for official only international development...
TRANSCRIPT
Document of The World Bank
FOR OFFICIAL USE ONLY
Report No. 47908-VN
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT FOR A PROPOSED CREDIT
IN THE AMOUNT OF SDR 235.2 MILLION
(US$350.0 MILLION EQUIVALENT)
TO
THE SOCIALIST REPUBLIC OF VIETNAM
FOR AN EIGHTH POVERTY REDUCTION SUPPORT OPERATION
June 8,2009
Poverty Reduction and Economic Management Unit East Asia and Pacific Region
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.
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VIETNAM - GOVERNMENT FISCAL YEAR January 1 - December 31
AAA
ADB
CCGT
CFAA
CPAR
CPRGS
CPS
DA
DPL
FDI
GDP
GSO
HCMC
m m ICR
IDA
IEG
IFC
ILSSA
IMF
LFS
MARD
M O C
MOET
MOF
CURRENCY EQUIVALENTS Exchange Rate Effective as o f May 1,2009
Currency Unit Vietnamese Dong US$ 1 .oo 17,783
Weights and Measures Metric System
ABBREVIATION AND ACRONYMS
Analytical and Advisory Activity
Asian Development Bank
Combined Cycle Gust Turbine
Country Financial Accountability Assessment
Country Procurement Assessment Review
Comprehensive Poverty Reduction and Growth Strategy
Country Partnership Strategy
Deposit Account
Development Policy Lending
Foreign Direct Investment
Gross Domestic Product
General Statistics Office
H o Chi Minh City
International Bank for Reconstruction and Development
Implementation and Completion Report
International Development Association
Independent Evaluation Group
International Finance Corporation
Institute o f Labor, Science and Social Affairs
International Monetary Fund
Labor Force Survey
Ministry o f Agriculture and Rural Development
Ministry o f Construction
Ministry o f Education and Training
Ministry o f Finance
M O H
M O H A
M O I T
MOLISA
MONRE
MPI
NBA
NGO
NTP
ODA
PEFA
PER-FA
PRSC
QEA
RWSS
SAV
SBV
SDR
SEDP
SFE
S M E
SOCB
SOE
ssc TA
VASS
VDR
VHLSS
vss W T O
FOR OFFICIAL USE ONLY Ministry o f Health
Ministry of Home Affairs
Ministry of Industry and Trade
Ministry o f Labor, War Invalids, and Social Affairs
Ministry o f Natural Resources and Environment
Ministry o f Planning and Investment
National Bar Association
Non-Governmental Organization
National Targeted Program
Official Development Assistance
Public Expenditure and Financial Accountability
Public Expenditure Review - Integrated Fiduciary Assessment
Poverty Reduction Support Credit
Quality at Entry Assessment
Rural Water Supply and Sanitation
State Audit o f Vietnam
State Bank of Vietnam
Special Drawing Rights
Socio-Economic Development Plan
State Forestry Enterprise
Small and Medium Enterprise
State-Owned Commercial Bank
State-Owned Enterprise
State Securities Commission
Technical Assistance
Vietnam Academy o f Social Sciences
Vietnam Development Report
Vietnam Household Liv ing Standards Survey
Vietnam Social Security
World Trade Organization
Vice President: James W. Adams, EAPVP Country Director: Victoria Kwakwa, EACVF
Sector Director: Vikram Nehru, EASPR Keiko Kubota, EASPR Task Team Leader:
This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.
VIETNAM
EIGHTH POVERTY REDUCTION SUPPORT CREDIT (PRSC 8)
TABLE OF CONTENTS
CREDIT AND PROGRAM SUMMARY ...................................................................................................... i I . I1 .
I11 . I V .
V .
V I .
INTRODUCTION ............................................................................................................................. 1
COUNTRY CONTEXT .................................................................................................................... 1
RECENT ECONOMIC TRENDS ........................................................................................ 1 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ................................ 4
THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES ......................... 6
BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ...................................................... 7 LINK TO CPS ...................................................................................................................... 7 COLLABORATION WITH THE IMF AND OTHER DONORS ........................................ 8 RELATIONSHIP TO OTHER BANK OPERATIONS ....................................................... 9 LESSONS LEARNED .......................................................................................................... 10 ANALYTICAL UNDERPINNINGS .................................................................................... 10
THE PROPOSED OPERATION ..................................................................................................... 13 OPERATION DESCRIPTION ............................................................................................. 13 POLICY AREAS .................................................................................................................. 14
OPERATION IMPLEMENTATION .............................................................................................. 23
POVERTY AND SOCIAL IMPACTS ................................................................................. 23 ENVIRONMENTAL ASPECTS .......................................................................................... 25 IMPLEMENTATION. MONITORING AND EVALUATION ........................................... 27 FIDUCIARY ASPECTS ....................................................................................................... -29 DISBURSEMENT AND AUDITING .................................................................................. 30 RISKS AND RISK MITIGATION ....................................................................................... 30
ANNEXES
Annex 1: Letter of Development Policy ......................................................................................................... 32
Annex 2: PRSC 6-10 Policy Matrix ................................................................................................................ 34
Annex 3 . Monitoring progress towards development outcomes .................................................................. 46
Annex 4: Supporting documentation for prior and policy actions under PRSC 8 .................................... 55
Annex 5: Fund Relations Note ........................................................................................................................ 61 .
Annex 6: Country at a Glance ........................................................................................................................ 63
TABLES IN TEXT
Table 1: Key economic indicators .................................................................................................................. 2
Table 2: Government budgetary operations ................................................................................................. 3
Table 3: Fiscal stimulus package and the financing gap .............................................................................. 5
Table 4: Development partners co-financing PRSC operations .................................................................. 8
Table 5: Resources mobilized through PRSC operations ............................................................................ 8
Table 6: Prior actions under PRSC 8 ........................................................................................................... .16
Table 7: Triggers for PRSC ................................................................................................ .......................... 20
Table 8: Assessment of environmental impacts of policy actions .............................................................. ..26
FIGURES IN TEXT
Figure 1. Summary of progress towards development outcomes ................................................................ 28
BOXES IN TEXT
Box 1. Good Practice Principles for Conditionality ...................................................................... 22
The PRSC 8 Credit was prepared by an IDA team consisting o f
Core team: Keiko Kubota (Task Team Leader), Martin Rama (Lead Economist), Quyen Hoang Vu (Operations Analyst), and Hisham A. Abdo Kahin (Senior Counsel).
Contributors: Noritaka Akamatsu, Viet Quoc Trieu, Hormoz Aghdaey, Viet Tuan Dinh, Nga Nguyet Nguyen, Minh Van Nguyen, Quang Hong Doan, Duc Minh Pham, James Anderson, Daniel Mont, Valerie Kozel, Maria Delfina Alcaide Garrido, Dzung The Nguyen, Severin Kodderitzch, Thanh Thi Mai, Binh Thanh Vu, Hoa Thi Mong Pham, Anh Nguyet Pham, Richard Spencer, Douglas Graham, Vinh Thanh Nguyen, Quang Vinh Nguyen, Dean Cira, Cung Van Pham, Jennifer Thomson, Phuong Thi Minh Tran, Jeffrey Waite, Bukhuti Shengelia, Huong Lan Dao, Van Anh Thi Tran, Paul Vallely, Hoi-Chan Nguyen, and Thang-Long Ton.
Peer Reviewers: Jan Walliser, William Wallace, and Vivek Suri.
I Task Assistants: Dung Thi Ngoc Tran and Hoa Chau Nguyen
CREDIT AND PROGRAM SUMMARY
VIETNAM EIGHTH POVERTY REDUCTION SUPPORT CREDIT (PRSC 8)
Borrower
Implementing Agency
Financing Data
Operation Type
Main Policy Areas
Key Outcome Indicators
Program Development Objectives and Contribution to CAS
The Socialist Republic o f Vietnam
The State Bank o f Vietnam ~~~ ~
SDR 235.2 mill ion (US$350 mil l ion equivalent). Standard IDA terms: 40-year maturity with a 10-year grace period. The proposed operation i s processed under IDA Financial Crisis Response Fast-Track Facility.
An eighth Poverty Reduction Support Credit, as the third in a cycle of five operations aimed at implementing Vietnam’s Socio-Economic Development Plan 2006-2010, approved in June 2006.
The present operation provides further support to Vietnam’s reform program. The current cycle o f PRSCs i s a vehicle for IDA, and the international partner community more broadly, to support a country that has undergone macroeconomic instability and i s suffering from the effects o f the global financial crisis. This support i s al l the more important as i t helps finance the government’s fiscal stimulus package to counter the adverse effects o f the global crisis and limit the depth of growth slow down, so that the poverty-reduction reforms can stay on track. The government has a strong track record o f economic growth and poverty reduction.
The proposed operation comprises policy actions in areas such as state-owned enterprise reform, financial sector reform, the social sectors, climate change, public administration and legal development. This comprehensive program, with the same broad coverage as the SEDP 2006-2010, provides the foundation for sustained growth, social inclusion, environmental sustainability and improved governance.
The preparation o f the proposed operation, like previous operations in this cycle, helped improve the content o f strategically important policy actions, to ensure the timeliness o f their adoption, and to monitor the impact o f the overall progress toward development outcomes.
Outcome indicators were identified at the beginning o f this PRSC cycle, together with the targets for 201 1, in the Program Document for PRSC 6 submitted to the Board in June 2007. I t i s reproduced in Annex 3, with the most recent updates available. The indicators cover the four pillars o f the program. A mid-term evaluation o f progress towards attaining the program’s objectives i s in progress during the preparation o f this operation.
The Country Partnership Strategy (CPS), submitted to the Board in January 2007, concluded that the SEDP o f the government incorporated the necessary poverty reduction principles, was broadly sound and was a plan that could both deliver growth and reduce poverty. The CPS defines the PRSC as one o f the modalities to
i
support the implementation o f SEDP. The Program Document for PRSC 6 charts the second cycle o f PRSC operations (PRSCs 6-10). The CPS allocates US$ 150 mil l ion to each o f the PRSCs in this cycle.
The amount o f credit for this operation i s increased by US$200 mil l ion on the basis o f the government’s financing needs to mitigate the effects o f the global crisis.
Vietnam i s now confronted with an unprecedented global financial crisis. Exports have slowed, and foreign direct investments and remittances from abroad declined. The government i s administering a stimulus package, which raises challenges both on financing and on implementation. IDA i s assisting the government through both technical advice and financial support. The dialogue incorporates responses in relation to the more efficient use o f state capital and in financial sector reform. B y providing resources directly to the budget, the proposed credit helps the government in financing the stimulus package and mitigating the social impacts o f the economic slowdown.
The risk o f a balance-of-payments problem has receded since last year, with a rapidly shrinking trade deficit and slower capital inflows diminishing the current account deficit from both sides. International reserves, estimated to be US$20 bi l l ion in April 2009 (four months o f imports) appear adequate. The authorities are also cautiously moving in the direction o f a more flexible exchange rate regime. The proposed credit contributes to further the integration o f Vietnam into the world economy by supporting a more conducive environment for businesses and financially-sustainable arrangements for developing infrastructure.
The risk o f financial sector turbulence had increased as a result o f the asset price bubbles o f 2007-08. The State Bank o f Vietnam has strengthened supervision and tightened prudential rules. An interest rate subsidy scheme introduced as part o f the stimulus package has amounted to a restructuring o f enterprise debt, preventing the deterioration o f bank portfolios. In addition to the policy actions included in this operation, the World Bank i s also supporting banking sector reforms through an investment credit and technical assistance.
The risk that governance reforms do not keep pace with rapid developments i s probably the most serious in the medium term. Cases o f corruption and social strife are increasingly related to land reallocation, clearance and compensation. Tackling this risk requires rapid progress in transparency at various levels, from regional planning to infrastructure master plans to land use to appropriate taxation to the monitoring o f assets o f the relevant c iv i l servants. This area receives special attention in the proposed operation, including several actions to improve transparency in public administration.
P111164
.. 11
IDA PROGRAM DOCUMENT FOR A PROPOSED EIGHTH POVERTY REDUCTION SUPPORT CREDIT
TO VIETNAM
I. INTRODUCTION
1. The eighth Poverty Reduction Support Credit (PRSC 8) i s designed to assist the government to implement i t s Socio-Economic Development Plan (SEDP) 2006-2010.’ I t aims to support al l four pillars o f the SEDP, namely, fostering business development, ensuring social inclusion, managing natural resources, and strengthening governance. The proposed credit i s the third in a programmatic series o f five annual single-tranche operations (PRSCs 6-10). This series follows the first cycle o f five operations (PRSCs 1-5). The PRSCs are well-suited to support the implementation o f the SEDP, as the cross-cutting nature o f the policy dialogue conducted through PRSCs encourages taking a holistic view o f the reform agenda, and promotes collaboration among l ine ministries and government agencies. The annual programming i s demanding, but provides the government with predictability for planning purposes, and also helps keep the reform momentum.
2. The PRSCs are designed to be forward-looking. The negotiation o f each PRSC operation includes reaching an agreement on a l i s t o f policy measures that will, in principle, be supported by the following operation. These policy measures, or “triggers,” are grounded in the SEDP 2006-2010 as well as other key documents and strategies, and are considered to have strategic importance to attain the SEDP objectives. Triggers are very limited in number. They are not conditions but rather a framework to guide the policy dialogue in the subsequent operation. I t i s understood that some triggers may not be ful ly met while others may be exceeded. In addition to the “triggers,” the policy dialogue conducted under PRSCs addresses a broader set o f issues, articulated as “benchmarks.” These benchmarks are reported to convey the scope o f the reforms being implemented. They are not part o f the legal agreement, although they strengthen the implementation o f the SEDP. The relatively large number o f benchmarks i s justified by the committed participation in the PRSC process o f close to two dozen government ministries and agencies and more than a dozen donors.
3. The proposed operation i s processed under the IDA Financial Crisis Response Fast-Track Facility in order to help meet the financing necessary to implement the government’s fiscal stimulus package as well as the reform program supported by the PRSC operation.
11. COUNTRY CONTEXT
RECENT ECONOMIC TRENDS
4. Having weathered a domestic crisis in early 2008, Vietnam i s now looking to navigate the global crisis. Accession to the World Trade Organization (WTO), in early 2007 had reassured investors about the government’s commitment to economic reform. I t translated into massive capital inflows in late 2007 and early 2008, resulting in economic overheating. Over the year, the capital account surplus reached US$17 billion, whereas remittances (which have a strong investment component in Vietnam) were close to US$7 billion. Together they amounted to over a third o f the gross domestic product (GDP) (US$70 bil l ion in 2007). Attempts to sterilize these inflows were not
’ K& hoach Phdt t r i h Kinh td - Xa“ hGi 5 niim 2006-2010 (Socio-Economic Development Plan 2006-2010), attachment to Government Resolution No. 25/2006/NQ-CP, dated October 9,2006.
1
able to prevent a boom in banking credit, an acceleration in inflation, a ballooning trade deficit and asset price bubbles.
5. A determined reaction by the government from March 2008 onward (the “eight groups o f measures”) succeeded in stabilizing the economy. In spite o f surging world prices o f food and oil, tight monetary policy and some measure o f fiscal restraint ended the asset price bubbles and brought monthly inflation down from more than 3 percent a month to virtually zero in barely six months. Combined with a more active management o f trade policy and the foreign exchange market, the stabilization package also succeeded in reducing the trade deficit to manageable levels. The overall economic situation was s t i l l fragile around May ,2008, when markets were nervous about a possible balance of payments crisis. There were also concerns about the health o f the banking system, and especially about the quality o f loans related to real estate and urban development. However, i t
gradually became apparent that the stabilization package was working, and tensions eased.
TABLE 1: K E Y ECONOMIC INDICATORS
Output, Employment and Prices GDP (% change previous year)
Industrial production index (% change, previous year)
Unemployment rate (%, urban areas)
Consumer price index (% change, period-end)
Public Sector Official fiscal balance (% GDP, excluding off-budget items)
General fiscal balance (% GDP, including off-budget items)
Total public debt (accumulated, % GDP)
Foreign Trade, BOP and External Debt Trade balance (BOP definition, US$ million)
Exports of goods, (US$ million, fob)
Exports of goods (% change, previous year)
Key exports, (value, % change) - crude oil
Imports of goods, (US$ million, fob)
Imports of goods (% change, previous year)
Current account balance (US$ million )
Current account balance (% GDP)
Foreign direct investment (BOP inflows, US$ billion)
Total external debt -DOD- (US$ billion)
as percent of GDP
Debt service ratio (% exports of g&s)
Reserves, including gold (US$ billion)
Reserves (in weeks of imports of g&s)
Financial Markets Credit to the economy (% change, period-end)
Short-term interest rate (3-M deposits, period-end)
Stock market - VN index (Jul2000 =loo)
2005 2006 2007 2008eJ
8.4 8.2 8.5 6.2
17.2 17.0 17.1 14.6
5.3 4.8 4.6 4.7
8.8 6.7 12.6 19.9
-0.1 1.1 -2.2 -1.6
-4.5 -1.1 -5.3 -4.7
44.5 44.1 46.3 43.3
-2,439
32,447
22.5
30.3
34,886
15.7
-560
-1.1
1.9
17.2
32.5
5.4
8.6
11.3
-2,776
39,826
22.7
12.1
42,602
22.1
-163
-0.3
2.3
19.1
31.4
5.0 11.5
12.5
-10,360
48,561
21.9
2.7
58,921
38.3
-6,992
-9.8
6.6
23.7
33.3
4.6
21.6
16.6
-12,782
62,685
29.1
23.1
75,467
28.1
-10,317
-11.5
8.9
28.6
31.9
3.5
23.0
14.4
31.7 25.4 53.9 25.4
7.8 7.9 7.4 8.1
308 752 972 316
2009 pl 2010 pl 2011 pl
5.5 6.5 7.0
9.5 13.7 15.2
6.5 5.0 5.0
6.0 5.0 4.5
-3.6 -3.6 -3.2
-8.7 -6.6 -6.0
44.2 46.6 48.5
-5,545 -6,415 -6,739
53,290 61,065 70,785
-15.0 14.6 15.9
-42.1 -8.3 1.8
58,835 67,480 77,524
-22.0 14.7 14.9
-4,615 -5,265 -5,589
-5.0 -5.3 -5.2
4.5 5.0 5.3
31.9 31.7 31.2
34.5 32.1 29.2
5.0 4.5 4.5
20.4 21.9 23.6
16.2 15.1 14.4
22 20 20
6.0 5.0 4.5
_ _ _ -__ -_-
Source: General Statistics Office (GSO), State Bank of Vietnam (SBV), International Monetary Fund (IMF), and World Bank. e = estimate, p = projections.
