Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized
Report No: 39500 -VN
INTERNATION L DEVE OPMENT ASSOCIATION
PROGRAM DOCUMENT
FOR
Public Disclosure Authorized A PROPOSED CREDIT
IN THE AMOUNT OF SDR 114.8 MILLION
(US$175.0 MILLION EQUIVALENT)
TO
THE SOCIALIST REPUBLIC OF VIETNAM
FOR A SIXTH POVERTY REDUCTION SUPPORT OPERATION Public Disclosure Authorized
May 22,2007
Poverty Reduction and Economic Management Unit East Asia and Pacific Region
Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content may not otherwise be disclosed without World Bank authorization Government Fiscal Year January 1 to December 3 1 Currency Equivalents Currency unit = Dong One US$ = 16,015 Dong (May 2007)
ACRONYMS AND ABBREVIATIONS
ADB Asian Development Bank BOT Bu ild-Operate-Transfer CFAA Country Financial Accountability Assessment CG Consultative Group CPAR Country Procurement Assessment Review CPIA Country Policy and Institutional Assessment CPRGS Comprehensive Poverty Reduction and Growth Strategy CPS Country Partnership Strategy DA Deposit Account DFID Department for International Development DSA Debt Sustainability Assessment EIA Environmental Impact Assessment FDI Foreign Direct Investment FSQL Fundamental School Quality Level GDP Gross Domestic Product GSO General Statistics Office IDA International Development Association IMF International Monetary Fund IOSCO International Organization of Securities Commissions IPPC International Plant Protection Convention JSAN Joint Staff Advisory Note LUC Land-Use Right Certificate MARD Ministry of Agriculture and Rural Development MDG Millennium Development Goals MOET Ministry of Education and Training MOF Ministry of Finance MOH Ministry of Health MOHA Ministry ofHome Affairs MOJ Ministry of Justice MOLISA Ministry of Labor, Invalids, and Social Affairs MONRE Ministry ofNatural Resources and the Environment MOT Ministry ofTrade MPI Ministry of Planning and Investment MTEF Medium-Term Expenditure Framework NGO Non-Governmental Organization NPL Non-Performing Loan NSC National Steering Committee ODA Official Development Assistance OOG Office of Government oss One-Stop Shop PCU Program Coordination Unit PEC Party’s Economic Commission PEFA Public Expenditure and Financial Accountability FOR OFFICIAL USE ONLY
PER-IFA Public Expenditure Review-Integrated Fiduciary Assessment PRGF Poverty Reduction and Growth Facility PRSC Poverty Reduction Support Credit PWD People Living with Disabilities SAV State Audit of Vietnam SBV State Bank of Vietnam SCIC State Capital Investment Corporation SEA Strategic Environment Assessment SEDP Socio-Economic Development Plan SFE State Forestry Enterprise SOCB State-Owned Commercial Bank SOE State-Owned Enterprise SPS Sanitary and Phyto-Sanitary ssc State Securities Commission TABMIS Treasury and Budget Management Information System UNDP United Nations Development Program VASS Vietnam Academy of Social Sciences VBF Vietnam Business Forum VDB Vietnam Development Bank VDG Vietnam Development Goals VHLSS Vietnam Household Living Standards Survey vss Vietnam Social Security WTO World Trade Organization
I Vice President - James W. Adams. EAPVP Country Director (acting) - Martin Rama, EASPR Chief Economist and Sector Director (acting) - Deepak Bhattasali, EASPR 1 Task Manager - Martin Rama, EASPR
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.
SOCIALIST REPUBLIC OF VIETNAM SIXTH POVERTY REDUCTION SUPPORT CREDIT
Table of Contents
I. INTRODUCTION...... 1 11. THE FIVE-YEAR PLAN 2006-2010...... 3 111. PROGRESS OVER THE PREVIOUS CYCLE ...... 7 A. OVERALL MACROECONOMIC PERFORMANCE...... 7 B. ECONOMIC GROWTH AND POVERTY REDUCTION...... 8 C. OTHER DEVELOPMENT OUTCOMES ...... 10 IV. THE CONTRIBUTION OF PRSCs ...... 10 A. RESOURCES MOBILIZED...... 10 B. LESSONS LEARNED ...... 13 V. THE NEW PRSC CYCLE ...... 15 A. ANALYTICAL UNDERPINNINGS...... B. STRATEGIC FOCUS ...... 17 C. MONITORING FRAMEWORK ...... 19 VI. THE PROPOSED CREDIT ...... 19 A. BUSINESS DEVELOPMENT ...... 20 B. SOCIAL INCLUSION...... 21 C. NATURAL RESOURCES...... 22 D. MODERN GOVERNANCE...... 23 E. TRIGGERS FOR PRSC 7 ...... 24 VII. OPERATION IMPLEMENTATION...... 28 A. POVERTY AND SOCIAL IMPACTS ...... 28 B. ENVIRONMENTAL ASPECTS...... 29 C. STEERING AND MONITORING ...... 30 D. ADMINISTRATION...... 31 E. BENEFITS AND RISKS ...... 32 VIII. COORDINATION WITH DONORS AND STAKEHOLDERS...... 33 A. THE IMF...... 33 B. OTHER MULTILATERAL AND BILATERAL DONORS.. C. CIVIL SOCIETY ......
I ANNEXES
Aiinex 1: IMF Letter ofAssessment ...... 36 Annex 2: Policy Actioiis over the New PRSC Cycle...... 37 Annex 3 : Monitoring Progress towards Development Outcomes...... 47 Amex 4: Letter from the Government on the Reform Program...... 56 Annex 5: Supporting Documentation for Prior Actions in PRSC 6...... 58 Annex 6: Vietnam at a Glance ...... 63 Annex 7: Map (IBRD 3351 1R) ...... 65
TABLES IN TEXT
TABLE1 : KEYECONOMIC INDICATORS...... 8 TABLE2: PROGRESS TOWARDS THE MILLENNIUMDEVELOPMENT GOALS...... 11 TABLE3: GENERALBUDGET SUPPORT OVERTIME ...... 12 TABLE4: GENERALBUDGET AND THE FINANCING GAP...... 13 TABLE5 : PROGRESS ACCOMPLISHED BY POLICY AREA...... 14 TABLE 6: KEY PRIOR ACTIONS FOR PRSC ......
TABLE7: AGREEDTRIGGERS FOR PRSC ...... 25 TABLE8: DONORSUPPORTTO PRSC 6...... 34
FIGURES IN TEXT
FIGURE 1 : VIETNAM’S PERFORMANCE IN REGIONAL PERSPECTIVE...... 9 FIGURE2: SUPPORTING THE IMPLEMENTATION OF THE SEDP 2006-20 lo...... 16
BOXES IN TEXT
BOX 1 : GOODPRACTICE IN POLICY LENDINGOPERATIONS.. . . . , ...... 18
Task Team
Core Team: Martin Rama (task manager), Vivek Suri (eo-task manager), Hoi-Chun Nguyen (senior legal counsel).
Contributors: Noritaka Akamatsu, Maria DelJina Alcaide Garrido, Soren Baunsgaard, Dan Biller, Viet Tuan Dinh, Quang Hong Doan, Hoonae Kim, Severin Kodderitzsch, Samuel S Lieberman, Simon Lucas, Thanh Thi Mai, Robin Mearns, Dzung The Nguyen, Minh Van Nguyen, Nga Nguyet Nguyen, William D. 0. Paterson, Due Minh Pham, Cuong Hung Pham, Hoa Thi Mong Phani, Richard Spencer, Jennifer Thomson, Thang-Long Ton, Viet Quoc Trieu, Carolyn Turk, Binh Thanh Vu, Jeflrey Waite.
Peer Reviewers: Satu Kristiina Kahkonen and Stefan G. Koeberle. Team Assistants: Hang Thu Nguyen and Dung Thi Ngoc Tran.
.. 11 SOCIALIST REPUBLIC OF VIETNAM: SIXTH POVERTY REDUCTION SUPPORT CREDIT
Credit and Program Summary
Borrower: The Socialist Republic ofVietnam.
Amount: SDRll4.8 million (US$175.0 million equivalent).
Terms: Standard IDA terms: 40-year maturity with a 10-year grace period.
Description: A sixth Poverty Reduction Support Credit (PRSC 6), as the first operation in a cycle aimed at implementing Vietnam’s Socio-Economic Development Plan (SEDP) 2006-20 10, approved in June 2006.
Benefits: The present operation provides further support to Vietnam’s reform program. The current cycle of PRSCs is a vehicle for the World Bank, and the donor community more broadly, to stay engaged with a client that has delivered an outstanding performance in terms of economic growth and poverty reduction. It also recognizes the commitment of the government to pursue and deepen its reform strategy, as reflected over the last few months in major milestones, including the entry into the World Trade Organization (WTO), the approval of an ambitious banking reform roadmap and the adoption of a determined stance in the fight against corruption.
Active engagement should strengthen the coherence of the program, especially because tlie effectiveness of sectoral policy actions hinges on the success of more fundamental governance reforms in areas such public financial management, public administration reform and legal and judiciary development. Engagement should also help improve tlie content of specific policy actions, to ensure the timeliness of their adoption, and to monitor the impact of the overall program on broader development outcomes.
