Higher deficit inevitable in virus fight

Higher deficit inevitable in virus fight, photo AFP

A senior economist from the Asian Development Bank (ADB) in Vietnam told VIR that it was a sensible move for the Vietnamese government to launch a VND250 trillion ($10.7 billion) programme to assist people and businesses currently bogged down in woes caused by the COVID-19, which has been declared by the World Health Organization a global pandemic.

“However, the use of such a gigantic sum of money from the state budget will lead to a high budget deficit, and the government is ready to accept this,” he said. “We are working with relevant ministries and agencies in Vietnam [about the issue]. Under our calculations, this credit package may increase Vietnam’s budget deficit to 3.8 per cent of GDP.”

This level is also higher than the 3.44 per cent of GDP earlier set by the National Assembly (NA) for this year.

According to the government, the country is prepared to sacrifice some economic benefits, including accepting a higher-than-expected budget deficit, in order to protect people’s health and boost domestic production, which is the key pillar for economic growth.

It is expected that the ADB will revise up its forecast for Vietnam’s budget deficit from its initial 3.4 per cent of GDP to 3.8 per cent over the next few weeks.

If this new forecast manifests itself, it would be the highest fiscal deficit level over the past four years, with 3.4 per cent of GDP in 2019, 3.6 per cent in 2018, and 2.3 per cent in 2017.

A few days ago Fitch Solutions, a subsidiary of credit rating firm Fitch Group – one of the world’s three largest rating firms – also revised up Vietnam’s fiscal deficit to 3.8 per cent of GDP from 3.4 per cent, after the government announced the stimulus package to help businesses tide over during the epidemic crisis.

Fitch Solutions also revised its forecast on government spending growth from 7.4 to 8.1 per cent of GDP, as it expects more expenditure on industries hard hit by the COVID-19 such as tourism, transport, electronics, and agriculture.

The agency lowered Vietnam’s revenue collection growth forecast from 4.1 to 3.2 per cent of GDP, as corporate profits could face pressure amid the epidemic. Tax breaks will also contribute to slower growth in government’s income.

Vietnam’s GDP size last year was about $250 billion. If the economy grows 6 per cent this year, its size will be $265 billion, meaning that the fiscal deficit will be $10.07 billion – based on the assumption that the budget deficit will be 3.8 per cent of GDP. If the economy grows stronger, the deficit will be higher as a matter of fact.

Late last year the NA set a target of 6.8 per cent economic growth for this year. However, while the virus outbreak is taking a heavy toll on the economy now, the government has ordered that the economic growth goal set by the NA must be achieved at all costs.

The NA last November adopted a resolution on state budget for 2020, with total state budget revenue of over VND1.51 quadrillion ($65.65 billion), and total state budget expenditure of nearly VND1.75 quadrillion ($76 billion).

The total budget deficit would be VND234.8 trillion ($10.35 billion), tantamount to 3.44 per cent of GDP.

On March 6, Prime Minister Nguyen Xuan Phuc signed and promulgated Directive No.11/CT-TTg with seven major solutions to coping with difficulties faced by producers and businesses amid the coronavirus outbreak.

Notably, PM Phuc ordered the State Bank of Vietnam (SBV) to implement a credit package worth VND250 trillion ($10.7 billion) offered to those and enterprises whose production and business activities are affected by the COVID-19 outbreak.

He requested the SBV to direct credit institutions to promptly and adequately meet capital demand for production and business, streamline the loan approval process, reschedule loans, waive and lower lending rates, and reduce service fees for enterprises affected by the virus.

According to the Ministry of Planning and Investment (MPI), to disburse the new credit package, it is necessary to thoroughly calculate all available financial and technical resources, and determine who will need support.

“For example, many farmers producing agricultural items such as dragon fruit and watermelon are suffering from the epidemic as they cannot export their products,” said MPI Deputy Minister Tran Quoc Phuong, adding that there will also be other solutions such as speeding up the disbursement of public investment.

“Localities need to soon complete all necessary procedures for projects to become operational, helping spur economic growth.”