Regions and Countries

	Table of Contents
p. 1 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program 2004-2006: Socialist Republic of Viet Nam

---

I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. Following National Assembly (parliament) elections on 19 May 2002, Viet Nam announced a new government structure in September 2002 that included a number of new ministerial appointments. The Government reorganized into 26 ministries and 13 agencies, issued several decrees and amendments to improve public administration, and completed preparation of a legal needs assessment and a legal system development strategy. Leaders of six countries sharing the Mekong River, including Viet Nam, met at a Summit held in Phnom Penh on 3 November 2002 to commemorate the 10th anniversary of Greater Mekong Subregion (GMS) economic cooperation program and adopt a common strategy for the next 10 years.

2. Preliminary data from the 2002 Multipurpose Household Survey shows a decline in the incidence of poverty from 37% in 1998 to about 29% in 2002, according to an international poverty line¹. The decline was not uniform across regions; for example, poverty rates remained constant at around 52% in the central highlands. During March and April 2003, Severe Acute Respiratory Syndrome (SARS) affected Viet Nam, with 63 reported cases leading to five deaths. Through close cooperation with the World Health Organization, the contagion was contained by the end of April. Progress in achieving the Millennium Development Goals and Targets (MDGT) has been notable in the area of poverty reduction and access to education. Appendix 1, Table A1.1, indicates the country's progress in achieving the millennium targets.

B. Economic Assessment and Outlook

3. According to Asian Development Bank (ADB) estimates, Viet Nam’s gross domestic product (GDP) grew about 6.4% in 2002, a slightly higher rate than 2001’s 5.8% ². Growth accelerated in the second half of the year, partly due to a recovery in exports. Industry and construction were the fastest-growing sectors—both registering 8.9% expansion—followed by services (6%) and agriculture (3%). Domestic demand, led by consumption and investment, was again the main source of economic growth.

4. The fiscal deficit, including onlending, increased slightly to 3.5% of GDP during 2002. Higher capital spending accounted for most of the increase in public expenditures. Broad money growth was moderate at around 18%. Prices increased moderately by 4%. Higher prices for cereals and foodstuffs, mainly rice, boosted purchasing power in rural areas. In June 2002, the interest-rate ceiling on lending in the domestic currency was removed, allowing banks to better price credit risk. This reform should expand lending to the emerging private sector.

5. Exports recovered from an initial contraction in 2002 to post annual growth of 7.4%. The recovery was largely due to better exports of garments, textiles, and marine products, most of which are destined for the United States (US). Because of relatively high import growth (19.5%), the current account fell into deficit (about 2.8% of GDP) for the first time since 1999. Total value of foreign direct investment (FDI) fell sharply in 2002 from 2001—down 41% to $1.33 billion—despite the fact that the number of project approvals rose. The change in FDI flows is partly a result of more small-scale foreign investment. Banking sector reform continued, while modest progress was observed in the implementation of the Small and Medium-Sized Enterprise (SME) Decree and in the reform and equitization of state-owned enterprises (SOEs).

6. The short- and medium-term economic outlook is good. Preliminary data suggests that during the first quarter of 2003, GDP grew by 6.9%, compared to 6.5% in the same period last year. Inflation averaged 2.1% for the first six months of 2003. Exports and imports are expected to grow at 9.1% and 13.1% respectively in 2003, slightly increasing the current account deficit to 3.7% of GDP. ADB sees GDP growing 6.9% in 2003 and 7.1% in 2004, underpinned by ongoing strong domestic demand and an expansionary fiscal policy. War in Iraq had mixed impacts, temporarily increasing crude oil revenues but depressing rice and tea exports. While SARS affected the tourism industry in the second quarter of 2003, the impact on GDP growth rate is likely to be modest thanks to rapid and effective containment of the disease.

7. Viet Nam is entering a new phase of economic development. Implementation of a bilateral trade agreement with the US, accession to the World Trade Organization, commitments to the ASEAN (Association of Southeast Asian Nations) Free Trade Area over the next 3 years, and the People’s Republic of China’s free trade arrangements with ASEAN by 2010 will all put competitive pressure on the economy. Careful assessment and management of their social implications will be necessary. The public investment program for 2001–2005, approved in December 2002, also highlights the significant financing needed to sustain Viet Nam’s development and implement its Comprehensive Poverty Reduction and Growth Strategy (CPRGS). The public investment program estimates total investment needs of about $60 billion at 2000 prices over 5 years, (equivalent to 31–32% of GDP), of which the state budget can only cover about 43%. Another 23% would come from domestic private sources, but a funding gap of about $20 billion remains. The Government expects FDI will cover $11 billion and official development assistance (ODA) $9 billion.

C. Implications for the Country Strategy and Program

8. Preliminary results from the 2002 household survey confirm that economic growth continues to reduce poverty in Viet Nam, but that the pace of poverty reduction is slowing and uneven. Targeting the poor is becoming more necessary. This supports the emphasis of the country strategy and program (CSP) on generating growth and employment through private sector development fostered by agricultural diversification, SME development, diversification of financing channels, and improved governance. It also devotes attention to socially inclusive development and focuses on the central region of Viet Nam, which continues to see high incidence of poverty. The Government has given strong signs of commitment to public administration reform supported by ADB operations. The attention to secondary education and preventive health that ADB operations embody are consistent with the Government’s commitment to universalize lowersecondary education by 2010 and to strengthen preventive health care in the wake of the recent SARS outbreak. While SARS caused ADB to suspend mission travel for about 1 month, its rapid containment limited the impact on operations.

9. Private sector growth and a gradual reorientation of FDI toward labor-intensive sectors are positive signs for Viet Nam. To support the country’s competitiveness as it faces increasing international integration, economic and social infrastructure must be modernized. In some sectors, ADB can provide support through ordinary capital resources (OCR) to (i) fill the financing gap and (ii) promote financial discipline by imposing commercial lending terms. At the request of the Government, and in cooperation with the relevant government agencies, the 2003 country programming mission started assessing the potential to expand OCR lending. The assessment will be completed in 2003 and its outcome incorporated into the 2004 country strategy and program update (CSPU).

___________________

Back Country Strategy and Program 2004-2006: Socialist Republic of Viet Nam	Next II. Implementation of the Country Strategy and Program