This engagement is all the more important given that this could be the last cycle of general budget support operations on concessional terms, hence providing an exceptional window for high-level policy access in a country that is not aid dependent.
Risks: At the same time, its own success confronts Vietnam with new challenges. The reform agenda has not progressed at the same pace across all fronts, and private sector response has been much stronger in some areas than in others. As a result, the country is facing potentially dangerous imbalances. The biggest risks faced by Vietnam are related to tlie sustainability of its remarkable performance, economically, socially and institutionally.
... 111 In the short term, the biggest vulnerability stems from possible turbulence in the financial sector, which could in turn undermine Vietnam’s gains in the fight against poverty. The development of capital markets has vastly outpaced that of the supervisory and regulatory capacity of monetary authorities. This calls for a rapid upgrading of policies related to the banking sector, the securities market and the management of public debt, all of which are part of the proposed reform program.
Success in global integration, resulting in massive inflows of Foreign Direct Investment (FDI) to the growth poles of the country and increased competition in formally protected sectors, may also test the ability of Vietnam to preserve social inclusion. There is a risk that some groups could lose in the short term, and a clear prospect of a widening urban-rural gap in the medium term. Rapid feedback channels from affected stakeholders, inclusive policies in the social sectors, and transparent mechanisms to transfer resources to the poorer regions are among the mitigating measures supported by the proposed series of operations.
Other imbalances are related to rapid urbanization and infrastructure development, in a context where transparency in land zoning conversion and compensation are still partial. Cases ofcorruption and social strife are increasingly related to land. Tackling this risk requires rapid progress in transparency at various levels, from regional planning to infrastructure networks to land use to appropriate taxation to the monitoring of assets of the relevant civi I servants. These are also areas receiving special attention in the proposed series of operations.
Disbursement: The credit will be disbursed upon declaration ofeffectiveness.
Co-financing : Numerous bilateral and multilateral donors have expressed their support to the PRSC process in Vietnam. Nineteen of them have participated in the preparation of PRSC operations in Vietnam, including this credit, and have been actively involved in the policy dialogue in the areas where they are stronger. Subject to confirmation, the following donors expressed their intention to contribute resources to this operation, either through grant finance or through parallel lending: the Asian Development Bank (ADB), Australia, Canada, Denmark, the European Commission, Germany, Ireland, Japan, the Netherlands, Spain and the United Kingdom. Others may join in the months following credit approval.
Project ID number: P 10 1724.
iv INTERNATIONAL DEVELOPMENT ASSOCIATION
PROPOSED CREDIT TO THE SOCIALIST REPUBLIC OF VIETNAM FOR A SIXTH POVERTY REDUCTION SUPPORT OPERATION
I. INTRODUCTION
1. Vietnam has been on a sustained path of economic reform since the launching of its Doi Moi (renovation) process, in 1986. Tlie overall principle has been tlie increased reliance on market mechanisms, while maintaining a socialist orientation. The latter can be interpreted as focusing on social inclusion while preserving a leading role for tlie state. Beyond this general principle, the process lias involved a systematic piloting of reforms, followed by some form of evaluation, an effort to forge consensus among relevant stakeholders, and finally the scaling up of reportedly successful initiatives. The drive towards reform started before the collapse of the Soviet Union. In its aftermath, it also involved important departures from the dominant approach to economic transition. Until recently, reform moves were especially cautious (if not outright slow) in relation to the privatization of state-owned enterprises (SOEs) and tlie restructuring of the banking sector. Gradualism might have prevented a collapse of economic activity and of government revenue in the early stages of transition, and probably resulted in a more limited concentration of wealth. It might have also resulted in a milder impact of tlie East Asian crisis. On tlie other hand, gradualism in the reform of the state sector raises concerns regarding the potential buildup of government liabilities.
2. Comprehensive economic reforms have led to rapid economic growth and remarkable progress on development outcomes. Vietnam has been among tlie fastest-growing economies in the world for almost two decades. The Gross Domestic Product (GDP) per capita Iias increased at roughly 6.9 percent per year in real terms. Given tlie very low level of domestic prices at the inception of tlie reform process, and the subsequent appreciation as the economy develops, the average growth rate of per capita GDP measured in dollar terms has been well into two-digit figures. What is more remarkable, amidst such rapid economic transformation, has been the relative stability of inequality indicators. Tlie Gini index increased from 0.34 in 1993, tlie year of the first representative household expenditure survey, to 0.37 in 2004. This stability probably reflects tlie priority given to rural development in the initial phases of economic transition, especially through a relatively egalitarian redistribution of collective agricultural land to individual households and the liberalization of trade in agricultural products. The modest increase in inequality lias resulted in a dramatic reduction in poverty. Based on a consumption basket of food and non-food items sustaining an intake of 2,100 calories per person per day, the poverty headcount declined from 58 percent in 1993 to less than 20 percent in 2004. Other social indicators, including child mortality, have shown equally remarkable improvements.
3. There was a considerable acceleration of reforms around 2001, justifying the first series of PRSCs, and then again in 2006. The former involved the passing of an enterprise law that greatly facilitated business registration and operation, the signing of a bilateral trade agreement with tlie United States that strengthened global integration and resulted in important legal improvements, the adoption of the first serious steps towards SOE divestiture and the
1 strengthening of public financial management. The latter was crowned by the accession to the WTO, the adoption of an ambitious banking reform roadmap, a new resolve to equitize large SOEs and transfer the exercise of state ownership rights out of line ministries and provincial governments, the drive towards introducing universal programs for social protection, and the adoption of a determined anti-corruption drive. There is little dissent regarding the direction for economic reforms, and internal debates are increasingly focusing on strengthening the mechanisms for citizen’s feedback aiid government accountability.
4. Emerging from massive poverty less than two decades ago, the vision now is to attain middle-income status by 2010. If current growth trends were to continue, GDP per capita could cross the US$lOOO benchmark in three years time. This would be an impressive accomplishment for a country whose economy was still dilapidated by decades of war, with incentives distorted by central planning, in the early 1990s. However, attaining middle-income status is seen as more than a quantitative goal. Referring to such status, rather than to any specific growth rate or threshold for GDP per capita, is a way to emphasize the need for a different, more sophisticated set of economic institutions. Vietnam has by now a much more diversified economy, involving an increasing number of stakeholders, aiid requiring finer steering mechanisms. Reaching middle-income status requires further financial deepening to support capital mobilization, the regulation of access to and pricing of infrastructure services, the gradual development of modern social insurance, more effective tools for environmental protection, legal atid judiciary reforms, atid the effective containment of corruption, among others.
5. The new SEDP 2006-2010 articulates this vision, reflecting the transition towards strategic planning for a market economy. The SEDP, approved in June 2006, illustrates the depth of Vietnam’s transition. Unlike previous five-year plans, which focused on quantitative targets as if the state was still in charge of producing most goods and services, the SEDP emphasizes development outcomes, and the policy reforms needed to attain them. It relies on data analysis, rather than administrative reporting, to substantiate its diagnostics and recommendations. It has also led to the adoption of a framework to monitor progress towards attaining development outcomes. The process through which the SEDP was prepared was more encompassing than in the past. Extensive consultations were held, going beyond the boundaries of government, aiid involving businesses, grassroots communities, overseas Vietnamese and donors. This was the first time a five-year plan was declassified and discussed by the National Assembly before being considered by the Party.
6. The donor community has decided to align its efforts behind the SEDP, while acknowledging that other key documents will shape reforms in the coming years. Such alignment is a testimony to the strong ownership of the reform program by the government of Vietnam. It also reflects satisfaction with the process through which the SEDP was prepared. Above all, the SEDP is seen as both a credible and a sustainable strategy to foster economic growth and poverty reduction. It is credible because of the ambitious policy reforms it proposes. Those reforms are organized around three pillars: supporting business development, keeping growth inclusive and better managing natural resources; a fourth, underlying pillar concerns the need to modernize institutions so as to deliver on the other three fronts. The SEDP is also seen as sustainable because it should lead to manageable levels of public debt by 2010, in spite of a massive effort to develop large-scale infrastructure. In the case ofthe World Bank, the Joint Staff Advisory Note (JSAN) submitted to the Board in December 2006, atid the Country Partnership Strategy (CPS) submitted in January 2007 concluded that the SEDP had incorporated the necessary Poverty Reduction Strategy principles, was broadly sound and was a plan that could both deliver growth and reduce poverty.
2 7. At the same time, donors recognize that some of the reforms needed will be challenging, requiring attention to their content and timeliness. The SEDP represents a sustainable development strategy only provided that macroeconomic management remains prudent aiid state sector reform is not unnecessarily delayed. The international commitments made by Vietnam in its drive to accede to tlie WTO can help, by imposing clear deadlines for the adoption of specific measures. But implementing WTO commitments from a “development approach”, as opposed to a inere “compliance approach”, will require strong cross-sectoral coordination. Moreover, the list of policy reforms considered by tlie SEDP is remarkably broad, which makes prioritization and sequencing a priority. There is conselisus that supporting the reform agenda ofVietnam does not entail favoring one ofthe SEDP pillars over the others. But it requires being selective within each of the pillars, and paying attention to the content ofthe most important measures.
