In recent consultations with senior Vietnamese officials, Era Dabla-Norris, mission chief in Vietnam and division chief in the IMF’s Asia and Pacific Department, said the conflict in Ukraine was likely to have a moderate impact on the pace of recovery and inflation in Vietnam. .
Despite the rise in the prices of goods and raw materials, the IMF estimates that inflation is still under control, which also demonstrates that economic activity is still moderate.
The IMF expects inflation in Vietnam to reach 3.9% by the end of the year, which is close to Vietnam’s control target. GDP is expected to grow by 6% in 2022 and 7.2% in 2023.
“The near-term outlook is fraught with significant risks,” Dabla-Norris said, adding that many factors can slow growth and increase inflation.
Immediate risks include increased geopolitical tensions and slower Chinese growth. Risks are also posed by tightening global financial conditions as well as developments in the real estate and corporate bond markets.
Standard Chartered also warned of mounting inflationary pressures in Vietnam, citing raw material supplies and geopolitical tensions. The bank estimates that the consumer price index will exceed 4% in 2022 and even reach 5.5% in 2023.
The IMF representative said that for Vietnam’s economy to grow and control inflation at the same time, policy formulation should be timely, and the size and structure of the policy support program should be flexible and adjusted according to the pace of economic recovery.
Fiscal policy will play an important role, particularly if downside risks to growth materialize, as room for further monetary easing is limited as long as inflation risks persist, she added.
“The rapid and effective implementation of the socio-economic development and recovery program will be essential to foster growth. The program prioritizes the health and recovery sectors and focuses on medium-term growth prospects,” she said.
Going forward, fiscal policy will need to strike a balance between providing temporary relief on the one hand and promoting economic transition on the other. In 2022, the overall budget deficit is expected to increase moderately, she added.
Regarding monetary policy, the IMF advises Vietnam to be wary of rising inflationary pressures. If persistent inflationary pressures emerge, the State Bank of Vietnam should tighten its monetary policy and clearly communicate the factors that led to this decision to help control inflation.
The IMF also believes that going forward, credit growth policies should strike a reasonable balance between promoting economic recovery and ensuring financial stability.
“The delegation appreciates the recent steps to increase exchange rate flexibility and modernize the monetary policy framework,” Dabla-Norris said.
It is also essential to strengthen the resilience of the banking sector in order to sustainably support medium-term growth. As its recovery strengthens, Vietnam should stop easing regulations on debt classification and provisioning.
Regulations allowing debt restructuring while keeping the debt pool unchanged should not be extended beyond the June 2022 deadline, as this would delay and potentially aggravate the recognition of uncollectible assets.
Strengthen banking resilience
According to the IMF, regulation and supervision of the financial sector should be strengthened in order to deal with emerging risks and build a more resilient banking system. She believes that a “macroprudential framework” can help ensure financial stability. To facilitate the resolution of bad debts, institutional and bankruptcy frameworks need to be strengthened, the IMF advised.
In conclusion, Dabla-Norris said Vietnam needs more drastic structural reforms as well as improvements in the business environment and labor quality. Policies should consider the implications for income and wealth inequality, she said, adding that increasing inequality has been found to reduce growth internationally.
“At the same time, as we move towards emerging economy standards, efforts must be made to strengthen governance and close data gaps,” she said.
The State Bank of Vietnam is targeting inflation below 4% this year.
Vietnam’s economy grew 2.6% last year, well below its pre-pandemic trend of 7%.