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Vietnam before the impact of the decline in ODA capital

Monday 06, 07 2020
Will ODA capital have a positive or negative impact on Vietnam's economy?
Vietnam before the impact of the decline in ODA capital
  • Challenges

In poor and developing countries like Vietnam, the ODA received is mainly used to invest in infrastructure, key projects, such as roads, energy, and industrial facilities, hospitals, schools, ... The situation of donors has been decreasing and will cut aid completely affecting the progress of construction works, or limiting the development investment capital of the receiving country. Growth rate and competitiveness will, therefore, be affected. Especially in the case of Vietnam, despite being out of poverty, but the development process is not really stable and solid, the country is still in the process of industrialization - modernization, people's lives only Recently improved, the infrastructure is still rudimentary, the role of ODA, therefore, is very large in providing potential resources to the economy. It is estimated that the capital source for infrastructure investment accounts for 40% of the total ODA. Managing how to continue investing in development when this aid is cut will be a big challenge for Vietnamese managers.

With the fact that aid sources are gradually becoming less preferential, interest rates are increasing, loan terms are declining, and conditions are more and more binding, Vietnam is currently and will face increasing pressure from the repayment. According to information from the Ministry of Finance, on average, the State Budget pays about $1 billion in ODA debt each year, the highest time will be paid in 2022-2025. This is a significant challenge in the context of Vietnam's relatively weak public finance industry, including relatively high and constantly increasing public debt, in parallel with the vulnerable banking sector. Specifically, the current budget deficit has lasted for many years. In 2019, the state budget deficit is about VND 174.3 trillion, equal to 3.48% of GDP. Although still lower than the National Assembly's approval of 3.5% of GDP, the continuous state budget deficit makes it difficult to reduce government spending to meet the debt repayment needs. Raising taxes or fees to increase revenue or borrowing new ones to repay old debts is not a long-term measure, especially when Vietnam's financial market is still relatively young and not fully developed. Not to mention, Vietnam has a relatively limited foreign exchange reserves, reducing ODA will partly cause a shortage of foreign currencies, accompanied by impacts from the global context that will easily lead to instability of the currency, the size of the Government's debt has also increased.

Since July 2017, when the World Bank officially stopped providing IDA (concessional loans from the International Development Association) to Vietnam, with obvious economic development impacts, Concerned about the implications for social development. The IDA program has a primary mission of reducing poverty and inequality in supporting economic growth. In Vietnam, this funding is often used for programs to reduce gender inequality, climate change, and protect the environment. When loans become less favorable, priority projects must be more inclined to activities with high capital recoverability, projects that serve social objectives will be difficult to compete. pictures. Besides, "graduating" ODA also means that the economy has made certain development steps, but it is accompanied by an increase in social inequality. No longer having access to IDA capital will partly make it difficult for poverty reduction and inequality, while post-IDA is a time of high priority for these areas. Lessons learned from Thailand and the Philippines are still hot, as both countries have been coping with the widening gap between rich and poor after 20 years of "graduating" IDA.

  • Advantages

Reducing aid from development partners will cause many difficulties for Vietnam, however, it is not surprising because our country has also foreseen and prepared itself to receive the impact that can happen. Moreover, the negative effects are also opportunities for Vietnam to be optimistic in this context.

Firstly, the preferential and cheap aid capital always comes with the conditions and requirements to ensure the profits of the companies from the donor country, thereby losing or reducing the opportunities and profits of public companies. companies belonging to ODA receiving countries. The borrower may have to gradually remove tariff barriers on lender's products, or have to purchase equipment, hire services, and staff from lenders with relatively high costs. For example, with loans from Korea, one of the mandatory requirements is that the contractor must be a Korean company or a partnership in which the Korean company holds more than 50% of the shares. Or in the case of China, the recipient country of ODA is forced to allow Chinese workers to implement the project. Decreasing ODA means that these conditions will be removed as well, opportunities for domestic enterprises will increase, and investment in programs and projects may be somewhat reduced.

Second, before more expensive loans, Vietnam is forced to calculate in order to use the loan most effectively. In fact, the effectiveness of ODA-invested projects is always a hot issue, when with gratuitous psychology, many projects implementing units do not have strict calculations, causing many losses and waste. Decree 52/2017 / ND-CP on re-lending the Government's foreign loans to the People's Committee of the province and city is considered one of the important steps to prepare for Vietnam's ODA graduation process. The budget constraint localities are still allocated, but the more developed localities such as Hanoi, Ho Chi Minh City, and Da Nang ... will sharply reduce the allocated capital for projects. Thus, localities will have to calculate whether this capital source can be effective from collecting fees and taxes to pay debts, if the project is not effective, unable to repay, they will borrow less. Improving the responsibility of the recipient unit will somewhat reduce the situation of widespread aid but not much use.

In the long term, when ODA is cut, Vietnam will be forced to increase its independence and independence in capital mobilization and business activities. Instead of relying on foreign aid, Vietnam will have to rise up to the fullest by its own internal capacity of the economy. Besides, when cheap capital sources become scarce, users of capital must also become stricter to ensure efficiency. Thanks to this, losses and waste will be also monitored more closely and reduced.

