The Saigon Times
HCMC – Vietnam’s GDP growth this year is expected to reach 2.4%, among the highest in the world, thanks to the country’s swift action in containing the Covid-19 pandemic, said an International Monetary Fund (IMF) representative.
The IMF has revised upward its forecast for Vietnam’s growth this year to 2.4% from the previous 1.6% in October. The data was released following a virtual mission of an IMF team led by Era Dabla-Norris between October 15 and November 13 to conduct discussions for the 2020 Article IV consultation with Vietnam.
“The fiscal response has been largely geared toward supporting vulnerable households and firms and has benefited from prudent policies adopted in the past. Monetary policy easing and temporary financial relief measures by the State Bank of Vietnam have alleviated liquidity pressures, lowered the cost of funding and facilitated the continued flow of credit,” she said.
The IMF representative added that the Southeast Asian nation could see a strong recovery in 2021, with growth projected to strengthen further to 6.5% as the normalization of domestic and foreign economic activity continues. Also, fiscal and monetary policies could remain supportive, although to a lesser extent than in 2020. Inflation is expected to remain close to the authorities’ target at 4%.
However, the outlook is subject to uncertainties stemming from possible renewed outbreaks, a protracted global recovery, ongoing trade tensions and corporate distress, which could translate into firm closures and bankruptcies, labor market and banking system strains, she said.
Given these uncertainties, flexibly adjusting the size and composition of the policy support will be important. Fiscal policy should play a larger role in the policy mix, she continued.
According to her, this year, the fiscal deficit is expected to widen due to a decline in revenue and higher cash transfers and capital spending. Fiscal support should be maintained in 2021, with improving efficiency in execution as a priority.
She suggested that over the medium term, the emphasis should be on mobilizing revenue for financing green and productive infrastructure, strengthening social protection systems and safeguarding debt sustainability.
In addition, the monetary policy should remain supportive in the near term. A greater two-way exchange rate flexibility within the current framework would reduce the need to build reserve buffers and facilitate the adjustment to a potentially more challenging external environment.
According to the IMF, the State Bank of Vietnam has struck an appropriate balance between supporting the recovery and banking system resilience. The close monitoring of risks in the banking sector remains crucial given that capital buffers are weaker than regional peers and uncertainties associated with the outlook.
Non-performing loan recognition and loan classification rules should be gradually normalized to support balance sheet transparency and confidence in the banking system. Additionally, banks’ capital positions need to be further strengthened and capital markets developed to enhance financial resilience and promote long-term financing.
The IMF noted that reforms to reduce economic dualism between the domestic and FDI sectors and lift productivity are crucial to support robust and inclusive growth. Continued efforts to remove structural distortions and improve the business climate are also welcome.
The country should prioritize reducing the regulatory burden facing domestic private firms, improving access to land and financial resources, particularly for small and medium enterprises, and reducing corruption.
Establishing an expedited SME-specific insolvency regime would help unlock capital and prevent unnecessary liquidations. Reducing labor skill mismatches, increasing human capital and technology access would also boost labor productivity, it said.
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