2
TABLE 2: GOVERNMENT BUDGETARY OPERATIONS
228.4 224.6
191.8 66.6
125.2
32.8 3.8
6.
279.4 271.5 236.3
83.3
153.0 35.2 7.9
Total revenues and grants
Tax revenues
Revenues
Oi l revenues
Non-oil revenues Non-tax and capital revenues
Grants
229.1 149.9
79.2
37.1 20.2 4.7 3.7
16.9
-37.8
-4.5%
Total expenditures Current expenditure
Expenditure on investment development
268.4 180.1 88.3
21.8 ' 9
4.7 4.3
12.8
-10.8
-1.1%
"Off-budget" expenditure and net lending Net lending
ODA financed VDB net lending
"Off-budget" investment expenditure
-37.8 -4.5%
45.2
21.2
7.4
24
Overall fiscal balance before stimulus package
As percent o f GDP
-10.8 -1.1%
12.4
13.6
1.6
-1.22
Fiscal Stimulus Package Revenue impacts (+ increase)
Expenditure impacts
Overall fiscal balance (including off-budget items)
As percent o f GDP
FINANCING Domestic (net)
Foreign (net)
Financing Gap In US$ billion
Note GDP at current price (VND trillion) 839 I 974
2007
316.0 311.7 265.9
77.0 188.9 45.8 4.3
341.5 229.3 112.2
35.4 17.4
7.3 10
18.0
-60.9 -5.3%
-60.9 -5.3%
37.5 19.7
17.8
-23.4
1.144
2008
416.8 409.5
359.1 88.8
270.3 50.4
7.3
434.2 298.3 135.9
49.8 22.8
9.0 13.8 27.0
-67.2 -4.5%
-67.2 -4.5%
56 30.3 25.7
-11.2
1,478
2009e
398.0 393.0
334.3 54.5
279.8 58.7 5.0
456.6 343.8
112.8
69.8 33.8 4.1
29.7 36.0
-128.4
-7.8%
-10.2
58.5
-197.1 -12.0%
167.6 142.8
24.8
-29.5 1.7
1.648
Source: GSO, IMF, and World Bank staff estimates. Figures in V N D trill ion unless otherwise noted.
The stabilization package took a tol l on economic activity, with the second quarter o f 2008 recording one o f the lowest growth rates in years (5.8 percent). At 6.2 percent, the GDP growth for 2008 was about 2 percentage points below historic trend. Most sectors coped reasonably well, and approvals for foreign direct investment (FDI) projects continued on the rise, reaching a record US$64 bil l ion for the year as a whole (71 percent o f GDP). However, the construction sector had i t s worst performance since the East Asian crisis, squeezed between frozen or declining property prices, high interest rates and high international prices for cement and steel. In the second half o f 2008, the financial crisis originating in the United States affected foreign demand. International prices o f
3
commodities exported by Vietnam were on a declining trend since the third quarter, export orders for garments and other industrial products collapsed in the fourth quarter, and a slowdown in manufacturing became noticeable. According to the official statistics, job losses appear to be modest, and the labor market remains tight for the skilled and semi-skilled. However, the impact i s stronger in some o f the large industrial parks, with casual and seasonal workers losing their jobs and others their overtime pay.
7. The government reacted swiftly to this second economic shock, shifting gears from stabilization to supporting economic activity (the “five groups o f measures”) in November 2008. The immediate components of this reaction included cutting payments o f enterprise income tax, deferring payments o f personal income tax, and providing a cash handout to poor households on the occasion o f the Lunar New Year. However, the most decisive move concerned monetary policy. This was seen as an urgent priority given the risk o f economic activity suffering disproportionately from the combination o f very high lending interest rates (around 21 percent by August 2008), a very rapid deceleration o f inflation (there was actually deflation in the last quarter o f 2008) and the slowdown in the demand for exports. The main policy rate was brought down by 7 percentage points over a short period o f time, and a credit guarantee scheme was established for small and medium enterprises (SMEs). In addition, an interest rate subsidy o f 4 percentage points was introduced for working capital loans. In practice, this scheme amounted to refinancing o f the debts by enterprises which could prove that they had viable operating plans.
8. Thanks to the stabilization efforts in early 2008, the Vietnamese economy was in a better position to weather the global crisis than i t would have been a year ago. At the beginning o f 2009, the trade account was roughly in balance. Over the first quarter o f 2009, exports declined by 11.6 percent excluding the gold re-exports compared to the same period in 2009 (exports including gold grew by 7.4 percent), whereas imports decreased roughly by 41.3 percent. The current account deficit i s projected to be about 5 percent o f GDP in 2009, down from 11.9 percent in 2008. Capital and intermediate goods constitute the bulk o f Vietnam’s imports. Foreign direct investors are large net importers, and the shrinking current account deficit in the first four months o f 2009 i s closely linked with the 30.2 percent decline (year-on-year) in the implemented FDI. The projected current account deficit should, therefore, be manageable. However, the international reserves are expected to decline in 2009 reversing the recent trend o f slow accumulation.
9. The banking sector i s muddling through. Quantitative indicators o f the quality o f their portfolio, based on days in arrears and rollovers, indicate that the fraction o f non-performing loans (NPLs) had started to decline in October 2008, when the monetary policy easing started, but are slowly climbing again. Qualitative indicators, based on borrower risk, suggest a higher level o f NPLs. During the period o f turbulence, the SBV upgraded i t s supervision efforts, including strengthened on- site supervision and raising minimum capital requirements. By the end o f 2008, al l commercial banks had raised their capital to the new minimum levels. The first phase o f the interest rate subsidy scheme, which was for working capital and for a limited period o f time, mainly benefitted private enterprises. B y encouraging banks to lend, i t supported a rapid restructuring o f bank loans without leading to an increase in total credit. The recently announced second phase o f the interest rate subsidy scheme, for investments and for up to two years, may have a more adverse effect on the quality o f lending. Credit to the economy has started to pick up, and with it, inflationary pressure as well.
MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY
10. While a crisis i s unlikely in 2009, growth w i l l be slower than in 2008. The 2009 growth forecasts by multilateral institutions range from 3.5 to 5.5 percent. The impact o f the global turmoil was severe in the f i rs t quarter o f 2009, resulting in 3.1 percent growth (year-on-year), about 4
4
percentage points below trend (the average for first quarter growth over the last few years was 7.2 percent).
11. There are some indications o f recovery. Agriculture i s expected to experience solid growth during the rest o f the year, after a poor first quarter due to the floods in the north o f the country. Helped by reduced interest rates and lower cement and steel costs, the construction sector reversed the three-quarters-long contraction trend and grew by 6.9 percent (year-on-year) in the f i r s t quarter o f 2009. As of April 2009, electricity consumption and retail sales registered real grown rate o f 10.7 and 7.5 percent, respectively, compared to the same period in 2008. This suggests that the manufacturing and services sectors are also coping.
12. On the other hand, there i s anecdotal evidence that the economic slowdown may become protracted. Systematic indicators are not available in high enough frequency to judge how broadly or deeply the downturn i s affecting the labor force, but many in the export sector are working on a reduced schedule or put on forced or unpaid leave. Many migrant workers have returned to rural areas or are struggling to survive on partial pay and reduced hours in the cities. The rapid assessment conducted highlighted how the lack o f occupation mobility and low s k i l l levels among Vietnamese workers creates uneven impacts. The limited information available suggests that erstwhile migrant workers are not easily absorbed into the rural economy.
TABLE 3: FISCAL STIMULUS PACKAGE AND THE FINANCING GAP
a. Total revenue (tax, non-tax and grants)
b. Total on-budget expenditure (recurrent and capital)
c. Other expenditure (Vietnam Development Bank (VDB) lending, ODA on-lending, off- budget investment)
d. Overall fiscal balance (=a-b-c)
e. Overall balance in percent of GDP
389.9
456.6 69.8
-136.5 -8.3
k. Financing available as of November 2008 (domestic and foreign)
1. Additional financing sources as of Mav 2009
f. Change in estimated revenue (independent of stimulus package)
h. Additional spending as a result of the stimulus package
g. Revenue foregone as a result of the stimulus package
i. Adjusted overall fiscal balance (=d+f-g-h)
j. Adjusted overall balance in percent of GDP
136.5 I 31.1
8.1 10.2
58.5
-197.1 -12.0
m. Financing gap (=i-k-I)
0. Financing gap as of May 2009 (in US$ billion)
n. Financing gap as of May 2009 (in percent of GDP)
13. Sustaining economic growth during the remainder o f 2009 wi l l require reliance on domestic demand, especially if the recovery in the developed world i s delayed, and international trade-related activities do not pick up. At the end o f 2008, the government announced a budget plan for 2009 which included a sizeable stimulus component. Whether the labor-intensive projects included in the stimulus package succeed in absorbing the unemployed and under-employed workers in a productive and timely manner would be an important element in determining the growth outcome for 2009.
29.5
1.8 1.7
5
14. The focus o f the stimulus package i s to scale up critically important public investments, especially in energy and transport. Infrastructure bottlenecks remain an important obstacle to the long-term development o f the Vietnamese economy. The focus seems appropriate but the overheating o f late 2007 and early 2008 had exposed important weaknesses in capital expenditures. Lack of coordination among provinces and sectors had led to a potentially costly duplication o f public investments and resulted in insufficient consideration to their environmental impacts. Large state- owned enterprises (SOEs) had taken advantage o f their liquidity to venture into real estate and financial investments, further fueling the ongoing asset price bubbles. Weak management o f the project had led to projects with dubious returns and poor implementation. Addressing weaknesses in the implementation o f public investments should thus be a natural complement to the stimulus package .
15. Vietnam has some fiscal space to finance a part o f the announced stimulus package. A debt sustainability analysis completed after the announcement o f the 2009 budget plan suggests that Vietnam’s external debt position i s robust. The total public external debt i s estimated to stand at 25 percent o f GDP (30 percent including the private sector) at the end of 2008. With nearly two-thirds o f this debt contracted on highly concessional terms, the ratio o f debt service to exports i s projected to remain at or below 5 percent in the coming years. The baseline scenario does not include the increased fiscal deficit for financing the stimulus package, but even the stress tests, including a large increase in debt-creating flows, indicated that Vietnam’s debt was largely sustainable in the long-run. A large increase in fiscal deficit financed by non-concessional loans and a large (30 percent) and sustained depreciation of the dong were identified as main risks to debt sustainability. Both scenarios are considered unlikely. Total public debt also remains manageable, as the bulk o f domestic debt i s issued long-term. Before the latest announcements on the stimulus package, i t was expected to increase from i ts current 47.5 percent o f GDP to 50.7 percent by 2012.
16. The main constraint to support the active fiscal stance o f the government stems from financing rather than from debt sustainability. The budget plan foresaw the issuance o f a second sovereign bond, which i s now unlikely in the current global context. Meanwhile, the additional components o f the stimulus package, adopted after the plan was approved, have increased the financing gap. Based on the current figures, there remains a gap o f around 29.5 tri l l ion dong (US$1.7 bil l ion - see Tables 2 and 3). I t could be higher if tax payment deferrals are converted into exemptions and once the fiscal impacts o f the interest rate subsidies materialize. Adopting an inadequately funded stimulus package could affect market sentiment; excessive reliance on domestic finance could crowd out the private sector; attempts to monetize a part o f the cost o f financing the stimulus package would reignite the inflationary tendencies. In the absence o f resources to finance further spending in infrastructure, the government may rely more on SOEs to carry out the needed investments, which could decrease transparency and efficiency o f the investments. Alternatively, they may postpone or cancel some o f the measures and thus m i s s the opportunity to limit the depth o f the growth slowdown, which w i l l hurt the poor and the vulnerable the most. These r isks associated with the financing gap make the contribution o f quick-disbursing official development assistance (ODA) all the more important, and justify the increase in the amount o f the credit for the proposed operation for the purpose o f supporting this fiscal stimulus package.
111. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES
17. The government’s vision i s articulated in several strategic plans and documents, including the ten-year Socio-economic Development Strategy 2001-2010 and the five-year SEDP 200 1-2006. There was a noticeable acceleration, starting around 2001, in the government’s drive towards relying on market mechanisms, developing a multi-stakeholder economy and further integrating with the region and the world. These strategic plans and documents aimed at establishing a market economy
6
with a socialist orientation. They built on the successes o f the renovation process initiated in the late 1980s with Obi mdi, while also preserving the strong poverty-reduction focus.
18. The SEDP 2006-2010, approved in June 2006, emphasizes development outcomes and the policy reforms needed to attain them, unlike previous five-year plans which focused on quantitative targets as if the state was s t i l l in charge o f producing most goods and services. I t relies on data analyses, rather than administrative reporting, to substantiate i t s diagnostics and recommendations. I t
has also led to the adoption o f a framework to monitor progress towards attaining development outcomes. The process through which the SEDP was prepared was more participatory than in the past. Extensive consultations were held, going beyond the boundaries o f government, and involving businesses, grassroots communities, overseas Vietnamese and development partners.
19. Other important policy developments have influenced this reform agenda. B y mid-2003, the government decided to aim for a rapid accession to the WTO. In late 2003, a new anti-corruption strategy started to emerge, with the emphasis shifting from punitive measures to increased transparency and strengthening o f the government systems. The new comprehensive anti-corruption strategy was adopted in May 2009, setting out preventive, demand-side solutions and monitoring mechanisms. The year 2004 saw the coming into effect o f the new Budget Law, which makes the National Assembly and People’s Councils at all levels responsible for resource appropriations. A banking reform roadmap was adopted in 2006 to prepare the banking sector for liberalization in accordance with Vietnam’s WTO commitments. The roadmap included revisions o f the Laws on SBV and on Credit Institutions, as well as preparation o f Bank Supervision Law and Deposit Insurance Law.
IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM
LINK TO CPS
20. The Country Partnership Strategy (CPS) submitted in January 2007 concluded that the SEDP had incorporated the necessary poverty reduction principles, was broadly sound and was a plan that could both deliver growth and reduce poverty. The CPS defines the PRSC as one o f the modalities to support the implementation o f SEDP. The Program Document for PRSC 6, submitted to the Board in June 2007, charts the second cycle o f PRSC operations (PRSCs 6-10). The CPS allocates US$l50 mill ion to each o f the PRSCs in the second cycle. In practice, however, the amount for PRSC 6 was increased to US$175 million. PRSC 7 was presented to the Board in June 2008 for the amount o f US$l50 million. There was an agreement among the government, co-financiers, and IDA that the performance was relatively weak, but that i t was due to difficult economic conditions rather than to waning commitment from the Government for reforms.
21. The amount o f credit the CPS allocates to PRSC 8 i s also US$l50 million. A higher amount for PRSC 8 i s not linked to performance against reforms set out in the agreed policy matrix, but justified on the needs basis, as the government faces a prospect o f higher fiscal deficits in 2009-10 due to projected shortfalls in revenues and a larger expenditure to finance the fiscal stimulus package. Future decisions on the amounts o f PRSCs remaining in this series (PRSC 9 and PRSC 10) w i l l be taken based on performance relative to agreed policy reforms to be supported by these operations, and possibly Vietnam’s budget support needs at the time in the context o f the global economic crisis
22. At the same time as increasing the credit amount in the proposed operation to ensure financing necessary to fund the fiscal stimulus package i s available on urgent basis, IDA i s taking the opportunity o f the global crisis to discuss and agree with the government substantive reforms in the energy sector and in the area o f public investment management and planning, where significant efficiency improvements can be made. These reform operations w i l l be delivered in FY 10.
7
COLLABORATION WITH THE IMF AND OTHER DONORS
23. The PRSC operations serve as an aid harmonization device, supported by an increasing number o f development partners. The PRSCs have been co-financed by bilateral and multilateral agencies, either through grants or parallel lending (Table 4). More importantly, the process saw a transition in the role o f co-financiers, from providers o f finance to partners engaged in the preparation o f the operations and the policy dialogue with the Government. This dialogue i s organized by policy areas, in which development partners engage selectively, based on their interests and technical capacity on the ground. The PRSC framework also serves as a coordination device for technical assistance (TA) provided by donors, and the TA in turn provides valuable inputs to the policy dialogue.
