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IMF encourages Vietnam to expand scope of reforms

Released at: 15:11, 06/07/2017

IMF encourages Vietnam to expand scope of reforms

Illustrative image (Source: news.zing.vn)

Executive Board of International Monetary Fund concludes its Article IV Consultation with Vietnam.

by Linh San

The Executive Board of the International Monetary Fund (IMF) has concluded its Article IV Consultation with Vietnam.

Vietnam’s dynamic economy continues to perform well, the IMF reports, aided by sound economic fundamentals. Growth moderated to 6.2 per cent in 2016, reflecting the impact of a drought, land salinization on agriculture, and lower oil production. 

Weaknesses in the oil sector continued in the first quarter of 2017 but underlying growth momentum remains robust, underpinned by strong manufacturing activity and foreign direct investment (FDI), robust domestic demand, and a rebound in agricultural production. 

Inflation rose to around 5 per cent in early 2017 due to increases in administered prices for healthcare and education. The current account surplus rebounded in 2016 to 4.1 per cent of GDP and gross international reserves rose substantially.

Authorities are developing a broad reform agenda, keenly aware of the limited fiscal space, the need to upgrade the growth model at home, and rising risks of economic fragmentation abroad. 

After years of high fiscal deficits and rising public debt, authorities are planning an appropriate amount of fiscal consolidation starting this year, although concrete measures have not yet been fully identified. 

Monetary policy was accommodative over most of last year against the backdrop of low core inflation, and the exchange rate has depreciated slightly since the fall of 2016. 

Macroprudential policies were tightened, while credit growth was robust. Bank reforms have progressed, but nonperforming loan (NPL) resolution, bank recapitalization, and legal reforms to strengthen market discipline have been sluggish. Good progress has been made on the legal framework for State-owned enterprise (SOE) reforms, but implementation has been slow. Authorities are planning to limit the role of the State in the economy, reduce State ownership in enterprises, and encourage private sector-led sustainable growth.

For 2017, growth is projected at 6.3 per cent and headline inflation is projected to stabilize at around 5 per cent as administered prices continue to be adjusted. 

The current account surplus is expected to decline somewhat, reflecting stronger imports. While the near-term outlook is positive, there are downside risks, including from high public debt, slow NPL resolution, tighter global financial conditions, shocks to external demand, and rising protectionism and the failure of the Trans Pacific Partnership. 

On the upside, successful implementation of authorities’ ambitious reform agenda could raise growth potential and increase resilience to shocks. Fast implementation of the Vietnam-EU and other bilateral trade agreements would fuel exports and FDI.

The IMF’s Executive Directors commended Vietnamese authorities for achieving robust growth with low inflation, pushing ahead with important reforms to promote private sector-led growth, strengthening public finances and tackling legacy issues in the financial sector while making progress on poverty alleviation. 

Directors noted that risks remain from the slow pace of banking sector reform, continued rapid credit growth, and limited fiscal and external buffers. 

Looking ahead, they encouraged authorities to expand the scope of reforms to safeguard hard-won macroeconomic stability, raise growth potential, and upgrade the growth model to enhance sustainability and productivity.

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