WB warns Vietnam against growing budget deficit

Vietnam’s fiscal deficit is estimated to have widened to about 6.4 per cent of the GDP in 2015. As a result, Vietnam’s total outstanding public debt was estimated at 62.2 per cent of the GDP, quickly inching towards the ceiling of 65 per cent of the GDP.

The latest estimates of the Ministry of Finance (MoF) show that actual budget revenues exceeded the initial target by 9.4 per cent in 2015. Despite this overall strong revenue performance, collections from major taxes, namely value-added tax (VAT) and corporate income tax (CIT), excluding oil, underperformed.

Weak collection of domestic tax was partially offset by non-tax revenues. However, some of the increase in non-tax revenues was based on one-off effects, such as proceeds from sales of state assets and the collection of land-use rights were 75 per cent higher than the initial plan of $3.1 billion, and accounted for roughly one-third of the state’s non-tax revenue. However, because these are not recurrent sources of revenue, the recent increases may not be sustainable.

“While the risk of acute debt distress remains low, the rapid pace of debt accumulation is a cause for concern,” said the report. “Fiscal buffers are increasingly limited and debt service poses a growing burden on the budget, with interest expenditures now absorbing 8 per cent of the total government revenue.”

The report advised Vietnam to compile a credible fiscal consolidation plan, which would not only lower overall financing needs, but also reduce the cost of commercial borrowing by bolstering investor confidence and improving Vietnam’s creditworthiness in capital markets.

Notably, in order to strengthen budget discipline, Vietnam should focus on spending efficiency gains as opposed to across-the-board curtailment of discretionary spending and investment. One area where such efficiency gains can be achieved, according to Sebastian Eckart, lead economist for the World Bank in Vietnam, is the procurement of pharmaceuticals.

Vietnam’s GDP grew by 5.5 per cent in the first half of 2016, compared to the 6.3 per cent in the same period last year. The Taking Stock report attributed the slower growth to a severe drought bringing down agricultural production and slower industrial growth.

Achim Fock, acting country director for the WB in Vietnam, commented that whether Vietnam will be able to achieve high sustained growth depends on its ability to boost productivity through structural reforms.

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