Vietnam before the impact of the decline in ODA capital

  • What does Vietnam need to do?

Difficulties caused by the decline in aid capital sources can be completely overcome if Vietnam is well prepared for the ODA graduation process. It is expected that the total demand for mobilizing and using ODA and concessional loans in the 2016-2020 period will be very large, about 39.5 billion USIn addition, the Government needs to strengthen the opening of the door to the private enterprise sector (private enterprise) in the implementation of ODA projects. Private enterprises are a very important driving force to promote the economy, when more economic sectors join, the openness, transparency, the competition will be higher, creating a more equal environment. Providing opportunities for private enterprises to access ODA will help reduce the capital thirst of businesses, helping businesses reduce capital costs. In fact, when consulting the draft Decree on the management and use of official development assistance and concessional loans in early 2018, the Ministry of Planning and Investment proposed that the Private Enterprise could access credit from ODA or concessional loans to implement public-private partnership (PPP) projects. Although this content was later disapproved and included in the official decree, this was a praiseworthy step to show that the "door" was somewhat open. Providing private enterprises with equal access to preferential ODA funds will help increase transparency in the use of ODA, reduce the collusion of interest groups, corruption, encourage technology transfer, and develop the economic sector private sacrifice.D (in addition to 22 billion USD in the transition from 2011-2015). Currently, Vietnam's longest loan is due until 2055, the average loan duration is 12.5 years. Thus, for nearly 40 years, Vietnam continues to have to repay ODA debt. However, a detailed plan to "graduate" ODA within the next 15-20 years is extremely necessary.

When ODA funding ends, Vietnam will be forced to increase domestic borrowing and preferential foreign trade loans to mobilize additional resources. But the corollary is that the burden of public debt will become more serious, as this capital is subject to higher interest rates. The first solution is still austerity, tightening the spending budget for the public authority. For projects that have been signed or are in progress, it is necessary to strengthen inspection and supervision to ensure investment efficiency, accelerate the implementation schedule and raise the disbursement rate, avoid the prolonged situation causing cost teams. The fight against negative, corruption and wastefulness must be further promoted. With programs and projects about to be signed, priority should be given to important public investment projects in key or recoverable areas. Instead of merely borrowing, programs and projects should come with long-term and decisive elements in the development of transfers, support for experience, ideas, expertise, data, …

In addition, the Government needs to strengthen the opening of the door to the private enterprise sector (private enterprise) in the implementation of ODA projects. Private enterprises are a very important driving force to promote the economy, when more economic sectors join, the openness, transparency, the competition will be higher, creating a more equal environment. Providing opportunities for private enterprises to access ODA will help reduce the capital thirst of businesses, helping businesses reduce capital costs. In fact, when consulting the draft Decree on the management and use of official development assistance and concessional loans in early 2018, the Ministry of Planning and Investment proposed that the Private Enterprise could access credit from ODA or concessional loans to implement public-private partnership (PPP) projects. Although this content was later disapproved and included in the official decree, this was a praiseworthy step to show that the "door" was somewhat open. Providing private enterprises with equal access to preferential ODA funds will help increase transparency in the use of ODA, reduce the collusion of interest groups, corruption, encourage technology transfer, and develop the economic sector private sacrifice.

Strengthening public-private partnership (PPP) is also an option to attract investment resources while taking advantage of the existing advantages of the private sector. Currently, a number of legal documents on PPP have been issued, such as the Government's Decree No. 15/2015 / ND-CP dated February 14, 2015, on investment in the form of PPP and Decree No. 30/2015. / ND-CP dated March 17, 2015, detailing the implementation of a number of articles of the Bidding Law regarding investor selection. However, these documents are still limited, not creating an attractive environment, flexible and favorable investment modes for investors, especially foreign investors to join with Government agencies in the implementation of important national infrastructure projects. Therefore, it is necessary to continue perfecting the system of legal documents, thereby perfecting the legal basis, management mechanism, and repayment mechanism.

Finally, the ODA project executives themselves, the leading agencies, and the people need to be aware of the need and urgency of not relying on foreign aid and wish to graduate. ODA as soon as possible. As in the case of Korea, the country that received development assistance since the 1960s always considered this to be "a shame" and limited ODA to a minimum. ODA per capita reached its highest level during 1960-1972 but it was only around 10USD, then gradually decreased. The government and people of Korea have made great efforts to participate in economic development, thereby bringing about a miraculous achievement when the country officially stopped receiving aid after 30 years and since 1993, transferred from the role of the country reception to host countries. Only when there is a sense of graduation from ODA will there be motivation to improve the efficiency of using capital flows, making necessary preparations for the post-ODA period.

>> 
The Ministry of Finance estimates that public debt will reduce to 52.7% of GDP by 2022

Alice Hoang  - Vietnam Credit

Categories:
Investment

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