Vietnam has a debt problem
Country's communist leadership has failed to arrest a rising budget deficit rooted in government inefficiency and waste
Last month, Vietnam’s Ministry of Finance (MoF) proposed a plan for raising various taxes to curb rising budget deficits and public debt. It’s not immediately clear, though, the plan will work.
International Monetary Fund statistics show that the government budget deficit had increased from 22.1 trillion dong, or 5% of gross domestic product (GDP), in 2000 to 293 trillion dong (US$13.1 billion), or 6.5% of GDP, in 2016. The government aims to reduce the budget deficit to 3.5% of GDP by 2020, according to the Medium-Term Fiscal Plan 2016–2020.
Since 2000, the Vietnamese government has consistently overspent its budget. The budget deficit forecast for 2017–2018 is about 5.8% of GDP per annum. Government revenue had increased over the last 15 years, partially due to economic growth of over 6% on average over the period. However, this growth cannot keep up with the government’s expenditures.
Recurrent expenditures, including administration, wages and salaries, social security, pensions, public security and defense have been the main cause for the budget deficits. According to MoF statistics, recurrent expenditures accounted for 66.3% of total government expenditure in 2016, compared to 18.7% and 15% for interest payments and public investment, respectively.
The government’s plan to raise taxes has been strongly opposed by the Vietnamese people. Nguyen Sinh Hung, then-chairman of the National Assembly, said at the Standing Committee’s official hearing in early 2016 that authorities should improve tax collection and that it was not a good time to raise taxes, without elaborating.
He was absolutely correct. The MoF plans to raise the environmental tax from 3,000 dong to 8,000 dong per liter of gasoline, although the price of gasoline in Vietnam has already become too high relative to consumers’ incomes and as compared to prices in neighboring Asian countries.
The price of gasoline was US$0.83 per liter in Vietnam on September 11, 2017 as compared to US$0.52 in Malaysia, US$0.64 in Indonesia, and US$0.90 in the Philippines on the same day, according to the statistics shown on GlobalPetroPrices.com. If approved, the new tax will push the gasoline price up to US$1.03/liter or US$3.90/gallon, while the average income per capita in Vietnam is US$6.00/ day.
The people of Vietnam have accused the government of falsely raising environmental taxes, since they believe that its intention is to reduce the budget deficit, not to protect the environment. The MoF also wants to increase the across-the-board 10 percent value-added tax (VAT) to 12% in 2019, and perhaps to as much as 14% in the near future.
The Communist Party of Vietnam (CPV), with four million members, is an exceptionally heavy burden on the national budget, since the government must fully finance its staff, offices, and activities.
According to the MoF’s official statistics, the government gave a total of 11.8 trillion dong to the CPV Central Committee Office during the period from 2006–2015 (excluding 2009, since data for that year is not available), more than was given to the National Assembly Office (9.1 trillion dong), the Governmental Office (6.3 trillion dong), and the Presidential Office (1 trillion dong).
The CPV Central Committee accounted for 41.8% of total budget reserved for these organizations during that nine-year period. It should be noted that in addition to the Central Committee Office, CPV has offices at the province, city, district and village levels. Vietnam has 58 provinces and five big cities under the central government.
CPV has a number of special central commissions, such as the Central Commission for External Relations, the Central Commission for Economic Affairs, the Central Military Commission, the Central Inspection Commission and the Commission for Popularization and Education, all of which have the same functions as the corresponding ministries in the government.
This situation creates a double burden on taxpayers, who call it “một cổ hai tròng”, or two slipknots around one neck.
In addition, the government also provides funds to mass organizations and government-sanctioned civil society associations, especially the Vietnam Fatherland Front, Communist Youth Union, Vietnam Women’s Union, the Veterans’ Association, the Farmers’ Association, and the Vietnam General Federation of Labor. These six organizations are well-connected to the CPV and received a total of 1.5 trillion dong from the 2016 national budget.
As Le Hong Hiep of the Institute of Southeast Asian Studies (ISEAS) has pointed out, some of the most effective measures to reduce the budget deficit are to cut recurrent expenditures, reduce the size of the government and merge special CPV central commissions into corresponding governmental ministries.
International donors have consistently put pressure on the government to separate the CPV’s functions from the national budget.
Vietnam’s total public debt as of mid-July 2017 was US$94.6 billion, or about US$1,038 per capita. The public debt has consistently increased over many years from 36% of GDP in 2001 to about 62.4% in 2016. According to an IMF forecast, it will be about 63.3% and 64.3% in 2017 and 2018, respectively, while the public debt ceiling is set by the government at 65% of GDP for 2020.
Rising public debt service obligations add to public expenditures. The rising government budget deficit will, in turn, raise public debt. These are the two sides of the same fiscal problem.
Dinh Tien Dung, Minister of Finance, has pointed out that “Public debt is increasing rapidly, primarily because of weaknesses in managing and using loans.”
Indeed, underperformance of state-owned enterprises (SoEs) remains a serious burden on the government’s budget and wider economy. Trinh Xuan Thanh, former head of PetroVietnam Construction Joint Stock Corporation, was accused of causing a financial loss of 3.3 trillion dong (about US$145 million) and fled to Germany. It was the most recent case in a host of SoE scandals in Vietnam.
The market value of SoEs in Vietnam is currently about US$300 billion. The planned privatization of state-owned enterprises has dragged on over two decades. The sooner this work is completed, the better for the economy. The sale of SOEs, which the government treats as revenue, will also help offset the budget deficit.
Vietnam is also well-known for its notorious public investment projects. Quite a few bridges have collapsed soon after they were completed. Roads were built to last for only a few years before major repairs were needed. There are too many cases to be listed in this article.
Vast resources have been wasted in these public investment projects, and yet no one was seemingly held accountable for the losses. Corruption pervading these projects is the main reason for their failure.
According to the State Bank of Vietnam (SBV), non-performing loans (NPLs) in Vietnam in 2016, including bad debts managed by the Vietnam Asset Management Company (VAMC), amounted to VN487 trillion (USD$21.3 billion).
They accounted for 8.8% of total outstanding loans of 5.5 quadrillion dong (USD$241 billion), a quite high ratio. SBV says it plans to bring the NPL ratio to below 3% by 2020.
NPLs tend to reduce capital resources for lending, result in lower bank profitability, lead to misallocation of capital, and drag on economic growth. A recent study on NPLs by the European Bank for Reconstruction and Development (EBRD) reveals that countries with a low NPL ratio tend to experience faster growth.
Raising taxes is not the answer to government inefficiency and wastefulness in Vietnam. Using loans and investing wisely is the best way to reduce public debts and the budget deficit in the long run. These measures are critical if Vietnam wants to maintain its economic growth momentum.
And the country can arguably ill-afford to waste any more time or money.