Donor ADB
Spain
AusAID ' CIDA (Canada)
Denmark
TABLE 4: DEVELOPMENT PARTNERS CO-FINANCING PRSC OPERATIONS
PRSC1 PRSCZ PRSCS PRSC4 PRSC5 PRSC6 PRSC7 PRSC8(e) 6.4 15.0 15.0 15.0 20.0 TBD
2.6 3.9 7.3 11.9 7.0
7.7 12.3 11.5 TBD
5.8 7.0 3.4 9.2 4.9 4.0
9.7 3.3 13.5 10.0 10.6 12.0 11.1 11.1
EC
KfW (Germany )
Ireland
Japan
Netherlands
DfID (UK) I 19.7 I 17.3 I 36.0 I 34.9 I 39.3 I 39.6 I 39.6 I 31.8 I 18.9 10.3 12.4 25.9 19.1 18.2
7.8 8.8 9.6 8.4
1.7 3.9 11.0 11.9 TBD
18.6 20.8 21.5 . 30.0 TBD TBD
13.4 10.0 16.0 17.6 31.0 17.6 9.6 TBD
New Zealand
SIDA (Sweden)
Switzerland
2.0 1 .o
3.7
4.9
Note: Figures are in million US dollars.
(PRSC6), AusAID (PRSC 7) , and CIDA (PRSC 8). The financings for the PRSC Secretariat are provided by DfID (PRSCs 4-3, Switzerland (PRSCs 5-6), World Bank
Financing for PRSCs 7 and 8 i s pending approval by the Parliament.
Co-financiers 21
27
31
115
120
157
188
158
TBD
TABLE 5: RESOURCES MOBILIZED THROUGH PRSC OPERATIONS
Total 171
127
131
215
220
257
363
308
TBD
Operation
PRSC 1 (I)
PRSC l(I1)
PRSC 2
PRSC 3
PRSC 4
PRSC 5
PRSC 6
PRSC 7
PRSC 8 (p)
Committed (US$ million) World Bank
150
100
100
100
100
100
175
150
350
Year
200 1
2002
2003
2004
2005
2006
2007
2008
2009 (PI
Disbursed ( World Bank
150
100
100
100
100
100
175
150
350
IS$ million) Co-financiers
0
22
27
67
80
113
159
230 (e)
TBD
Note: (e): estimates; (p): projections.
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24. In addition, assessment and projections on macroeconomic indicators are discussed regularly with the IMF. While specific point projections could vary, there i s a broad agreement between the two institutions on the status o f the economy and the direction i t should take so that the country would continue on the robust growth path and to attain i t s poverty-reduction goals. The two institutions also collaborate on annual debt sustainability analysis.
RELATIONSHIP TO OTHER BANK OPERATIONS
25. The CPS i s organized around the four pillars of the SEDP, with the policy dialogue to help implement Vietnamese reform program. The PRSCs are the apex o f policy dialogue, while sector development policy lendings (DPLs) delve deeper into sector-specific dialogue. When there i s a need for a more focused sector policy dialogue, sector DPLs complement the PRSCs, as i s the case with Program 135 Phase 2 Support (P107062), Higher Education Development Policy Program (P104694). High-level actions fall under PRSC, and more detailed ones are treated under sectoral DPLs. A program comprising investment lending, analytical work, and technical assistance supports implementation at the sectoral level. There i s a strong complementarity between the different components o f the program. The overall direction o f the policy dialogue i s informed by the analytical work. Concrete policy measures are often made possible by preparatory technical assistance. Investment credits also provide an opportunity to pilot new initiatives and approaches, which are then scaled up through the policy dialogue. The reforms supported by the latter, in turn, enhance the effectiveness o f sectoral investments. The lending program i s being complemented with the International Bank for Reconstruction and Development (IBRD) resources starting in fiscal 2009. The financing priorities for IDA and IBRD include energy, transport, tertiary education, water, urban, and health sectors.
26. Several o f the ongoing or pipeline investment projects and analytical and advisory activity (AAA) products are particularly complementary to the PRSCs. In the financial sector, Financial Sector Modernization and Information System Project (P088759), Payment System and Bank Modernization Project (P082627), Financial Market Infrastructure Development (P105 198), and Policy Note on Banking Sector Reform (PI 12285), as well as Institutional Development Fund (IDF) grants supporting Development o f Legal Foundation for Vietnam’s Banking System (P104484) and Strengthening Accounting Capacity o f State-Owned Commercial Banks (SOCBs) (P104702) work hand-in-hand with the PRSCs’ efforts to modernize the central bank, increase disclosures o f relevant financial information, and contribute to the development o f the financial sector in general. In addition, technical assistance for Enhancing Deposit Insurance in Vietnam (P110730-TA091526) and for Strengthening Public Credit Registration in Vietnam (P113854-TA092765) i s also on going.
27. In the education sector, the Banks lending operations and non-lending activities complement the PRSC’s focus on fundamental education strategy and policies in the areas o f quality, equity and accountability. Investment lending supports the development and implementation o f standards-based approaches to education delivery, especially to disadvantaged groups o f children (Primary Teacher Development Project (PO5 1838), Primary Education for Disadvantaged Children Project (P044803) and School Education Quality Assurance Project (PO9 1747)) and the exercise o f autonomy (combined with accountability) at higher levels o f the education sector (Higher Education Project (P004828), Second Higher Education Project (P079665)). The f i rs t sectoral DPL operation w i l l complement the PRSC series by delivering a more comprehensive set o f higher education reforms than can be delivered through the multi-sectoral PRSC instrument, notably in the areas o f governance, financing, quality assurance and public financial management.
28. Seven PRSC operations have supported the implementation o f Vietnam’s reform agenda so far. PRSC 1, a two-tranche credit for US$250 million, was approved by the Board in June 2001. I t s focus was mainly on the structural reform agenda. The second tranche o f PRSC 1 was released in December 2002. PRSC 2, a one-tranche operation for US$lOO million, was approved in June 2003.
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This operation was aligned with the Comprehensive Poverty Reduction and Growth Strategy (CPRGS) o f the Government, which made it possible to broaden considerably the range o f reforms supported. In addition to the mainly structural aspects covered by PRSC 1, this second credit included various policy actions aimed at keeping development inclusive and building modem governance. PRSCs 3 to 5 were also one-tranche operations o f US$lOO mil l ion each. These were approved in June 2004,2005 and 2006 respectively and had a broad sectoral coverage.
29. The sixth PRSC, approved in 2007, launched the second series o f PRSCs. The seventh PRSC was approved in June 2008. These operations added natural resource management and environment pillar to the other three other pillars in the previous operations.
LESSONS LEARNED
30. One o f the lessons learned from the previous operations i s the need to have a comprehensive approach to economic reform for several reasons. First, there are linkages between policy actions across sectors, so that a piecemeal approach would end up being less effective. For instance, improving the delivery o f social services requires a better balancing o f current and capital expenditures on the supply side, as well as a better understanding o f what the priorities are from the demand-side. Good public financial management i s an essential ingredient to improved results in health and education sectors. Another obvious example i s the inter-linkages between the anti- corruption dialogue and public administration reform. As different ministries and agencies are in charge o f these two agenda, PRSC’s overarching framework i s useful in addressing the underlying issues holistically.
31. Second, there are differences in, the readiness o f the leadership to embrace reforms in different areas, with the window o f opportunities difficult to predict. As a result, i t i s useful to accumulate various technical building blocks necessary across the entire policy spectrum, so that ambitious reforms can be supported without delay whenever the opportunity arises.
32. Finally, the PRSCs serve as a one-stop shop for the interaction between the government and the donor community. When coordinating the numerous donors with different interests and agenda, excessive selectivity has proven impractical. In addition, i t could also represent a lost opportunity, as the large number o f partners translates into a wider range o f technical expertise than when IDA i s acting alone. Hence, the policy action matrix contains f i f ty odd discussion items at the beginning o f each operation. Policy actions are not conditions but are entering points to guide the policy dialogue. The policy action matrix narrows down over the course o f preparing the operations, as the dialogue evolves and the readiness o f the government counterparts becomes clearer (Annex 2).
33. A mid-term review o f the second PRSC cycle (PRSCs 6-10) i s currently underway (see section VI). Once the review i s complete, the findings wi l l be reflected in the design o f the subsequent operations.
ANALYTICAL UNDERPINNINGS
34. The Vietnam Development Report (VDR) 2007, entitled Aiming High, provides the main underpinnings for the current PRSC series. The preparation o f this report was built on the analytical work done over the f i r s t PRSC cycle, on structural reforms (as summarized in the VDR 2006, on Business), institutional modernization (VDR 2005, on Governance) and on social inclusion (VDR 2004, on Poverty). The process was led by the World Bank with a large number o f development partners participating, several o f them contributing extensive written inputs. Participants included the co-financiers o f the f i rs t PRSC series as well as other development partners not formally involved in direct budget support, including the United Nations agencies and international non-governmental organizations (NGOs). A reviewing committee o f recognized Vietnamese experts and policy-makers advised on each o f the policy areas and on the overall thrust o f the report.
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35. A new series o f VDRs goes more in depth into each o f the four pillars o f the SEDP 2006- 2010. The f i rs t volume in this series, the VDR 2008 on Social Protection, examines the challenges remaining in relation to poverty alleviation, with a focus on the plight o f ethnic minorities. While representing only 14 percent o f the Vietnamese population, ethnic minorities account for a large share o f the poor. Even though their poverty rates have been declining steadily in recent years, the gap with the Kinh majority has not narrowed, and some ethnic groups remain especially deprived. The VDR 2008 also analyzes the structural shifts affecting the Vietnamese society, resulting from the demographic transition and rural-to-urban migration, and the change in the nature o f the shocks experienced by Vietnamese households, from greater exposure to international fluctuations to the growing importance o f communicable diseases. These shifts and shocks have important implications for the design o f public policies and programs, supporting the development o f more institutional social protection mechanisms and the transition to a risk-based approach and demand-side financing in the case o f the health sector.
36. The more recent VDR 2009, Capital Matters, focuses on constraints to the mobilization o f resources for accumulation and on the efficiency o f investments by both the public and the private sector. Some o f those constraints are common to many developing countries, whereas others are more specific to the transition from planned to market economy. The report reviews the operation o f the main channels used to mobilize resources for investment in Vietnam, including tax revenues, bank borrowing, bond issuance, equity, and ODA. In the case o f public investments, i t identifies weaknesses in the selection, appraisal and implementation o f projects. Some o f those weaknesses result from the different speed at which decentralization, public financial management and environmental policies have progressed in recent years. Special attention i s devoted to state capital, and the potential r isks created by weak corporate governance in SOEs, conflicts o f interest in the Government between ownership and regulation, and the ability o f large groups o f SOEs to control financial institutions, thus undoing previous efforts to harden the budget constraint.
37. A Public Expenditure Review/ Integrated Fiduciary Assessment (PER-FA) and a Country Fiduciary Accountability Assessment (CFAA) were carried out in 2005 and 2007, respectively. While noting the progress made, they pointed out areas that are in need o f further improvements. These include the process o f budget development, accessibility o f financial information, and accounting and auditing framework. These recommendations form the basis for policy dialogue conducted through the PRSC series.
38. The policy dialogue in the energy sector i s informed by extensive analytical work over the past ten years. Recent analytical work includes support for the preparation and passing o f the Electricity Law (2004) and the Roadmap for Reform o f the Electricity Sector (2006), Electricity Licenses (2006 and 2007), Conceptual Design o f Competitive Generation Market (2008), Framework for Thermal BOT Tenders (ongoing), Development o f Market Rules for the Competitive Generation Market (ongoing), and Grid Code, Distribution Code and Metering Code (ongoing). Work on restructuring o f the electricity sector includes Restructuring the Power Transmission Business (2005), Equitization of the Power Sector (2006) and most recently a policy note on Restructuring for the Competitive Generation Market (2008). Pricing studies include Bulk Power, Distribution Margin and Retail Tariff Design study (2005), Retail Tariff Methodology (2008), Tariff Calculation Model (ongoing), and Transmission Pricing Methodology (ongoing). The Bank has also reviewed energy plans and planning processes, particularly Power Master Development Plan No.6 (2006) and the Gas Master Plan for Southern Vietnam (2008).
39. Women Retirement Age Increase Gender Equity Dimension (2008), a study funded by the World Bank and authored by the Institute o f Labor Science and Social Affairs (ILSSA)2, on gender
ILSSA i s a research institute associated with the Ministry of Labor, Invalids and Social Affairs (MOLISA).
11
equity and women retirement age in Vietnam informs the policy dialogue on gender social protection issues carried out in PRSC operations.
40. Forest and forest land management by community and farmers in Vietnam have been a subject o f many studies. These studies include A Brief History of Forest Policy Work from the Field (2002), Review of Policy and Implementation Framework for Decree 200 (2005), and Vietnam Land Policy Stocktaking Study (2008).
41. The f i rs t study was prepared by Program on Forests (PROFOR) Vietnam3 - a branch o f the global program on Forest. Review of Policy and Implementation Framework for Decree 200 (2005) was prepared under the umbrella o f the Forest Sector Support Program framework which has State Forest Enterprise (SFE) reform as a priority area requiring attention and assistance. The World Bank and the Netherlands Development Organization ( S N V ) provided funding and guidance in collaboration with the Ministry o f Agriculture and Rural Development (MARD). The Review includes both national and local level perspectives in i t s recommendations; i t i s based on dialogue at national level as well as fieldwork conducted in five provinces (Nghe An, Thua Thien-Hue, Quang Nam, Quang Ngai, and Binh Dinh). The review was conducted for the purpose o f identifying and developing the main strategic issues that are critical for understanding the impact o f SFE reform and i t s future direction.
42. The Vietnam Land Policy Stocktaking Study (2008) was prepared with extensive participation o f former and current staff o f Ministry o f Natural Resources and Environment (MONRE). The goals o f the study were to assess progress, in terms o f analysis and understanding o f key topics, consolidate lessons, and begin to identify knowledge gaps and define areas where future work and policy dialogue could be usefully targeted. The report finds that land issues are implicated in a variety o f ways in Vietnam’s ongoing and accelerating economic and social transformation. The nature o f rights to land, and the extent to which they are perceived as secure and accessible, play key roles in shaping economic options and livelihood strategies across all sectors o f society. Land use policies and practices greatly influence the availability o f and access to land and the prospects for sustainable management o f natural resources and the environment. Land as a source o f revenue i s gaining increasing prominence in thinking about public and private finances at all levels.
43. Review and Analysis of the Pollution Impacts from Vietnamese Manufacturing Sectors (2008) informs the policy dialogue on pollution control, although the proposed operation does not specifically address the manufacturing sectors. The study was prepared by the World Bank team in partnership with the International Center for Environmental Management as well as the Ministry o f Industry and Trade (MOIT) and MONRE.
44. Water Sector Review (2008), prepared for the Office o f the National Water Resources Council on behalf o f the Government o f Vietnam, funded by the Asian Development Bank (ADB), informs the water sector dialogue. The coverage o f the study includes the current status o f water resources and water-related environments, water supply and sanitation, flooding and natural hazards, irrigation, aquaculture and fisheries, river basin management.
PROFOR i s a multi-donor partnership housed now in the World Bank (ESSD), but was in the United Nations Development Program when the study was done in Vietnam. Website i s http://www.profor.info.
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V. THE PROPOSED OPERATION
OPERATION DESCRIPTION
45. The proposed operation i s timely and critical. The PRSC represents a well-established mechanism to provide a coordinated technical advice from development partners when the need to act swiftly without distraction o f multiple players i s the greatest. In addition, the financing mobilized through this operation w i l l be particularly useful in funding the fiscal stimulus package to combat the negative effects o f the global financial crisis and w i l l allow the government to take measures to limit deepening o f the growth slowdown.
46. The medium-term policy matrix was developed at the beginning o f this PRSC cycle (Annex 5). The development outcomes were also established at the same time (Annex 3). The policy actions included in the matrix are grounded in the SEDP 2006-2010 and other strategic documents and analytical work. Some o f the policy actions are adjusted as new issues arise, such as the unfolding global financial crisis, new studies become available, or the original plan becomes no longer applicable. The policy reforms to be discussed in each PRSC are chosen every year through a process involving sector teams at the World Bank and participating development partners. Each year, the matrix starts from nearly 200 init ial proposals in September to about 50 policy actions for the official discussion with the government.
47. Each year, the policy matrix contains two types o f policy actions. The f i r s t type i s “triggers,” which are deemed to be more strategic, because o f their potential impact on development outcomes over time. These actions are selected during the previous PRSC operation, and are reported in the minutes o f the negotiations (PRSC 7 in this case). The triggers that are deemed met become prior actions for the current operation (Table 6). Analogously, another set o f strategic reforms, considered achievable during the next 12 months are chosen during this operation, and reported in the minutes o f the negotiations o f the proposed operation (Table 7). The “triggers” represent a collective understanding of what measures need to be taken to address immediate concerns (for example, the SBV Law, strengthening financial management o f SOEs and their investments), and which medium- term structural reforms should be tackled as priority (for example, promoting the use o f renewable energy, management o f debt). The assessment o f triggers i s holistic, with the understanding that some wi l l not be met completely while others can be exceeded.
48. In addition to the triggers, the policy matrix also contains additional reform actions undertaken by the government. This broader set o f actions, or “benchmarks,” does not reflect the use o f conditionality. I t s reporting i s rather intended to convey the breadth and scope o f the reforms being undertaken by the Government o f Vietnam. B y providing a more comprehensive picture o f developments in each policy area, this matrix allows a better understanding o f the progress being made in each o f the four pillars o f the reform program.
