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IMF Executive Board Completes the 2019 Article IV Consultation with Vietnam

On June 19, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Vietnam. [1]

Trade tensions and financial volatility affecting emerging economies in 2018 were also felt in Vietnam, including through a stock market correction. Nevertheless, the economy has remained resilient to date and growth reached a 10-year high of 7.1 percent in 2018. The expansion is broad-based, fueled by healthy growth in incomes and consumption of the growing and urbanizing middle class, a strong harvest and surging manufacturing sector. Inflation averaged 3.5 percent in 2018. The strong economic momentum is expected to continue in 2019, aided by competitive labor costs and other strong fundamentals, including a diversified trade structure, and recently signed free trade agreements which are spurring reforms. However, a soft landing of growth is expected, to 6.5 percent in 2019 and over the medium term, reflecting weak external conditions. Inflation is expected to pick up slightly in 2019 on the back of administered price increases but should remain below the authorities’ four percent target.

Macroeconomic policies have been tightened in recent years: A reduction in the budget deficit and strict limits on new government guarantees and robust growth during 2016-18 have contributed to reducing public debt to 55.5 percent of GDP at end-2018, from 60 percent at end-2016. The State Bank of Vietnam has continued to reduce credit growth, but liquidity continued to be ample in 2018, aided by external inflows and the growing capital market. The SBV is guiding banks to adopt Basel II standards in 2020 and developing plans to recapitalize systemic state-owned commercial banks. The external position in 2018 was substantially stronger than warranted by fundamentals. The authorities intervened in both directions to keep the Dong within a narrow band and reserve accumulation continued.

Reforms continue along a wide front: the monetary and fiscal systems are being gradually modernized, and blocks of shares in large state enterprises continue to be offered for sale. The fight against grand corruption since 2016 has resulted in significant sentences, a new anti-corruption law has been approved, a PIMA has been completed and the AML/CFT system is about to be reviewed. But the list of reforms is even longer and the strong economy provides an opportunity for more ambitious reforms to level the playing field for the domestic private sector and increase investment by reducing administrative and licensing procedures and trade barriers. IMF staff remains engaged in a wide-ranging capacity development program with Vietnam.

Executive Board Assessment [2]

Executive Directors commended the Vietnamese authorities for their prudent policies which have contributed to economic resilience and impressive growth amidst rising trade tensions and external uncertainties. Directors welcomed the authorities’ continued commitment to macroeconomic stability and wide‑ranging reforms and agreed that policy priorities should continue to focus on building buffers, strengthening governance, and boosting productivity and private sector‑led growth.

Directors welcomed the authorities’ fiscal consolidation efforts, especially improvements in tax policy and administration, including higher environmental taxes, the tightening of government guarantees and lower current spending, which helped reduce public and publicly guaranteed debt. They noted that further consolidation should focus on the quality of adjustment so as to keep the public debt on a declining path and create room for priority infrastructure and social spending, prepare for rapid prospective population aging, and deal with the effects of climate change and digitalization. Revenue‑enhancing measures should focus on broadening bases, including unifying VAT rates, a property tax, and reducing exemptions and improving tax administration. Directors noted the ongoing efforts to rationalize the public sector wage bill and underscored the need to improve public financial and investment management.

Directors welcomed the current monetary and credit policies stance, especially declining credit growth which is helping Vietnam cement macroeconomic stability. They encouraged the authorities to continue to limit interventions to maintaining orderly market conditions and maintain efforts towards greater exchange rate flexibility while gradually building reserves. Directors called for reforms to reduce remaining barriers to investment, including improving access to land and credit, that would boost private investment and raise worker productivity and growth. They looked forward to a well‑sequenced modernization of the monetary framework with technical assistance from the Fund.

Directors noted ongoing reforms in the financial sector, including the shift of bank business models to lending to households and private firms, accompanied by more prudent aggregate credit growth limits and the deepening of bond and equity markets, which has reduced financial stability risks, improved the quality of financial intermediation and boosted economic growth. Directors welcomed the adoption of Basel II standards and encouraged swift recapitalization of the systemic state‑owned banks and the construction of a modern macroprudential framework to replace quantitative credit limits and deal with potential financial stability risks.

Directors welcomed the reforms to modernize economic institutions and improve governance. They highlighted that priority needs to be given to strengthening anti‑corruption legislation further, reforming and improving oversight of state‑owned enterprises, implementing Public Investment Management Assessment recommendations, and improving statistical systems and data provision and transparency. Directors welcomed the authorities’ plan to strengthen the AML/CFT regime and address any related issues to be identified by the forthcoming peer review by the Financial Action Task Force’s Asia Pacific Group.