Public debt should be kept within acceptable limits

Vietnam is facing numerous challenges with public debt rising and the pressure on paying it off also growing. 

Currently, the ratio of public debt to GDP has neared the 65% threshold and the economic slowdown in the first half of year has exacerbated the situation.

The reasons why the ratio of public debt is so high and growing rapidly have been thoroughly analysed by the media and experts who conclude that public debt is accelerating because spending is larger than revenue and due to inefficient spending and corruption.

It should be noted that regular expenditure accounts for a large proportion and is growing fast, resulting in a consistently large spending deficit, throwing the government into a vicious circle of resorting to new loans to balance the budget.

Furthermore, the debt servicing cost also accounts for a large part of expenditure, eating into the investment capital for development. It is also worth mentioning that during an economically difficult time, Vietnam must continue borrowing to stimulate or at least maintain the current pace of growth. 

Therefore public debt’s rapid growth is the result of economic slowdown and increasing expenditure.

According to the government’s report to the National Assembly, in the four years from 2011 to 2015 public debt doubled to US$117 billion, while Vietnam only produced around US$200 billion each year worth of goods and services. 

In the past four years, public debt has risen by an annual rate of 20%, far exceeding the GDP growth rate, which has caused the ratio of public debt to GDP to rise from 50% at the end of 2011 to nearly 65% at present. 

Some say if the economy continues to slow, the public debt ratio could soon cross the 65% threshold.

The question here is whether these statistics are accurate or not. 

If yes, is such a ratio safe? According to a research group of the Vietnam Institute for Economic and Policy Research (VEPR), Vietnam method of calculating public debt in many ways does not conform with international practices. 

For example, risks from non-governmental organisations, but which have their loans guaranteed by the government, are excluded. 

Nevertheless, the sheer inclusion of these organisations’ debt obligations in total public debt could exaggerate the real figures. 

Experts recommend a solution that is to build a statistic framework on net public debt instead of aggregate public debt based on international practices.

This is crucial to containing the risks of public debt and formulating public debt indicators for Vietnam based on relative comparison with countries of a similar development level. 

In general, Vietnam’s approach excludes risks arising from non-government agencies using public funds and social insurance funds, so it is necessary to standardise Vietnam’s statistical practices to be in line with international standards to better control public debt.

Because Vietnam’s public debt mainly comes from domestic creditors, the risk of a debt crisis is not high in theory. 

On the other hand, domestic public debt is causing negative impacts on the economy such as higher interest rates, which in turn affects the private sector’s investment and creates pressure on inflation in the medium term.

More importantly, the negative effect of public debt should be understood as the accumulated risk of loose fiscal policy and inefficient public spending.

VEPR Director Nguyen Duc Thanh says public debt’s rapid growth is essentially due to failure to maintain budget discipline of both the central and local governments, not including large state-owned enterprises whose contributions to the state budget are less than what they ask for.

As such, in order to fully solve this issue, it is necessary to strengthen government agencies’ supervision capacity and accountability. 

The goal is to make all spending by central and local governments to be fully accounted, and the National Assembly or authorised agencies to be able to keep such spending under control in an effective manner. 

It must be ensured that public spending is not influenced by interests of ministries, agencies, localities and interest groups in economic sectors.

The public debt ceiling should be considered as a fixed bar to improve the effectiveness of fiscal policy, in addition to its meaning as a safe threshold to prevent a public debt crisis in the future. 

For this reason, maintaining a fixed public debt ceiling is important to controlling macroeconomic risks in the medium term. Instead of raising the threshold, bold measures are needed to keeping public debt within the safe limits.