Vietnam needs prudent fiscal policy: WB

World Bank lead economist in Vietnam Sandeep Mahajan stressed in a press briefing of the bank’s East Asia and Pacific Economic Update early this week that Vietnam should map out a medium-term fiscal plan aimed at increasing State income and keeping regular expenditure stable.

According to the report, public and publicly guaranteed debt has increased from 59.6% of GDP in 2014 to 62.5% in 2015. The bank predicts that the proportion will rise further, reaching 63.8% in 2016, 64.4% in 2017 and 64.7% in 2018.

He attributed the rise to a long term loosened fiscal policy. An increase in public investment was necessary during the previous global economic downturn which caused a decrease in private investment and consumption, Mahajan said.

The economist also said that Vietnam should be aware of growing fiscal pressure, with the fiscal deficit estimated at 6.5% of GDP in 2015, “reflecting a weak revenue outturn and increased current and capital spending”.

“The Government is yet to announce credible measures to implement medium-term fiscal consolidation (on either the revenue of expenditure sides)”, the report said.

Mahajan said that reducing the fiscal deficit could not be done overnight, but it was time for Vietnam to consolidate its fiscal policy.

Mahajan said that Vietnam was still able to pay all due debts.

However, economists expressed their concern over the payment terms because most debts were short-term which pressured the budget, particularly in light of the country’s current high budget deficit.

Mahajan said that if the Government spent up to 16% of the country’s budget every year to pay public debt, investment for development in various areas such as education and health would be cut, so the Government needed a stable spending plan.

The World Bank was working with the Government on fiscal matters, and the Ministry of Finance would make the final decision, the economist said.

When asked whether Vietnam’s ratio of public debt to GDP was too high, Mahajan said that there was no standardised measure for the risk of public debt of all countries.

For example, Japan’s public debt is 200% of GDP but is not a concern as the country has an effective investment plan. In contrary, in some countries, the ratio is just 50% but still alarming.

Bank M&A procedures

On the Vietnamese Government’s efforts to reduce the number of commercial banks, World Bank economists said the Government should focus on merger and acquisition (M&A) procedures and reform in the banking sector rather than aiming at the quantity.

Mahajan said that M&As should be done in a strict and suitable process to create a sharp fall in number of credit institutions.

Although substantial progress has been made in the shake-up of financial organisations, it will be hard to slash the number of commercial banks from 34 to 15-17 by the end of 2017, according to the World Bank.