Regions and Countries

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Country Strategy and Program Update 2002-2004: Viet Nam

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I. Development Situation

A. Recent Political and Social Developments

1. The ninth congress of the communist party of Viet Nam (CPV) was held on 19-22 April 19-22 2001. The congress elected a 150-member Central Committee (CPV CC) with a five- year term. At its first plenary session, the CPV CC elected a new general secretary of the CPV CC and a 15-member political bureau. The congress served as a forum for reports on party programs since the last congress. The political report sought ratification of party directives for the future, stressing the importance of party building and discipline. The 10-year socioeconomic development strategy and 5-year plan directions presented at the congress set forth a number of goals including an annual economic growth rate of at least 7 percent. While recognizing the need for an evolving multisector economy that provides equal opportunities for the private sector, the report stressed that the State would continue to play a leading role in strategic activities. Reconciling these two potentially conflicting objectives will be a challenge.

B. Economic Assessment and Outlook

2. Gross domestic product (GDP) growth in Viet Nam accelerated to over 6 percent in 2000, after two years of economic slowdown when the growth rate ranged between 4.4 and 4.7 percent (Appendix 1). Sectoral performance was marked by strong recovery in the industry and construction sector and robust performance by the agriculture sector. On the demand side, domestic consumption picked up (5.6 percent increase), in part due to the rise in public sector wages and to the Government’s fiscal stimulus package. The ratio of gross domestic investment to GDP rose to 23.6 percent, with domestic private investment responding well to the Enterprise Law. There was also a modest recovery of foreign direct investment.

3. Fiscal estimates for 2000 reveal higher revenue receipts and expenditure than the budgeted levels, with a combined effect of lower-than-expected fiscal deficit (4.5 percent of GDP). Monetary policy remained accommodative in 2000 with a significant acceleration in credit growth. The year-on-year percentage change in the consumer price index was negative (-0.6 percent) due to the declining food price index. The current account balance remained in surplus in 2000 although the surplus narrowed to 1.6 percent of GDP as imports recovered (34.5 percent growth). Export performance remained resilient growing by 25.2 percent in US dollar value, led by the price-driven surge in crude oil exports. The exchange rate was relatively stable until the fourth quarter of the year: the period average depreciation was 1.6 percent while the end-of-period depreciation was 3.5 percent. The external debt position improved after Viet Nam secured in September 2000 a restructuring of its outstanding transferable ruble debt owed to Russia.

4. Structural reforms went on in 2000. The surge in registration of private small- and medium-scale enterprises (SMEs) was due in no small measure to the Enterprise Law. Revisions to the Foreign Investment Law were made to create a more conducive environment for foreign investors. In the banking sector, an overall framework for reform of state-owned commercial banks (SOCBs) was prepared and individual SOCBs drew up restructuring plans. A comprehensive plan for reform of state-owned enterprises (SOEs) was also drawn up, but completed equitizations fell short of the announced targets. The most notable development in the trade arena was the signing of the bilateral trade agreement with the United States in July 2000. There was also progress in trade liberalization with the removal of a number of quantitative restrictions.

5. The economy is expected to grow by 6.4 percent in 2001 and by around 7 percent in 2002. Domestic demand will be the main driver of economic growth in 2001, underpinned by rising private consumption and a modest recovery in domestic investment. However, export growth is expected to slow down to around 12-13 percent while import growth is likely to increase faster than exports at 16-17 percent. The external sector outlook is based on declining oil prices and uncertain growth prospects in the industrialized countries. Sustaining strong growth in Viet Nam requires a pickup in the investment rate, with much of the needed increase coming from the private sector. The increase in turn requires reforms that create an enabling environment for private sector development, including banking and SOE reform, and safeguarding external competitiveness to enable Viet Nam to realize export potential in areas where it has a comparative advantage. The fiscal deficit is likely to widen as the Government meets the costs of the structural reform programs it has committed to. the Government has committed to are incurred. The deficit is, however, expected to remain within manageable limits.

C. Implications for the Country Strategy and Program

6. The Government envisions Viet Nam to become an industrialized country by 2020, with an annual GDP growth rate of at least 7 percent during the period, and proportionally higher growth in industry and the urban areas. Among the social goals, poverty incidence (according to a food poverty line) is targeted for reduction by one third by 2005 and by two thirds by 2010. Additional quality of life targets by 2010 include achieving universal lower secondary education, reduced children malnutrition rate from one third to less than 20 percent, increased life expectancy from 68 to 70-71 years, near universal access to clean water in urban areas, and expanded forest cover from 28 to 43 percent. The Government is aware that, to achieve these goals, in the initial years significant emphasis will have to be placed on developing and diversifying the rural economy.

7. To support the Government’s vision in a manner consistent with the overarching poverty reduction objective of the Asian Development Bank (ADB), the country strategy and program (CSP) under preparation suggests that future ADB operations address dimensions that will make growth and the structural transition pro-poor and sustainable. To this end, ADB will selectively focus its operations on three pillars: pro-poor sustainable economic growth, social development, and good governance. In addition, ADB will pursue synergy in its operations by concentrating a share of investment projects, designed with an integrated poverty reduction focus, in the relatively impoverished Central Region of Viet Nam, especially in the Central Highlands and North Central Coast. This approach has been endorsed by the Government and guides the proposed country assistance plan (CAP).

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