CG Meeting: IMF Brings out Assessments, Outlook, Challenges to Vietnam

CG Meeting: IMF Brings out Assessments, Outlook, Challenges to Vietnam

Vietnam's economy has performed well in recent years however there remain concerns in overheated credit growth, high inflation, slow reforms and weak macroeconomic management, said Shogo Ishii, the International Monetary Fund (IMF) Asia and Pacific Department Chief at the 12^th Consultative Group Meeting for Vietnam held yesterday in Hanoi.

The meeting on December 1 focused on Vietnam's progress in meeting the objectives of the government's Comprehensive Poverty Reduction and Growth Strategy (CPRGS) and the Five-Year Socio-Economic Development Plan for 2006-2011.

Over the past years, Vietnam has made remarkable economic achievements. Real gross domestic production (GDP) grew by 7.25 per cent in 2003, led by strong investment and export growth. Growth slowed in the first quarter of 2004 due to the impact of the avian flu outbreak and droughts on agricultural production, but began to rebound in the following months.

Inflation was modest at 3 per cent in 2003 but rose to 10 per cent in October 2004 (both year-on-year), owing mainly to a jump in food prices, which represent 48 per cent of the CPI basket. Since July, however, annualized monthly inflation has declined (0.5 per cent in July, 0.6 per cent in August, 0.3 per cent in September, 0 per cent in October and 0.2 per cent in November). Notwithstanding a widening of the external current account deficit by strong import demand, Vietnam significantly increased its international reserves, which reached US$5.6 billion (about 9 weeks of imports) at end-2003. A further modest increase has been recorded so far in 2004.

Nonetheless, the recent sharp acceleration in credit growth is a cause for concern, given uncertain loan quality and its implications for bank balance sheets. Credit growth accelerated from 28 per cent at end-2003 to 36 per cent by July 2004, led by loans to state enterprises.

In regards to recent high inflation, the authorities have taken a series of measures. They have substantially increased reserve requirements, and lowered the tariffs on a number of items, including petroleum and steel products. In August 2004, a Prime Minister’s directive called for a cut in government expenditure and lending by state-owned banks.

For 2004 as a whole, economic growth and the external current account are likely to be broadly unchanged from 2003, with inflation falling toward the end of the year and the budge deficit narrowing. Real GDP growth in 2004 is likely to be at 7-7.5 per cent. Inflation is expected to fall to 9.5 per cent on-year. The current account deficit is projected to be at 4.5 per cent of GDP, financed by a combination of ODA inflows and FDI inflows.

Implementation of structural reforms has been mixed. While significant progress has been made in trade liberalization, reforms in the areas of State-owned commercial banks (SOCBs) and state-owned enterprises (SOEs) have moved slowly.

Talking about outlook and challenges to Vietnam Mr. Ishii affirmed that the 2005 economic prospect appears generally favorable, provided that the authorities can contain inflationary expectations. Real GDP growth is projected to be broadly unchanged, with inflation expected to decline to about 5-6 per cent. Although export growth is likely to decline, the external current account deficit can continue to be financed by ODA and FDI inflows. The expected lower export growth reflects the elimination of textile quotas for existing WTO members, which will expose Vietnam to greater market competition. The State Bank of Vietnam should tighten monetary conditions further if the monetary policy actions and administrative and fiscal measures taken so far prove to be insufficient.

Sustaining strong growth and poverty reduction over the medium term hinges not only on continued prudent macroeconomic management but also structural reforms. The later includes restructuring SOCBs and SOEs, further developing the private sector, securing WOT accession and enhancing governance and the transparency of policy making.

At the end of the report, the IFM representative affirmed that Vietnam had a strong record of success in achieving high growth and significant poverty reduction over the past years. Vietnam can build on its remarkable achievements thus far and sustain the momentum of strong growth and poverty reduction over the medium term.

Despite the expiration of the Poverty Reduction and Growth Facility (PRGF) program in April 2004, the fund and the government of Vietnam remain committed to a fruitful dialogue. Toward this goal, the fund maintains a regular policy dialogue with the government, and provides analysis and policy assessments on macroeconomic and financial sector issues.

Going forward, the IMF fully supports the Vietnamese government in its efforts to implement the CPRGS and the Five-Year Socio-Economic Development Plan for 2006-2011. The IMF will continue to cooperate closely with other international financial institutions, and contribute actively to the broader dialogue between the government and its development partners in the Consultative Group process.

• IMF Reports