ADB report : Vietnam faces tough economic policy
HANOI - Vietnam must reform inefficient state-owned firms, develop a modern financial system and let the private sector bloom or its recent economic success could amount to little, the Asian Development Bank said on Thursday.
The ADB, in its annual country report, praised Vietnam for achieving high economic growth, price stability and fiscal prudence but said the road ahead would be tough.
It said Asia's financial crisis would likely dampen short-term economic prospects in communist Vietnam, whose 78 million people remain among the poorest in the world with average annual incomes just above $300.
Any fall in foreign investment inflows in 1998, especially from key Asian investors, would keep Vietnam's balance of payments under pressure, the Manila-based bank said.
In addition, export growth would likely slow due to Vietnam's relatively overvalued dong currency and as important Asian export markets softened amid the regional financial woes.
These factors would slow gross domestic product (GDP) growth in 1998 to 5.0 percent from 9.2 percent last year, the ADB said. It predicted growth of 6.5 percent in 1999.
The government last week revised its 1997 GDP growth figure to 8.8 percent from an earlier estimate of 9.0 percent.
``The path to a fully fledged market economy is now becoming increasingly difficult to traverse in Vietnam. The remarkable economic growth of the past will ultimately amount to little if the country cannot sustain growth well into the future,'' the ADB report said.
``If Vietnam is to sustain its growth, the government must extend its progress on reforms; in particular, it must transform moribund state enterprises into vibrant, competitive firms and lay the foundation for a modern, robust financial system.''
Vietnam embarked on economic reforms in the late 1980s when some state controls on the economy were lifted.
However, many economists say those reforms, known as ``doi moi,'' or economic restructuring, have run their course and what is needed are sweeping new measures to attract more foreign investment and reduce the obstacles to doing business in Vietnam.
Calls for quick progress on reforms have gained credence amid Asia's economic crisis, which has prompted some countries in the region to throw their doors wide open to investment.
Foreign investment approvals in Vietnam fell last year by some 40 percent to $5.1 billion.
In addition, plans to partially privatise most of Vietnam's more than 6,000 state companies have proceeded at a glacial pace.
The ADB said links between the state sector and the banking system had shackled private firms.
Vietnam's state banks were burdened with many non-performing loans from public sector companies, it said, without giving any figures.Preferential lending was also making access to credit difficult for private firms.
The tax system strongly discouraged private entrepreneurship and a variety of other legal and bureaucratic obstacles not only raised costs, but increased risks, the report added.
``Experience elsewhere suggests that the private sector can provide the needed dynamism in the long term. Thus the lack of private sector development during the 1990s is a concern.''
The ADB also took issue with Vietnam's balance of payments.
"Vietnam's Achilles' heel is its external account. Few economies have managed to sustain current account deficits of more than five percent of their GDP for long...''
The ADB predicted Vietnam's current account deficit at 7.0 percent of GDP in 1998 from 7.7 percent in 1997. GDP in 1996 was put at $23.5 billion.
Export growth would be 15 percent in 1998, from 22.2 percent last year and a whopping 41 percent in 1996, it said.
The ADB said while Vietnam's savings ratio had increased, it had not been able to keep pace with investment demands.
``The weak financial position of many (state firms), along with a poorly developed and regulated financial system, have held back savings,'' it said.
Gross domestic savings were 17.7 percent of GDP, it said.
Vietnam's problem is that plenty of money -- estimated by some economists at around $8 billion -- lies outside the banking system, partly reflecting a lack of trust in local banks.
REUTERS, April 23, 1998.
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