Interview: Stephen P Groff
What strategies need to be emphasised to ensure Vietnam is able to remain below the National Assembly’s public debt limit of 65% of GDP?
STEPHEN P GROFF: The government of Vietnam has undertaken an expansionary fiscal policy over recent years in an effort to step up investment in vital infrastructure and service delivery. However, due to these expansionary policies Vietnam’s public debt has risen steadily since 2010, and is now beginning to approach the public and publicly guaranteed debt limit of 65% of GDP approved by the National Assembly. Ensuring that public debt remains at sustainable levels will require a number of coordinated policy actions over the coming years.
The first of these actions will be reversing Vietnam’s declining revenue-to-GDP ratio. Over the past five years, the tax base has been eroded by reductions in corporate income tax rates, the removal of tariffs and duties on traded products, and the granting of tax exemptions. Adding to these pressures are low oil prices that have hurt resource tax collections, which make up about 10% of total revenue. Central government revenue and grants fell from 27.6% of GDP in 2010 to 22% in 2015.
Second, Vietnam should pursue opportunities to deepen private sector involvement in infrastructure, to alleviate fiscal pressures and promote greater investment efficiency. This could include, for example, strengthening the government’s commitment to transparent and competitive public-private partnerships. To achieve this, a focus could usefully be placed on selecting a number of high-profile, high-impact projects. A coordinated government effort to speed their progress and ensure implementation, according to best international practices, would be welcome.
Finally, further reforms are needed to improve the overall efficiency and impact of public expenditure. Vietnam’s revised State Budget Law, which was approved in 2015, lays the foundation for significant improvements in public expenditure and fiscal management practices. These improvements include more transparent and accountable expenditure and the preparation of a detailed five-year public debt management plan.
How can Vietnam begin to implement real and meaningful reforms to aid its economy?
GROFF: Having reached lower-middle income status in 2010, the country now finds itself at an economic crossroad – with a need for reforms to address its weak spots. Previous rapid growth in the working age population has been starting to fall and the early benefits of urbanisation and shifting labour from unproductive farms to more productive factories are dissipating. Vietnam continues to lag behind its regional peers on various international rankings of competitiveness and ease of doing business. Adding to these challenges are inefficiencies in state-owned enterprises (SOEs), and a shallow banking system that relies on a few large state-owned banks.
SOEs continue to absorb a very large share of aggregate investment, yet their contribution to real GDP and aggregate employment is low relative to private enterprise. There is also wide variation in the business regulatory environment across the country’s 63 provinces, based on business perception surveys. There is need for greater transparency and disclosure of information related to policy-making, as well as for a more transparent and effective regulatory environment. Vietnam must now grapple with the technically and politically challenging structural reforms that are needed to boost labour productivity and global competitiveness. The opening up of Vietnam’s economy has helped make the country an attractive destination for foreign direct investment, while also helping to boost exports.
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