8. The proposed credit is the first in a five-year cycle aimed at supporting the implementation of the SEDP. PRSCs are well-suited to address the chal letiges mentioned above. The cross-cutting nature of the policy dialogue they support strengthens coordination among line ministries and government agencies. Their emphasis on a selected number of policy actions facilitates an in-depth discussion of their content. Their otherwise demanding annual sequence, combined with the forward-looking nature of tlie triggers used to launch the preparation ofthe next operation in tlie cycle, helps keeping the pace of reform. Meanwhile, the progress made on public financial management over the last decade mitigates the risks associated with direct budget support. However, unlike other developing countries with aii ongoing PRSC process, Vietnam is not dependent on tlie resources contributed by donors to finance government spending. Overall, and in spite of their large number of co-financiers, PRSC operations in Vietnam amount to less than 2 percent of public expenditures and about a third of the additional cost of economic reforms. The fact that PRSC resources are not essential for tlie operation ofthe Vietnamese government raises tlie bar for tlie policy dialogue, giving especial relevance to its analytical underpinnings.
9. Engagement at this stage is seen as essential to lay the foundations of a modern and inclusive market economy, supporting sustained growth in the longer term. If Vietnam succeeds in attaining middle-income status before 20 10, the cycle of PRSCs associated with the SEDP will be the last one to be supported by IDA. The concessional component of donor co- financing may also decline over time. Therefore, the five-year period ahead represents a critically important window for engagement by the international community. Such engagement is all the more relevant because Vietnam’s ability to sustain its remarkable growth trajectory over several more decades, and eventually become an industrial country, may be determined during this period. The reforms associated with attaining middle-income status are more complex than those needed to move away from central planning. Active engagement should contribute to improving the content aiid coherence of such reforms.
11. THE FIVE-YEAR PLAN 2006-2010
IO. The SEDP 2006-2010 is a milestone in the modernization of planning in Vietnam, justifying the alignment of donor support to its implementation. Approved in June, 2006, it outlines tlie policy measures needed for Vietnam to advance to middle-income status by the end of the decade. Following an established practice, the SEDP sets the framework for government action and resource allocation. But this framework is much more focused on attaining
3 development outcomes than in the past. Until recently, five-year plans entertained the fiction that government was still in direct control of delivering goods and services, which resulted in the compilation oflarge numbers of production targets. Consultation processes involved government agencies only, whereas self-reporting and administrative data substituted for a genuine assessment of results. By contrast, the framework for the SEDP was influenced by consultations outside government, from grassroots communities to the overseas Vietnamese. And for the first time the government’s primary planning document will also be used as a basis for guiding and allocating Official Development Assistance (ODA).
11. The preparation SEDP 2006-2010 built on the experience with the Comprehensive Poverty Reduction and Growth Strategy (CPRGS). Since the late 1990s, several initiatives had been undertaken to support the modernization of planning processes. In June 2001, recognizing the limitation of both traditional five-year plans and targeted poverty reduction programs, the Minister ofPlanning and Investment (MPI) was given the responsibility to produce a broader document, addressing poverty issues in a comprehensive way. In preparing this document, consultation and debate beyond were extended beyond govern tnent boundaries, reaching out to poor communities. The new document represented an important step in terms of content as well. Rather than relying on administrative records, the analysis combined high- quality quantitative and qualitative data into the discussion. This led to a better coverage of sensitive issues, including the challenge of combating ethnic minority poverty and the problems faced by urban migrants in accessing basic services. In parallel, there was a shift away from the description of inputs and the setting of targets towards the statement of development objectives. As part of this process, the Milletinium Development Goals (MDGs) were localized into a clearly defined set of Vietnam Development Goals (VDGs). There were also efforts to connect policy actions and resource allocation, with a rudimentary “costing” exercise for the VDGs.
12. CPRGS provided the foundation for the first series of PRSC operations in Vietnam, while also playing an important demonstration effect. The new document was approved it1 May 2002, covering a three-year period. Subsequently, government officials, donors and NGOs discussed the sequence of policy actions needed to attain the CPRGS objectives. This exercise, jointly with subsequent analytical work by the World Bank and ADB towards the Vietnam Development Report 2003, laid the foundations for a series of direct budget support operations. Since June 2003 an increasingly large number of donors channel resources to the government through annual PRSC operations, it1 recognition of the progress made in the implementation of the CPRGS agenda. The allocation of those resources is decided by government and their spending is processed through Vietnamese procedures. But the triggers to proceed with the following operatioii in the cycle were related to the adoption ofthe key policy measures to deliver on the CPRGS objectives. By strengthening the coherence of reforms across sectors, improving their content and timeliness, and mobilizing donor resources in their support, this process showed that strategic planning for development made sense in a market economy, but was quite different a process from the one leading to traditional five-year plans.
13. This approach was workable thanks to the considerable progress made in public financial management over the years. Important steps in the process included the introduction of a single treasury account, the adoption of international public accounting standards, and the establishment of the State Audit of Vietnam (SAV) as an agency under the National Assembly. An obvious follow-up to the “costing” of CPRGS was the preparation of Medium-Term Expenditure Frameworks (MTEFs). The first pilot MTEF reports, covering education, health, transport, and agriculture and rural development, were submitted to the Ministry of Finance (MOF) at the end of the previous five-year cycle. Four provincial MTEFs are also under preparation. These pilots have now been extended and have been complemented by regulations that set annual budgets within a multi-year framework. While the submission and approval ofthe
4 budget by the National Assembly continues to be done on an annual basis, they have to be based on a multi-year framework. Initially covering three years, this framework has by now been extended to the entire planning cycle. A further link between planning and budgeting processes resulted from the introduction of norms for allocating resources to provinces. Those norms concerned recurrent budget expenditures first, and capital expenditures more recently. They became fully operational in 2007. Mainly based on population figures, these norms also incorporate poverty measures into their formulas and should lead to additional resources for poorer parts ofthe country.
14. However, CPRGS also needed to be adjusted over time, especially in relation to its treatment of large-scale infrastructure. Planning documents for a command economy emphasized massive investment projects, whereas CPRGS focused on expenditures related to human development and social protection. At a deeper level, there were also diverging views in relation to the main drivers of poverty reduction, with the East Asian experience attaching more importance to large-scale infrastructure than the more microeconomic (or grassroots) poverty analyses underlying CPRGS. At times, this gap translated into a debate on whether ODA resources should be channeled to investment projects or rather to the government budget. Subsequent experience clearly showed the complementary of these two vehicles for ODA. Aware of the need to bridge the gap, the government proposed to “expand” the CPRGS so that it wouId more appropriately address the role of large-scale infrastructure in economic growth and poverty reduction. This was done in December 2003.
15. A more important shortcoming of CPRGS was its sitting outside the mainstream decision-making processes used by the government of Vietnam. The CPRGS was neither the five-year plan nor a recognized sectoral strategy. This unclear status subsequently generated some confusion among officials, who found it difficult to judge what their obligations were in relation to the document. Conveying the CPRGS approach and messages to authorities at local levels was most difficult. With the progress made in decentralization in Vietnam, almost half of public expenditures are allocated by government officials in provinces, districts and communes. But few local officials knew about CPRGS or considered that it had direct implications for their daily work. To redress this shortcoming, an initiative to rollout the CPRGS approach to the provinces was launched in April 2004. Over time, two dozen provincial governments experimented with the preparation of strategic plans. Their efforts were supported by donors in a decentralized fashion, each local government choosing its own approach to bring together the various departments involved and come up with a renovated provincial plan. The experience was rich in terms of learning, but diverse if measured in terms ofsuccess on the ground.
16. These gaps and shortcomings highlighted the importance of working through the normal planning processes of Vietnam. Towards the end of the five-year cycle that just finished, the need to mainstream the CPRGS approach was obvious to government and donors alike. In September 2004 the Prime Minister issued a directive stating that the new five-year plan would be drafted according to the same principles that had governed the preparation of the CPRGS. Guidelines subsequently issued by MPI to line ministries and provinces emphasized the importance of using a broad range of data (including participatory poverty assessments, survey data and research carried out by local institutes and international organizations) to underpin planning objectives. The guidelines required an open process, specifically involving the publication ofdraft plans. They also specified the need to identify indicators linked to the VDGs and to include a resource dimension into the plan.
17. The process leading to the preparation of the SEDP 2006-2010 had important strengths compared to its predecessors. There was a serious effort to collect inputs from different groups of the Vietnamese society. In addition to internal discussions within
5 government, consultation workshops were held with local officials, groups of academics, the domestic business sector, iiiteriiational and local non-governmental organizations (NGOs), people living with disabilities (PWD), overseas Vietnamese, women and women’s groups, aiid donors. A series of participatory research exercises involving local experts and international NGOs also helped to gather feedback from poor communities in 17 sites across the country. Tlie draft SEDP was declassified for the first time ever, and it was discussed by the National Assembly in November 2005, a departure from previous practice which scl~eduledNational Assembly discussion after the Party Congress. This innovation gave members of parliament more influence over tlie content of the document than in previous planning cycles. There was also a second round of consultations within government and with donors and NGOs following the first discussion at tlie National Assembly.
