Regions and Countries

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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 2005-2006: Socialist Republic of Viet Nam

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I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. Local elections were held in Viet Nam on 25 April 2004, under the amended laws on the organization of People’s Councils and People’s Committees. At the end of 2003, the Government announced two new provinces (Dien Bien and Dak Nong) and a new city (Can Tho). Viet Nam reconfirmed its commitment to regional integration (i) by reducing on 1 July 2004 the last 755 import tariffs under the Association of Southeast Asian Nations (ASEAN) Free Trade Agreement; (ii) at the 17-19 September 2003 Greater Mekong Subregion (GMS) Ministerial Meeting in Dali, People’s Republic of China (PRC); and (iii) through the first joint cabinet meeting with Thailand on 21-22 February 2004. Viet Nam signed the United Nations Convention Against Corruption last year and endorsed the Asian Development Bank (ADB)- Organization for Economic Cooperation and Department (OECD) Anticorruption Initiative for Asia and Pacific – Action Plan in June 2004. Anticorruption trials resulted in strong sentences, including long convictions and resignations for some senior government officials.

2. Final analysis of the 2002 Multipurpose Household Survey data confirmed a continuing decline in the incidence of poverty, from 58% in 1993 to 37% in 1998 and 29% in 2002. The decline during the last 5 years was not uniform across the different regions of the country: poverty in the Mekong Delta area showed the sharpest drop (from 37% in 1998 to 23 %) while it remained the highest in the Central Highlands (about 52%). At the December 2003 Consultative Group (CG) meeting, the Government presented a new chapter of the Comprehensive Poverty Reduction and Growth Strategy (CPRGS), emphasizing the role of large-scale infrastructure in growth and poverty reduction. The chapter underlines the need to invest in infrastructure to ensure high growth rates and budget revenues that can be used to address poverty in less dynamic areas. Nearly 1 year after severe acute respiratory syndrome (SARS) was detected and controlled, 15 people died and 15% of the country’s total poultry stock was culled in an outbreak of avian flu in February 2004. The outbreak was contained by April, but it affected a large number of farmers and pointed to a need for the government to pay closer attention to public and animal health.

B. Economic Assessment and Outlook

3. Viet Nam was one of the world’s fastest growing economies in 2003. Gross domestic product (GDP) grew by 7.1%, underpinned by strong domestic demand and exports. Industry and construction grew by 9.6%; agriculture and fisheries by 3.1%, due to expansion of fisheries output and higher coffee and rubber prices; and services rebounded to annual growth of 6.8%, after the initial impact of SARS on tourism and trade. The budget deficit grew wider in 2003 to 4.8% of GDP from 3.8% in 2002, in part to pay for the cost of government financed reforms. Broad money supply increased by 25% in 2003, compared with 17.6% growth in 2002, and the consumer price index (CPI) rose by 4.0%.

4. The trade deficit widened to $3.3 billion in 2003 from $1.3 billion in 2002, as exports— led by crude oil, textiles, garments, seafood, and footwear—could not keep pace with the surge in imports resulting from higher demand for capital and intermediate goods, including construction materials. The current account deficit in 2003 is estimated at $2.1 billion; 5.8% of GDP. Net foreign direct investment (FDI) inflows for 2003 stood at $622 million, while remittances rose to an estimated $2.6 billion. Viet Nam continued to make progress in its negotiations for World Trade Organization (WTO) accession, ambitiously scheduled for 2005. Banking sector reform continued, while modest progress was observed in the reform and equitization of state-owned enterprises (SOEs). The Poverty Reduction and Growth Facility (PRGF) program with the International Monetary Fund (IMF) expired in April 2004 because the Government and the IMF did not agree on the issue of auditing the central bank foreign exchange reserves.¹

5. Viet Nam’s GDP growth is projected to rise to 7.5% in 2004 and 7.6% in 2005, underpinned by strong domestic demand and annual export growth of 12.0%. In November 2003, the National Assembly set economic and social targets for 2004, including GDP growth of 7.5-8%, requiring investment equivalent to 35% of GDP; Consumer Price Index increase of less than 5%; fiscal budget deficit below 5% of GDP; a reduction in the share of households below the national poverty line to less than 10%; and a drop in the number of malnourished children to 26%. The growing budget and current account deficits, coupled with rising inflation rates, are still within manageable limits and compatible with Viet Nam’s rapid growth path and accelerating international economic integration. The budget and current account deficits do, however, highlight a continuing need for prudent macroeconomic management.

