Strengthening Resilience to Future Shocks

1:58:40 PM | 6/15/2020

The Covid-19 pandemic has rocked Vietnam's longstanding resilience to external shocks. The economic growth rate may be halved in 2020, compared to the pre-crisis forecasts, with increasing pressure on State budget revenues and export revenue.

According to the World Bank, although the economy is still strong, the Government may have to mobilize an additional US$5 billion to cover the deficit from budget revenues due to reduced revenue and the implementation of the financial support needed to reduce the negative impact on businesses and households. The financial support package developed and proposed by the authorities is ambitious, but the affordable cost is limited. This program will combine financial support measures with tax measures for both formal and informal sectors. However, the program focuses primarily on businesses and formal workers. The remaining main challenge is how to remit money to informal workers, mainly street vendors and small farmers, as they are not clearly defined by, nor can they easily access, conventional manual remittance.

The financial sector also has solutions to reduce the cash flow difficulties that many businesses are facing. However, according to the latest World Bank’s Policy Update, Vietnam needs to be closely monitored as banks may also suffer lower profitability and greater risk of debt increase if the crisis is longer than expected.

In response to this fact, the World Bank group has proposed cooperation with Vietnam in a number of areas with specific topics to address and shorten the crisis period as well as enhance Vietnam's preparation for shocks in the future in accordance with the needs of the Government.

The first measure is economic monitoring because the country's financial and macroeconomic forecasts will need to be constantly updated according to frequent changes both in the country and globally. The Covid-19 pandemic has placed many restrictions on traditional face-to-face data collection methods. The use of technology such as mobile phones and the internet to collect data has been used in places where traditional survey methods cannot be implemented. World Bank experts have developed many tools, some of which can be applied in Vietnam, such as quick surveys of companies/households via mobile phone and online monitoring information, which may include satellite data (such as images of the Earth at night), digital data (hotel reservations, data on transportation and mobilization) and aviation data to monitor the economic activity, as well as the prices of important commodities. Moreover, they can assist tax authorities in developing and implementing a compliance strategy to help control non-compliant behavior due to crisis, such as late/undeclared filing and increase tax debt.

In addition, we should implement the measures being proposed to protect the most affected groups. The World Bank may cooperate with Vietnam to solve difficulties when transferring aid in the informal sector by sharing experiences currently being implemented in other countries, including Thailand, Indonesia and the Philippines, which are also facing similar challenges; provide technical assistance to monitor opinion gathering programs from beneficiaries and the community and their coping strategies using social media platforms through agreements between the World Bank Group and some social media/internet companies.

 Notably, Vietnam will need to pay attention to the necessary reforms to optimize economic coping measures when the health crisis starts to end in the next few months. These activities may include support for the Government to simulate the total domestic demand when accelerating current public investment programs. Proposed actions are aimed at promoting disbursement of development investment through digitalization of procedures and expediting the approval process for priority expenditures. Because public investment can create temporary jobs and provide income support, it is possible to adjust existing public investment projects or deploy new ones, thereby stimulating economic development right now. Specific actions can be designed to enhance customer response in areas of difficulty such as tourism and transportation. At the same time, there is an opportunity to expand the digital program through enhanced reforms to promote e-payment, e-learning and e-government. In fact, this may be an opportunity for the Government to implement the recently approved overarching Financial Strategy. Another group of actions could be to support solutions to strengthen the health system's preparedness and response to future disease outbreaks.

Until now, the Government's response has focused precisely on policies that aim to smooth the loss curve for health, finance and businesses. Those are crisis reduction policies. How long a country can maintain these policies - with great financial and economic costs - depends on each initial condition, capacity, capital, level of infection and financial capacity of that country. But it is clear that these measures cannot last forever.

It is known that in addition to technical assistance in the above areas and in emergency funding for health-related actions, the World Bank may provide budget support through a series of DPO programs with the amount determined by the two sides, but can be more than US$500 million for each program. Such lending programs will not only reduce budgetary pressures that may arise in the short and medium term, but also provide foreign currency when the international balance of payments is expected to deteriorate and allow Vietnam diversify funding sources. As interest rates on international markets have dropped recently, the lending costs of the World Bank will be competitive, especially compared to the issuance of bonds on the domestic market.

By Quynh Anh, Vietnam Business Forum