18. There is also considerable progress in relation to the use of data and the set up of a credible monitoring and evaluation framework. Reliable data from representative l~ousel~old surveys is used by the SEDP 2006-2010 to present a comprehensive analysis of poverty in Vietnam. Tlie text includes candid discussions about disadvantaged groups and regions and about tlie challenges presented by the emergence of a growing gap between socioeconomic groups. Issues of social inclusion are no longer restricted to the discussion of targeted programs but are instead tackled in the sectoral sections of the plan. A results framework was recently completed by MPI. This framework is structured logically around a results chain from inputs to outcomes. It includes a substantial pillar that refers to measuring progress in the promotion of good governance, committing the government to measuring progress in improving transparency and participation, strengthening decentralization, managing public resources better aiid reducing corruption. The framework also recognizes that much ofthe information on results will need to be provided or verified tlirougli independent surveys.
19. In the SEDP, the government sets out intended actions that fall broadly into four main areas: (a) the promotion of growth and transition to a market economy; (b) reducing poverty atid ensuring social inclusion; (c) managing the environment aiid natural resources in a sustainable manner; and, (d) building institutions that can support the strategy. The first three pillars are explicitly listed in tlie SEDP, whereas the fourth one is introduced in the monitoring and evaluation framework as the foundation to make progress on the other three. Taken together, intended actions under these four pillars can pave the way for Vietnam to become a middle- income country by the end ofthe period.
20. The SEDP 2006-2010 is also fiscally sustainable, despite the high level of public investment associated with the development of large-scale infrastructure. The baseline scenario of the most recent Debt Sustainability Assessment (DSA) by the World Bank and the IMF is broadly in line with tlie investment and growth outlook of the SEDP. It estimates public and publicly-guaranteed debt to increase from nearly 44 percent ofthe GDP in 2005 to around 51 percent by 201 1, This increase, though significant, is still considered well within manageable limits, especially since more than half of it will remain on highly concessional terms. Tlie concessiotial component of Vietnam’s debt, embodied in long repayment periods and low interest rates, is reflected in the gap between the nominal level of public debt and its net present value. External debt, both public and private, is projected to decline somewhat: from a little over 32 percent of GDP to just under 3 1 percent. The ratio ofexternal debt service payments to exports is estimated to remain below 6 percent during 2005 to 201 1. Vietnam should thus remain at low risk of external debt distress.
2 I. Reform programs are not cast in stone, however, and the SEDP 2006-2010 is bound to be complemented by other strategic documents and policy developments over time. The importance of planning should not be over-emphasized, especially in a market economy. Change
6 also happens outside documents produced every five years. For instance, some of the most important decisions over the last cycle, from the acceleration of negotiations to accede to the WTO to the adoption ofthe banking reform roadmap to the approval ofthe Anti-Corruption Law, were not foreseen as such in the previous five-year plan or in the CPRGS. Also, the plan is at times a follower, more than a leader, to the extent that it records and scales up provincial innovations. In approaching the proposed series of operations, it is therefore important to keep in mind that there will be departures from the SEDP 2006-2010, especially in the outer years of the program. One of the reasons for active engagement is precisely to encourage and support departures that could further deepen the reform process ofVietnam.
22. With a sound and sustainable strategy at hand, the challenge now lies in implementation. Substantive progress will require prioritizing the many policy actions identified in the SEDP, clarifying their sequence and timing and assessing their possible cost. There is agreement that prioritization should involve selecting the key reforms within each of the SEDP pillars, rather than choosing across pillars. It is also clear that protecting the prudence that has characterized macroeconomic policy over the last few years and delivering on state sector reform will be essential to contain the growth of explicit and implicit government liabilities and keep the overall approach to development financially sustainable. Besides, effective implementation will also require sound reporting systems that can identify and acknowledge shortcomings, supported by processes for adjusting policies accordingly. The experience with policy reforms over the previous cycle is especially relevant in this respect.
111. PROGRESS OVER THE PREVIOUS CYCLE
A. OVERALL MACROECONOMIC PERFORMANCE
23. While neither the SEDP 2001-2005 nor CPRGS had a monitoring framework attached to it, progress can be gauged along a set of standard indicators. A sound macroeconomic management is a prerequisite for sustainable growth, and Vietnam did reasonably well in this respect (Table 1). Economic growth rates have been on a slightly upward trend over the five-year period. This is not the result of expansionary policies. Both government spending and government revenue have gradually increased over time, but the budget balance has remained fairly stable, at modest levels. Exports have grown vigorously, bringing the overall trade balance back to equilibrium after a sizeable deficit towards the middle of the five-year period. Rapidly growing FDI, coupled with an expanding ODA program and increased remittances from overseas Vietnamese have resulted in a current account surplus and a larger volume of international reserves. While inflation accelerated in 2004, this was mainly the result of supply shocks, including higher prices for oil and construction materials as well as higher food prices from the first avian influenza outbreak. Since then, the growth rate of banking credit has been on a decelerating path, mainly due to efforts to improve the quality of loan portfolios, and the inflation rate is gradually subsiding.
7 TABLE1: KEYECONOMIC INDICATORS
Indicator 2001 2002 2003 2004 2005 2006e Real GDP (percent change) 6.9 7.0 7.3 7.8 8.4 8.2 Industrial output value (percent change) 14.6 14.5 16.1 16.0 17.2 17.0 Inflation (percent, by year end) 0.7 4.0 2.9 9.5 8.4 6.6 Nominal depreciation (percent, by year end) 3.9 2.0 1.6 I .5 0.7 1.o Credit to the economv (percent change) 21.4 22.2 28.4 41.6 31.7 22.0 General government budget (percent of GDP) Total revenues and grants 21.6 22.7 24.9 26.7 25.9 26.8 Total expenditure (including interest) 24.4 24.2 26.1 25.8 27.1 27.5 Current expenditure 16.0 15.7 16.7 16.9 18.5 18.7 Capital expenditure 8.4 8.4 9.4 8.9 8.6 8.8 Budget balance (excluding on-lending) -2.8 -1.4 -1.2 0.9 -1.2 -0.7 Extra-budgetary outlays (percent of GDP) On-lending ofODA 1.o 0.9 1.5 0.9 1.o 1.2 On-lending ofdomestic resources (DAF) 1.2 1.5 1.7 1 .o 0.5 0.8 On-lending ofsovereign bond 0.0 0.0 0.0 0.0 1.4 0.0 Off-budget investment speiiditie 0.0 0.0 1.6 1 .o 2.0 2.0 Current account balance (in US$ billion) 0.7 -0.4 -1.9 -1.6 0.2 1.2 Current account balance (in percent of GDP) 2.0 -1.1 -4.9 -3.4 0.4 2.0 Export growth (nominal, percent change) 4.0 11.2 20.6 31.4 22.5 22.1 Imports growth (nominal, percent change) 2.3 22.1 28.0 26.6 15.7 20.1 Total external debt (US$ billion) 12.5 12.3 13.5 15.4 16.9 19.0 Total external debt (percent of GDP) 38.5 35.2 34.2 33.9 32.0 31.3 Debt service ratio (percent of exports) 10.6 8.3 7.5 5.9 5.5 5.5 ~ ~ ~~~~~ ~ ~~ Reserves, including gold (US$ billion) 3.4 3.7 5.6 6.3 8.6 11.2 Reserves (in weeks of goods iimorts) 10.0 8.6 10.3 9.9 11.0 13.0 Source: World Bank. Figures for 2006 are preliminary estimates.
B. ECONOMIC GROWTH AND POVERTY REDUCTION
24. Vietnam’s strong economic performance over the last five years is not a mere reflection of a more favorable international environment. It could indeed be argued that the regional recovery from the East Asian crisis, rather than homegrown reforms, were the main determinants of success. One way to assess the validity of this hypothesis is to compare Vietnam’s growth rate to that of other countries in the region. To iron out the effect ofshort-term fluctuations and measurement error, three-year moving averages can be used. Also, to take changes in relative prices into account, several definitions of output can be used, such as GDP per
8 capita in local currency at constant prices, in US dollars at current prices, or in PPP dollars at constant prices. The results of this exercise are unambiguous: Vietnam’s relative position improves quite steadily over time, climbing six or seven positions in just a few years (Figure 1, left panel). A similar exercise, at the worldwide level, shows that China and a few oil-rich countries still do better, but Vietnam climbed some 40 to 60 positions, depending on how growth is measured.
FIGURE1 : VIETNAM’S PERFORMANCE INREGIONAL PERSPECTIVE
, Vietnam in East Asia and the Pacific Roportion of people living with less than 1 PPP $ per day 1999 2000 2001 2002 2003 2004 2005 I -44etnam 0 -China 1 a EastAsiaandPacific 50 - - - - 2 Indonesia I Y -Thailand r3 40 ~~ - ~ -c 2 4 w- 5 ,$ 30 ~- 6 -Per capita income 20 - ~ change (constant LCUj 7
~ -e Percapitaincome - -- 18 - change (constant us$) 10 9 -----Percapita incomce ---/---, 0 188’ 10 change (PPP constant) ~ __ 1990 1992 1994 1996 1998 2000 2002 2004
Source: World Bank.