C. Implications for the Country Strategy and Program

6. The ADB Country Strategy and Program (CSP) for Viet Nam, approved in January 2002, emphasizes (i) generating economic growth and new employment through private sector development and improved governance; and (ii) paying attention to socially inclusive development and geographic focus on the central region, where the incidence of poverty remains high. The joint poverty assessment completed in 2003 by the Government and a number of official development assistance (ODA) partners including ADB² confirmed that economic growth continues to reduce poverty in Viet Nam. That study also confirmed, however, that the pace of poverty reduction is slowing and targeting the poor is becoming more necessary. To deal successfully with the accelerating pace of international economic integration, Viet Nam also needs to modernize its economy and institutions and accelerate investment to an estimated 35% of GDP. Faster growth, which is likely to benefit the more advanced areas, will need to be accompanied by measures to distribute the fruits of growth, including targeting on poor areas and groups. To address these emerging issues, and to more fully incorporate the results of the above-mentioned poverty assessment and expansion of the CPRGS in the programming of ADB operations, ADB plans to prepare a new CSP for Viet Nam in 2005, to align with the Government’s 5-year plan for 2006-2010, which is currently under preparation.

7. The new CSP will—among other issues—propose how ADB can help address the investment and modernization needs of Viet Nam by supplementing Asian Development Fund (ADF) lending with London Interbank Offered Rate (LIBOR)-based ordinary capital resources (OCR) and Private Sector Operations Department (PSOD) focused on economic infrastructure and modernization. A joint ADB-Government OCR assessment is currently being undertaken to determine the extent of sustainable OCR lending. The preliminary results show that Viet Nam will need to invest about 35% of GDP over the next 15 years to grow at the planned rate of 7.5% per year, even in a scenario of sustained reforms and productivity gains. Under this scenario, the savings-investment gap will range from 3% to 6% of GDP between 2004 and 2020. Concessional ODA flows, FDI, and remittances will provide part of the needed external financing, but additional medium- and long-term external borrowing of up to 3% of GDP annually is likely to be required. ADB’s LIBOR-based loans and private sector operations can provide an attractive alternative to other forms of sovereign and external borrowing. The initial debt sustainability assessment confirms that Viet Nam can sustain additional OCR lending up to $500 million per year for the next 15 years, when financing needs are more acute. ADB’s private sector financing products and credit enhancing instruments will also be used to catalyze longterm commercial financing in sectors with difficult market conditions and that lack a proven track record for limited recourse financing.

8. At the sector level, the preliminary assessment of OCR lending potential has focused on the transport, power, and private sectors. In transport, initial emphasis has been placed on highways that can improve national and subregional connectivity, and generate improved incomes and employment through the efficient movement of goods and people. Requests have also been advanced by the government to consider investment to improve mobility and water supply in large urban areas. The power sector strategy aims at (i) ensuring stable power supply for economic activity through financing and implementation of needed power sector infrastructure projects including transmission, distribution, and generation (hydroelectric and thermal). Investments in power generation would complement private investments and would be structured in a manner to fill the investment gap in power generation after taking into account private sector capability or interest to meet the overall investment requirements of the power sector in Viet Nam; (ii) promoting financial and fiscal sustainability by unbundling the Electricity of Viet Nam; (iii) creating an enabling environment for private sector participation in a competitive power market in Viet Nam; and (iv) encouraging the distribution of power in the GMS. PSOD will continue to support privately led initiatives to promote sustainable growth, and will collaborate with Viet Nam country team to promote increased private-sector investment. The proposed OCR lending pipeline will be finalized and confirmed during preparation of the new CSP.

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