The Asian Development Bank (ADB) in Vietnam has suggested that given limited monetary policy space, fiscal and investment spending will be key for economic growth in 2024.

“A comfortable fiscal position with a mild budget deficit and a low public debt-to-GDP ratio provides sufficient fiscal space to support growth,” the ADB said.

Accelerated public investment the backbone to new growth

The ongoing 8 per cent VAT reduction programme was extended until June and the National Assembly is expected to continue extending it further to the end of this year, with a final decision to be made in June.

Nearly two weeks ago, Prime Minister Pham Minh Chinh tasked the Ministry of Finance to propose a scheme on extending and reducing a number of taxes including VAT and fees for the second half of 2024 to assist businesses and individuals. This scheme will be discussed by the legislative body in May and June.

In addition, accelerated public investment and improved business conditions could spur private investment in 2024. Vietnam will earmark as many as $27.37 billion for public investment this year, most of which will be for investing in infrastructure development, and efforts must be made to disburse at least 95 per cent of the sum.

“This target must be achieved, and it is requested that all localities and ministries must roll up their sleeves to disburse this type of capital,” PM Chinh said.

Together with disbursements of $24.16 billion from 2023, this additional public investment would significantly stimulate growth, which is also spurred on by the disbursed sum of $4.63 billion worth of foreign direct investment in Q1 2024 – up 7.1 per cent on-year, also the highest three-month figure since 2020.

In addition, according to the ADB, low domestic interest rates, fiscal policy measures, and wage increases will spur consumption-led services in 2024.

At present, the annual lending rate is sitting at an average of 5-6 per cent, the lowest level, at many commercial banks over the past many years. The State Bank of Vietnam (SBV) on April 19 reported that in Q1, credits grew 1.34 per cent as compared to the end of last year. Notably, two-month credits fell 0.72 per cent on-year.

PM Chinh last week ordered the SBV to direct commercial banks to continue reducing lending rates to support businesses and the public. The government is expecting credits for the whole economy will grow 15 per cent this year.

Besides that, the Ministry of Home Affairs sent a document to the Ministry of Labour, Invalids, and Social Affairs showing a consensus about a 6 per cent increase in Vietnam’s regional minimum wage for four regions nationwide, effective from July 1.

Region 1 will see wages increase to VND4.96 million ($206.60), region 2 to VND4.41 million ($183.75), region 3 to VND3.86 million ($160.80), and region 4 to VND3.45 million ($143.75).

What is more, retail sales in Vietnam in the first quarter of 2024 were 8.2 per cent higher than the same period in 2022.

“Revived economic activity, though slow, will elevate logistic services, while the liberalised visa policy will likely boost tourism. Overall, services are forecast to expand by 7.7 per cent in 2024,” the ADB stated. “Global demand for agricultural commodities and free trade agreements will continue supporting agricultural exports.”

Figures from the General Statistics Office showed that Vietnam’s total state budget revenues in the first quarter of this year is estimated to reach about $22.48 billion – up 9.8 per cent on-year. Total state budget expenditure in this period is estimated to stand at $16.4 billion, up 8.3 per cent on-year. This led to a budget surplus of $6.08 billion.

Fiscal policy has ample space available to support growth and the most vulnerable, thanks to prudent policies. In the current environment, fiscal policy can be more effective in promoting domestic demand moving forward, given highly leveraged corporates and weak external demand.

However, policy implementation should be stepped up, including by addressing bottlenecks in the public investment cycle. Ramping up social safety nets and cash transfers to the most vulnerable would help sustain more inclusive growth. Strengthening the budget processes would ensure the effectiveness and transparency of fiscal policy. Over the medium term, further efforts are warranted to mobilise revenues to bolster social spending and infrastructure investment.

Strengthening the fiscal framework and budget processes would increase transparency and enhance the quality and effectiveness of fiscal policy. The budget process is weakened by overly conservative revenue projections in recent years. A budget based on realistic projections and assessment of risks would allow to better decide on the appropriate fiscal space and level of spending and debt, while increasing transparency.

The scope and duration of permitted carryover spending could be more limited and ensure that all spending is integrated in the budget process. It would be important to accelerate efforts to strengthen macro-fiscal capacity (projections, risk assessment, impact of fiscal measures). Conducting expenditure reviews would help identify priorities and improve the quality of expenditures. Source: International Monetary Fund


VIR