Regions and Countries

	Table of Contents
p. 2 of 20 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Viet Nam : I. Country Performance Assessment

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A. Economic Performance Assessment

1. Viet Nam had a strong pro-poor growth record over the period from 1992 till the onset of the Asian crisis in 1997. GDP expanded at an average annual rate of 9 percent and the incidence of poverty declined from 58 percent in 1992/93 to 37 percent in 1997/98. During this period, the main impetus to growth came from a boom in private consumption and a surge in foreign direct investment (FDI) inflows. The high growth period was followed by two years of economic slowdown during 1998-1999, and, most recently, economic recovery. During 1998- 1999, GDP growth decelerated to 4.4-4.8 percent. Manufacturing and services, the main drivers of rapid growth prior to 1997, decelerated for two consecutive years. Investment as a share of GDP fell by almost 4 percentage points. The investment slump was also reflected in import compression with falling imports of raw materials, machinery and capital goods. The urban unemployment rate rose from 6 percent in 1997 to 7.4 percent in 1999. On the positive side, after disappointing performances in 1998, the agriculture sector and exports performed well in 1999. A bumper rice crop as well as growth in fisheries and livestock boosted agriculture sector growth to 5.2 percent in 1999. Export growth, which had slumped to 2.4 percent in 1998, picked up to 23.2 percent in 1999 reflecting the price-driven surge in the value of oil exports and the fast growing manufacturing exports led by garments and footwear. Falling prices of agricultural commodities, principally rice and coffee however meant that volume effects dominated growth in value of agricultural exports. Declining world price of rice also dragged down the domestic price of rice and consequently the inflation rate has been falling. Overall, the two-year economic slowdown served as a wakeup call because it reflected not only vulnerability to loss of investor confidence but also the surfacing of structural weaknesses in the real and financial sectors.

2. After two years of slowdown, Viet Nam’s economy is now showing signs of recovery. Real GDP is estimated to have grown by 6.2 percent in the first half of 2000 and staff estimates that GDP growth for the whole year will be 6.1 percent (official estimates are 6.7 percent). Agriculture is estimated to have grown by 4 percent in the first half of 2000 but sectoral growth in the second half of the year could dip as output adjusts to falling world prices of agricultural commodities. Industry and construction grew by over 9 percent in the first half of 2000, and assuming that investment and imports continue to recover, could register a growth of 9.7 percent for the whole year. Services sector growth has picked up and is projected at 4.5 percent for 2000. Exports in the first six months of 2000 registered a growth of 26.2 percent over the same period the previous year, led by an increase in crude oil exports as world oil prices remained high. Despite higher volumes, export earnings from rice and coffee were substantially lower because of a slump in the international prices for these commodities. Imports have recovered—they were 30 percent higher in the first half of 2000 compared to the same period the previous year. Consequently, the current account surplus is expected to narrow. The slowdown in FDI inflows continued in 2000.

3. The Government’s macroeconomic management has generally been prudent. Fiscal deficits have been contained within manageable limits and have been financed by non-inflationary sources (mainly through external and domestic non-bank sources). Recently, there has been some easing of the fiscal stance to spur economic recovery. A fiscal stimulus package focused on rural infrastructure was launched in mid-1999. As a result, the fiscal deficit widened from 2.6 percent of GDP in 1998 to 2.8 percent in 1999 and is expected to further expand to 3.2 percent in 2000. Of concern are the underlying revenue and expenditure trends. Revenue as a share of GDP declined by 4 percentage points over the last five years to 18.3 percent in 1999, despite being shored up by higher oil revenues. The revenue to GDP ratio has been falling in recent years due to falling trade tax collections and continued dependence on state-owned enterprises whose performance has been deteriorating. The brunt of fiscal adjustment has been borne by cuts in non-wage current expenditure. The expenditure to GDP ratio has fallen 3 percentage points to 21.2 percent in 1999, squeezing non-wage current expenditures, including operations and maintenance expenditure and social spending.

4. On the monetary policy side, interest rates are gradually being liberalized. In August 2000, the State Bank of Viet Nam replaced the monthly ceiling rate on dong borrowings with a prime monthly rate of 0.75 percent. Also, the ceiling interest rate for foreign currency lending was replaced with an interest rate based on Singapore’s interbank market. SBV’s monetary policy has been accommodative. Broad money grew by 39.3 percent in 1999 fueled by rapid growth in foreign currency deposits. In the first half of 2000, broad money grew by 14.3 percent. Credit growth, which was subdued in 1999, picked up this year. The monetary overhang resulting from the rapid liquidity growth is likely to generate inflationary pressures and further weaken the fragile health of the banking system. The rapid liquidity growth has not yet reversed the trend in falling inflation, in part because banks have been re-depositing foreign currency deposits (FCD) in overseas banks. There has been a portfolio reallocation from dong deposits to FCD caused by higher rates on US dollar deposits relative to rates on dong deposits. The use of indirect monetary instruments remains limited because of the lack of a well developed capital market. The opening of a stock exchange in Ho Chi Minh City in July 2000 is as yet mainly of symbolic significance as only four local firms have officially registered to list on the bourse.

