Press Release No. 17/262

IMF Executive Board Completes the 2017 Article IV Consultation with Vietnam

July 5, 2017

On June 7, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Vietnam. [1]

Vietnam’s dynamic economy continues to perform well, aided by sound economic fundamentals. Growth moderated to 6.2 percent in 2016, reflecting the impact of a drought and land salinization on agriculture and lower oil production. Weakness in the oil sector continued in the first quarter of 2017, but the 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 percent in early 2017 due to increases in administered prices for health care and education. The current account surplus rebounded in 2016 to 4.1 percent of GDP, and gross international reserves rose substantially.

The 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, the 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 SOE reforms, but implementation has been slow. The 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 percent and headline inflation is projected to stabilize at around 5 percent 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 the 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.

Executive Board Assessment [2]

Executive Directors commended the Vietnamese authorities for achieving robust growth with low inflation, pushing ahead with important reforms to promote private sector-led growth, strengthening the 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 the 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.

Directors considered the tightening of the fiscal stance as appropriate and welcomed the authorities’ intention to ensure that consolidation is growth-friendly. They also concurred with the intention to reduce the deficit to 3½ percent of GDP by 2020 and to maintain public debt below the legal limit of 65 percent of GDP. Directors stressed the importance of revenue-enhancing measures, including unifying VAT rates, higher excise and environmental protection taxes, and a property tax. They also stressed the need to reduce exemptions and incentives and improve tax administration. Reforms to raise cost recovery in public services are welcome but need to ensure equity, protect the poor, and raise service quality. Directors encouraged civil service reforms to reduce the public sector wage bill and improvements in public spending efficiency to create room for priority infrastructure and social spending.

Directors noted that monetary policy should remain on hold but be alert for signs of rising core inflation. They stressed that vigilance would be needed to contain rapid credit growth and credit allocation made more market-based, which would improve its efficiency in supporting growth. Directors underscored that a modernization of monetary policy management, including greater exchange rate flexibility and a gradual shift to using inflation as the nominal anchor, will enhance resilience to external shocks. They noted Vietnam’s strong external position and called for policies over the medium term to gradually reduce the imbalance through stronger domestic demand and investment, a lower saving rate and greater exchange rate flexibility.

Directors welcomed progress made in banking sector reforms to address impaired assets and increase provisioning. They stressed that the pace of reforms should be accelerated and their scope broadened to include development of a legal framework for bank resolution, strengthening of the Vietnam Asset Management Company, and implementation of further reforms to strengthen debt enforcement and market discipline. Enhancing the AML/CFT framework and its effective implementation will also support financial stability.

Directors welcomed ongoing structural reforms and underscored that Vietnam will need to build a sustainable, modern economy before the demographic tailwinds fade. For this, more extensive policy action is needed to reform institutions and raise potential growth. Reforms of the state-owned enterprise sector and improved outcomes from vocational and tertiary education will also be critical. Directors commended the authorities for ratifying the Paris Agreement and for putting climate change and implementation of the Sustainable Development Goals at the core of their policy agenda. They stressed that higher environmental taxes and better pricing of externalities in the energy sector can help promote a green, more resilient economy.