49. The technical meetings are coordinated by the PRSC Secretariat at the SBV. The Secretariat reports to the Steering committee for the PRSC process, which i s chaired by the first Deputy Prime Minister. The Secretariat identifies the relevant line ministry or government agency for each o f the proposed policy actions. The technical meetings with those ministries and agencies provide an opportunity to go into the specifics o f each action, to comment on draft policy documents, and to agree on a time schedule for their completion. As a result o f these technical meetings, some measures are deemed completed, some may be consolidated, and others may be postponed to the next operations. Pending issues regarding policy actions which are considered o f strategic importance (either in terms o f content or timing) can be raised to the attention o f the Steering Committee.
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POLICY AREAS
50. The PRSCs 6-10 address the four pillars of the SEDP, namely business development, social inclusion, natural resource management, and modern governance, in a balanced way. The 11 triggers chosen for the preparation o f PRSC 8 are evenly distributed across the four pillars. The progress in achieving these 11 triggers was assessed in May 2009. According to this assessment, seven o f the triggers are fully met, two are partially met, and two are missed. The missed triggers are: (1) adopt standards for certification o f health care providers and classification o f private hospitals, and (2) prepare a revised Press Law to encourage accurate, objective and responsible reporting on corruption. The partially-met triggers are: (1) approve a strategic plan to ensure prudential and effective investment o f social security funds, and (2) establish criteria and time-bound plan to access the quality o f forest resources nationwide. O f the two partially-met triggers, the first was considered close to being met, as the plan was in the final stage, and was submitted to the Governing Board o f the Vietnam Social Security (VSS) for comments, the last step before submitting i t for official approval by the Prime Minister. Therefore, this trigger was rephrased and included in the l i s t o f “prior conditions.” The second (forestry) had elements towards meeting the trigger, but was deemed further away in substance from being met. Therefore, this trigger was postponed to future operations, and was not included in the l i s t o f “prior actions.”
51. The fact that not al l triggers were met reflects a less than stellar performance, as well as how ambitious these programs are: PRSC triggers are aimed high enough so that they are challenging. The expectation i s that not all triggers w i l l be met in all operations whereas some wi l l be exceeded. The performance under PRSC8 i s roughly comparable to PRSC 7, which had 14 triggers with 8 met, 5 partially met, and one missed. There were no triggers in PRSC 6, which was the f i rs t one in the cycle. In the first cycle, al l 15 triggers were met in PRSC 5, whereas performance was similar under PRSC 4 (3 out o f 15 triggers partially met) and PRSC 3 (1 out o f 14 triggers was not met and 2 were partially met). There were no explicit triggers for PRSC 2.
52. The Task Team’s assessment i s that the slippages are a reflection o f technical obstacles or misreading political economy and institutional process. There i s a clear commitment and substantial progress towards developing a social security investment strategy, establishing certification standards for health care practitioners and classification o f private hospitals, and adopting criteria for classifying forests. All triggers represent a ground-breaking achievement, and the government teams run into technical problems due to inadequate capacity. The revision o f the Press Law was expected to offer an opportunity to protect better journalists and media outlets which report on corruption, while at the same time dissuading l ibel and defamation. Ideally, such dissuasion should rely on c iv i l measures rather than criminal prosecution. However, i t turned out that the political consensus necessary for this type o f breakthrough does not yet exist, and the preparation o f the Law was postponed until next year. This delay i s a set-back, but the silver lining i s that the government decided to discuss the matter further, rather than adopting a revised law that does not address any o f the concerns.
53. On the positive side, in relation to the environment trigger, there has been progress beyond the adoption o f the National Targeted Program (NTP) for Climate Change and assignment of institutional responsibilities. The NTP was approved in December 2008, and implementation arrangements are underway. Implementing this NTP requires inter-ministerial coordination, which i s always a difficult task in the Vietnamese administration. The relevant ministries have grasped the importance and urgency o f tackling the potential effects o f climate change, and their diligence and commitment to reforms are to be commended.
54. The view o f the Task Team i s that the performance under this operation does not reflect a weak commitment o f the government to reform. While there are nuances in the assessment o f the triggers across co-financiers, and various interpretations can be offered for the overall slowdown in
14
policy performance, there i s a determination o f the donor community to remain engaged in the dialogue with the government over economic reforms.
55. In addition to assessing the triggers, the technical meetings with the government provide the platform to engage in a broader dialogue. Progress in the implementation o f the reform agenda i s assessed on an annual basis through the adoption o f a series o f benchmarks, reflected in the policy matrix o f each o f the PRSC operations. For a measure to be considered a benchmark, i t needs to meet four criteria. First, i t needs to be explicitly mentioned in the SEDP 2006-2010 or be part of some other strategic policy document o f the government. Second, the measure has to be considered in the VDR series or in other analytical documents as conducive to the attainment o f development outcomes. Third, the measure has to be strategic in importance. And fourth, i t has to be monitorable, in the sense that i t s completion can be documented.
56. Over the year elapsed since the last operation in the series, the Government o f Vietnam made progress in i t s reform agenda, across all policy areas. The benchmarks are distributed roughly evenly in the four pillars. The triggers and benchmarks are discussed briefly below by pillars.
Pillar I. Business development
57. Strengthen financial management of SOEs and their investments in other entities, defining the level of such investments. The venturing o f Economic Groups and General Corporations (large groups o f SOEs) into asset markets on a large scale fueled the asset bubbles o f 2007/8 and contributed to macroeconomic instability. Their investments in banks and other financial institutions raised the prospect o f related-party transactions which could increase the vulnerability o f the economy in the medium term. To address these risks, the government revised the relevant regulations on the financial management o f SOEs. The revisions limit the scope and nature o f SOEs’ investment activities outside their main business lines, and especially into banking, insurance and securities sectors. The revised regulation prevents large SOEs from holding controlling stakes in banks. It also reduces the scope for conflict o f interest by not allowing SOEs to buy stakes o f other businesses whose managers or owners have blood relationships with those SOEs’ leaders.
58. Prepare the revised Law on SBV focusing i ts mandate on and enhancing i t s autonomy in regard to monetary policy and financial sector stability. One o f the main building blocks o f the comprehensive roadmap for the banking sector reform, endorsed under PRSC 5, i s the transformation o f the SBV into a modem central bank. I t i s to be achieved through the adoption o f a revised SBV Law. The revised Law gives technical autonomy to the SBV, and clarifies SBV’s mandate in the conduct o f monetary policy and the supervision o f the banking sector. I t i s expected to be submitted to the National Assembly for discussion during the spring session o f 2009, and for approval in May 2010. The draft s t i l l contains elements that could be improved further, but moves largely in the right direction. Overheating o f the economy in 2008 caused the delay in processing the Law, as the SBV was preoccupied in fighting the macroeconomic instability. However, SBV has moved to strengthen the supervision o f the banking sector without waiting for the revised Law. The Credit Institution Law, another o f the building blocks, i s to be processed at the same time as the SBV Law. Parallel processing i s considered useful in harmonizing the related laws, to ensure efficiency and to avoid overlaps and gaps.
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Area
Pillar I: Business development
Policy Action
State sector reform
Financial sector reform
Strengthen financial management o f SOEs and their investments in other entities, defining the level o f such investments
Prepare revised law on State Bank o f Vietnam focusing i t s mandate on and enhancing i t s autonomy in regard to monetary policy and financial sector stability
Infrastructure
Pillar 111: Natural Resources
Adopt a pricing system for electricity from renewable energy and provide incentives for government procurement o f energy-efficient equipment
Education Formulate education development strategy to 2020 focusing on equity o f learning outcomes and relevance o f contents
Vote: The prior actions listed in this table are those included in the Financing Agreement for the proposed operation. The complete set o f prior actions agreed upon between government and development partners for PRSC8 can be found in Annex 5.
Social protection
59. Adopt a pricing system for electricity from renewable energy and provide incentives for government procurement of energy-efficient equipment. Coping with rapid growth in the demand for electricity i s one o f the main infrastructure challenges currently faced by Vietnam. Organizing a market for electricity and making large investments in generation, by both public and private sectors, w i l l be critical to increasing the supply o f electricity. It i s also clear that electricity could be used more efficiently and the increase in generation capacity should not come at the expense o f the environment. In July 2008, the Regulations on Avoided Cost and Standardized Power Purchase Agreement for Renewable Energy Small Power Producers was approved by the MOIT, and came into effect on January 1, 2009. The tariff under this regime was calculated based on the system marginal thermal unit (a notional Combined Cycle Gust Turbine (CCGT) calculated from the weighted average o f all CCGTs), and therefore, i s a cost-recovery tariff without subsidies. The new tariff table for 2009 under the new regime was adopted on December 24,2008.
60. In addition to the three prior actions discussed above, the dialogue in the business development pillar also addressed diverse issues in the areas o f global integration, financial sector reform, private sector development, and infrastructure. In the area o f global integration, a framework for implementing the policies following the WTO accession was approved. On strengthening the
Prepare a strategic plan to ensure prudential and effective investment o f social security funds
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Environment Approve national target program on adaptation to climate change and allocate institutional responsibilities for i t s implementation
Public financial management
Legal development
Formulate public debt management law consolidating the management o f domestic and external debt
Establish the National Bar Association, with governing documents and structures approved by the community o f lawyers
financial sector to adapt to the new global environment, monitoring o f indirect investment flows was strengthened, and contingency plans to address possible adverse effects o f the global financial crisis on the banking sector were carried out. To promote private sector development, regulations were issued to reform agriculture research, and to nurture SMEs. In infrastructure, improving traffic safety was sought through a new Road Law and i t s implementation.
Pillar 11. Social Inclusion
61. Formulate education development strategy to 2020 focusing on equity of learning outcomes and relevance of contents. While past strategic documents have focused on different sub- sectors within education, this strategy represents a comprehensive and integrated approach to planning across the education sector, from early child education to higher education. Given the progress accomplished in extending the coverage o f primary and lower secondary education in Vietnam, the strategy reflects a concern to ensure that education opportunities are distributed equitably across the youth population in a society where disadvantage i s characterized by poverty, geographic remoteness and ethnic minority status. It also reflects the increased importance placed on the quality o f learning outcomes at all levels o f the education system and on the relevance o f training offered in vocational, technical, professional, and higher education. The strategy was developed through an extensive consultation process, beginning within the Government's education establishment (via in-house discussions), then including key professional stakeholders (in townhall meetings) and extending to the broad public (through the Ministry o f Education (MOET) website). Over 700 written comments were received. MOET has received comments from the influential Politburo. Clearance from the Politburo i s generally the last step in adopting important strategies for the government. According to MOET, the feedback was broadly supportive o f the content, with guidance to ensure coherence between the overall strategy o f the next SEDP and this education strategy, and to align the period o f the education strategy with the new SEDP timeframe (2011-2020). The strategy w i l l be adopted with the new SEDP in 2010.
62. Prepare a strategic plan to ensure prudential and effective investment of social security funds. Due to the youth and rapid formalization o f the labor force, the old-age pension program o f Vietnam i s quickly accumulating reserves. The expansion of the old-age pension program to the informal sector, implemented under the previous operation, should accelerate this trend. The long-run viability o f the program depends on the soundness o f the investments made with the contributions from workers and employers. The record so far i s not reassuring, as VSS agency has invested in low- return assets, in accordance with the Social Insurance Law. During the proposed operation, VSS formulated a strategic plan to identify potential investments, develop an investment portfolio, choose forms o f investment, and decide on the share o f different asset classes. The process included identifying appropriate benchmarks, with priority given to security over profitability. Based on the plan, recommendations w i l l be made to expand the l i s t of asset classes considered in the Social Insurance Law. Although the latest draft contains elements that can be strengthened further, i t i s considered a breakthrough achievement, as i t fundamentally alters the way VSS manages i t s investments. The latest draft has been submitted for comments to VSS's Governing Board, which i s the beginning o f the approval process. Even though the trigger as i t was originally formulated has not been fully met, the Team deems that there has been sufficient progress towards achieving it.
63. In addition to the two prior actions discussed above, the dialogue in the social inclusion pillar also covered discussions in health and promoting gender equality. In the health sector, the treatment of medical waste was strengthened. On gender equality, the dialogue focused on making operational the Laws on Anti-Domestic Violence and on Gender Equality by adopting an action plan and issuing guiding regulations.
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Pillar 111. Natural Resource Management
64. Approve the National Targeted Program on Adaptation to Climate Change and allocate institutional responsibilities for i ts implementation. Vietnam i s one o f the countries that would be most severely affected by the rise in the sea level as a result o f climate change. Due to i t s long coast line and high population density, i t i s also particularly vulnerable to floods and typhoons, which can also be expected to become more common. Realizing these challenges, the government decided to embark early on in the preparation o f a plan for adaptation to climate change. Led by MONRE, a NTP was approved under this operation. This plan assigns responsibilities to line ministries, government agencies and provincial authorities, so as to avoid duplication and overlaps. MONRE, the Ministry o f Planning and Investment (MPI), and the Ministry o f Finance (MOF) are now making financial and institutional arrangements to implement the NTP.
65. In addition to the prior condition discussed above, the dialogue in the natural resources pillar also addressed issues in the areas o f land and forests, water, and the environment. In land and forests, there was progress in transferring land owned by SFEs to local communities. In water sector, the irrigation service for poor farmers was reformed, as the government was interested in providing support to this group to mitigate potential negative impacts from the WTO accession. Following up on an item carried over from PRSC 7, institutional responsibilities were allocated to develop a unified national sanitation strategy. A national action plan for personal hygiene, safe water, and environment sanitation was developed, and regulation on private sector participation in rural water supply was issued. In the area o f protecting the environment, management o f sewerage and drainage services was reformed, and biodiversity protection law was issued.
Pillar IV. Modern Governance
66. Formulate Public Debt Management Law consolidating the management of domestic and external debt. Much progress has been made in public financial management reform. The State Budget Law, passed in 2002, transformed fundamentally the expenditure side, whereas the tax reform strategy currently under implementation i s modernizing both tax instruments and tax administration. Less progress has been accomplished in relation to the management o f public assets and liabilities. An important milestone in this direction i s the Law on Public Debt. This Law creates a dedicated debt department in MOF, consolidates the management o f domestic and external debt to a large extent under this department, and strengthens the information sharing among different ministries who have roles in managing debt for historical reasons. Even if incomplete, such consolidation i s important to Vietnam when the economy i s integrating into the world, and buying and selling o f government bonds become a critical ingredient in conducting macroeconomic policy. The Law has been submitted to the National Assembly. The Law i s expected to be approved in the Spring 2009 session, and to become effective on January 1, 2010.
67. Establish the National Bar Association (NBA), with governing documents and structures approved by the community of lawyers. This trigger i s based on the Judicial Reform Strategy to 2020, which refers to the need o f creating favorable legal conditions to promote the self-management status o f lawyers’ organizations, while enhancing their responsibility towards their members. The trigger i s considered important to build institutional momentum for further legal and judicial reform. I t i s expected that self-management by the NBA wi l l bring new dynamics for the profession by building competencies and providing training, establishing standards for quality o f legal services, and demanding stronger administration o f justice and overall respect for the rule o f law. Regional seminars have been held to disseminate election rules for the constitutional congress o f the new NBA, and provincial bars have discussed the draft charter. Representatives for al l provincial bar associations have been elected for the constitutional congress. A first National Congress was held in May 2009, which adopted the governing documents, including the charter and code o f conduct.
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68. In addition to the two prior actions discussed above, the dialogue in modern governance pillar also included discussions in the areas o f planning processes, public financial management, legal development, public administration reform, and fighting corruption. There was a revision o f investment laws and promotion o f participation and result-based approach in the planning process. There was also progress in introducing the modern treasury and budget management system, and improving the state audit planning. In legal development, c iv i l judgment executions were strengthened. In public administration reform, administrative procedures were simplified and principles o f merit-orientation in civi l service management were adopted. A comprehensive anti- corruption strategy was adopted to improve governance.
Triggers for PRSC 9
69. During the negotiation o f the proposed credit, an agreement was reached on a l i s t o f measures that w i l l in principle be supported by PRSC 9. These measures are grounded in the SEDP and other key documents and strategies that reflect measures to mitigate the impacts o f the global economic crisis. The l i s t also builds on the progress made in the policy dialogue with government over the current PRSC cycle. The set o f measures are chosen because o f their strategic importance to attain the development objectives o f the SEDP towards the end o f the five-year cycle. They should not be interpreted as conditions, but as a guide to focus the policy dialogue during the next 12 months. Progress towards meeting the triggers w i l l be assessed in the second half o f 2009 in order to launch the formal preparation o f the next operation in the series.
70. Adopt regulation on State-owned Economic Groups for better corporate governance, exercising of the state-ownership rights, and supervision. The MPI i s drafting a decree regulating State-owned Economic Groups, which w i l l be an important element in SOE reforms. I t i s expected to strengthen separation between the regulator and the entity that exercises the ownership rights, improve corporate governance o f the SOEs, and introduce market discipline in running these entities.
71. Revise regulations to better assess commercial banks’ portfolio risks, enhance public disclosure, and strengthen supervision. The revision o f Decision 493 (on loan classification and provisioning), Decision 457 (on prudential ratios), and the Law on Credit Institutions are expected during PRSC9 period. The changes w i l l help: (i) better assess the quality o f assets and financial health of the banks; (ii) improve disclosure to public o f financial results; and (iii) enhance supervision o f credit institutions.