25. Vietnam’s performance is even stronger in relation to poverty reduction, with no other country registering faster progress. Admittedly, poverty comparisons across countries raise important methodological difficulties, stemming from the fact that both the structure of consumption bundles and the prices of goods and services differ considerably from one place to another. One usual shortcut is to set the poverty line at some intuitively appealing level, such as one PPP dollar per day. Based on this measure, between 1990 and 2004 the percentage of the population living in poverty in Vietnam fell by roughly 3 percentage points per year, twice the rate ofChina (Figure 1, right panel). Adjustments to PPP exchange rates might somewhat modify these results, but they are unlikely to lead to substantially different country rankings. Moreover, in Vietnam’s case the trend is confirmed when using a comparable poverty line, related to the consumption bundle (including food and non-food items) necessary to secure a daily food intake of2,100 calories per person per day.
26. Remarkably, the pace at which poverty rates fell accelerated over the last few years. As the poverty rate declines, reducing it further becomes more difficult, so that a gradual deceleration of the process could be expected. However, after a slowdown between 1998 and 2002, the pace at which Vietnam is reducing poverty picked up again. This acceleration could to some extent have been amplified by a quirk ofthe data. The 2002 household expenditure survey was much larger in scale than previous ones, and was conducted with less supervision and training of enumerators. While the 2004 survey was already of a better quality, there is a
9 possibility that poverty was over-estimated in 2002. However, it could have been under- estimated as well. And in any event, tlie apparent acceleration in poverty reduction is consistent with other developments during tlie period. Output grew faster, the prices of commodities which are essential to sustain farmers’ livelihoods (such as coffee and rice) increased, and tlie volume of resources transferred to poorer provinces in tlie context ofdecentralization expanded.
27. However, progress in poverty reduction has been slower for Vietnam’s ethnic minorities. Using a domestic poverty line that reflects basic calorie and non-food needs, poverty among ethnic minorities in Vietnam was still 61 percent in 2004, compared to 14 percent of the Kinli and Chinese majority. In some parts of the country, such as tlie South Central Coast, poverty rates among ethnic minorities are above 90 percent. In 2004, more than one third of all ethnic minorities in Vietnam lived in hunger and was unable to meet basic calorie needs.
C. OTHER DEVELOPMENT OUTCOMES
28. Vietnam has also outperformed many other countries in terms of progress towards achieving the MDGs. Five oftlie ten main MDG targets set for 201 5 have already been attained, and another four could be reached ahead of time (Table 2). However, Vietnam might only partially achieve the target 011 reversing the loss of environmental resources. Also, it should be noted that alongside a remarkable performance on nearly all of tlie MDGs, important disparities in achievement remain between tlie Kinli majority and ethnic minority groups. For example, fewer ethnic minority cliildren are enrolled in school, especially girls. Also maternal mortality and child mortality rates are much higher in mountainous areas where many ethnic minorities live than in tlie rest of Vietnam.
IV. THE CONTRIBUTION OF PRSCs
A. RESOURCES MOBILIZED
29. Five PRSCs supported the implementation of the economic reforms, including the CPRGS agenda, over the previous five-year cycle. PRSC 1, a two-tranclie operation for 250 US dollars million, was approved by tlie Board ofDirectors ofthe World Bank in June 2001. Its focus was mainly on tlie structural reform agenda. The second tranche of PRSC 1 was released in December 2002. PRSC 2, a one-tranche operation for 100 million US dollars, was approved in June 2003. By then, CPRGS liad already been issued, making it possible to broaden considerably tlie range of reforms supported by tlie international community. In addition to the mainly structural aspects covered by PRSC 1, this second credit included various policy actions aimed at keeping development inclusive and building modern governance. PRSCs 3 to 5 were also one- tranche operations of 100 million US dolalrs each. These were approved in June 2004, 2005 and 2006 respectively and liad a broad sectoral coverage too. In addition to providing resources to the budget, PRSC operations served as an effective coordination device, supported by an increasingly large number of donors. PRSCs have been co-financed by bilateral and multilateral agencies, either through grants or through parallel lending. More importantly, the process saw a transition in the role of co-financiers, from providers of finance to partners substantially engaged in tlie preparation of tlie operations and tlie policy dialogue with government. This dialogue is
10 organized by policy areas, in which donors engage selectively, based on their interests and technical capacity on the ground.
TABLE2: PROGRESS TOWARDS THE MILLENNIUMDEVELOPMENT GOALS
Goal 1 Eradicate extreme poverty and hunger Progress Status Target 1 Halve between 1990 and 20 15 the Poverty reduced by two thirds Already proportion of people living in poverty between 1993 and 2004 achieved Target 2 Halve between 1990 and 2015, the Proportion reduced by more than Already proportion who suffer from hunger two thirds between 1993 and 2004 achieved 1 Goal 2 I Achieve universal primary education I Progress I Status I Target 3 By 201 5 boys and girls to complete a Grade 5 completion rate has risen Likely to be full course of primary schooling has reached 89 percent achieved Goal 3 Promote gender equality Progress Status Target 4 Eliminate gender gaps in primary and Gender equality at all school Already secondary education no later than 201 5 levels, except for ethnic minorities achieved I Goal4 I Reduce child mortality I Progress 1 Status I Reduce by two thirds between 1990 Reduced by 60 percent between and 20 15, the under-five mortality rate 1990 and 2002, now at 2311 000 I Likelytoachieved be I 1 Goal 5 I improve maternal health I Progress I Status I Target 6 Reduce maternal mortality by three Fell by two thirds, from 250 per Likely to be quarters, between 1990 and 2015 100,000 births in 1990 to 85 now achieved Goal 6 Combat HIViAIDS and other diseases Progress Status Target 7 By 20 15 have halted and begun to Infection rate went up from 0.34 Likely to be reverse the spread of HIViAIDS percent in 2001 to 0.44 in 2005 achieved By 2015 halted and reverse the Malaria cases severely reduced Already incidence of malaria and other diseases achieved I Goal 7 I Ensure environmental sustainability I Progress 1 Status 1 Target 9 Embrace sustainability and reverse the Forest cover up but loss in closed- Uncertain to loss of environmental resources canopy forest and biodiversity achieve Target 10 Halve, by 20 1 5 the share of people Share without improved water Likely to be without drinking water and sanitation source fell by almost three quarters achieved
30. The PRSC process led to disbursements to the budget on an annual basis, thus meeting the objective of aligning aid to domestic budget cycles. Since PRSC 2, commitments were made in June of each year, which is the time when the preparation ofthe budget starts. The budget is approved by the National Assembly towards November, for the following calendar year. The submission to the National Assembly already factors in the amount of resources expected from PRSCs. Because such credits are disbursed fully within a few months of their signature, PRSCs have been a relatively predictable source of funds. Disbursements by co- financiers, either under the form of grants or parallel lending, take place over a longer period of time. But there was progress in speeding up those disbursements (Table 3). Because of the concessional terms of the loans involved, and the grant nature of much of the co-financing, a
11 large fraction of the resources transferred do not need to be paid back by Vietnam. The total grant fraction was three quarters towards the end ofthe cycle.
TABLE3: GENERALBUDGET SUPPORT OVER TIME
Committed Disbursed (US% million) (US$ million) Grant World co- Element World co- Operation Bank inanciers Total (percent) Year Bank financiers PRSCl (I) 150 22 172 66 2001 150 0 PRSCl (11) 100 27 127 69 2002 100 22 PRSC2 100 31 131 70 2003 100 27 PRSC3 100 116 216 75 2004 100 67 PRSC4 100 118 218 73 2005 100 80 PRSC5 100 154 254 75 2006 100 113 2007 159
Source: World Bank.
3 1. In spite of the increasingly large volume of aid resources disbursed through PRSC operations, the amount was modest compared to financing needs. Some of the reforms supported through the PRSC process entail substantial costs to the budget. The restructuring of state-owned commercial banks (SOCBs) initiated under PRSC 1 led to a phased-in re- capitalization financed by government bonds. The social safety net to assist workers who become redundant as a result of SOE equitization and restructuring became more active over time. The PRSC process also supported additional spending in the social areas, under the form of funding for health expenditures among the poor, and a steady increase in the budget for education. Even if all other policy actions under the PRSC process had been budget-neutral, the additional cost of the reforms would be in the range of 300 to 600 million US dollars per year. The total resource contribution by PRSCs represents less than half ofthis amount (Table 4). From this perspective, general budget support operations can be seen as a cost-sharing arrangement between the government of Vietnam and the donor community. The contribution of general budget support operations is even more modest when compared to government spending at the aggregate level. The resources provided represent less than 20 percent ofthe total budget deficit, except in 2004, and less than 2 percent oftotal government spending in Vietnam.
