Stimulus should be time-bound, and an exit strategy clearly established to minimize fiscal risks

8:13:53 AM | 1/27/2022

“Stimulus should be time-bound, and an exit strategy clearly established to minimize fiscal risks,” recommended Mr. Francois Painchaud, IMF Resident Representative, Vietnam/Lao PDR, when asked about Vietnam’s fiscal policies to support economic recovery. Bui Lien reports.

Could you give some comment about the effectiveness of the monetary policy of Vietnam in economic recovery and business support?

 Macroeconomic policies have helped mitigate the economic fallout of COVID. To alleviate the impact of COVID on households and businesses, since early 2020, the SBV reduced its policy rate 3 times with a total cut of 1.5-2% percentage points and maintained abundant liquidity in the banking system, which kept the interbank rate low. Monetary policy is appropriately accommodative given Vietnam’s current economic circumstances and subdued inflation. Nevertheless, inflation developments should be carefully monitored in light of supply chain disruptions and expected pent-up demand as the economy recovers. If excessive inflationary pressures emerge, the SBV should clearly communicate the underlying drivers and stand ready to tighten to ensure that inflation expectations remain well-anchored.

 The SBV also swiftly introduced a legal framework to flexibly restructure existing bank loans, temporarily waive or lower interest payments and provide temporary forbearance on the loan classification for restructured loans. Banks have also helped to mitigate the impact of COVID with credit packages. Since January 2020, the banking system has restructured loans (keeping the same loan group) worth about 5.3% of total loan outstanding; and exempted/reduced interest rate on about 16% of their loans.

The credit package, including loan restructuring and regulatory forbearance as mentioned above, was appropriately extended until June 2022 to support viable firms impacted by the current outbreak. SMEs’ financial access should be facilitated. Given the economic impact of the pandemic, NPLs have, however, increased. In due time, the exceptional support will need to be gradually phased out to limit the risk of fueling riskier lending. The SBV should closely monitor asset quality, particularly the rise of NPLs, including restructured loans, and banks should be encouraged to provision in accordance with the classification of assets.

Given the tentative recovery underway, Vietnam’s ample fiscal space, and the constraints on monetary and financial policies, fiscal policy should play a greater role in supporting the economy through targeted, temporary and timely support. Against this backdrop, policies need to be carefully calibrated, targeted, coordinated, and communicated to support a resilient, inclusive, and green recovery.

According to the IMF's forecast, inflation will continue to rise until mid-2022, Vietnam in addition to rapidly promoting vaccine coverage, which financial response policy Vietnam should be adjusted to support economic recovery and curb inflation?

Inflation has remained subdued so far. However, inflation is expected to gradually rise towards the SBV’s inflation target as the economy recovers and imported inflation starts to pass through. We expect the economy to grow at 6.6% in 2022 as vaccination continues and households and firms adapt to life and work with the Covid-19 virus.

Fiscal policies can do more and better to support the economic recovery. The authorities have appropriately increased the fiscal support on health, including for faster vaccine rollout, social protection for households, and liquidity measures for firms. The envisaged recovery plan, expected to be approved by the National Assembly, provides an opportunity to jumpstart the recovery while advancing the country’s medium-term socio-economic development agenda. The fiscal package should be in the context of a credible medium-term fiscal framework and preserve macroeconomic stability. In particular, the size of the fiscal support, should not excessively stoke demand-side inflationary pressures, at a time when supply-side inflationary pressures exist.

More spending is crucial to support the recovery. Health spending, importantly on vaccines, ICU capacity and medical equipment, should be increased. Higher spending on social protection will also be essential for continued compliance with the health measures in the face of renewed outbreaks. Cash transfers should be better targeted to low-income households and the self-employed (including informal workers) and to help migrant workers return to work. Going forward, enrolling workers into social security programs that can be activated and scaled up when needed would enhance automatic stabilizers and reduce implementation lags.

Fiscal support packages to date have been largely tax-based, and mostly in the form of tax deferrals compared to other countries. However, previous experience suggests that the uptake of such measures is typically limited, including due to low corporate profitability. Measures such as temporary CIT loss-carry backward could more appropriately improve the cash flow of hardest-hit firms. Over the medium-term, a comprehensive reform of direct and indirect taxes is warranted, focusing on rationalizing tax expenditures, broadening the VAT base, raising excise duties, and adopting a unified property tax.

Public investment on needed physical, digital, and green infrastructure could be scaled up to bolster demand and growth potential but improving public investment efficiency will be key to reducing implementation lags and increasing the growth multiplier effect.

As the economy moves from containment to recovery, the available fiscal space should gradually shift from broad-based liquidity support toward more productive investments, from temporary cash transfers to permanent expansion in social safety nets, all the while safeguarding hard-won fiscal sustainability. Stimulus should be time-bound, and an exit strategy clearly established to minimize fiscal risks.

Vietnam has improved the investment environment over the years, what can it do to better attract foreign investment in the coming time?

Despite the severe impact of the pandemic, Vietnam still remains a destination for foreign investors. With its large population, growing income and positive economic outlook over the medium and long term, Vietnam has a lot to offer to FDI companies in terms of market size and potential. Moreover, its geographical location and already open economy and continuous efforts by the authorities to expand trade agreements will continue to attract FDI. To better attract foreign investors in the future, Vietnam would benefit from (i) improving its institutions and regulations, including improving property rights, competition, corporate governance, and reducing corruption and non-tariff barriers; (ii) improving infrastructure and connectivity; and (iii) strengthening labors’ skills to meet businesses’ needs.

By Vietnam Business Forum