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Vietnam: IMF Executive Board Concludes 2016 Article IV Consultation

Press Release No. 16/307 June 27, 2016

On June 17, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV consultation1 with Vietnam. Vietnam’s economy has experienced solid growth with low inflation, reflecting policy attention to maintaining macroeconomic stability. Economic performance was robust through most of

2015, driven by rapid export growth, foreign direct investment (FDI), and strong domestic demand. Manufacturing and exports moderated near year-end—reflecting slowing external demand—and agriculture production fell sharply in the beginning of 2016, owing to a severe drought and arable land salinization. Inflation declined below one percent in 2015 before ticking upward in early 2016 due to higher food and administered prices. The current account narrowed sharply from rising imports, and gross international reserves declined in the second half of 2015 before recovering in early 2016.

Fiscal policy has been loose in recent years. The deficit was 5.9 percent of GDP last year. Revenues rose strongly, reflecting tax and non-tax collection, while expenditure was higher than planned, owing to carry-forward spending by local governments, and higher capital, social and interest spending. Public debt has risen sharply. Monetary policy was accommodative over most of last year amid falling inflation, and credit growth was robust. Liquidity conditions were tightened around year-end as global financial volatility increased, and the exchange-rate regime was made more flexible. A number of important reform steps have been taken, but non-performing loan (NPL) resolution, bank recapitalization, and state-owned enterprise reforms have been sluggish.

For 2016, growth is projected to moderate to around 6 percent, reflecting the adverse agriculture shock, lower external demand and spillovers of tighter global financial conditions. Headline inflation is projected to rise modestly. Reserves are expected to increase to around 2 months of imports, and public debt to reach around 62 percent of GDP. While the near-term outlook is broadly positive, there are downside risks, including from high and rising public debt, slow NPL resolution progress, prolonged drought, tighter or more volatile global financial conditions, and weak growth in key advanced and emerging economies. Upside opportunities exist, including rapid implementation of recently signed trade agreements, which would usher in productivity gains, fuel exports and incentivize reforms.

Executive Board Assessment2

Executive Directors commended Vietnam’s recent good macroeconomic performance and the significant progress made in achieving the Millennium Development Goals. Directors were encouraged by the broadly favorable economic outlook, but noted that external and domestic risks exist, mainly from the rising public debt, rapid credit growth, and slow banking sector reforms. Directors welcomed the authorities’ commitment to prudent policies and reforms, and emphasized that determined steps are needed to build on the current achievements and boost the economy’s growth potential.

Directors underscored that growth-friendly fiscal consolidation is key to reversing the rise in public debt and creating space for critical social and development expenditures. They urged the authorities to begin taking measures this year to reduce the fiscal deficit to 3 percent of GDP by 2020. Directors stressed the importance of structural revenue-enhancing measures, including rationalizing exemptions and incentives, broadening the tax base, and further strengthening revenue administration. They also encouraged the authorities to take steps to reform the civil service to rationalize the public wage bill, improve spending efficiency, and use equitization receipts to finance the deficit.

Directors supported the current monetary policy stance and welcomed the shift to a more flexible exchange rate regime, while encouraging the authorities to remain vigilant should price pressures emerge. They called on the authorities to continue to build international reserves, further strengthen the monetary policy framework, and undertake institutional and operational reforms to support a gradual shift toward using inflation as the nominal anchor.

Noting that the recent rise in credit growth could pose risks to financial stability, Directors welcomed the authorities’ proposals to tighten macroprudential policy and recommended further tightening if needed. They stressed the need for further efforts on banking sector reforms, including measures to resolve nonperforming loans, recapitalize banks by existing shareholders, enhance governance, risk management, and supervision, and adopt international financial reporting standards.

Directors encouraged the authorities to intensify the pace of structural reforms to boost productivity and the economy’s long-term growth potential. They welcomed progress made on the legal framework for state-owned enterprise reforms and urged continued efforts in this area, including greater transparency and a level-playing field with the private sector. Directors also recommended improvements in education to strengthen human capital and address skills mismatches, complemented by a conducive business climate.