Vietnam should reform amidst strong growth, says IMF

Vietnam’s growth is projected at 6.6 per cent in 2018.- Photo VNA

According to the IMF, Vietnam’s strong economic momentum is expected to continue in co2018, aided by the reform push, higher potential output, the global recovery and commitment to macroeconomic and financial stability.

“Growth is projected at 6.6 per cent in 2018, despite a mild tightening in credit growth targets and a neutral fiscal stance. Inflation is forecast to rise to just under the 4 per cent target, led by higher oil prices and gradual increases in administered prices.

“On current trends and if reforms continue at their current pace, 6.5 per cent annual growth remains feasible beyond 2018,” IMF’s analysts noted.

However, the IMF said, despite recent economic strength, economic distortions and capacity constraints remain, and external and domestic risks and longer-term challenges loom on the horizon.

“Financial buffers are still thin, macroeconomic policy frameworks remain inflexible to manage possible shocks and the external position is substantially stronger than warranted by fundamentals,” the institution noted, recommending that fiscal policy should emphasise high-quality consolidation to meet large development needs and ensure that Vietnam has the fiscal space to meet longer-term challenges.

A slightly more ambitious consolidation than currently planned, and a lower debt ceiling than the current statutory limit, will be needed to create additional fiscal room before aging sets in the mid-2030s and provision for contingencies. Stronger consolidation could boost medium-term growth if it relies on high quality structural fiscal measures and measures to boost private investment.

The IMF said that reforms should focus on broadening tax bases; reducing administrative and wage-related spending; protecting social spending through well-designed social security and civil service reforms and protecting and improving the quality of public investment. Comprehensive and timely fiscal accounts based on GFSM 2014 (Government Financial Statistics Manual) and improved budget planning and execution should help facilitate consolidation.

To sustain macroeconomic stability, the institution suggested that monetary policy should be tightened by further lowering credit growth to bring it in line with ongoing improvements in financial deepening while greater two-way exchange rate flexibility within the current band should be allowed to reduce speculative inflows, absorb shocks and help bring down the external surplus.

In addition, reserve accumulation should continue but more gradually, with fully sterilised interventions. The modernisation of the monetary framework should also start, gradually easing away from credit targets to begin a phased shift to inflation targeting and greater exchange rate flexibility.

Financial sector balance sheets, supervision and risk management need to be further strengthened, IMF said, adding that a stronger financial sector can help improve the efficiency of financial intermediation to service the domestic economy and investment. Strong credit and asset price growth may be contributing to the build-up of risks in the financial system.

"State-owned commercial banks should be capitalised swiftly with government funds, and by raising private sector and foreign ownership limits. It is critical to develop a macro prudential framework and improve data quality on credit aggregates and balance sheet exposures to monitor and proactively manage risks, and ensure that sufficiently robust liquidity and crisis management frameworks are in place to provide legal and operational clarity regarding early intervention and communication to mitigate emerging financial sector risks."

The reform drive needs to be broadened and accelerated to tackle the remaining barriers to investment and to raise labour productivity, the IMF said, adding that priority areas include high-quality infrastructure investments; further reductions in regulatory barriers and transitioning to international standards for regulatory excellence, transparency and data quality to aid investment; reforms to tertiary education; efforts to reduce the concentration of land ownership in state hands; and continued reforms in State-owned enterprises.