72. Produce cost estimates and conduct public consultation on full-day schooling for primary education. For primary education, one o f the most pressing and compelling issues facing Vietnam i s full-day schooling. The government i s committed to this agenda, and i t i s important to bring to the forefront the implications that i t w i l l have. Producing cost estimates i s a pre-requisite for the development o f a full-day schooling roadmap.
73. Adopt national standards and establish a unified licensing system for health care practitioners. The Ministry o f Health (MOH) plans to adopt the national standards through a ministerial circular, to become effective by January 2010. The most suitable certification model for Vietnam i s s t i l l being debated. I t i s expected that the certification w i l l not only cover doctors who are managers in private hospitals (as currently), but also be extended to al l health care practitioners, both public and private. Advisory Boards at central and provincial levels w i l l be established. M O H also plans to establish a unified licensing system for central to provincial levels, with the mandate o f certifying health practitioners. The system wi l l strengthen the technical quality o f health practitioners, thus, to ensure the quality o f service delivery. The standards and system are expected to be consistent with the Law on Examination and Treatment, which i s expected to be adopted by the National Assembly by end 2009, but if necessary, MOH wi l l prepare a revised regulation by May 2010.
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74. Establish indicators, identify gaps, and adopt a plan to address them in monitoring of gender equality in priority areas. This trigger i s a pre-requisite for effective implementation of the Gender Equality Law and i t s decree on measures to ensure gender equality which i s under preparation. MOLISA has issued a plan to re-organize/ reunite the current National Committee for the Advancement o f Women (NCFAW) network at the local levels (currently under the MPI and the Vietnam Women’s Union (VWU)) in 2009 and 2010 which could be a reliable resource for data on gender equality at local levels. The priority areas are poverty reduction, labor, and land-use rights certificates. Progress i s also expected in the areas o f social services and women’s representation in administrative agencies.
Area
TABLE 7: TRIGGERS FOR PRSC 9
Policy action
State sector reform
Financial sector reform
Adopt regulation on State-owned Economic Groups for better corporate governance, exercising o f the state-ownership rights, and supervision
Revise regulations to better assess commercial banks’ portfolio risks, enhance public disclosure, and strengthen supervision
Education Produce cost estimates and conduct public consultation on full-day schooling for primary education
I Adopt national standards and establish a unified licensing system for health care practitioners
Gender Establish indicators, identify gaps, and adopt a plan to address them in monitoring o f gender equality in priority areas
75. Develop a plan to continue the current National Targeted Program for rural water supply and sanitation, which focuses on promotion of rural sanitation and addresses personal hygiene. The government i s considering three options after the Rural Water Supply and Sanitation
Water and sanitation
Environment
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Develop a plan to continue the current National Targeted Program for rural water supply and sanitation, which focuses on promotion o f rural sanitation and addresses personal hygiene
Issue guidelines for efficient use o f water resources to accompany the irrigation services fee waiver policy
Public financial management
Legal develonment
Formulate regulation for internal audit development and implementation, defining organizational responsibilities
Enhance access to information by the public and specify the mechanisms
Public administration reform
Issue regulations and approve pilot schemes to strengthen competition, merit- orientation, and transparency in the recruitment, appointment, and promotion o f civi l servants
Fighting corruption
~~
Carry out annual procurement compliance and performance audits and make public the findings, adopt a procurement code o f ethics for participants, and launch an open access electronic bidding system
(RWSS) NTP II completion in 2010, namely, (i) having a new NTP ITI, or (ii) extension o f the NTP 11, or (iii) having a new national RWSS program. MARD (possibly in cooperation with MOH, MOET and the Ministry o f Construction (MOC)) i s expected to develop a plan to undertake an RWSS program after 2010 as an expansion o f NTP II, which focuses on sanitation and addresses personal hygiene to ensure that by 2015 Vietnam w i l l achieve the Millennium Development Goal in water supply and sanitation. In addition to this, many o f the issues which are relevant and important for the rural water and sanitation such as rural sanitation, drinking water quality, RWSS Operation and Maintenance (O&M) and privatization, w i l l be discussed during the process o f developing such a Beyond NTP 11 program.
76. Issue guidelines for efficient use of water resources to accompany the irrigation services fee waiver policy. A regulation (Decree 115/2008/ND-CP) was issued in 2008 to provide financial relief to poor farmers through a policy o f irrigation services fee waiver. There i s a concern, however, that this policy reduces farmers' perception o f the economic value o f irrigation water and water services and diminishes incentives to conserve water. A situation o f water scarcity already exists in some crucial river basins, and irrigation i s the largest user o f water resources. Therefore, guidelines for water use efficiency would be important in implementing the Decree 115. MARD i s to issue these technical guidelines, to complement the Circular 36 issued by the MOF, which provides financial guidelines.
77. Formulate regulation for internal audit development and implementation, defining organizational responsibilities. Progress in internal audit was included one o f the most urgent reforms in the latest CFAA jointly prepared by the government and donors. This issue becomes more important if the government intends to decentralize further to the local levels. The legal framework on internal audit i s weak with no clear definition o f the concept, scope and nature o f internal auditing and i t s role in the internal control framework o f the government. Without legal clarity, agencies are hesitant in establishing and operating an internal audit function. In the meantime, there i s a need to review the responsibilities for directing internal auditing in the public sector between MOF and the State Audit o f Vietnam (SAV). SAV i s chairing the preparation o f a decree on organization and operation o f internal audit, which i s now in i t s f i r s t draft.
78. Enhance access to information by the public and specify the mechanisms. The Law on Access to Information i s expected to be submitted to the National Assembly for discussion in May 2010. The Law should increase access to timely and accurate information which i s essential to prevent and detect corruption. The Law i s expected to enhance access to information by: (i) stipulating types o f information made public; (ii) specifying the mechanisms to access information, including automatic disclosure and disclosure upon requests; and (iii) outlining responsibilities for oversight and monitoring access to information.
79. Issue regulations and approve pilot schemes to strengthen competition, merit- orientation, and transparency in the recruitment, appointment, and promotion of civil servants. The Law on Civ i l Servants, adopted by the National Assembly in November 2008, i s a major step towards improved quality o f c iv i l service. The Prime Minister's Decision 365 o f March 2009 adopts an action plan for the implementation o f the Law. The plan instructs issuance o f 11 implementing decrees and development o f three proposals on piloting new human resource policies. This trigger i s expected to achieve: (i) development o f implementation decrees; (ii) introduction o f new human resource policies; and (iii) approval o f pilot programs specifying institutional arrangements, mechanisms, duration, and resources.
80. Carry out annual procurement compliance and performance audits and make public the findings, adopt a procurement code of ethics for participants, and launch an open access electronic bidding system. With the establishment o f the Law on Procurement in April 2006, the Government o f Vietnam has been trying to ensure compliance by procuring entities and improve
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efficiency in the procurement process o f public investment. A sound public procurement system i s also a key element in the context o f fairness while preventing corruption. I t i s critical that there i s increased efficiency, transparency, fairness, and accountability in the procurement process o f public investment in order to foster the confidence o f the public in government institutions.
I Box 1. Good Practice Principles for Conditionality
Stakeholder consultations were held in February 2009 in Hanoi in the context o f 2009 Development Policy Lending Retrospective, conducted by the Operations Policy and Country Services Department o f the World Bank.
Ownership. There i s general agreement across the stakeholder groups that the PRSC series have been firmly rooted in the Government’s own reform agenda, as expressed first through the CPRGS and then the SEDP. In both the donor and NGO consultations, participants mentioned that this was “best practice.”
Harmonization. Alignment to the CPRGS and the SEDP helped development partners work more coherently in support o f government outcomes. There was general acknowledgement that the PRSC operation was a complex one, bringing together multiple ministries and donors. Government participants were particularly appreciative o f donor efforts to coordinate assistance around the SEDP and PRSC. There was s t i l l concern over the current framework for accountability, i.e. the PRSC framework being similar, but not identical, to the SEDP monitoring framework. There were views that donors should resist the temptation to use independent monitoring mechanisms. Inputs from NGOs emphasized how accountability works in practice, outlining the need to engage alternative and independent viewpoints. Donors also emphasized how harmonization could be improved, suggesting a more structured approach to engagement in the PRSC process. This would enable “newcomers” to the process (which grows annually in terms o f number o f participants) to understand better their roles and obligations.
Customization. The general sense was that the process had become increasingly tailored to the country priorities. The need to balance the wish to promote desirable reforms and the respect for the country’s priorities, perhaps described as “the art o f the possible,” was recognized. A repetitive theme refers to building the analytical capacity within the Government, so that the Government, rather than development partners, can lead the process o f determining which actions should be prioritized in the agreements. Currently the prioritization and sequencing o f actions and triggers was undertaken more by donors than by the Government, although the Government owns the broad agenda from which the PRSC operations are derived.
Criticality. The size of the policy matrices was kept minimum compatible with an active policy dialogue across the reform agenda. A multi-sector, multi-agency, multi-donor operation i s likely to need a spread o f “benchmarks” in order to keep the operation inclusive and motivating for al l participants. While this number i s higher than in other countries, this i s justified in Vietnam, given the breadth o f its reform program and the maturity reached by the PRSC process. With two dozen line ministries and government agencies and a dozen co-financiers, drastically narrowing the focus o f the policy dialogue, concentrating on just a few policy actions would amount to demobilizing a large portion o f the constituency for economic reform. The Bank and all co-financiers use the same policy matrix to decide on their level o f support, thereby providing a single harmonized platform for the policy dialogue and disbursements.
Transparency and predictability. Both predictability and transparency had increased over recent years. The PRSC process has led to disbursements to the budget on an annual basis, thus meeting the objective of aligning aid to domestic budget cycles. Since PRSC 2, commitments were made in June o f each year, which i s the time when the preparation o f the budget starts. The budget i s approved b y the National Assembly towards November, for the following calendar year. The submission to the National Assembly already factors in the amount o f resources expected from PRSCs. Although the World Bank inputs were predictable, there was less predictability over the timing and level o f co-financier resources that would be available. Not al l donors were able to commit to financing beyond the current years and as levels o f co-financing increase, this adds an element o f uncertainty into the operation.
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VI. OPERATION IMPLEMENTATION
POVERTY AND SOCIAL IMPACTS
81. The reforms supported by the PRSC series have led to a fundamental transformation o f the Vietnamese economy, including increasing reliance on market mechanisms and growing integration into the world economy. Vietnam’s rapid economic growth i s a testimony to the soundness o f the program. This rapid transformation, however, i s bound to have large social impacts: greater economic fluctuations from increased integration with world markets, potential financial instability due to exposure to capital flows, growing inequality as agglomeration effects play out and the economic hubs o f the country sail ahead, and possible vulnerabilities as market mechanisms develop throughout the social sectors. The PRSC operations address these concerns through various measures such as strengthening and extending the coverage o f the pension programs and health insurance, taking measures to improve the stability o f the banking sector, and improving the monitoring o f capital flows, and developing policies to mitigate potential adverse effects o f integration.
82. There are winners and losers in any reform process and the reforms supported by this series o f PRSCs seek to maximize the number o f families and individuals who participate in Vietnam’s economic transformation and mitigate the harmful effects. The country’s rapid rate o f poverty reduction bears witness their success. However, some groups may benefit less or in some cases suffer adverse impacts. In cases where the reform program affects identifiable groups, the PRSC support measures to offset adverse impacts. As tuition fees for secondary and tertiary levels were increased to ensure better quality service, scholarship programs for the poor were enhanced. In the health sector, subsidies to cover the insurance premium for the poor and near poor were increased. The issues relating to environmental protection and pollution control were discussed as a priority, as the poor are generally the f i rs t to suffer from deteriorating conditions. A fee waiver policy for poor farmers was developed, to provide relief to poor farmers who may be adversely affected by the WTO accession.
83. Assessing the wider social impacts o f a transformation o f this magnitude i s challenging. Good tools exist to assess the consequences o f trade liberalization, an import‘ant component in earlier phases o f the PRSC cycle. However a retrospective assessment o f the studies conducted at the time concludes that they were not able to foresee the actual consequences. In a s imi la r vein, more recent attempts to identify ex ante who wins and loses from the WTO accession have proven inconclusive. The WTO accession matters because i t brings competition in services, raises standards or increases financial openness, and none o f this can be easily captured with the tools at disposal. A review of a dozen studies based on computable general equilibrium models and almost as many sectoral studies (reported in VDR 2006 Doing Business) shows that few results are robust across the studies, suggesting a high sensitivity to the methodology and assumptions used. T o fill this gap, increasing emphasis has been put on monitoring and evaluation in al l areas o f the program (linked to the Monitoring and Evaluation (M&E) framework in the SEDP) and the team recently completed a broader review o f social protection issues (VDR 2007 Social Protection).
84. The Social Protection VDR updates Vietnam’s poverty assessment. I t identifies the main shifts and shocks being faced by the Vietnamese economy through a period o f fundamental transformation, rather than dealing with potentially adverse impacts on a policy- by- policy basis. Identifying the right policy responses i s also challenging. In many other parts o f the world, cash transfers (conditional or otherwise) are seen as a clean tool to achieve compensation and enforce the Pareto principle. However, Vietnam makes limited use o f cash transfers. This i s partly due to implementation issues: handing over cash i s fraught with fiduciary risk, as shown by a recent attempt to make one-time payments (so-called Tet bonuses) to poor households so as to offset the economic downturn. There have been numerous reports o f misuse o f these funds and there i s little evidence that Tet bonuses have helped to offset the emerging consequences o f the recent economic downturn.
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More generally, there i s a concern about the dependence created by cash transfers, and a vision that resources should be better used by promoting the participation o f the poor and near-poor in universal programs, or increasing spending on local infrastructure and services in poorer regions o f the country. In terms o f the former, households classified as “poor” according to criteria developed by MOLISA are eligible for social services that would otherwise have a cost (e.g. exemption o f school fees, payment o f health insurance premium, access to credit without collateral). Community development programs like Program135 and the recently initiated 61 Poor Districts Program are examples o f the latter.
85. The PRSC cycle, and the proposed operation in particular, builds on this approach through specific measures to improve the design and implementation o f universal programs, further develop the information base for identification o f beneficiaries, and strengthen public financial management and accountability so that resources can be channeled and used effectively. Under the Social Inclusion Pillar, key policy actions are included for education, health, and social security, with particular focus on ensuring equity o f learning outcomes and the relevance o f curriculum in the education sector, also making sure that al l children, including those from the most disadvantaged groups, have access to full day schooling at the primary level. Governance module included in the Vietnam Household Living Standards Survey (VHLSS), and attempts to establish indicators and identify data sources in the area o f gender equality, all contribute to the overall efforts o f improved monitoring and evaluation. In the area o f public financial management reforms, a modem system to manage the Treasury and state budget i s being introduced, auditing o f state budget execution i s being improved, and in the future operations (PRSCs 9-10), procurement reforms w i l l also be tackled.
86. In addition to specific measures in the policy matrix, efforts rely on a range o f analytical work and TA implemented in close cooperation with specific ministries, local research institutes attached to these ministries, and academia. The World Bank has an ongoing program o f capacity building and technical assistance with the GSO, which supports regular conducting o f the VHLSSs (VHLSS 2002, 2004, 2006, and 2008) and related poverty assessments. Recent support to GSO focuses on improving the system for collecting price data and calculating regional cost-of-living indices for better poverty measurement, and on supporting quarterly Labor Force Surveys (LFS) to monitor the emerging labor impacts o f the global financial crisis. TA i s also provided to ILSSA, the research institute that supports MOLISA, to streamline and ensure greater consistency in the system used to determine which households are categorized as poor and thus receive fee exceptions and other services. Social protection units in MOLISA also receive TA for capacity building, and additional support i s provided for nuts and bolts o f modem social protection, including social security reform. In addition to policy actions included in the PRSC operations, a social security reform credit i s under preparation.
87. In parallel to the fundamental social transformations from rapid growth, reforms in PRSC 8, and the PRSC cycle more generally, w i l l come under pressure from increased economic turbulence. Overheating in the late 2007 and ripple effects o f the global financial crisis starting in 2008 are examples o f consequences o f being more open to the rest o f the world. Social impacts o f the global economic slowdown are s t i l l emerging and i t i s important to monitor these carefully over the coming months. The World Bank i s working along three lines to address these issues: first, strengthening core statistical systems and scaling them up to respond to the information needs o f the policy process; second, making creative use o f existing information (e.g. administrative data and other sources) to assess immediate impacts in key sectors and; third, supporting complementary rapid assessments and identifying emerging areas o f concern. In addition to the ongoing support to the GSO, the World Bank i s working with the Vietnam Academy o f Social Sciences (VASS) and Oxfam Great Britain to implement a series o f rapid assessments focusing on workers and f i rms . I t i s also working with the MPI to build a database and to initiate regular monitoring o f f i r m s in Vietnam’s Industrial Parks ( I p s ) and Economic Zones (EZs). The World Bank also supports one-off exercises to assess employment vacancies in major urban areas, and changes in levels o f international migration. Early results from recent rapid assessments suggest that informal sector and migrant workers in urban areas have been
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particularly hard hit by the economic slowdown. Many migrant workers have returned to rural “sending” communities, but assessments suggest that rural areas may be hard-pressed to absorb the extra labor. VASS has distributed init ial findings to the National Assembly and has provided several in-depth briefings to members.
88. The findings o f ongoing work on impacts o f the economic slowdown wi l l feed into the policy dialogue for PRSC 9, especially as the first matrix i s compiled in September, and initial discussions take place with the government and PRSC stakeholders.
