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Article IV Consultation With Vietnam Concluded

by Mary Swire, for, Hong Kong

26 November 2007

The International Monetary Fund last week published the conclusions of its recent Article IV consultation with Vietnam.

The consultation, which was concluded in late October, found that Vietnam has recorded continued strong economic performance since its last Article IV consultation.

GDP growth rose to 8.2% in 2006, according to the IMF, with non-oil exports remaining an important engine of growth. Private investment has also expanded briskly, led in large part by accelerated foreign direct investment (FDI) disbursements in the wake of Vietnam's World Trade Organization (WTO) accession.

Industrial activity, retail sales, and trade data point to a continued strong expansion so far in 2007.

The report went on to observe that the overall fiscal deficit was lower than budgeted in 2006, but the budget plan for 2007 suggests that the fiscal stance appears set to be eased.

A better-than-expected revenue outturn, together with slow implementation of off-budget investment plans, helped to compress the overall deficit to 3.8% of GDP. However, if the government fully implements its plans for 2007, the fiscal deficit could widen to well over 7% of GDP in 2007, with the non-oil deficit rising by at least 1-1½ percentage points of GDP.

The near-term outlook remains broadly favorable, the IMF predicted, and Vietnam has good prospects for sustained growth and poverty reduction over the medium term, provided that the government can take timely action to rein in demand pressures.

GDP is projected to expand by about 8-8¼% in 2007-08, underpinned by continued strong growth in exports, investment, and private consumption.

In a statement, the IMF Executive Board announced that:

"Directors called on the authorities to maintain a prudent and restrained fiscal policy. Given the need to curb inflationary pressures in the short run, the non-oil fiscal deficit needs to be placed on a declining path as soon as possible. Directors therefore welcomed the government's decision to postpone further large increases in public sector wages."

"Most Directors recommended that any revenue windfalls be saved. Directors encouraged the authorities to complete as soon as possible the pass-through of higher oil prices to domestic administered prices, while ensuring that an adequate social safety net is in place to protect low-income groups. Directors also encouraged the authorities to ensure that state-owned enterprise (SOE) projects are not funded through the issuance of new sovereign bonds."

"Directors stressed that over the medium term, a concerted effort to boost revenues and curb expenditure growth will be required to protect debt sustainability. Planned tax reforms will need to be carefully designed, and tax administration should continue to be strengthened. Civil service administrative reforms, including the implementation of a more differentiated, merit-based wage structure and overall rationalization of employment, also need to be pursued. Directors noted that efficiencies in building critical infrastructure could be secured by improving the screening of public projects, and encouraging private investment in those that are commercially viable."

It continued:

"Directors observed that the opening up of Vietnam's financial system has heightened the importance of banking system reform. They supported the government's plans to equitize the main state-owned commercial banks (SOCBs). In this regard, Directors welcomed the recent approval of the equalization plan for Vietcombank. They considered that allowing scope for foreign strategic investors to participate in SOCB equitizations would help strengthen SOCB governance."

"Directors encouraged the authorities to expedite plans to grant the State Bank of Vietnam (SBV) adequate autonomy and authority to carry out monetary policy aimed at price stability and effective bank supervision. They supported the authorities' request for technical assistance to build financial sector institutional capacity."

And concluded:

"Directors shared the authorities' concerns about the risks posed by possible overheating in the stock market, and they supported the measures to tighten prudential controls on banks' securities-related lending. Improved securities market regulation, including steps to discourage insider trading and money laundering, will be essential to protect the stability and integrity of the capital market."

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