World Bank: Deepening Structural Reforms Crucial to Productivity-Led Growth in Vietnam

December 5, 2016

New report says Vietnam’s medium-term outlook remains favorable, but with significant domestic and external risks

Hanoi, December 5, 2016 – Despite a fragile global environment, Vietnam’s economy remains resilient, thanks to robust domestic demand and export-oriented manufacturing, according to the World Bank’s latest Taking Stock report. Vietnam’s medium-term outlook remains favorable, with GDP expected to expand by 6 percent this year.

The report, a biannual review of the country’s economic performance, finds that Vietnam’s growth slowed to 5.9 percent during the first three quarters of the year, mainly because of a severe drought that has reduced agricultural output, cut down on oil production and slowed external demand. The fundamental drivers of growth – resilient domestic demand and export oriented manufacturing – remain in force.  

Vietnam’s growth was accompanied by low inflation and widening current account surplus. And despite price hikes for health and education services, core inflation remains low and headline inflation is expected to stay below the official target of 5 percent.

“Vietnam’s macroeconomic stability creates a favorable environment for policy makers to accelerate structural reforms, which is crucial as the country moves toward a more productivity-led growth model,” said Ousmane Dione, World Bank Country Director for Vietnam. “The adoption of the 2016-2020 economic restructuring plan by National Assembly in November, for instance, would address some of the emerging obstacles to growth in the economy.” 

According to the report, Vietnam’s fiscal deficit remains sizable and is approaching the statutory limit of 65 percent of gross domestic product, but the government has reinforced its commitment to achieving fiscal consolidation in the medium term. The economy’s recent performance owes in part to rapid credit growth and an accommodative fiscal stance, which may support growth in the short term but amplify existing medium-term financial and fiscal risks. 

In addition, easing monetary conditions and reducing credit growth can exacerbate existing macroeconomic and financial vulnerabilities. Several risks could adversely affect medium term prospects, including delayed implementation of structural and fiscal reforms, a further slowdown in the global economy, fragile global financial market conditions, and the prospect of rising interest rates in the US. 

The report also discusses how the agricultural sector can bring about more economic value and better livelihoods for farmers and consumers, using less natural and human resources but without degrading the environment. 

Vietnam’s agricultural sector has made enormous progress, such as higher productivity and output, contributing to national goals of achieving food security, poverty reduction and social stability. But there are growing concerns about the quality and sustainability of Vietnam’s agricultural growth. Higher productivity has come from more and more inputs and increasing environmental costs. 

According to the report, the Vietnamese government has played a major role in agricultural development. But the government will need to lead less yet facilitate more to transform Vietnam’s agriculture and agro-food system. For example, the government can undertake less direct investment in agriculture while focusing more on facilitating a more active agricultural land market, supporting rural infrastructure, reducing the transaction costs of farmers and agro-enterprises, and revitalizing the country’s agricultural innovation system. 

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