ENVIRONMENTAL ASPECTS
89. The proposed operation i s likely to have.overal1 positive effects on the environment, forests, and other natural resources. The Task Team carried out an analysis4, as required under Operations Policy 8.60, to determine if there are significant effects on the country’s environment, forests, and other natural resources. “Significant effects” are defined in the Toolkit as “environmental changes o f sufficient magnitude, duration, and intensity as to have non-negligible effects on the natural resource base and on human welfare.”
90. A number o f policy actions raised at least the theoretical possibility o f negative environmental impacts. Such potential impacts have been reviewed carefully by the Bank as part o f the preparation o f related lending operations. For example, an Environmental Assessment was carried out in 2008 under the System Efficiency Improvement, Equitization and Renewable Project (P066396). Such works discount the possibility o f any l ikely negative impacts from any o f the policy actions (see table below).
91. There are a number o f environmental policy actions that are included precisely with the objective o f generating a significant positive environmental impact. Others, while not being strictly environmental, are also expected to result in positive environmental externalities. The following table provides summary information on these triggers and policy actions, the intended positive impacts, and an analysis o f status (likelihood o f achievement and actions being taken or to be taken to enhance likelihood o f a significant impact). Policy actions that are considered to be positively significant for the environment are in bold. Other policy actions are not l ikely to generate significant positive impacts either because their implementation i s slow or off-track or the environmental impacts o f the policy are minor.
World Bank Toolkit “Assessing the Environmental, Forest, and other Natural Resource Aspects of Development Policy Lending” (World Bank, 2008).
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TABLE 8: ASSESSMENT OF ENVIRONMENTAL IMPACTS OF POLICY ACTIONS
Policy action Adopt pricing system for small producer renewable energy. Procure more energy- efficient equipment (trigger)
Enhance treatment o f medical waste discharged by hospitals at both central and local levels (benchmark)
Better assess the quality o f forest resources nationwide (trigger) and transfer more SOE-held forest resources to local stakeholders (benchmark)
Develop a unified national sanitation strategy (benchmark), and Adopt performance contracts for sewerage (benchmark)
Approve the NTP on climate change (trigger)
Improve biodiversity legal framework (benchmark)
Intended or likely impacts Certainly should have a significantly positive impact by providing incentives for renewable energy which displaces both carbon and air pollution emissions that might otherwise be generated from the most likely alternative energy source in Vietnam, namely coal. If as a result, energy prices were to rise, such a measure could in theory trigger recourse to dirtier fuels.
Reducing discharges o f hazardous wastes and other discharges could potentially have a significant positive benefit.
These policy actions have the potential o f bringing about positive impacts if they result in better forest management. They could generate negative impacts if they triggered more, or more exploitative, use o f forests.
Promoting more unified and efficient approaches to sanitation i s intended in part to lead to reduced pollution loads.
By spurring and facilitating national and sub-national actions and strategies on climate change, the NTP will certainly lead to more and better adaptation measures. Any measure to promote better conservation o f biodiversity w i l l have obviously positive environmental conseauences.
Status & actions being taken Positive impacts o f this achieved measure w i l l probably be felt only gradually over the corning years as renewable energy sources from small producers become more important. An IDA project on renewable energy w i l l help to further production o f renewable energy by small producers and includes many measures to mitigate any possible environmental consequences o f this sector’s development in Vietnam. Energy prices in Vietnam wi l l not be affected by the small amounts of energy that could be generated by small producers o f renewable energy.
The regulation i s issued but i t wi l l be many years before i t w i l l bring about actual positive environmental benefits.
The Bank works extensively in the forest sector in Vietnam (ongoing Forest Sector Development Project) and has carried out analytical work on forestry governance (FLEG program) and on improving forest management (in context o f development o f a new Sustainable Forest Land Management Project). The proposed reforms in forest sector, by transferring more control to local populations with a stake in long-term sustainability o f the resources, w i l l certainly result in better forest management. Because o f the slowness with which these reforms are taking place, the positive impacts from these PRSC policy actions are not likely to be significant.
The likely positive benefits from more coherent approaches to sanitation strategies are likely to have significantly positive environmental impacts.
Rapid and concerted progress on the NTP suggests this policy action will bring about significant positive impacts.
A new biodiversity law has been passed but the current lack o f regulations does not mean there are likely to be any short-term measurable benefits.
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IMPLEMENTATION, MONITORING AND EVALUATION
92. The PRSC operations have been included in a number o f evaluations o f budget support operations, policy lending, and application o f good principles in conditionality. A Quality at Entry Assessment (QEA) for the first PRSC cycle was conducted shortly after the approval o f PRSC 2. The QEA rated the proposed series as highly satisfactory in terms o f i t s strategic relevance and approach and to i t s poverty reduction and social inclusion aspects. All other dimensions were considered satisfactory. A review o f Implementation Completion Reports (ICRs) by the Independent Evaluation Group (IEG) reached similar conclusions. Based on the relevance and achievements under most objectives, the overall outcome o f the first PRSC cycle was rated satisfactory. Another assessment was conducted after PRSC 4, as a part o f a broader evaluation o f general budget support, commissioned by 24 donors and conducted by the University o f Birmingham in seven countries. This assessment showcased Vietnam as a successful example o f government-donor collaboration, with strong impact on policies. The assessment for Vietnam was updated after PRSC 5 by the same research team, by then working in a consulting firm (Mokoro). This update was financed by the World Bank as an input for the preparation o f the current PRSC cycle. The updated assessment concluded that PRSCs were effective at supporting policy reforms, at l inking policy and budgets, at strengthening financial management, and at helping harmonization. The inclusiveness o f process was highly valued. At the same time, PRSC operations were judged less effective at supporting policy breakthroughs and at helping policy implementation. Two more evaluations are ongoing at present, both at the global level. One o f them i s by IEG, and i t s findings w i l l soon be submitted to the Board. The other i s conducted by the World Bank for 2009 Development Policy Retrospective. In this context, consultations with major stakeholders were conducted in Hanoi in February 2009.
93. Progress in the implementation o f the reform agenda in the PRSCs 6-10 i s monitored through a set o f development indicators, as described in the Program Document for PRSC 6 (2007). The indicators were chosen based on the monitoring framework for the SEDP, but they are fewer in number. In the case o f governance, the set o f indicators goes beyond the SEDP monitoring framework. This was an area where the experience in monitoring was limited, and the use o f enterprise and household surveys, as opposed to administrative self-reporting, was not yet common. At the beginning o f this PRSC cycle, i t was deemed impractical to monitor the progress towards development outcomes on an annual basis because collecting and processing survey data take time, and policy reforms are unlikely to yield outcomes immediately. The Executive Board approved that the assessments be done twice during this PRSC cycle, towards the middle o f the cycle and at the end o f it.
94. This year being the middle o f the cycle, a midterm review o f the progress towards development outcomes i s conducted alongside the preparation o f PRSC 8. PRSCs are designed to be holistic, as the channels through which outcomes can be produced are diverse, and causes and effects do not always have a linear one-to-one relationship. As such, this review does not attempt to dissect which policy action led to progress in which indicators, but give a global view o f the progress made in attaining the targets define at the outset o f this SEDP and PRSC cycle.
95. Overall progress towards achieving the development outcomes has been impressive (see Annex 3). Setting out a five-year framework to monitor progress quantitatively i s itself an accomplishment for a developing country. Even though data availability i s s t i l l an issue, the government has made efforts to switch from administrative reporting to statistical and survey-based monitoring and evaluation. And in the areas that data are already available, many have made strides towards achieving the targets.
96. At the time o f writing, 12 indicators are s t i l l missing out o f 51. The missing data can be classified into two groups. The first group has conceptual issues on what constitutes the indicator.
27
The second group has well-defined indicators, but they have not been updated since the benchmarking exercise or have stale updates.
97. The first group includes client satisfaction with customs, people l iving in urban slums, the quality o f surface water and air, and extent o f unreported public expenditure. In the f i rst two, how the baseline figures were constructed i s not clear. Preparations for a new client satisfaction survey for customs service users are underway, but the results w i l l not be available until 2001, and i t i s not clear that they w i l l be comparable to the benchmark figure. The VHLSS 2008 wi l l have information on people l iving in slums, but again, the comparability with the benchmark figure i s questionable. The last three indicators were under development when PRSC 6 was presented to the Board in 2007. The public financial management indicator, i t was expected that a Public Expenditure and Financial Accountability (PEFA) exercise would have taken place in time for a midterm review, so that the quantitative indicator can be defined, but i t has not been the case. A workshop i s planned in September 2009 to discuss how to develop good indicators that can be followed systematically over time. The counterparts for these indicators are MONRE, the Vietnam Environmental Protection Agency (VEPA), and the MOF.
98. Many indicators in the second group o f missing information and some o f the stale information w i l l be updated when the results o f VHLSS 2008 and Enterprise Survey become available. They were conducted in 2008, and their results are expected to be released in the second half o f 2009. Twelve indicators depend on the results o f the VHLSS, and three depend on the investment climate module o f the Enterprise Survey. The investment climate module in the 2008 survey was not identical to the one used in the 2006, so some data comparability issues may arise. Some o f the indicators in the second group relate to administrative information, which i s s t i l l being collected. More information on three o f them i s expected to become available between now and the Board presentation. The indicators concerned are SOE performance, provinces adopting modern planning, and provincial departments with one-stop shop.
FIGURE 1. SUMMARY OF PROGRESS TOWARDS DEVELOPMENT OUTCOMES
rn Progress w Mixed or deterioration 0 No progress 0 Missing
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99. Among the 39 indicators for which updated figures are available, the progress i s encouraging. Twenty-nine indicators have made strides towards achieving the targets, seven o f which have already attained the goals. These seven are: (a) export orientation; (b) quality o f loan portfolio in the banking sector; (c) private domestic investment; (d) learning outcomes in primary school; (e) river basins with inter-provincial management; (0 share o f debt in GDP; and (g) fraction o f civi l judgments enforced. O f the ten indicators that have s t i l l ways to achieving the targets, there i s no quantifiable progress in six: (i) share o f strategic investors’ ownership in SOCBs; (ii) proportion o f children stunted or underweight; (iii) protection o f biodiversity; (iv) provincial screening of, public investment; (v) adoption o f integrated regional planning; and (vi) public agencies with internal auditing functions. Four indicators are showing mixed results or deterioration: (1) stock market capitalization; (2) private enterprises away from the growth centers; (3 ) share o f female delegates in the National Assembly; and (4) forest quality.
100. , Whether the targets set out at the beginning have already been achieved or not obviously depends on how ambitious the targets were and the nature o f the indicators. For example, some indicators tend to make linear progress while others might have a J curve or a step-function. Therefore, the fact that they are already achieved should not be a reason for complacency, nor should slow progress be deplored without examining the reasons. O f the ten lagging indicators, two are due to market conditions, many are due to the slow nature o f progress. The indicators relating to provincial level reforms are making slower progress than those at the central level, but i t i s not clear how the PRSC process might be able to address this issue more adequately. The deterioration in the forest quality and lack o f progress in internal auditing functions are the two worrisome indicators, and these are the areas which the design o f the PRSCs 9-10 could and should be tailored to address.
FIDUCIARY ASPECTS
101. Fiduciary arrangements. The fiduciary r isks o f the current public financial management systems (budgeting, accounting, reporting, and auditing) are assessed as moderate. Since the IMF does not currently have a program in Vietnam, i t i s not possible to rely on i t s assessment o f the control environment o f the SBV. However, the enactment o f the Audit Law in 2005 helps address the issues related to audit and accounting arrangements. The Audit Law has established the SAV as an independent institution reporting to the National Assembly with the Auditor General being appointed and dismissed by the National Assembly. Audit reports were made public for the first time in 2006. The SBV i s subject to auditing by SAV on an annual basis, but under the current laws, the audited financial statements and audit reports o f SBV are treated as a national secret and are not published.
102. Deposit account (DA). To address fiduciary r isks in the foreign exchange control environment, the Borrower w i l l open and maintain a dedicated DA in U S dollars for the Borrower’s use once the Credit i s approved by the Board. The DA wi l l form part o f the country’s official foreign reserves. An equivalent amount w i l l be credited to an account o f the government available to finance budgeted expenditures. If after deposit in the DA the proceeds o f the Credit or any part thereof are used for ineligible purposes, as defined in the Financing Agreement, the Bank w i l l require the Borrower to either return that amount to the DA to be used for eligible purposes, or refund the amount directly to IDA.
103. The Bank w i l l retain the right to seek an independent audit o f the DA established in SBV by an auditor acceptable to the Bank to seek reassurance on the accuracy o f the information relating to transaction from this account that was provided by the Borrower, including accuracy o f exchange rate conversions; and that funds in this account were not used to finance expenditures excluded under the Agreement. The Government w i l l furnish to the Bank as soon as available, but in any case not later than six months after the deposit o f the single tranche credit amount into the foreign currency DA, a certified copy of the audit report, o f such scope and in such detail as the Bank shall reasonably request .
29
DISBURSEMENT AND AUDITING
104. The Credit w i l l follow IDA disbursement procedures for development policy lending operations, and the Credit proceeds w i l l be disbursed in compliance with the stipulated release conditions. Various measures have been taken to ensure that the overall fiduciary policies and institutions are adequate to proceed with support from IDA and other development partners. Analytical underpinnings for the operation include the 2002 Country Procurement Assessment Review (CPAR), the 2005 PER-FA and the CFAA (2007). Disbursement w i l l not be linked to any specific purchases and no procurement requirements w i l l have to be satisfied.
Disbursement, reporting and auditing arrangements.
RISKS AND RISK MITIGATION
105. The proposed operation i s a vehicle for the World Bank, and the donor community more broadly, to stay engaged with a client that has delivered an outstanding performance in terms o f economic growth and poverty reduction. I t also recognizes the commitment o f the government to pursue and deepen i t s reform strategy. Active engagement should strengthen the coherence o f the program, especially because the effectiveness o f sectoral policy actions hinges on the success o f more fundamental governance reforms in areas such public financial management, public administration reform and legal and judiciary development. Engagement should also help improve the content o f specific policy actions, to ensure the timeliness o f their adoption, and to monitor the impact o f the overall program on broader development outcomes. The value o f this engagement i s all the more important given that this would be the last cycle o f general budget support operations in concessional terms, hence providing an exceptional window for high-level policy access in a country that i s not aid dependent.
106. At the same time, Vietnam faces new challenges. The country i s now confronted with an unprecedented global financial crisis, although i t seems to be faring better than i t s more export- dependent neighbors in the region so far, partly due to the strong adjustment i t had implemented in 2008 to address the economic overheating resulting from massive capital inflows. However, Vietnam wi l l not be unaffected by the crisis; exports have already slowed down, and €31 and remittances from abroad are expected to decline. The government i s administering a fiscal stimulus package, which raises challenges both on financing and on implementation. The Wor ld Bank intends to assist the government in implementing the stimulus through both technical advice and financial support. The global financial crisis had already started unfolding when the preparation o f the proposed operation began, and policy dialogue already incorporates some responses, for example, in relation to the more efficient use of state capital and in financial sector reform. By providing resources directly to the budget, the proposed credit should also help the government in mitigating the social impacts o f the economic slowdown.
107. The risk o f balance o f payments problem receded since last year, with rapidly shrinking trade deficit and slower capital inflows diminishing the current account deficit from both sides. International reserves, estimated to be US$23 bil l ion at end 2008 (3.6 months o f imports), appear adequate. In the f i rst quarter o f 2009, there was a slight trade surplus, amounting to a small current account surplus. The authorities are also cautiously moving in the direction o f a more flexible exchange rate regime. The proposed credit contributes to further the integration o f Vietnam into the world economy by supporting a more conducive environment for businesses and financially sustainable arrangements for infrastructure development. These actions should help increase the efficiency and competitiveness o f Vietnamese f i r m s .
108. The risk o f financial sector turbulence had increased as a result o f the asset price bubbles o f late 2007 and early 2008. While credit risk rating by commercial banks i s not yet up to the international standards, the SBV has strengthened supervision and tightened prudential rules. Measured on the basis o f quantitative indicators, the share o f N P L s has declined since September
30
2008. An interest rate subsidy scheme introduced as part o f the stimulus package has amounted to a restructuring o f enterprise debt incurred during the overheating period in 2007-08, mitigating possible deteriorations in bank portfolios. In addition to the policy actions included in this operation, the World Bank i s also supporting banking sector reforms through an investment credit and TA.
109. The risk that governance reforms do not keep pace with rapid developments i s probably the most serious in the medium term. Cases o f corruption and social strife are increasingly related to land zoning and land compensation. Tackling this risk requires rapid progress in transparency at various levels, from regional planning to infrastructure master plans to land use to appropriate taxation to the monitoring o f assets o f the relevant civi l servants. This area receives special attention in the proposed operation, including the recommendation to increase transparency and ensure competition when the state equitizes i t s assets or allocates resources, and several actions to improve transparency in public administration.
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ANNEX 1 : LETTER OF DEVELOPMENT POLICY
STATE: BANK OF ~ I E T ~ ~ ~ Office . 47 - 49 Ly Thai To. Hanoi
TCA (84-4) 8242 479 FCIX : (84-4 8268 765
Mr. Robert B. Zoellick President The World Bank Washington, DC
I
Dear Mr. Zoellick:
Starting in 200 1, the World Bank and the donor community have supported the economic renovation program of Vietnam through a series of seven Poverty Reduction Support Credits (PRSGs).
