Budget woes cause for concern

The World Bank has warned that Vietnam must reduce its exposure to fiscal risk

 World Bank Vietnam’s lead economist, Sandeep Mahajan, is concerned with Vietnam’s current budgetary difficulties.

“Rising fiscal risks have to be managed,” Mahajan said, stressing that Vietnam could face more severe budget difficulties in the medium term, as large amounts must be taken from the state coffers to cover the country’s debts.

Currently, Vietnam’s budget is reportedly sufficient to pay for debts and recurrent spending, which occupies 70 per cent of the state’s total budget expenditure.

The World Bank is working with Vietnam’s government to formulate the best plan for using the state budget.

The government aims to narrow the budget deficit to 4.9 per cent of GDP this year and to 4 per cent next year. Continuing a shift which began in 2015, the budget for 2016 will put greater emphasis on capital expenditure, which is slated to rise by 25.5 per cent. Current expenditure is set to rise by a modest 6.5 per cent.

However, the Asian Development Bank warned that “Plans for fiscal consolidation are at risk from shortfalls in revenue.”

Over the past five years, several factors including the removal of or reductions in import tarriffs under Vietnam’s international and regional commitments, as well as tax incentives for favoured firms have eroded the tax base. Low oil prices are also dragging down resource tax revenue, which comprises 10 per cent of the total. Central government revenue and grants fell from 27.6 per cent of GDP in 2010 to 22 per cent last year.

“The government could use funds from the equitisation of state-owned enterprises and issue more short-term securities to support the budget in the near term, but achieving a more sustainable fiscal position is likely to require tax reform to reverse falls in the ratio of tax to GDP,” said a recently released ADB report on Vietnam’s economic outlook.

Standard & Poor’s has also warned that Vietnam could face national financial insecurity if it continued its current trend of overusing  state coffers.

Fiscal pressure has increased as the deficit was estimated at 6.5 per cent of GDP last year, reflecting a weak revenue outturn and increased current and capital spending.

Public and publicly guaranteed debt (under the Ministry of Finance’s definition) is estimated to have increased to 62.5 per cent of GDP in 2015, up from 59.6 per cent in 2014, inching toward the legally mandated debt ceiling of 65 per cent. Standard & Poor’s noted that in the future, Vietnam should pay special attention to controlling its budget overspending, bad debt, and the growing public debt in the banking sector.

Meanwhile, a World Bank report on Vietnam’s economic prospects for 2016 pointed out that “The government is yet to announce credible measures to implement medium-term fiscal consolidation on either the revenue or expenditure side.”

Head of the International Monetary Fund Article IV Mission Delegation John Nelmes recommended a growth-friendly fiscal consolidation (beginning this year) to reduce the fiscal deficit to about 3 per cent of GDP by 2020 and put public debt on a sustainable path.

The consolidation should focus on broadening the revenue base, safeguarding spending on high-quality public investment in education, health, and infrastructure, while also making resources available to resolve non-performing loans and strengthen capital in state-owned banks.