12 TABLE4: GENERALBUDGET SUPPORT AND THE FINANCINGGAP
Cost of key reforms (US$ million) 2002 2003 2004 2005 2006 SOCB Recapitalization 307 292 101 0 0 Social safety net 2 34 83 I78 104 Health care funds 0 33 46 48 91 Education budget 0 46 160 3 62 537 Total 309 405 389 587 73 1 PRSC contribution (percent) 2002 2003 2004 2005 2006 Cost of key reforms 39.5 31.3 42.9 30.7 29.1 Budget deficit 14.9 11.8 72.6 17.1 22.6 Government expenditure 1.4 1.2 1.4 1.3 1.3
B. LESSONS LEARNED
32. The main contribution of PRSCs has been their ability to serve as a platform for a continued policy dialogue on a broad range of issues with key government counterparts. However, given the encompassing nature of Vietnam’s reform program in general, and of the CPRGS agenda in particular, progress was not even across all policy areas. Identifying strong and weak areas in policy making is essential to ensure the sustainability of this success over time. Starting with PRSC 3, a set of indicators covering a broad range of policy areas was used to assess progress. The set of indicators chosen for this exercise can be questioned. Neither the previous five-year plan nor the CPRGS had a monitoring and evaluation framework to build upon. Indicators were then derived from the text of those documents and from other relevant sectoral strategies and policy statements.
33. Overall, progress was slower in policy areas characterized by limited political will, conflicting institutional responsibilities or insufficient analytical work (Table 5). The speed at which progress was made across policy areas within each of these pillars depended on the political will to implement the reforms. The contrast between rapid progress in the integration with the world economy and slow reform in the banking sector is revealing in this respect. To some extent, this contrast may reflect a deliberate choice, whereby rapidly moving towards WTO accession would be a way to “lock-in” the need for subsequent reforms in the banking sector. In other cases, as in water, limited progress reflects institutional overlap and unclear delimitation of competencies across several ministries or agencies. In the case of corruption, the commitment to fight it is undeniable but it is more recent. This is one area where progress on inputs (such as laws, or coordinating bodies) may take quite some time to translate intro progress on outputs and outcomes. Beyond the specifics, the classification of policy areas depending on the progress made is consistent with the ratings prepared for the Country Policy and Institutional Assessment (CPIA). Those ratings are above the regional average in relation to macro-economic management and social inclusion. They are below in relation to the financial sector, labor and social protection, and transparency and anti-corruption.
13 TABLE5: PROGRESS ACCOMPLISHEDBY POLICY AREA
Policv areas with clear urogress over 2001-2005 Policv area Indicator Value as of 2001 Most recent Trade Ratio of exports to GDP 47 percent 61 percent SOE reform Share of outstanding banking credit 42 percent 32 percent going to SOEs Private sector Wage employment in the formal 1.3 million 3.6 million development private sector Infrastructure People living within 2 km of an all- 76 percent 84 percent weather road Health Infant mortality rate 3711000 18/1000 Education Net lower secondary school enrolment 62 percent 80 percent (in 1998) Land Households having a land use 42 percent 72 percent certificate for their agricultural land ( in 1998) Water Population with access to an improved 76 percent 79 percent water source (in 2002) Planning process Planning documents become more Focus on Results-based results-oriented production targets M&E framework Public financial Detailed budget information publicly Partial access Full disclosure of management available only central budget
Policy areas with more limited progress.- over 2001-2005 Policv area Indicator Value as of 2001 Most recent Banking reform Ratio of non-performing loans (NPLs) 15 percent Maybe 8 to 10 in banking system percent
Water Integrated river basin planning Limited Institutional coordination conflicts Environment Preservation of highly bio-diverse Widespread Degradation forests, wetlands and coral reefs degradation continues Legal development Legal system in place with the ‘rule of Limited legal Good strategies, law’ replacing the ‘rule of man’ transparency little action Anti-corruption Reduced corruption as measured by Widespread Progress difficult independent monitors corruption to assess
Source: World Bank
34. One ofthe key lessons learned from the previous series of operations IS the need to have a comprehensive approach to economic reform. There are important linkages between policy actions across sectors, so that a piecemeal approach or an excessive selectivity would end up being less effective. For instance, improving the delivery of social services requires a better balancing of recurrent and capital expenditures on the supply side as well as a gradual move towards demand-side financing, especially for the poor. Public financial management reform is thus crucial to deliver better outcomes in education or health. There are also differences in the readiness of leadership to embrace change in different areas, with the time of openings and accelerations being difficult to predict. This calls for readiness across the entire policy spectrum, accumulating the various technical building blocks necessary to support more ambitious change whenever the government endorses it. Finally, the fact that PRSCs are the only vehicle for high-
14 level policy dialogue in Vietnam puts a higher burden on the contents of these operations, which need to serve as a one-stop shop for the interaction between the government and the donor community.
V. THE NEW PRSC CYCLE
A. ANALYTICAL UNDERPINNINGS
35. The SEDP 2006-2010 clearly spells out the government’s priorities and approach to development for the next five years. It might not be a perfect document, but it is good enough for the international community to use it as the strategic vision to guide their support to Vietnam. Indeed, the process leading to the preparation of the SEDP was open and consultative, the analysis in the document has a strong focus on social inclusion and poverty reduction, the social and economic targets established in the document are ambitious but achievable, and a monitoring framework was set up for the first time. The SEDP 2006-2010 thus offers an opportunity for upstream harmonization, whereby government and the international community share a common view of what needs to be done, in the spirit of the Hanoi Core Statement on aid effectiveness. Accordingly, the major donors in Vietnam have pledged to align their support strategies to the SEDP and to assess the results oftheir assistance using the government’s monitoring framework. Support to the SEDP will involve using a combination of instruments, in addition to PRSCs, including analytical work, sectoral work and technical assistance (Figure 2).
36. However, the SEDP is also a comprehensive and ambitious document, dealing with almost every aspect of economic reform in Vietnam. Over its more than 300 pages (without counting the monitoring framework) it discusses development orientations for all sectors and fields, with varying degrees of analytical depth and detail. As a result, aligning to a nationally owned strategy is not as simple in practice as it may sound. A careful analytical “reading” ofthe SEDP is critical to translate it into a concrete set of policy actions to be implemented during the new PRSC cycle. Prioritization, sequencing and monitoring are part ofsuch “reading”.
37. The Vietnam Development Report 2007, co-signed by 16 donors, provides the main analytical underpinnings for the new PRSC series. The preparation of this report, entitled Aiming High, started shortly after the approval of the SEDP by the National Assembly. The report was submitted to the Consultative Group (CG) meeting of December, 2006 as a contribution ofthe international community to the implementation ofthe SEDP. The report built on the analytical work done over the previous PRSC cycle, on structural reforms (as summarized in the Vietnam Development Report 2006, on Business), institutional modernization (Vietnam Development Report 2005, on Governance) and on social inclusion (Vietnam Development Report 2004, on Poverty). While the process was led by the World Bank, a large number of donors participated in it, with several ofthem contributing extensive written inputs. Participants included the co-financiers ofthe first PRSC series but also other donors not formally involved in direct budget support, including the United Nations agencies and international NGOs. A Reviewing Committee of recognized Vietnamese experts and policy makers advised on each of the policy areas and on the overall thrust ofthe report. A background, independent evaluation of the first series ofPRSCs, was also commissioned as part ofthis process.
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c B. STRATEGIC FOCUS
38. The main objective of the proposed series of operations is to help Vietnam develop the economic policies and institutions needed to become a middle-income country. The goal set by the SEDP 2006-201 0 should not be interpreted merely in quantitative terms, but rather as laying out regulatory frameworks and monitoring mechanisms well suited to steering a much more complex and sophisticated economy, with a much broader number of stakeholders. As the transition to a market economy is gradually being completed, the focus needs to shift from basic structural reforms to second- generation reforms, reflecting both the shift in the role of government in relation to production and the changing relationship between state and society. Thus, priority goes to measures aimed at strengthening the supervision of financial markets, at regulating access to and pricing of infrastructure services, at building inclusive and financially viable social insurance systems, at better managing natural resources and protecting the environment, and at increasing transparency and accountability at all levels.
39. One difficult question faced in preparing the new PRSC series was whether to focus on selected SEDP pillars or to cover all four. One possible interpretation ofVietnam’s recent development experience holds that success in the long term crucially depends on the acceleration of structural reforms. Another possible interpretation is more optimistic about Vietnam’s ability to deliver on the structural reform agenda, but less so in relation to the governance agenda. However, fostering business development, keeping growth inclusive, ensuring environmental sustainability and improving governance are all priorities for Vietnam. One of the strengths of the reform agenda embraced as a result ofDoi Moi has been its comprehensive nature. Adopting an “either-or” approach in relation to those key priorities would be as questionable as choosing between economic reforms and the development of large-scale infrastructure in the early stages of the previous PRSC cycle. Back then, the government of Vietnam avoided the pitfall of such “either-or” approach by pushing towards the integration of policy reforms and infrastructure development, through the “expansion” ofCPRGS. The new PRSC cycle builds on a similar integration of perspectives. The Vietnam Development Report 2007 argues that alignment should not be about emphasizing one pillar of the SEDP over the others, but rather be about preserving one ofthe main strengths ofVietnam’s reform process, namely its comprehensive, cross-sectoral nature.