During this period, our economy g e w at an annual rate in excess o f 7 percent per year in r e d terms. The h c t i o n of the popularion living below the international poverty line, which stood at 38 percent in 1998, had declined to less than 16 percent by 2006, with the trend continuing. This period has also seen considerrable progress in social indicators, with Vietnam now being on a solid track to attain or exceed most if not all o f the Millennium Development Goals. Considerable progress was made in da t i on to business development, public administration reform and the strengthening of governance more broadly.
As you may know, ow country has weathered a major macroeconomic turbulence in late 2007 and early 2008, when we experienced a surge in capital inflows, resulting in high inflation, a large trade deficit and an asset price bubble. We had successfully managed to stabilize the economy when the global financial crisis broke out. The stabilization effort made our economy more resilient, allowing us to navigate this global crisis better than other countries in the region, Our economy registered a positive, albeit reduced, growth rate in early 2009. We are mobilizing resources to stimulate domestie: demand so that poverty reduction can continue, and there are encouraging signs that growth is regaining momentum. We remain however vigilant of m y developments that can lead to economic inst ty, particularly in the financial sector, and are upgrading OUT capacity to conduct effective macroeconomic policies.
We are also determined to carry on the refom? process that we launched with Doi Moi. Building on the success of this process, Vietnam's Socio-Economic Development Plan (SEDP) for 2006-20 10 was approved by the National Assembly on June 29,2006, In December 2006, the SEDP was presented to the Board o f Executive Directors of the World Bank.
out of low income status by 201 0 and lay the foundations to become an industrial country by 2020. The SEDP aflirms that rapid growth should go hand in hand with improved sustainability, and improved competitiveness of the economy. Importance is attached to the quality o f growth, which should be linked with poverty reduction, culsureti development, comprehensive human development, excrcise of democracy and social equity. The SEDP also aims to narrow the development gaps among regions, step by step, while preserving and improving the environment. We would like to draw your altention to the Chapter IV of the SEDP which provides the Development Orientation of various sectors over the period 2006-2010.
A key goal ofthe SEDP i s to sustain rapid cconomic growth so that Vietnam can move
32
Overall, the objectives, tasks and solutions o f the SERF can be m p p e d on to three pillars, namely, business development, natural resources and the environment, and social
t, Chapter IV highlights the goals, tasks, and solutions for achieving a@kxtltural tr ial modernization, and service sector growth. Chapter VI1 of the SEDP identifies
the roles o f various stakeholders in business development. We aim to create favorable conditions for the development of the private sector without limiting i t s scales, fields or regions. Chapter N.B details the goals, tasks, and solutions for the social sectors, while Chapter N.C identifies goals and policies for the sustainable development o f natural resources and protection o f the environment.
In order to achieve the objectives of economic growth, business development, environmental sustainability and social equity we need to improve the institutional h e w o r k of the socialist-oriented market economy in a comprehensive manner, The measures to this effect are especially highlighted in Chapter E+ The chapter emphasizes legal r e f o m for supporting a m k e t economy, the importance of improving the quality of public administration, and strengthening the fight against corruption.
and agencies for implemcnting the SEDP and the state budget during this year, This resolution af f i rms our commitment to successfully achieving the targets identified in the SEDP.
The tasks listed in this resolution bear a close resemblance with the policy actions and triggers identified in the first two operations in this wries (PRSCs 6-7) and in the proposed credit. Jointly with the following operations in the series, the proposed credit effectively supposts the implementation o f the reform agenda outlined in the SEDP. The proposed credit afso contributes to harmonization, in the spirit o f the Hanoi Core Statement on Aid Effectiveness. Our government appreciates the technical inputs provided through this process, as well a$ the resources to implement policy reforms and the reduced transaction costs in conducting the policy dialogue with the donor community.
Our government therefore requests the Asmiation's assistance through' this eighth PRSC, in recognition for the progress made in the implementation o f our development srnttegy and at the time of fiscal difEculty. We recognize that many challenges lie ahead, but we are confident that we wil l be able to overcome them, We also recognize that the international environment is more uncertain at present and priority needs to be given to economic stability. We hope that we can count on the support o f the Association to address these challenges and difficulties and make progress in the implementation of our reform program.
The government's resolution No. 3/2007NQ-CP identifies the task of various ministries
We look forward to your continued support,
Yours sincereIy,v.
Nguyan ?'&I Gidu Governor
33
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ANNEX 4: SUPPORTING DOCUMENTATION FOR PRIOR AND POLICY ACTIONS UNDER PRSC 8
Area
Global integration
State sector reform
Financial sector reform
Pillar I: Business development
Set up M&E framework for the implementation o f government policies post-WTO accession
Make commercial scale infringements o f patent, trademark rights and rights o f design a crime
Strengthen financial management of SOEs and their investments in other entities, defining the level of such investments
Prepare revised law on State Bank of Vietnam focusing its mandate on and enhancing its autonomy in regard to monetary policy and financial sector stability
a Improve monitoring o f foreign indirect investment b y strengthening prudential rules and supervision for custodians and brokers
Supporting Documentation
MOIT Circular 06/2009/TT-BCT o f March 20,2009 guiding the implementation of Resolution 16/2007/NQ-CP on the government’s action plan to implement some major policies for fast and sustainable economic growth post-WTO accession, which includes an M&E framework.
a The revised Criminal Code submitted to the National Assembly in May 2009 for adoption: Article 170a - Crime o f Infringing upon Author’s Rights and other Related Rights, and Article 171 - Crime o f Infringing upon Industrial Property Rights and Rights over Plant Varieties (Breeder’s Rights).
Decree 09/2009/ND-CP o f February 5,2009 on financial management o f SOEs and state capital invested in other entities (revising Decree 199/2007), limiting the scope and nature o f SOEs’ investment activities outside their main business lines (capped at 30 percent), especially into banking, insurance and securities sectors.
SBV Official Letter dated M a y 20, 2009 clarifying the improvements suggested b y the World Bank of the draft law.
a The 1 lh draft o f the Law on the State Bank o f Vietnam, submitted to the Prime Minister and the National Advisory Council for Monetary Policy.
M O F Decision 121/2008/QD-BTC o f December 24, 2008 regulating the operation o f foreign investors in the stock market.
M O F Decision 124/2008/QD-BTC o f December 24, 2008 regulating the operation o f representative offices o f foreign security companies.
SBV Official Letter No. 5 2 4 4 m - Q L N N dated June 12,2008 to credit institutions allowed to provide foreign exchange services, requesting updated data on foreign exchange transactions o f foreign indirect investors.
Prime Minister Official Letter No. 2675NPCP-KTTH dated April 24, 2009 allowing SBV to establish a Workmg Group on International Balance o f Payment which consists o f representatives o f concerned ministries and government bodies. -
(Continued)
55
ANNEX 4: SUPPORTING DOCUMENTATION FOR PRIOR AND POLICY ACTIONS UNDER PRSC 8 (CONTINUED)
Pillar I: Business development
Financial sector reform (cont.)
Private sector development
Infrastructure
Benchmark
Adopt a contingency plan to address potential adverse effects stemming from the global financial crisis on banking sector
Issue regulation on agricultural extension in disadvantaged areas to promote poverty reduction
Promote S M E development through revising regulations, formulating an action plan for supporting industries, and improving coordination among responsible ministries
Adopt a pricing system for electricity from renewable energy and provide incentives for government procurement of energy- efficient equipment
Supporting Documentation ~ ~~
SBV Plan No. 672RA-NHNN approved b y Government Official Letter No. 36NPCP-KTTH datec January 13, 2009 to ensure the safety o f the banking sector and stability o f macro-economy in the context of global financial crisis: Excerpt on the main objectives and key solutions o f the banking sector.
Prime Minister Decision 162/2008/QD-TTg o f December 4,2008 on agriculture and fishery extension in disadvantaged areas.
M O I T Decision 771/QD-BCT o f February 16,2009 on the establishment o f the Supporting Industry Enterprise Development Center.
Draft Decree to promote supporting industry (mainly SMEs) development and coordination among relevant ministries prepared by MOIT.
Draft Action Plan for the Master Plan on supporting industries formulated by MOIT.
Draft revised Decree 90/2001/ND-CP on supporting S M E s prepared b y MPI and approved in principles b y the Prime Minister in May 2009.
M O I T Decision 18/2008/QD-BCT o f July 18,2008 on Avoided Cost and Standardized Power Purchase Agreement for Renewable Energy Small Power Producers, effective from January 1,2009.
Decision 24/QD-DTDL o f the Electricity Regulatory Agency (under MOIT) of December 24,2008 adopting the avoided cost tariff table for 2009.
The revised Road Law No. 23/2008/QH12 dated November 13, 2008, effective f rom July 1, 2009.
.................................................................................... ................................................................................... " ,....,,. ........................................................................
Revise the road law to improve traffic safety through inter alia better standards and strengthened supervision of commercial vehicle operators
(Continued)
56
ANNEX 4: SUPPORTING DOCUMENTATION FOR PRIOR AND POLICY ACTIONS UNDER PRSC 8 (C ONTI WED)
Pillar 11: Social Inclusion
Benchmark
Formulate education development strategy to 2020 focusing on equity of learning outcomes and relevance of contents
Enhance treatment o f medical waste discharged b y hospitals at both central and local levels
Prepare a strategic plan to ensure prudential and effective investment of social security funds
Operationalize the Anti- Domestic Violence Law b y adopting action plan and issuing guiding regulation
Issue regulation to assign institutional responsibilities and allocate budget for implementing measures in ensuring gender equality
Documentation
MOET Official Letter No. 4178BGDDT-KHTC dated May 22,2009 indicating the close-to-final status of the current draft strategy and confirming some o f i t s key contents.
Politburo Notice No. 242/TB-TW o f April 15,2009 providing the orientation for education and training development towards 2020.
15* Draft o f the national Education Development Strategy 2009-2020 dated April 20, 2009 incorporated instructions f rom the Politburo and comments f rom extensive consultations.
M O H Circular 7164BYT-KCB o f October 20,2008 to enhance the management and treatment o f medical waste discharges.
Decision 40/QD-BYT o f January 6,2009 establishing the Steering Committee for medical waste treatment.
Decicion 207/QD-BYT o f January 20,2009 establishing the Advisory Council for selecting technology for medical liquid water treatment.
VSS Official Letter No. 1458BHXH-KHTC dated May 21, 2009, confirming that the strategic plan was submitted to VSS's Governing Board for comments- the last step before submitting i t for official approval b y the Prime Minister.
Draft Investment Plan for Social Security Funds dated May 18, 2009 incorporated comments from the World Bank in terms o f strategic allocation, performance benchmark, competition and oversight.
D MOCST Decision 4415/QD-BVHTTDL of October 16, 2008 on action plan for MOCST activities to implement the Anti-Domestic Violence Law.
* Decree 08/2009/ND-CP o f February 4,2009 guiding the implementation o f the Anti-Domestic Violence Law.
B Decree 08/2009/ND-CP o f Mayl9, 2009 guiding the implementation o f the Law on Gender Equality
(Continued)
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ANNEX 4: SUPPORTING DOCUMENTATION FOR PRIOR AND POLICY ACTIONS UNDER PRSC 8 (CONTINUED)
Pillar 111: Natural Resources
Benchmark
Transfer State Forestry Enterprise land to local authorities for reallocation to households, ethnic minority groups and private enterprises with focus on poor areas
Issue regulations to ensure financial sustainability o f irrigation services and provide financial relief for poor farmers
Allocate institutional responsibilities to develop a unified national sanitation strategy
..........................................................................................................................................................
Adopt a national action plan for information, education and communication for personal hygiene, safe water and environment sanitation
~ ~~
Approve national target program on adaptation to climate change and allocate institutional responsibilities for its implementation
Adopt regulations for performance contracts for sewerage and drainage at local levels
D Adopt legal framework for biodiversity protection to clearly delineate and better administer protected areas, and to improve community consultation process
Documentation
MARD Decision 185/KL-QLBVR o f March 6,2009 reporting the transfer o f forest in 2008.
Decree 115/2008/ND-CP o f November 14,2008 (replacing Decree 154) on eligible exemption of irrigation charges, methods o f supporting imgation units, irrigation norms, and responsibilities o f the local authorities for water source management.
M O F Circular 36/2009RT-BTC o f February 26,2009 guiding Decree 1 15.
Government Official Letter No. 7695NPCP-KTN o f November 10, 2008, assigning M O C to take the lead in formulation o f a unified strategy and i t s action plan on sanitation.
M O C Decision 77/QD-BXD o f January 22,2009 establishing the drafting team and editing team for the strategy and i t s action plan (led b y Department o f Science, Technology and Environment under the guidance o f a Vice Mnis ter o f Construction).
MARD Decision 734/QD-BNN-TL o f March 18,2009 on information, education, and communication program to implement the National Targeted Program on rural water and sanitation 2006-2010.
...............................................................................................................................................................................................................................................................
Prime Minister's Decision 158/2008/QD-TTg o f December 2, 2008, approving the National Targeted Program in Response to Climate Changes.
M O C Circular 09/2009/TT-BXD o f May 21,2009 guiding Decree 88/2007.
The Law on Biodiversity No. 20/2008/QH12 dated November 13,2008, effective f rom July 1,2009.
58
(Continued)
ANNEX 4: SUPPORTING DOCUMENTATION FOR PRIOR AND POLICY ACTIONS UNDER PRSC 8 (CONTINUED)
Area
Planning processes
Public financial management
Pillar IV: Modern Governance
Benchmark
Revise the investment laws to improve efficiency in state capital expenditures and strengthen the management o f public investment projects
Conduct mid-term review of the SEDP and strengthen result- based approach in M&E framework for planning
.......................................................................................................................................................
Formulate public debt management law consolidating the management of domestic and external debt
Conduct public financial management reforms including commitment accounting, vendor management and new chart o f accounts
...........................................................................................................................................................
Adopt procedures for annual audit plan ensuring sufficient frequency and adequate provincial coverage
Documentation
Draft law revising al l the key laws related to public capital investments (namely the laws on Construction, Procurement and Environment Protection), appraised b y the Economic Committee o f the National Assembly in early May 2009 for expected adoption in June 2009.
The mid-term evaluation o f SEDP 2006-2010 completed in early 2009.
The Vietnam Household Liv ing Standard Survey (VHLSS) conducted in late 2008 with the newly introduced Governance Module, representing a breakthrough in the area of monitoring and evaluation.
Draft Public Debt Management Law submitted to the National Assembly in May 2009 for adoption.
MOF Circular 107/2008/TT-BTC o f November 18, 2008 guiding budget management within TABMIS.
MOF Circular 108/2008/TT-BTC o f November 18, 2008 on annual budget closing and final accounts.
M O F Circular 113/2009/TT-BTC o f November 27, 2008 on management o f budget commitment.
MOF Decision 646/QD-BTC of March 3 1,2009 adopting the accounting regime (including the new chart o f accounts) for entities undertaking TABMIS pilot.
S A V Decision 734KTNN-TH o f July 23,2008 providing technical guidelines to formulate the audit plan for 2009.
SAV Decision 08/2008/QD-KTNN o f December 19, 2008 on preparation and issuance o f SAV’s annual audit plan.
S A V Decision 01/2009/QD-KTNN o f January 9,2009 issuing i t s annual audit plan for 2009.
(Continued)
59
ANNEX 4: SUPPORTING DOCUMENTATION FOR PRIOR AND POLICY ACTIONS UNDER PRSC 8 I (CONTINUED)
Area
Legal development
Public administration reform
Fighting corruption
Pillar IV: Modern Governance
Benchmark
Establish the National Bar Association, with governing documents and structures approved by the community of lawyers
Simplify the procedures, strengthen the management, and improve the monitoring and complaints system o f c iv i l judgments execution
Adopt principles o f competition, merit-orientation and transparency in the recruitment, appointment, promotion and dismissal o f c iv i l servants
....................................................................................................................................................
Develop indicators for monitoring and evaluating the implementation o f PAR and provision o f public administrative services
Issue a comprehensive anti- corruption strategy, setting out preventive, demand-side, and sector-specific solutions, and monitoring mechanisms
Documentation
Resolution dated M a y 12,2009 signed by Chairman o f the current National Bar Association, on behalf o f the Chairmanship o f i t s Congress, which confirms the approval o f the governing documents and structure b y the community o f lawyers.
Decision 7 16/QD-HDLT of March 3 1 I 2009 o f the Interim Council on the preparation o f the constitutional congress.
Prime Mnister 76/QD-TTg o f January 16,2008 endorsing the establishing the National Bar Association and formulating the Steering Committee for the first national lawyers’ congress.
The Law on Civ i l Judgment Execution No. 26/2008/QH12 dated November 14, 2008, effective from July 1,2009.
.....................................................................................................................................................................................................................................................
The Law on Civ i l Servants No. 22/2008/QH12 dated November 13,2008, effective f rom January 1, 2010.
..................................................................................................................................................................................................................................................
* M O H A Official Letters No. 3389BNV-CCHC and No. 3390BNV-CCHC o f November 10,2008 adopting the set o f indicative indicators for the monthly reporting on PAR implementation b y ministries (7 indicators) and provinces (9 indicators).
B M O H A Official Letter No. 415BNV-CCHC o f February 20, 2009, requesting for compliance with reporting requirements.
B Government’s Resolution 21MQ-CP o f May 12, 2009 adopting the national anti-corruption strategy to 2020.
Note: Boldface indicates Prior Actions included in the Financing Agreement for the operation.