5. The crawling peg system, introduced in February 1999, allows the interbank exchange rate to depreciate by a maximum of 0.1 percent per day from the previous day’s average interbank market rate. Between February 1999 and June 2000, the nominal depreciation of the dong has been only 1.5 percent against the US dollar. Although the dong did not depreciate much in nominal terms over this period, with falling inflation, the real effective exchange rate (REER) depreciated by an estimated 6 percent. The depreciation of REERs of competitors, however, has been even steeper. There are emerging sources of pressure on the dong that may require greater flexibility in exchange rate management, including a widening of the permissible band. The external debt position has improved after agreement was reached with Russia in September 2000 in which Viet Nam secured a major writedown of its outstanding non-convertible debt.

6. There has been some liberalization of the trade and investment regimes. The most notable step has been the signing, in July 2000, of a bilateral trade agreement with the United States, the implementation of which will require adjustments to trade, investment, and property rights regulations. The freeing up of trading rights has resulted in a quantum leap in the number of non-state trading enterprises, but import licenses are still required for products not included in an enterprise’s business registration license. The number of items that require an import license has been reduced from 20 to 9. Quotas and targets on traded commodities, including rice, have been reduced although quantitative restrictions still cover one-third of imports. However, some manufacturing industries continue to be highly protected. The Government is preparing a detailed road map for meeting its ASEAN Free Trade Agreement (AFTA) commitments. The signing of the trade agreement with the US is also likely to result in opening up market access.

7. Viet Nam’s private sector, though small in terms of its contribution to GDP, is labor intensive and export-oriented. However, it faces many explicit and implicit barriers that prevent it from playing its potential role as the main engine of growth. The passage of the Enterprise Law in June 1999 has paved the way for a more favorable environment but its implementation is still going through start-up problems. Promotion of private small and medium enterprises, elimination of entry barriers, increased access to credit, and allowing land use rights to be freely transferable are some of the measures needed to accelerate private sector development.

8. The government’s SOE reform program envisages restructuring large SOEs, equitizing medium-scale SOEs, divesting small and medium enterprises, and liquidating the worst-performing ones. Progress in equitization has been slower than planned because of obstacles such as inter-enterprise debt, problems in valuation of land, equipment and buildings, and the question of how to address displaced workers, which is politically sensitive. A renewed reform program is presently under consideration of the Government.

9. The rising debt burden of loss-making SOEs translates into a growing stock of non-performing loans for the already weak and under-regulated banking sector. It is well recognized that the problems of SOE reform and banking sector reform have to be tackled together for the healthy development of Viet Nam’s financial sector. The main plank of the Government’s banking sector reform program is the restructuring of its joint stock banks and state-owned commercial banks. During the past year, there has been some progress in restructuring 14 weak joint stock banks that have a high risk of insolvency and low capital base, but limited progress in restructuring the four large state-owned commercial banks. The Government intends to set up an Asset Management Company that will focus on non-recoverable debts that have collateral. To reduce the burden of directed credit on the banking system, the Government established the Development Assistance Fund in 1999, paving the way for separating commercial and policy-based lending.

10. Negotiations are ongoing with the International Monetary Fund (IMF) and the World Bank on a new Poverty Reduction and Growth Facility (PRGF) and the second Structural Adjustment Credit (SAC), respectively. While the Government shares the broad thrust of the proposed PRGF-SAC program, agreement needs to be reached on the pace and timing of implementation.

11. The remaining reform agenda for the Government in pursuit of pro-poor, employment-friendly growth is quite substantial. In terms of macroeconomic policies, there is a need for improved revenue and expenditure management, liberalization of interest rate policy, use of more market-based monetary instruments, and better coordination of monetary and exchange rate policies. In terms of structural policies, the priority areas include private sector development, liberalization of the investment and trade regimes, SOE reform, and the related banking reforms. Obviously, the structural reforms mentioned have direct and quasi-fiscal impact. However, postponement of structural reform would only add to its costs. Clearer indications on the extent and depth of future reforms are expected as a result of the next Communist Party Congress, which will take place in the first half of 2001.

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