40. Supporting the implementation of Vietnam’s reform agenda across its four pillars requires being selective within each of them. The SEDP contains long lists of policy actions to be adopted over the five-year cycle. It is unlikely that all those actions have the same strategic importance, and even among priority actions, appropriate sequencing may be the key to success. The previous five-year cycle provided clear illustrations of this principle, with accession to the WTO being a pre-requisite to make politically more difficult decisions in banking a necessity. At a more practical level, there are capacity constraints, both on the government side and on the donor side. It is often argued that limited government capacity is one of the main bottlenecks in the implementation ofdevelopment programs in Vietnam. But donor resources (financial and technical) are limited too, and thus cannot possibly support the full range of initiatives set out in the SEDP and related plans and strategic documents.
17 BOX 1: GOODPRACTICE IN POLICY LENDINGOPERATIONS
The preparation of this credit, and the broader series of budget support operations for the implementation of the SEDP 2006-2010, follows good practice principles on development policy lending. In particular, the following issues were considered: Government ownership. The objectives of the proposed series of credits are aligned to those of the SEDP 2006-2010, a strategic document which is part of mainstream planning processes at national level. The SEDP outlines the policy measures needed for Vietnam to advance to middle-income status by the end of the decade. The proposed series of credits involves no effectiveness conditions, with all policy actions being completed by the time of submission to the Board. One of the key criteria to retain an action as part of the program is that it can be traced back to the SEDP or other key strategic document or plan of the government. Triggers for the next operation in the series are discussed with government, and agreed upon as a mechanism to focus the policy dialogue, not as disbursement conditions. Analytical input. The “translation” of the very comprehensive SEDP into a concrete set of policy actions to be implemented during the new PRSC cycle required careful prioritization, sequencing and monitoring. The large analytical program supported by the World Bank and other donors, summarized in the annual Vietnam Development Reports (VDRs), was used to this effect. After several VDRs addressed in greath depth the issues faced by Vietnam in relation to Poverty, Governance and Business, the VDR 2007, co- signed by 16 donors, provides the main analytical underpinnings for the new PRSC series. Analytical work on the social impacts of global integration, on gender, and on environmental issues was also used for the design of the proposed PRSC series. Accountability framework. The size of policy matrices was kept to the minimum compatible with an active policy dialogue across the four pillars of the SEDP. The Financing Agreement for PRSC 6 refers to 12 actions, compared to 15 under PRSC 5 and 14 under PRSC 4. The total number of prior actions is similar to that of previous operations. While this number is higher than in other countries, this is justified in Vietnam, given the breadth of its reform program and the maturity reached by the PRSC process. With two dozen line ministries and government agencies and a dozen co-financiers, drastically narrowing the focus of the policy dialogue, concentrating on just a few policy actions would amount to demobilizing a large portion of the constituency for economic reform. The Bank and all co-financiers use the same policy matrix to decide on their level of support, thereby providing a single harmonized platform for the policy dialogue and disbursements. Performance orientation. The proposed series of credits is fully aligned with the budget cycle of Vietnam. Commitments will be made in June of each year, which is when the preparation of the budget starts. The budget is approved by the National Assembly towards November, for the following calendar year. The submission to the National Assembly already factors in the amount of resources expected from PRSCs. Progress in the implementation of the reform agenda will be monitored through a well defined set of development indicators, with the same framework employed by all co-financiers. Those indicators are based on the monitoring framework for the SEDP, although they are fewer in number and have a relatively stronger emphasis on governance. The timing for assessments will be aligned to that of the government, including the annual report to the National Assembly on the implementation of SEDP, and the mid- and end-cycle reviews of progress in development outcomes.
41. As in the previous PRSC cycle, the policy dialogue between donors and government is broad in nature, encompassing all major policy areas. This comprehensive approach is justified in Vietnam, where the PRSC process has reached considerable maturity. With two dozen line ministries and government agencies and almost 20 donors participating in it, drastically narrowing the focus of the policy dialogue, concentrating on just a few policy actions would amount to demobilizing a large portion
18 of the constituency for economic reform. Entire sectors could not have any particular anchor to focus their efforts on, and technical and human resources could end up being under-utilized.
42. However, having a broad sectoral coverage is not incompatible with identifying a core set of about a dozen policy actions to be followed much more closely in each operation. The analyses in the Vietnam Development Report 2007 indicate a series of priority areas where progress is critically needed for Vietnam to become a middle-income country and put itself on a sustainable growth path. Actions in these areas are the only ones included in the Development Credit Agreement. The remaining ones are discussed in the Program Document, and appropriately documented by government but do not have legal status. As in previous PRSCs, this compromise allows reconciling a focus on a limited number of priorities with the need to make progress across a broader front in order to fully support Vietnam’s ambitious reform agenda.
C. MONITORING FRAMEWORK
43. In parallel, progress in the implementation of the reform agenda will be monitored through a well defined set of development indicators. Those indicators are based 011 the monitoring framework for the SEDP but they are fewer in number (Annex 3). In some areas, the set of indicators proposed in the Vietnam Development Report actually goes beyond the SEDP monitoring framework. This is the case in relation to governance, where the monitoring experience is more limited and there is a more limited experience in the use of enterprise and household surveys, as opposed to administrative self-reporting. However, because reliable data need to be collected from surveys and other sources with demanding implementation requirements, the monitoring of progress towards development outcomes cannot be conducted on an annual basis. It is expected that the new PRSC cycle will involve some annual monitoring but only two in-depth assessments, towards the middle ofthe cycle and at the end ofit.
VI. THE PROPOSED CREDIT
44. Over the year elapsed since the last operation in the series, the government of Vietnam made considerable progress in its reform agenda, across all policy areas. Some of the actions undertaken during this period are deemed to be more strategic, because of their potential impact on development outcomes over time. Those are the actions reported in the Credit Agreement for each of the operations (Table 6). However, as in the previous cycle, each operation highlights through a comprehensive policy matrix all of the actions that were part of the PRSC policy dialogue over the preceding year and were completed by the time the negotiation of the credit took place (Annex 2 for the list and Annex 5 for the supporting documentation). This broader set ofactions does not reflect the use of conditionality. It reporting is rather intended to convey the breadth and scope of the reforms being undertaken by the government of Vietnam, year after year. By providing a more comprehensive picture ofdevelopments iii each policy area, this matrix allows a better understanding of the progress being made in each ofthe four pillars ofthe reform program.
19 TABLE6: KEYPRIOR ACTIONS UNDER PRSC 6
I Pillar I:Business development I Further restrict list ofsectors where 100-percent state ownership is to be retained.
0 Require public disclosure of financial statements of SOCBs in line with internationally accepted standards. Decentralize investment ownership to better integrate capital and recurrent budgets in the road transport sector.
0 Clarify contract specifications, investor qualifications and treatment ofunsolicited proposals for BOT projects. Pillar 11: Social inclusion 0 Extend performance standards for primary teachers nationwide, including evidence-based assessments
0 Adopt HIV/AIDS law and prepare action plans to scale up harm reduction, fight stigma and discrimination.
0 Unify legal framework to address gender disparities and increase women’s participation in decision making. Pillar 111: Natural resources Issue strategy to strengthen linkages between protective and economic functions of forests, and promote local ownership. Pillar IV: Modern governance
0 Allocate state capital expenditure transparently, using criteria like population, poverty and ethnicity
0 Disclose results of audits conducted by the SAV and its annual audit plan
0 Establish separate legal, judicial, economic, and budget committees to strengthen National Assembly’s supervisory role Operationalize Steering Committee against corruption with power to suspend high level officials if suspected.
Note: The prior actions listed in this table are those included in the Financing Agreement for the current operation. The complete set of prior actions agreed upon between government and donors for PRSC 6 can be found in Annex 2.
A. BUSINESS DEVELOPMENT
45. The drive to integrate further in the global economy remains one ofthe most important sources of reform momentum in Vietnam. In its initial stages, this drive focused mainly on reducing barriers to trade in goods, first regionally and then with key trade partners in the industrial world. Subsequently, the Bilateral Trade Agreement with the United States led to increased coinpetition in services and considerable legal reform. The trend was furthered deepened, on a multilateral basis, with the accession to the WTO, which was completed during the period covered by this operation. The most important prior actions in relation to global integration, under PRSC 6, were the granting oftrading and distribution rights to all foreign firms, in line with international commitments, and the issuance of regulations to guide the intellectual property law, with adequate enforcement mechanisms.
46. The period covered by this operation witnessed progress in SOE reform, under the form of more divestiture and better monitoring of performance. The list of sectors where 100-percent state ownership is to be retained was further restricted from 29 to 19, and by now covers mainly activities that can be deemed strategic. This should lead to more SOEs being divested, with the use of share auctions
20 now retained as the main mechanism for equitization, and the participation of foreign strategic investors allowed. To the extent that the state still retains a share of the capital in many sectors and enterprises, additional steps have been taken to ensure that they are managed efficiently. By now, all SOEs are classified according to their performance, based on their turnover, profitability, servicing of debts and compliance with the law, and the results of this classification are published. Meanwhile, the exercise of ownership rights on behalf of the state is being transferred from line ministries and provincial governments to the State Capital Investment Corporation (SCIC), a for-profit organization under the Prime Minister. This transfer of ownership should resolve the conflict of interest that ministries and provinces used to face, as they formulated and implemented policies affecting the enterprises they ran.
