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Economic Sector

Last updated: Thursday, October 18, 2018

 

Changing Landscape of Development Financing

Posted: Friday, September 28, 2018

Prudently managing public debt, ending the race to the bottom in FDI attraction, accelerating private investment and introducing new taxes are highlighted contents in the Financing Sustainable Development in Vietnam Report, recently released by the United Nations Development Programme (UNDP).

Dramatically changing financial landscape
The report noted, the accelerating Industrial Revolution 4.0 requires a new mobilisation strategy. The picture of development financing in Vietnam is changing dramatically. Although total financial resources for development in Vietnam (public and private investment, foreign direct investment (FDI) and international official development assistance, and domestic loans) have increased in value, they are still short of the demand. Among these sources, it seems that only inward remittances are stable (but according to local studies, much of this capital source is still held by the public, not yet available for investment). Other capital flows have changed dramatically.

The most visible change is a considerable drop in State funds. Government revenues are unstable and insufficient to sustainable rising regular spending obligations and the share for development investment is always restricted. While FDI inflows to Vietnam are not as strong as they used to be, the quality is not high, either. Domestic private sector investment lags behind ASEAN's average.

Another important source of development financing for Vietnam is official development assistance (ODA) though soft loans have declined and the preferential rate is subdued as well, said Mr Kamal Malhotra, United Nations Resident Coordinator and UNDP Resident Representative in Vietnam.

Although non-refundable ODA accounts for a small share of only one per cent of total ODA, this important financing source for Vietnam through technical assistance, capacity building and policy recommendation is also falling sharply. While the ODA to GDP ratio has been on the gradual fall, the share of other official financial sources (OOF, less preferential loans than ODA) to GDP has risen above that of other ASEAN countries.

According to UNDP experts, Vietnam is not a highly indebted country but public debt has risen sharply towards the safe-haven level, with a surge in potentially risky domestic borrowing. Government borrowings from the Vietnam Social Security Fund, the State Capital Investment Corporation (SCIC), the Debt Repayment Fund and idle capital of the State Treasury have gone to the limit. Government-guaranteed debts incurred by State-owned enterprises (SOEs) and local governments are also a significant source of risk to public debt sustainability.

Unsatisfactory private investment
With a mixed financing landscape, Vietnam needs to develop a new strategy to engage all socio-economic actors to mobilise investment resources to deliver sustainable development goals (SDGs).

The report recommended that Vietnam apply the principle of “whole government” and “whole society” as set in the 2030 Sustainable Development Agenda, meaning to further accelerate growth of other important financial forms, know how to mobilise possible resources, and promote the synergy of investments from all financing sources, especially from the private sector.

“Domestic private investment is not accessing what it deserves. Vietnam needs to expand domestic private investment with stronger reform efforts and better conditions for it to develop,” said Mr Kamal Malhotra, adding that the private sector has strong potential but needs proper support and a good regulatory framework for stronger growth.

Remarking on the future of Vietnam’s development finance, Ms Caitlin Wiesen, UNDP Country Director for Vietnam, said, it is essential to raise awareness and strengthen the management of interactions of development financing resources to navigate negative impacts on the macro-economy, maximise interactions of development financing resources, while ensuring macroeconomic stability, sustainable debt management and stable economic growth.

With respect to interactions of financial sources, Dr Ho Dinh Bao, the lead author of the report, said that new taxes, such as property tax and CO2/carbon tax, should be introduced and the scope of taxation should be also expanded to be a source of more regular budget income. In addition, there is a need to prudently manage public debt and increase government revenue from better management of State assets. Mr Nguyen Tien Phong, a comprehensive and inclusive growth expert at UNDP, added that it is necessary to actively improve the business environment and national credits to attract more FDI flows of higher quality, put an end to the race to the bottom in drawing FDI funds, and abandon the use of incentives through taxes and other privileges.

But expanding government revenues is only effective if public investment and spending resources are used effectively and transparently, linked to accountability and further staff downsizing to make the administration more efficient and effective. And, this must be a priority.

“Savings that can be obtained by regular spending cuts for wage payments may open up the opportunity to increase State funds for research and development (R&D) and intensive investment for '21st Century Skills' for Vietnam to seize the opportunities given by the Fourth Industrial Revolution,” said Mr Haoliang Xu, Assistant Secretary General of the United Nations and Director of the Regional Bureau for Asia and Pacific at UNDP.

PV








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