in 2007 points to a fiscal deficit that remains contained below budgeted levels. The budget does not envisage additional expenditure plans or extra-ordinary revenue shortfalls. Therefore, the characterization that policy is “loose” is unwarranted. Further, the commitment to ensuring economic stability has also ensured that steps have been taken to safeguard this restraint. Staff has rightly pointed to wage restraint as a prime example and the authorities will seek to build on these gains. Going forward, the authorities remain committed to expanding revenue sources, which would entail pursuit of a prudent and transparent fiscal stance and progress in broadening the tax base. In this regard, the Ministry of Finance has announced and provided full disclosure of off-balance sheet fiscal items on its website. Further reform on the horizon would be centred on implementing the Law on Tax Administration. The Law, which came into effect on July 1, 2007, enhances transparency in the regulations and increases the power of tax administration agencies to enforce the tax rules. The implementing regulations for the Law on Tax are now being developed.

10. The authorities concur with staff that Vietnam’s external position is sustainable and consistent with underlying fundamentals. In particular, the authorities note a strengthening of the reserves position due to sustained long-term private investment inflows, indicating the attractiveness of the Vietnamese economy. The authorities also concur with staff that the Vietnamese dong is appropriately valued and note the call to allow for more flexibility in the exchange rate. In this regard, the SBV reiterates its commitment to greater flexibility, and has taken steps towards this goal. The central bank is currently in the process of drafting the implementing regulations under the new Foreign Exchange Ordinance, which envisions greater exchange rate flexibility and a less-rigid exchange rate management regime. However, the authorities caution that the speed, though not direction, of the shift will need to take into account prevailing market conditions. In anticipation of this move towards greater flexibility, the SBV is working on a plan to increase the convertibility of the dong and to accelerate de-dollarization. In the meantime, the operational focus of the central bank is on reducing risks in the short term while building capacity in the financial sector to manage the greater flexibility over the medium term.

Outlook and Structural Policies

11. The authorities agree with staff that strong growth will be sustained in 2008. Further, they concur with staffs view that the external sector would strengthen while inflationary pressures would ease somewhat. To the extent that the growth picture for 2008 is similar as the one seen in 2007, macroeconomic policy will respond in a similar manner, with an appropriate monetary stance and prudent fiscal management.

12. A key factor that would influence the short- and medium-term outlook would be implementation of structural reforms. In this area, the authorities have announced an ambitious programme, centred on adjusting to a more externally-oriented economy. Based on the government’s Post-WTO Plan of Action, each ministry is now issuing its own Plan of Action in order to implement WTO commitments. There is also progress in combating corruption. Following the passage of the Anti-Corruption Law, the government has enacted its Plan of Action on the matter. As a first step, Steering Committees on Anti-corruption at the central and local levels have been set up and put into operation.

13. The reform of SOEs is a key plank of structural reform efforts in Vietnam. Staff has outlined in some detail the progress on this front in terms of regularising their status and operations as commercial entities, efforts at addressing their financial reporting, valuation of assets and, in many cases, partial privatization and listing, or equitization. As staff also point out, not only has the progress on this front been impressive but it is being expedited further. However, the authorities wish to highlight that staff’s assessment on the use of public funds is not accurate. Vietnam does not have a policy of concessional public financing for SOEs. To the extent that they are publicly-owned enterprises, funds for re-capitalization, where needed, would naturally come from the government as the current owners of these entities. However, public funds are no longer earmarked for SOE projects. For instance, the authorities have abolished the export assistance fund, while the Development Assistance Fund has been turned into Vietnam Development Bank, which will be run as a normal bank going forward. Thus, SOEs that need to borrow to meet project financing requirements would be expected to do so on commercial terms, similar to other enterprises.

14. To complement the reform of the SOEs and to build an indigenous supply chain, the Vietnamese authorities are also giving due attention to small- and medium-scale enterprise (SME) development. To this end, the authorities are actively implementing the Master Plan for SME Development, 2006-10. Some localities have already developed their own SME development plans and have established implementing units.

Financial Sector: Developments in the Regulatory Framework and Structural Reforms

15. The rapid growth of the financial system has been another positive feature of Vietnam’s recent development experience. The growth of the sector mirrors the growth of the economy in general, and is an important supportive factor behind rapid real GDP expansion. Staff’s assessments quite rightly point out the peculiar challenges such rapid growth has placed on all concerned, including economic planners and regulators. Nevertheless, the authorities remain committed to fostering financial development and expanding financial inclusion. The main task will be to balance the competing needs for rapid development against ensuring the regulatory and risk management infrastructure is able to keep pace.

16. Regulatory developments have been guided both by the short-term concerns raised by rapid credit growth and the long-term aspiration to move to an updated and modern regulatory model. In April of this year, the SBV issued revised regulations on loan classification and provision towards better credit quality, and improved control of credit risks. Following that, a directive to the control of the scope and quality of credit to securities investment in order was issued in May in order to ensure orderly development of the country’s nascent equity market and also as a measure to maintain macroeconomic stability. Going forward, the authorities continue to put in place elements of a risk-based supervision framework. To this end, work on developing risk warning and assessment instruments, setting up risk-based supervisory procedures and formulating minimum requirements on risk management for credit institutions are all in progress. Staffs positive assessment of the authorities’ request for technical assistance in this matter is welcome, showing again the congruence between staff and the authorities on key policy challenges in the immediate term.

17. In terms of structural reforms in the financial sector, the large state-owned commercial banks (SOCBs) are all at various stages of equitization. A number have already completed the process and will be listed in due course, with the first initial public offering to take place in the near term. This reform process will include room for substantial foreign participation, as was seen in the similar process that was put in place for insurers in Vietnam. As staff has pointed out, foreign financial institutions have the scope to take substantial stakes in the reformed SOCBs of up to 15 percent, an increase from the previous limit of 10 percent. The authorities also would reaffirm that staff are correct in noting that flexibility to raise the level of foreign ownership exists on a case-by-case basis. In addition, as the excellent chapter on trade liberalisation in the special issues paper notes, the authorities are moving forward on financial liberalization expeditiously.


18. The Vietnamese economy stands on a momentous threshold. The country will transition from low-income to middle-income status in the very near future, a success story that testifies to the importance of maintaining an outward orientation in order to embrace the benefits of international trade and investment. Balancing that, of course, would be structural reforms and capacity building - including developing the legal and regulatory framework, improving the depth of financial markets and improving human resources - in order to mitigate risks arising from globalization. Vietnam’s authorities have rightly recognized both the opportunities and risks and have endeavoured to strike the appropriate balance between the two. Nevertheless, the authorities also reiterate their belief that in the longer term, there is no trade-off between stability and growth; indeed, without the former, the latter could not be sustained. This philosophy underscores their commitment to economic and financial stability, even under challenging conditions. In this regard, the Fund has played a key role in assisting the authorities, especially during this year’s Consultations, which rightly focused on these institutional capacities in an environment of strong growth and relative stability. For these efforts, and for the long-term engagement between the Fund and Vietnam, the authorities and we would like to record our appreciation to staff and Management.

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