Vietnam's Economy to Face Major Challenges in 2005
In 2004, although Vietnam encountered difficulties it obtained remarkable economic achievements. The country’s economic growth remained at high rate of 7.69 per cent last year with the gross domestic product (GDP) reaching up to US$44.5 billion and GDP per capita of US$542 per year. However, Vietnam is still one of the least developed countries in the region when basic economic fundamentals are taken into account.
Entering the year 2005 - the last year in the five-year socio-economic scheme from 2001 to 2005, Vietnam has set the target of achieving an economic growth of 8.5 per cent. This is surely not an easy to reach goal. To meet this difficult target, apart from exerting all its strength, Vietnam needs to anticipate implicit difficulties and challenges it may encounter in the coming time to prepare measures to deal with them.
Impact from other economies
In 2004, the world’s economic situation had a great impact on Vietnam’s economy, particularly the sharp increase in world crude oil price pushed up considerably prices of almost all inputs for production. In addition, the terrible earthquake and tsunami at the end of 2004 claimed more than 160,000 lives and caused damages worth more than US$13 billion for South East Asian and South Asian countries. Besides, China’s move of curbing its economy from growing too fast for a sustainable development has had certain effects on Vietnam’s economy.
The above-mentioned factors have been affecting economies in the region. East Asian countries may see average economic growth rate decreasing down to 5.5 per cent while China’s GDP growth will be lower at 8.5 per cent. Vietnam will inevitably not be able to avoid negative impact itself.
Pressure from high inflation
The consumer price index (CPI) rose by 9.5 per cent in 2004, representing a figure over three times higher than that in 2003 and nearly double the target set by the National Assembly for the whole of last year. The 2004 CPI was the highest recorded increase since 1990 (higher than the level of 9.2 per cent in 1998 after country faced the financial crisis in 1997).
Major reasons leading to high inflation in 2004 were 15.6 per cent rise in price of food and foodstuff, which account for 48 per cent of the basket of goods and services used to calculate CPI, and strong price increase of inputs for production such as petrol and fertiliser. Besides, the recorded increase in gold price of 11.7 per cent in 2004 and the issue of new bank notes with higher denomination (at the end of 2003) of the State Bank of Vietnam also contributed to the soared consumer prices last year.
In 2005, Vietnam’s economy will continue to face pressure of a possible high inflation because prices of import materials for local production are still at high levels while domestic prices of strategic goods including coal, electricity and cement have been scheduled to rise. Moreover, higher salaries for around seven million civil servants and former civil servants (effective from October 2004) and more intensive investment of the State (for ensuring high economic growth) also put the economy in a danger of encountering high inflation.
Agriculture facing serious droughts; bird flu epidemic spreading
Agriculture production accounts for 30 per cent of GDP hence it has important role for the country’s socio-economic development and stability. In 2004, total areas confronting droughts nation-wide were 263,000 hectares, causing a loss of more than VND5,000 billion (US$320.5 million). About half of total areas for agricultural cultivation in Red River Delta were in short of water while some areas in the Mekong Delta were encroached by seawater and lacked fresh water for irrigation in the winter-spring crop. Meanwhile, serious droughts occurred in many areas in Central Highland provinces.
The Avian flu epidemic in 2004 claimed 290 lives and forced local farmers to kill more than 42 million fowl, causing a gross loss of around VND1,400 billion (US$89.74 million) and diminishing GDP growth rate by 1 per cent. Currently, bird flu epidemic is recurring and if the country does not bring out preventive measures the lethal epidemic will fast spread nation-wide, causing serious consequences not only for agriculture but also the tourism sector.
Attracting capital sources for development investment
Vietnam attained gross domestic product (GDP) of US$44.5 billion in 2004. The country reported total export revenues of US$26 billion. However, according to experts, external factors contributed much to Vietnam’s high economic growth in 2004 with total overseas remittance of over US$3 billion, total disbursed official development assistance (ODA) funds of US$1.65 billion and total foreign direct investment of US$4.2 billion (US$2.85 billion fresh FDI).
In 2005, Vietnam targeted to reach an economic growth of 8.5 per cent. Therefore, development investment/GDP ratio must increase by 2-5 per cent against 2004 to 35-38 per cent. Moreover, because of low efficiency of the State-owned enterprises and limited budget revenues the government will have to focus on attracting overseas remittance, foreign investment and investment capital from private sector. This year Vietnam needs to consider effect of investment from state budget and investment of state-owned enterprises, especially investment for infrastructure construction. The government must have absolute measures to prevent waste and inappropriate investments, which happened previously.
Acceding to the WTO
In 2004, Vietnam made great leaps in the process of integrating into the regional and global economy, especially achievements in the itinerary of tariff reduction. Vietnam has gone through most favoured nation (MFN) agreements with 90 countries and territories. Currently, Vietnam has finished negotiations with the EU on World Trade Organisation (WTO) accession and is carrying out negotiations with other giant economies such as the US, China and Japan. It is expected that Vietnam will join in the WTO at the end this year.
However, to end negotiations with big economies there must be great efforts from parties. From Vietnam’s side, the country needs to continue tax reforms and customs modernisation. In the process of entering WTO, Vietnam has to cut import taxes on groups of goods and this will certainly have a negative impact on domestic production in some sectors. The local machine manufacturing sector will face damages while some other sectors such as garment and textile and agriculture will benefit when the country access the WTO. Negative impact on some sectors will not only last in 2005 but are expected to continue in the following years.
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