60
ANNEX 5: FUND RELATIONS NOTE
Vietnam-Assessment Letter for the World Bank May 2 1,2009
Recent Developments and Outlook
1. Vietnam i s weathering the global crisis better than many other countries but st i l l has been adversely affected. In the f i rs t quarter o f 2009, real GDP growth declined to 3.1 percent (y/y), mainly owing to a contraction in manufacturing related to waning exports, compounded by a drop in agriculture due to adverse weather conditions. Moreover, while the current account balance moved to a surplus, driven by a sharp fal l in imports and large gold re-exports, this was more than offset by a significant weakening in capital flows, and gross reserves declined by $1 bi l l ion to $22 bil l ion at end- March. On the positive side, inflation eased further to 9 percent (y/y) in April due to lower food and fuel prices.
2. Nevertheless, the period ahead i s expected to be challenging. Real GDP growth i s projected at around 3% percent for 2009 as a whole with an anticipated recovery in agriculture as well as robust construction and resilient private consumption supporting economic activity in the face o f continued weak exports. With commodity prices stabilizing, inflation i s l ikely to moderate further to 5 percent by end-2009. The current account i s projected to shift to a deficit, as imports pick up following the recent easing o f policies. With capital inflows likely to remain weak, pressures on the balance o f payments are expected to increase. In addition, banks continue to face a difficult operating environment, and the economic slowdown i s likely to increase corporate and banking vulnerabilities. The main downside risk to the outlook i s the uncertain global economic environment, which could weaken Vietnam's growth prospects and capital flows.
Policy Challenges
3. Given this challenging environment, the government will need to strike a careful balance between growth and stability objectives. In particular, a greater focus on maintaining macroeconomic and financial stability w i l l be necessary in the period ahead to preserve the stabilization gains achieved in the latter part o f 2008.
4. Monetary policy would need to be tightened to ensure external stability. Despite the recent widening o f the trading band, the dong has continued to trade at the weaker end o f the band. The significant easing o f monetary policy since the last quarter o f 2008, along with the introduction o f interest subsidy schemes, has led to a large increase in credit growth, which could weaken the external position and add downward pressures on the dong. A tightening o f monetary conditions coupled with a clearer policy communication could help boost confidence in the dong. To be credible, these measures would have to be supported by a viable fiscal policy. If credit expansion continues to accelerate and the external position weakens sharply, however, stronger monetary and exchange rate policy actions may be needed.
5. I t will be important that the government adopt a revised fiscal strategy for 2009 that i s consistent with maintaining macroeconomic stability. This strategy needs to cover not only revisions to the original 2009 budget plan but also off-budget expenditures (including stimulus measures such as the interest subsidy schemes executed by the SBV). In the absence o f additional external financing, an overall fiscal deficit (including off-budget expenditure and on-lending) beyond 8% percent o f GDP in 2009, which i s close to the level o f the original budget plan, would be difficult
61
to finance without crowding out private sector activity, adding pressures on the balance o f payments, and undermining medium-term fiscal sustainability to the extent that stimulus measures are permanent. Careful consideration o f the stimulus package w i l l be needed to limit the deficit to this level. Some stimulus measures may be absorbed by reprioritizing existing spending, but others-such as tax stimulus measures that are not well-targeted and the interest subsidy schemes-may need to be reconsidered. More generally, the government needs to shift away from measures providing temporary cash relief to enterprises toward more efficient public investment projects and social safety net measures aimed at protecting vulnerable groups.
6. Safeguarding banking sector stability remains crucial. While banks so far have managed to weather the economic downturn, credit risk remains the primary concern. Moreover, the lending rate cap as well as higher deposit rates and provisioning costs have squeezed banks’ profit margins, and smaller banks continue to face tight liquidity conditions. The SBV should further strengthen bank supervision, including by ensuring that banks properly assess credit risks and classify loans extended under the interest subsidy schemes. Going forward, the SBV needs to improve i t s banking data reporting system to enhance financial transparency and expedite legal reforms that w i l l strengthen i t s operational autonomy and effectiveness in safeguarding the soundness o f banks.
7. Improving data provision and communication strategy would help bolster policy credibility. The quality and timeliness o f data-especially in the fiscal, state-owned enterprise, and banking sectors-need to be substantially strengthened. The communication strategy could be enhanced by presenting a regular assessment o f the economic situation and direction o f policy to the public in a transparent and consistent manner, in order to manage market expectations more effectively and improve investor confidence.
IMF Relations
8. The 2008 Article IV consultation was concluded by the Board on March 16, 2009. A staff visit took place in April 2009. The next Article IV consultation mission i s expected to take place in early 2010.
62
ANNEX 6: COUNTRY AT A GLANCE
Vietnam a t a glance 9/24/08
Key Development Indicators
(2007)
Population, mid-year (millions) Surface area (thousand sq. km) Population growth (%) Urban population (% of total population)
GNI (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international $)
GDP growth (%) GDP per capita growth (“A)
(most recent estlmste, 200&2007)
Poverty headcount ratio at $1.25 a day (PPP, %) Poverty headcount ratio at $2.00 a day (PPP, %) Life expectancy at birth (years) Infant mortalky (per 1,000 live births) Child malnutrition (% of children under 5)
Adult literacy, male (“4 of ages 15 and older) Adult literacy, famale (% of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primaryenmiiment, female (% of age group)
Access to an improved water‘source (% of population) Access to improved sanitation facilities (% of population)
.
Vietnam
85.1 329 1.2 27
67.2 790
2,550
8.5 7.2
71 15 20
109 1 03
92 65
East Asia & Pacific
1,914 16,299
0.8 43
4,174 2,180 4,941
10.5 9.6
18 40 71 24 13
95 87
111 109
87 66
LOW income
1,296 21,846
2.1 32
749 578
1,500
6.5 4.3
57 85 29
72 50
100 89
68 39
Net Aid Flows
(US5 millions) Net ODA and official aid Top 3 donors (in 2006):
Japan France Germany
Aid (% of GNi) Aid per capita (US$)
Long-Term Economic Trends
Consumer prices (annual % change) GDP implicit deflator (annual % change)
Exchange rate (annual average, local per US$) Terms of trade index (2000 I 100)
Population, mid-year (millions) GDP (US$ millions)
Agriculture Industry
Services
Household final consumption expenditure General gov‘t final consumption expenditure Gross capital formation
Exports of goods and services Imports of goods and services Gross savings
Manufacturing
1980
277
4 15 0
5
0.6
53.7
1990
181
1 12 16
3.0 3
36.4 42.1
6,482.8
66.2 6,472
2000 2007‘
1,681 1,846
924 563 53 159 33 87
5.5 3.1 22 22
-1.7 7.5 3.4 8.2
14,167.8 16,056.0 100 97
77.6 85.1 31,173 71,216
(% of GDP)
38.7 24.5 20.4 22.7 36.7 41.6 12.3 18.6 21.3 38.6 38.7 38.1
84.3 66.4 67.1 12.3 6.4 5.5 12.6 29.6 35.3
36.0 55.0 75.7 45.3 57.5 83.6 -2.3 30.5 32.6
Age distribution, 2007 I Male Female
I l5 lo Dercent ’O l5
Under-5 mortallty rate (per 1,000)
1890 1885 2oM 2006
0 Vietnam GI East Asia & Pacific
I Growth of GDP and GDP per capita (K)
2 T - +GDP -GDP par capita
1980-90 1990-2000 2000-07 (average annual growth %)
2.1 1.6 1.3 4.6 7.9 7.8
2.8 4.3 3.9 4.4 11.9 10.3 1.9 11.2 11.7 7.1 7.5 7.2
9.8 12.9 3.2 7.5
19.8 11.0
24.1 19.2 28.2 20.5
Note: Figures in italics are for years other than those specified. 2007 data are preliminary. .. indicates data are not available. a. Aid data are for 2006.
Development Economics, Development Data Group (DECDG).
63
Vietnam
Balance of Payments and Trade
(US$ millions) Total merchandise exports (fob) Total merchandise imports (ci9 Net trade in goods and services
Workers’ remittances and compensation of employees (receipts)
Current account balance as a % of GDP
Reserves, including gold
Central Government Finance
(% of GDP) Current revenue (including grants)
Current expenditure
Overall surpluddeficit
Highest marginal tax rate (“h)
Tax revenue
individual Corporate
External Debt and Resource Flows
(US$ millions) Total debt outstanding and disbursed Total debt service Debt relief (HiPC, MDRI)
Total debt (“A of GDP) Total debt service (“A of exports)
Foreign direct investment (net inflows) Portfolio equity (net inflows)
2000 2007
14,483 39,826 15,637 44,891
-238 -5,538
2,000 5,500
642 -2,198 2.1 -3.1
3,030 11,485
20.4 25.5
15.9 19.7
-2.0 -3.4
50 40 32 28
12,825 20.202 1,310 918 - -
41.1 33.1 7.6 2.0
1,298 2,315 0 0
Composition of total external debt, 2008
0 ,404 3,663
IMF 181
Other multi- laferal 2,197
IMF 181
Other multi- laferal 2,197
Bilafsral, 9,671
US$ millions
Private Sector Development 2000 2008
Time required to start a business (days) - 50
Time required to register property (days) - 57 Cost to starl a business (“A of GNI per capita) - 16.8
Ranked as a major constraint to business 2000 2007
Access tolcost of financing .. 40.5 Access to land .. 25.9
Stock market capitalization (% of GDP) .. 27.4 Bank capital to asset ratio (“A)
(%of managers SUNepd who agreed)
IGovernance Indicators, 2000 and 2007
I Voice and accountability
Political Stability
Regulatory quality
Rule of law
Control of corruption
0 25 50 75 1W
2007 Country’s percentile rank (0-100) 0 2wo higher MI- imp’y better ratinp
Source: Kaufmann-Kraay-Mastruzzi, World Bank
Technology and Infrastructure 2000 2007
Paved roads (“h of total) Fixed line and mobile phone
High technology exports subscribers (per 1,000 people)
(“A of manufactured exports)
25, l
4 61
11.0 5.3
Environment
Agricultural land (%of land area) 28 31 Forest area (% of land area) 37.7 41.7 Nationally protected areas (“A of land area) .. 4.4
Freshwater resources per capita (cu. meters) .. 4,410 Freshwater withdrawal (“A of internal resources)
CO2 emissions per capita (mt) 0.69 1.2
19.5
GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 3.3 ’ 3.5
Energy use per capita (kg of oil equivalent) 482 617
(US$ millions)
IBRD Total debt outstanding and disbursed Disbursements Principal repayments Interest payments
IDA Total debt outstanding and disbursed Disbursements Total debt service
IFC (fiscal year) Total disbursed and outstanding portfolio
Disbursements for IFC own account Porifolio sales, prepayments and
repayments for IFC own account
of which IFC own account
MIGA Gross exDosure
0 0 0 0
1,113 174
9
223 107 25
18
46
0 0 0 0
4,549 748 64
70 70 22
7
111 New guarantees 10 0
Note: Figures in italics are for years other than those specified. 2007 data are preliminaty. .. indicates data are not available. - indicates ObSeNatiOn is not applicable.
Development Economics, Development Data Group (DECDG).
9/24/08
64
1
2
3
45
6
7
89
1010
11111212
13131414
151516161717
18181919 2020
212122222323 2424
2525 26262727
2828
2929
3030
3131
32323333
3434
3535
3636
3737
3838
3939
4040
4242
4343
4141
4444 4545
4646
4747 48484949
5050
51515252
5353
6464
5454
5555
5656
5757
58585959
6060
6161
62626363
LangLangSonSon
Ho Chi Minh CityHo Chi Minh City
Bien HoaBien HoaThu DauThu Dau
MotMot
Phan ThietPhan Thiet
DongDongXoaiXoai
Tan AnTan An
Bac LieuBac Lieu
Vi ThanhVi Thanh
Vung TauVung TauMy ThoMy Tho
Ca MauCa Mau
Rach GiaRach Gia
Long XuyenLong Xuyen
Hai PhongHai Phong
Ha LongHa Long
Phong ThoPhong Tho
DienDienBien PhuBien Phu
Lao CaiLao Cai
Quy NhonQuy NhonPleikuPleiku
Buon MaBuon MaThuotThuot
Gia NghiaGia NghiaDa LatDa Lat
VinhVinh
Vinh YenVinh Yen
Nam DinhNam DinhNinh BinhNinh Binh
Dong HoiDong Hoi
Dong HaDong Ha
Tam KyTam Ky
Nha TrangNha Trang
Tuy HoaTuy Hoa
Kon TumKon Tum
Son LaSon La
Yen BaiYen Bai
HaHaGiangGiang
TuyenTuyenQuangQuang ThaiThai
NguyenNguyen
Cao BangCao Bang
Bac CanBac Can
Soc TrangSoc Trang
Tra VinhTra VinhCan ThoCan Tho
Cao LanhCao Lanh
Ben TreBen TreVinh LongVinh Long
Tay NinhTay Ninh
Quang NgaiQuang Ngai
Da NangDa Nang
Ha TinhHa Tinh
Thanh HoaThanh Hoa
Thai BinhThai Binh
Hung YenHung YenHa DongHa Dong
Ha NamHa Nam
Viet TriViet Tri
Hai DuongHai Duong
Bac GiangBac GiangBac NinhBac Ninh
Hoa BinhHoa Binh
Hue Hue
Phan Rang-Phan Rang-Thap ChamThap Cham
HANOIHANOIHANOIHANOI
An
na
m C
or
di l l e
ra
CentralCentral
HighlandsHighlands
Ngoc LinhNgoc Linh(3143 m) (3143 m)
CHINACHINA
C A M B O D I AC A M B O D I A
THAILANDTHAILAND
LAOLAOPEOPLE'SPEOPLE'SDEM. REP.DEM. REP.
To To NanningNanning
To To HepuHepu
To To TiandongTiandong
To To BabaoBabaoTo To
KunmingKunming To To KaiyuanKaiyuan
To To Muang XaiMuang Xai
To To LuangLuang
PrabangPrabang
To To KhammouanKhammouan
To To SavannakhetSavannakhet
To To Kampong ChamKampong Cham
To To KampongKampongChhnangChhnang
An
na
m C
or
di l l e
ra
Hainan I.Hainan I.(China)(China)
1
2
3
45
6
7
89
10
1112
1314
151617
1819 20
212223 24
25 2627
28
29
30
31
3233
34
35
36
37
38
39
40
42
43
41
44 45
46
47 4849
50
5152
53
64
54
55
56
57
5859
60
61
6263
LangSon
Ho Chi Minh City
Bien HoaThu Dau
Mot
Phan Thiet
DongXoai
Tan An
Bac Lieu
Vi Thanh
Vung TauMy Tho
Ca Mau
Rach Gia
Long Xuyen
Hai Phong
Ha Long
Phong Tho
DienBien Phu
Lao Cai
Quy NhonPleiku
Buon MaThuot
Gia NghiaDa Lat
Vinh
Vinh Yen
Nam DinhNinh Binh
Dong Hoi
Dong Ha
Tam Ky
Nha Trang
Tuy Hoa
Kon Tum
Son La
Yen Bai
HaGiang
TuyenQuang Thai
Nguyen
Cao Bang
Bac Can
Soc Trang
Tra VinhCan Tho
Cao Lanh
Ben TreVinh Long
Tay Ninh
Quang Ngai
Da Nang
Ha Tinh
Thanh Hoa
Thai Binh
Hung YenHa Dong
Ha Nam
Viet Tri
Hai Duong
Bac GiangBac Ninh
Hoa Binh
Hue
Phan Rang-Thap Cham
HANOI
CHINA
C A M B O D I A
THAILAND
LAOPEOPLE'SDEM. REP.
PhuQuoc
Hainan I.(China)
Mekong
Black
Red
Ma
Gul fof
Tonkin
Gulfof
Thai land
M e k o n g De l
t a
To Nanning
To Hepu
To Tiandong
To BabaoTo
Kunming To Kaiyuan
To Muang Xai
To Luang
Prabang
To Khammouan
To Savannakhet
To Kampong Cham
To KampongChhnang
An
na
m C
or
di l l e
ra
Central
Highlands
Ngoc Linh(3143 m)
22°N
20°N
18°N
16°N
14°N
12°N
10°N
22°N
20°N
18°N
16°N
14°N
12°N
10°N
108°E106°E104°E
110°E108°E106°E104°E102°E
VIETNAM
12345678910111213141516171819202122232425262728293031
Lai ChauDien BienLao CaiHa GiangCao BangSon LaYen BaiTu Yen QuangBac CanLang SonPhu ThoVinh PhucThai NguyenBac GiangQuang NinhHa NoiBac NinhHa TayHung YenHai DuongHai PhongHoa BinhHa NamThai BinhNinh BinhNam DinhThanh HoaNghe AnHa TinhQuang BinhQuang Tri
323334353637383940414243444546474849505152535455565758596061626364
Thua Thien HueDa NangQuang NamQuang NgaiKon TumGia LaiBinh DinhPhu YenDac LacDac NongKhanh HoaBinh PhuocLam DongNinh ThuanTay NinhBinh DuongDong NaiBinh ThuanT.P. Ho Chi MinhBa Ria-Vung TauLong AnTien GiangDong ThapBen TreAn GiangVinh LongTra VinhKien GiangCan ThoHau GiangSoc TrangBac LieuCa Mau
PROVINCES:
0 50 100 150
0 50 100 150 Miles
200 Kilometers
IBRD 33511R
JANUARY 2007
V IETNAM
PROVINCE CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
PROVINCE BOUNDARIES
INTERNATIONAL BOUNDARIES
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.