The challenges of economic restructuring

VIR’s Nguyen Hanh talks with Sanjay Kalra, the IMF’s Resident Representative for Vietnam, about how far the country has travelled on the reform path, and how much further it has to go.

Economic restructuring has been high on the government’s agenda for the past two years, but the distance from agenda to action is still great. What is your view?

We would agree that much remains to be done, and at an accelerated pace. The current reform plans recognise that a structural transformation of Vietnam will require efforts in multiple areas, but their implementation is not yet quick enough to deliver Vietnam to its full potential.

Successfully designing and implementing a broad set of policies - staying the course on macro-economic stabilisation, restructuring banks and state-owned enterprises (SOEs), strengthening the monetary policy framework - will all have a noticeable impact on Vietnam’s economy.

How will the slow restructuring and equitisation of SOEs impact Vietnam’s development going forward, given that the state economic sector dominates key industries and, according to IMF statistics, owns a third of all business assets? What reforms should or can enforced in this area?

SOE reform is central to raising the growth rate and potential of the Vietnamese economy through a more efficient allocation of resources. Another critical issue is a resolution of banking system problems, and future growth performance. The reforms should focus on changing the incentive structure by considering broader equitisation, enhancing competition in state-dominated sectors, strengthening corporate governance, and ensuring a level playing field with private firms. An important part of this effort will be to enhance the transparency of SOEs by making public their financial operations.

The Enterprise Law issued in 2005, which allowed enterprises to do what the law does not prohibit, unleashed the business spirit of the private sector, leading to a boom in new corporate establishments. What new kinds of dramatic reforms are needed to bolster the development of the private sector in Vietnam today?

There are several steps that can be taken to create an improved business and investment climate in Vietnam. Several of these measures are suggested by international surveys of Doing Business and Global Competitiveness. In addition to these measures, there is an urgent need to reform the financial sector so that it can more fully and effectively intermediate credit to the enterprise sector from savers in the economy. In particular, measures should be put in place to resolve non-performing loans (NPLs) in the banking system, recapitalise banks, and strengthen banking supervision and regulation. Strengthening credit risk analysis and governance in all banks - both joint stock and state-owned commercial banks - by promoting greater transparency should be a top priority. A greater role for foreign capital in the enterprise and financial sectors can not only bring in investible resources, but also human capital and know-how to contribute to Vietnam’s growth process.

Restructuring of public investment is a pillar of Vietnam’s economic restructuring

Vietnam’s macro-economic situation has been stabilised with more positive indicators like inflation, foreign currency reserve and the forex rate. The country’s economic growth is about 5-6 per cent which is considered good in the current global context. But the economy is losing its dynamism and this is worrisome. Do you agree?

It is indeed true that Vietnam has regained macro-economic stability over the past year, but the economy is progressing at two speeds. The export sector is performing well, especially foreign-invested enterprises, but the domestic sector, though improving, has yet to find a solid footing because of several factors, including low productivity, structure of resource allocation, impaired bank balance sheets and inefficiency in several SOEs.

That said, Vietnam is a country endowed with several advantages, including a young and hardworking population. In addition, FDI interest in Vietnam remains strong. Utilising these endowments to achieve a high demographic dividend over the next decade is the responsibility of Vietnam’s policymakers.   

Vietnam’s economic growth over the past two decades is recognised as a success story thanks to the reforms which started in 1986. But some economists argue that the country needs a second reform for a new phase of development. Do you agree, and if so, what should a second reform involve?

The average annual growth rate for Vietnam has indeed fallen between 1986-1995 and 1996-2012. This reflects, in part, the impact of the global financial crisis since 2008, but also a slowdown in the underlying growth rate. Some of this slowdown was due to macroeconomic instability during 2011 and 2012.

But it also reflects structural weaknesses that have built up over time, with inefficiencies in several sectors of the economy. In this context, the government of Vietnam has rightly focused its reform programme on the financial and SOE sectors. In addition, the government has identified the need for greater efficiency in public investment.