VietNamNet Bridge – Many questions have recently surfaced over a lot of macroeconomic issues in Vietnam, especially the use of official development assistance (ODA), the country’s rising public debt, and institutional changes among others. The Saigon Times Daily talked with Victoria Kwakwa, country director for the World Bank in Vietnam, about such controversial issues.

Victoria Kwakwa

Over the past two decades, international donors have committed over US$80 billion in ODA for Vietnam, with a half having been disbursed. The ODA loans have undeniably contributed to the nation’s development. However, as you know, some National Assembly deputies are concerned about ODA usages, while many donors have agreed on the efficient use of ODA loans in Vietnam. So, what are your major points?

A first point to note is the considerable amount of knowledge, new ideas and innovations that come through ODA.  ODA should not be seen and has indeed not only been about financing but also about helping Vietnam tap into global knowledge and innovations to solve development problems. ODA projects have helped build skills of Government counterparts in transparent procurement, sound financial management and in monitoring results of public investments.

Second, several analyses also show that ODA has been used relatively effectively by the Government of Vietnam to help the country’s development agenda to move out of widespread poverty and a relatively low level of economic activity to a country which has recorded some of the highest economic growth rates and poverty reduction rates in the world. ODA has been pivotal in supporting Vietnam to meet the country’s key social and infrastructure spending needs, informing directions for policy reforms, improving the country’s business environment, and catalyzing knowledge transfer for innovation and to help position the country to effectively deal with its existing and emerging challenges.

Third, ODA has been provided on financing terms that have made it possible for Vietnam to avoid a debt crisis. Most of it has been grant, highly concessional terms or terms that are much cheaper than what Vietnam could get from borrowing on international capital markets. Vietnam has been a recipient of concessional financing from development partners. These loans typically have a grace period during which the government does not have to make repayments. Such borrowing has been very helpful for Vietnam’s major, long-term investments that can take many years to finish and generate economic returns. So Vietnam was able to spend on such projects without putting pressure on government revenues, which historically have also been quite strong.

The Government’s recent international bond issue of US$1 billion attracted coupon rate of 4.8% for 10 years.  This is more expensive and shorter duration than loans provided by development partners.

Finally, Vietnam and development partners are committed to enact measures to make effective and efficient use of ODA resources. However, moving from general principles to implementation of best practices is difficult and time consuming. The Government has recently introduced several measures to improve capital absorption capacity and effectiveness. The World Bank and other development partners have been working very closely with the Government to improve the country’s fiduciary system, which will help to make management of not only ODA-funded projects, but public investment more efficient and more transparent.   

ODA management is still described as non-transparent, creating loopholes for corruption. How do you think about this assessment, and what are obligations of the donors in this respect?

I think it would be unfair to describe ODA management as non-transparent.  As you know Vietnam has a clear regulatory framework to guide implementation of ODA.  Decree 38 on ODA management was revised in 2013 and another revision is planned for 2015. All ODA activities are prepared under this framework and must comply with its provisions. This decree is publicly available and well known to ODA donors and implementers. Perhaps the general public could be made more aware of the provisions of this decree. Most development partners including the World Bank make their ODA projects public and include beneficiaries in preparation and implementation. All ODA donors have an obligation to continue to be transparent and share information about the activities and projects they fund and their impacts, with all stakeholders.  This is important for avoiding corruption on projects and ensuring that ODA resources are used for their intended purposes.

Vietnam can absorbed an ODA amount of US$3-4 billion a year; and a Vietnamese now bears a debt of US$930, a sharp increase from US$159 nearly a decade ago. Is ODA the main factor behind Vietnam’s rising public debt, which is to reach the ceiling of 65% of GDP?

