Challenges of Green Transition and Medium-term Economic Growth

Vietnam’s economy is facing enormous challenges in short- and medium-term growth. Even with some structural adjustments and the positive effects of new growth drivers, it will be very hard to attain the average annualized GDP growth of 6.5% in the 2021-2025 period. The average GDP growth for the first two years of this period is only 5.26%. Assuming that the GDP growth is 5.5% in 2023 and 7% annually in 2024-2025, the average 5-year annual growth rate will be merely 6%.

Medium-term economic growth prospects

Mr. Nguyen Xuan Thanh from Fulbright School of Public Policy and Management under Fulbright University Vietnam stated that the Vietnamese economy’s current growth drivers - domestic consumption, investment, and export - are not shifting to a green and circular economy. He argued that without policies to encourage behavioral changes in consumption, investment, and production/business, the green transformation goals would be unattainable. He also warned that administrative interventions, passive responses, and forced growth model transformation without a roadmap would severely hamper economic growth.

 After two quarters of low economic growth in 2023, achieving a 6.5% growth in 2023 would be extremely difficult, if not impossible, as the growth rate would have to reach 9% in the last two quarters.

If the public investment budget approved by the National Assembly and assigned by the Prime Minister in 2023, which amounted to VND707 trillion (US$30.1 billion), was completed 95%, the disbursement value would increase by 24.6% year on year and add 1.2-1.3 percentage points to the growth rate. This rate would require massive investment spending in the second half of 2023. If this assumption was realized, the GDP growth would be 5.5% or possibly up to 5.8%.

Before this reality, a 7% annual economic growth in the next three years would be very challenging for the Vietnamese economy. This target would require domestic consumption to rise by 7%, exports by 8.5% (imports might be higher), and total investment by 9%. By sector, agriculture would grow by 3%, industry by 7-7.2%, and services by 6.8-7%. This scenario would require macroeconomic stability to be maintained and macroeconomic policies not to be changed abruptly.

Mr. Nguyen Xuan Thanh said that although foreign direct investment (FDI) would be as high as US$15 billion a year, private investment could recover to the 2022 level if low interest rates were sustained. However, to achieve a total investment growth of 9%, public investment would still have to be a key driving force. He mentioned that according to the existing medium-term state budget and public investment plan, the absolute scale of state-funded public investment spending would decline in 2024 and 2025. If this scenario was maintained, investment would not likely be a driving force for medium-term growth, especially as private real estate and construction sectors would hardly recover quickly in the near term. He suggested that the state budget plan, including medium-term public investment, needed to be adjusted and tilted towards stronger public investment.

He emphasized that the absolute scale of public investment in 2023 was over VND700 trillion (US$30.1 billion). Vietnam’s economy needed US$32-35 billion a year of public investment (7.5-8% of GDP) in the 2024-2026 period. Most importantly, the increased amount of public investment capital needed to be prioritized for infrastructure investment projects towards green transformation and sustainable development.

Growth engines driven toward green transition and sustainable development

Mr. Nguyen Xuan Thanh stated that Vietnam’s consumption and production models faced two major challenges for sustainable development: high energy intensity and a lot of non-recyclable or non-reusable waste.

He noted that if the intensity of electricity use could not be lowered or only slightly lowered, Vietnam’s electricity consumption demand would rise by 7% annually from 2024 to 2030. Under this scenario, Vietnam’s electricity consumption per capita would reach 4,500 kWh, equivalent to the current consumption in the United Kingdom. China’s electricity consumption per capita was currently nearly 6,000 kWh but its per capita GDP was three times that of Vietnam. The UK was 10 times higher. In an optimistic growth scenario, Vietnam’s GDP per capita would likely reach nearly US$7,000 in 2030 (at 2022 base prices), which was about half of China’s current GDP per capita. He argued that the electricity consumption per capita of 4,500 kWh by 2030 was too high. Vietnam needed to increase electricity efficiency and reduce elasticity from above 1 to below 1. Then, future electricity demand growth would be 5-6% yearly until 2030.

He suggested that policy planning and enforcement towards increased energy efficiency needed to focus on limiting investment in energy-intensive industries; encouraging strong tax incentives for energy-saving technological applications; firmly implementing the roadmap to increase electricity prices and energy prices that fully included socioeconomic costs; and adjusting construction and equipment installation standards.

He also pointed out that circular economy-boosting policies, if planned in an institutionally fragmented way, would unlikely create incentives for voluntary application and, if imposed rigidly, would significantly reduce the competitive energy of economies. He proposed that a better approach was to plan policies that fostered the circular economy led by cluster-based ecosystems. Policies needed to aim at developing support services in the ecosystems where businesses and consumers would benefit by actively adopting the circular economy.

He emphasized that in public investment plans, renewable energy investment projects needed to be given top priorities and the highest incentives for private investment, both domestically and internationally. It was necessary to strengthen the power grid to transmit renewable power from production fields to consumers. The power grid also needed to be invested in a “smart” way to elastically respond to supply and demand fluctuations.

It was important to build an electricity price bidding system for renewable energy producers; equate electricity prices to new production costs, especially if the new supply was more expensive than the average cost and the current electricity price and there were solutions for licensed renewable energy projects.

The government needed to have a clear approval roadmap for any new power projects, especially fossil fuel-powered projects. In addition to renewable energy investment, other economic infrastructure also needed to be encouraged for green investment or more specifically carbon-neutral investment. Existing infrastructures also needed to be encouraged to adopt decarbonization measures. He highlighted that among the economic infrastructure, seaports were the most important.

The next focus on green transformation was urban infrastructure in major cities of Vietnam such as Hanoi, Ho Chi Minh City, Hai Phong, Da Nang and Can Tho. He defined green transformation as a connotation of the smart urban model. He recommended that the National Assembly needed to create a specific mechanism in the form of a “sandbox” for technological innovations so that local governments could actively build their smart and sustainable cities with the active participation of people and businesses.

By Anh Mai, Vietnam Business Forum