Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Vietnam.

Vietnam began 2020 following a prolonged period of high growth. The last three decades of market-oriented reform supported a structural transformation from agriculture to a modern economy based on FDI-led manufacturing, lifting Vietnam from one of the poorest countries in the world to lower middle-income status. In recent years, growth averaged 7 percent, and the emphasis on “leaving no one behind” boosted living standards, contributing to notable progress towards the Sustainable Development Goals.

Economic activity remained strong with stable inflation in 2019, as the rate of new business creation reached a six-year high. Fiscal consolidation efforts helped contain public and publicly guaranteed debt to 43 percent of GDP, well below the 65 percent statutory limit. Despite moderating trade flows on account of U.S.-China trade tensions, the current account surplus rose to 3.8 percent of GDP as a result of sharply slowing imports of raw materials and intermediate goods, record tourist arrivals, and large remittance flows. Vietnam’s external position in 2019 was assessed to be substantially stronger than warranted by fundamentals due to structural features.

Following the onset of the COVID-19 crisis, decisive measures were taken to limit the health and economic fallout. Early and concerted efforts helped ease lockdown restrictions and contain the associated policy support package relative to other countries. Fiscal policy focused on temporary support to firms and vulnerable households, while monetary policy was eased to maintain abundant liquidity in the banking system. Real GDP growth in 2020 was 2.9 percent, among the highest in the world. The current account surplus is projected to narrow to 2.2 percent in 2020, as collapsing tourism receipts and weaker remittances are only partially offset by subdued imports and lower income payments. Despite some economic scarring, a strong recovery is expected in 2021 as normalization of domestic and foreign activity continues. Fiscal and monetary policies are expected to remain supportive, although to a lesser extent than in 2020, and inflation is projected to remain close to the authorities’ target at 4 percent.

Executive Board Assessment [2]

Executive Directors noted that the COVID-19 pandemic disrupted a prolonged period of high growth and improvements in living standards. They commended the authorities for their decisive and comprehensive response to the pandemic, which, supported by strong fundamentals and policy buffers, has been instrumental in ensuring the economy’s resilience. Directors noted that risks to the outlook are tilted to the downside and stressed the need for measures to limit permanent scarring and promote sustained, inclusive, and greener growth.

Directors underscored the need for fiscal measures geared towards protecting workers and vulnerable households, including through improved budgetary execution and enhanced targeting. They stressed that once the recovery is firmly underway, gradual fiscal adjustment should center on revenue mobilization to help create space for priority social and infrastructure spending and support greener and more inclusive growth. Directors noted the need for continued efforts to upgrade fiscal policy frameworks to safeguard fiscal sustainability.

Directors recommended maintaining an accommodative monetary policy stance, while remaining mindful of underlying banking sector vulnerabilities. They emphasized that corporate support for viable firms should be gradually phased out and regulatory forbearance normalized. Directors underscored that financial risks should be closely monitored and problem loans addressed in a timely manner. Medium term objectives include enhancing private debt restructuring frameworks and further strengthening banks’ capital position in the context of adopting Basel II requirements.

Noting the staff’s assessment that Vietnam’s external position was substantially stronger than warranted by fundamentals and desirable policies, Directors called for steadfast reform efforts to remove the remaining barriers to private investment and enhance social safety nets. At the same time, some Directors urged caution in interpreting EBA model results, which may not adequately capture Vietnam-specific structural factors and measurement issues. In the context of reserve adequacy, Directors welcomed efforts to allow greater two-way exchange rate flexibility and modernize the monetary policy framework, which would help the economy to adjust to the changing external environment.

Directors stressed the importance of structural reforms to improve the business environment, enhance productivity, and boost post-pandemic potential growth. They concurred that priority should be given to reducing labor skill-mismatches, promoting digital transformation, and ensuring a level playing field, particularly for SMEs. Directors welcomed continued efforts to improve economic institutions and strengthen governance.