On the issue of public debt, we would like to acknowledge the rules that the Government has adopted to monitor public debt levels (Decision No. 958) to improve transparency on public debt reporting. This has enabled the media and the public to raise questions and require explanation. Rising public debt levels as measured by public debt to GDP is a matter of concern and should be monitored closely. Regarding the concerns on rising public debt, it is important to look beyond the headline ratio of public debt to GDP, which provides an important preliminary indicator of solvency. For example it is important to assess the impact of rising debt stock on debt servicing costs; quality of spending; fiscal risks that might lead to rapid rise in public debt; composition of public debt; extra budgetary sources of borrowing. A better understanding of these issues will help to come up with more focused solutions and better prioritized solutions to ensure that debt levels are sustainable. In our view, the Government does need to find options that would help close the fiscal deficit and reduce borrowing requirement. There are reforms under way to improve tax administration and find efficiencies in spending. These are critical to generate the fiscal space needed to sustain essential spending on public services without accumulation of unsustainable debt. In terms of debt repayment capacity, we consider Vietnam is still within sustainable threshold as both the debt servicing to revenue ratio of 22.5% and the external debt servicing to export receipts ratio of 2.8% are within acceptable limits. We would still recommend that the Government keep a close watch on the debt level and in particular “contingent liabilities” from the state enterprise sector.

Do you think that Vietnam is addicted to ODA, as some donors said at a recent meeting ahead of the Vietnam Development Partnership Forum?

No, we do not agree that Vietnam is addicted to ODA. ODA is relatively small compared to the size of the economy. ODA disbursement was 3% of GDP in 2013, compared to FDI implementation of nearly 7% of GDP.  

What institutional changes resulting directly from Vietnam’s ODA commitment to the international donors that impressed you the most?

ODA has promoted several institutional reforms through technical assistance, investment projects and policy financing. Highlights include adoption of the common investment and enterprise law, support to Vietnam’s historic accession to WTO; modernization of treasury and budget management system; modernization of financial management information systems in Vietnam’s banking sector; community-based disaster risk management approach; community-driven development approach; move to competitive power-generation market; setting up of the Directorate of Roads of Vietnam; performance-based contracting in the transport sector.

How do you think about the private sector that remains small and the objective for discrimination, while the State sector including SOEs still takes the largest share in the economy? Policies for private involvement in infrastructure development, including the public-private partnership, are still not available. Is that the fact international donors wish to see after more than two decades since ODA was resumed?

Development partners would like to see a more vibrant private sector playing a more prominent role in the economy, a more efficient state enterprise sector, focused on areas where there is a solid justification for public participation, and investing public resources much more efficiently. Leveling the playing field between the private and public sectors as part of a more aggressive state enterprise reform program is critical in this regard, in addition to policies to continue to strengthen the business environment. Development partners are trying to support this reform agenda and also help the Government put in place a solid framework for development of PPPs. There is considerable room for stronger government action on these issues.

What are your comments on public investment?

The Government has taken a number of important steps in the last three years to bring more discipline over capital spending. Directive 1792 has helped to manage more carefully the number of new projects that are proposed in the State Budget. Greater priority is accorded to completion of ongoing projects, clearance of arrears to construction companies, and counterpart funding for ODA projects. The numbers show that there has been some consolidation in capital spending. The share of capital spending in overall GDP has declined to around 8%, from closer to 11-12% in 2008-2009. The challenge, however, is not necessarily the level of public investments but more the quality. The quality of public investments is severely affected by several factors. One of them is the lack of regional coordination. On December 2, nearly three quarters of public investments in Vietnam are implemented by local authorities. It is very important to ensure that investment decisions are coordinated among provinces within a region to avoid overlap and overinvestment in physical capital stock.

The new Law on Public Investment adopted by the National Assembly addresses a number of challenges in the systems and processes of public investment management in Vietnam. It impacts capital spending quality. We are hopeful that the new law will enable the Government to better prioritize projects; ensure solid appraisal to assess economic and financial viability; provide adequate capital and recurrent budgets for project implementation and operation; and regularly conduct evaluations on how the projects are operating.

Thank you very much.

SGT/VNN