OREANDA-NEWS. April 25, 2016. An IMF mission team led by Mr. John Nelmes visited Hanoi and Ho Chi Minh City April 6-22 to conduct the 2016 Article IV consultation discussions with Vietnam.1

At the conclusion of the visit, Mr. Nelmes made the following statement:

“Vietnam has achieved commendable macroeconomic outcomes. Last year growth was strong, inflation fell to low levels, foreign direct investment was robust, and important new trade agreements were successfully negotiated.

“The achievement of macroeconomic stability provides a solid foundation for a broadly positive economic outlook, although risks and medium-term challenges exist. For 2016, growth is expected to ease to around 6 percent, mainly reflecting weaker external demand and severe drought and salination of arable land that have adversely affected agriculture. Underlying inflation should remain low, although headline inflation is expected to rise modestly due to a pick-up in food prices and planned increases in administered prices for education and health services. The current account surplus is projected to ease in the near term with slowing external demand although foreign direct investment is expected to remain strong.

“Downside risks to the outlook arise from the drought, slower global growth, and spillovers from global financial market volatility. Rapidly rising public debt is a concern. It is reducing fiscal room for maneuver and could pressure domestic interest rates, which could adversely impact corporate and bank performance. Progress has been made in banking-sector and state-owned enterprise (SOE) reforms, and implementation of a number of key measures is now needed. On the upside, rapid implementation of new free-trade agreements could help propel domestic structural reform.

“The mission and the authorities discussed building on recent achievements through a second generation of economic reforms that would strengthen resilience, mitigate risks, and place Vietnam on a higher sustainable growth path that delivers robust long-term prosperity.

“Fiscal policy has registered deficits averaging around 6.5 percent of GDP since 2012, driving a sharp increase in public and publicly guaranteed debt that is estimated to reach around 62 percent of GDP this year. The mission recommended a growth-friendly fiscal consolidation—beginning this year—to reduce the fiscal deficit to around 3 percent of GDP by 2020 and put public debt on a sustainable and downward path. The consolidation should focus on broadening the revenue base, and safeguarding spending on high-quality public investment in education, health, and infrastructure, while also making resources available to resolve non-performing loans and strengthen capital in state-owned banks.

“The mission considered that monetary policy should remain on hold as recent domestic shocks feed through the economy so long as underlying inflation pressure remains muted. Should evidence of second-round effects on inflation emerge, some tightening of monetary policy would be warranted. The recently-introduced flexible exchange-rate mechanism is a commendable development. Permitting greater exchange-rate flexibility and strengthening monetary policy instruments, while moving gradually towards using inflation as the nominal anchor for monetary policy, will allow Vietnam to safeguard macroeconomic stability while buffering external shocks.

“Discussions also covered financial-sector, structural and SOE reforms that are critical for raising productivity and medium-term growth. In particular, accelerating the resolution of non-performing loans in banks and in the Vietnam Asset Management Company, accompanied by strengthening banks’ capital through increased private-sector participation and budget resources for state-owned banks, improved operational management, and adoption of international financial reporting standards as part of time-bound bank restructuring plans are needed to reinforce macro-financial stability and the foundation for robust growth. SOE reforms should be accelerated through more rapid and comprehensive equitization and divestment of non-core assets, and transparency of equitization proceeds and their use. Productivity gains would be further supported by creating a level playing field in access to resources for the private sector, supporting research and development, improving the efficiency of public investment, and expanding vocational training to address skills mismatches.”

The mission met Deputy Prime Minister Vuong Dinh Hue, Central Economic Commission Chairman Nguyen Van Binh, State Bank of Vietnam Governor Le Minh Hung, Vice Finance Minister Truong Chi Trung, Vice Minister of Planning and Investment Nguyen The Phuong, members of the National Assembly, other senior government officials, private sector representatives, academics, and development partners.

1 The conclusions of the Article IV Consultation mission are subject to IMF Executive Board discussion.