47. The implementation of the ambitious banking reform strategy adopted under the previous operation focuses for now on strengthening the commercial orientation of SOCBs, which still dominate the market at present. The strategy assumed that regulation and technical upgrades alone would not be sufficient to overcome the interference of non-commercial objectives in lending decisions, especially at provincial levels. Introducing private capital in SOCBs, with the participation of strategic foreign investors with recognized resources and expertise, was seen as necessary to accomplish this transformation. Prior actions under this operation prepared the ground for the equitization oftwo SOCBs, including one of the largest ones, over the next year. The equity stake allowed to foreign strategic investors was increased, while all SOCBs were required to disclose their financial statements in line with internationally accepted standards.
48. Policies to support the development of the already vibrant private sector remain centered around the removal of administrative barriers to entry. Under this operation, processing times were reduced and the fee structure for business registration was rationalized. The authority to issue investment certificates was clarified, more detail was provided 011 sectors where investment is conditional, and the documentation for investment registration or evaluation was standardized. A consultative mechanism to streamline Iicenses and oversee the implementation of new investment-enterprise regime was established, and guidelines and options were issued for foreign investors to transition to such regime. The single- window mechanism was adopted for businesses to cover registration, tax, and seal formalities in selected provinces. In parallel a monitoring mechanism to assess the constraints faced by businesses was set up, under the form of an investment climate module attached to the enterprise survey every two years. The sample used for this module is representative at the provincial level, facilitating comparisons in business friendliness across local authorities.
49. In infrastructure, mechanisms are being set up to increase the efficiency of public resources and increase the volume of private funding. In relation to public resources, the decentralization of investment ownership should lead to a better integration of capital and recurrent budgets in the road transport sector. About 40 projects will be transferred to the Vietnam Roads Authority, the entity which thus far has been responsible for only the maintenance budget. The transfer of investment ownership is expected to strengthen the Ministry of Transport’s oversight function, by separating its earlier roles of both owner aiid supervisor of projects. The adoption of wastewater charges based on cost recovery should also contribute to the sustainability of investments in water and sanitation. This measure is accompanied by appropriate caps to protect the poor. As for private funding, its mobilization for infrastructure projects should be facilitated by the newly issued BOT decree, which clarifies contract specifications, investor qualifications aiid treatment ofunsolicited proposals.
B. SOCIAL INCLUSION
50. In education, the government strategy expanded coverage of high-quality schooling at lower levels with competition and incentives for excellence at higher level. While the coverage of primary
21 education has continued to expand, quality remains an issue, with children in poorer areas being at a disadvantage. After having introduced Fundamental Quality Standard Levels for schools, under the previous PRSC cycle, a key prior action under this operation extends performance standards for primary teachers nationwide. The implementation of such standards will rely on evidence-based assessments of teacher performance, as opposed to diplomas and seniority. At the higher end, transparent criteria have been adopted to decide on university admission quotas on a pilot basis.
5 1. A fundamental transformation in the government’s approach to HIV/AIDS has taken place in recent years and is being consolidated at present. Risky behaviors, including the practice of commercial sex and the use of intravenous drugs were traditionally labeled as “social evils”, often resulting in stigma and discrimination for the affected populations. But the approach changed considerably under the previous cycle, with a new strategy emphasizing prevention and treatment over repression. This public health approach is reflected in the HIV/AIDS law passed under this operation, and the subsequent preparation of a comprehensive set of action plans to scale up harm reduction. These action plans foresee the introduction of needle exchange and methadone substitution programs. Meanwhile, across tlie health sector as a whole, an effort was undertaken to improve the budgetary balance between health infrastructure, human resources, subsidies and preventive care.
52. The design of the pension program was improved, so as to extend its coverage and make its compulsory component financially viable. Until tlie mid-l990s, only public sector workers were entitled to old-age, disability and survivor benefits, under a non contributory program funded out of general government resources. This program was subsequently extended on a contributory basis to all formal sector workers, but old-age pension benefits remained determined by average salaries in the years preceding retirement. The period covered by this credit saw the passing ofthe first ever Social Insurance Law was passed, which makes pension benefits for private sector workers depend on the average salary over all the years of contribution. In a rapidly growing economy, this average salary is substantially lower than the salary in the years preceding retirement, so that the law drainatically improved the financial viability of the system. It also introduced a voluntary pension program for farmers and informal sector workers, making it possible to gradually extend the coverage ofthe social insurance system. This voluntary program is currently in its design phase. However, the stronger financial viability ofthe system and its potentially broader coverage should not hide the shortcomings ofcurrent pension formulas. Under the new law, there are considerable gaps between the level ofbenefits for men and women, and for public and private sector workers. Also, benefits are far removed from the actuarial benchmark, which encourages relatively short periods of contribution and the under-reporting of earnings.
53. While gender equality indicators are better in Vietnam than in many other developing countries, steps are being taken to narrow the remaining gaps. The passing of a law on gender equality, a prior action under this operation, is an important step in this direction. It is recognized that regulation alone cannot be sufficient, as abuses go often unreported and enforcement capacities are limited. But the new law unifies legal framework to address gender disparities and increases women’s participation in decision making.
C. NATURAL RESOURCES
54. The SEDP gave increase prominence to development sustainability, and the latter hinges to a large extent on the management of natural resources. Two main issues stand out in relation to land. First, is the management of forests, which are still to a large extent under the control of SFEs. This has resulted in a blurring of commercial and protective functions, but there is also a risk that SFE restructuring could lead to the encroaching of forest land by outsiders, to the detriment of local
22 populations (especially from ethnic minorities) whose livelihoods depend to a large extent on the use of forests as a public good. To address this risk, under this operation the government issued a strategy to strengthen linkages between protective and economic functions of forests, and to promote ownership by local households and communities.
55. The second critical issue faced by Vietnam in relation to land management concerns conversion, reclamation and resettlement, in the context of a rapid urbanization process. Close to one million people may be moving every year to urban and peri-urban areas, and entire swatches of land are being cleared for infrastructure development or to host industrial parks. Lack of transparency in reclamation and conversion plans may result in sizeable capital gains for those with access to tlie relevant information. Insufficient compensation for the affected populations is leading to recurrent social unrest. The Land Law, approved under the previous PRSC series, paved the way for the use of market prices as the basis for compensation. But gaps remained in relation to land occupants who do not have appropriate documentation for their tenure, something common in a country where the handing over of land to households and firms is still an ongoing process. Under this operation, resettlement and compensation procedures have been clarified for cases where occupants lack a land-use right certificate (LUCs), and meclianisms have been set up to handle complaints.
56. Development sustainability also hinges on the appropriate control of pollution and environmental damage resulting from business activity, be it by the public or the private sector. Considerable progress was made during the previous cycle on the use of Environmental Impact Assessments (EIA) for large investment projects. Under this operation, consultation with the communities where projects are to be located became mandatory, and the local feedback needs to be incorporated when reporting back to the relevant authorities.
D. MODERN GOVERNANCE
57. The transformation of planning processes, from the direct allocation of resources to the strategic steering of the economy, has continued during this period. In tlie command and control economy, MPI would play the role of an arbiter in the selection of investment projects submitted by various government bodies. With investment decisions devolved to the National Assembly and People’s Counci Is, the role of MPI has shifted towards the allocation of the budget envelope available for capital expenditures. In the period covered by this operation, norms were adopted to allocate state capital expenditure transparently across provinces, using criteria like population, poverty and ethnicity. These norms make a considerably larger amount of resources available to the poorer provinces in the country. Also during this period regulations were adopted for the preparation of regional development plans, specifying responsibilities and requiring disclosure. Under the new regulations, infrastructure master plans will have to be based on the broader, regional development plans. Thanks to the new approach, issues such as comparative advantage, land use and population flows are expected to gain more prominence in choosing the layout for infrastructure networks.
58. Public financial management reform, one of the cornerstones of the Vietnamese program, has focused on strengthening systems and increasing transparency. The State Audit of Vietnam had been established as a specialized agency under the National Assembly towards the end of the previous cycle. Under this operation, for the first time tlie results of SAV audits and its annual audit plan were disclosed. This period also witnessed the publication of the report on budget execution for the current year and tlie budget plan for forthcoming year, which will happen on an annual basis hereafter. In the same spirit, regulations were issued for the periodic disclosure of external public debt and its composition. This signals an increased emphasis on the management of resources and liabilities,
23 compared to a previous focus on public expenditures. Thus, a regulation to guide the establishment and issuance of benchmark government bonds was implemented, and the administration procedures for all taxes were consolidated into a single law, modernizing assessment and enforcement methods.
59. Increased oversight of government actions, at both national and local levels, has been a common theme underlying the legal reforms adopted under this operation. The National Assembly has become increasingly active in its supervisory role, especially since the passing of the Budget Law of 2002. This trend was reinforced recently with the establishment of separate legal, judicial, economic, and budget committees. These committees are also expected to include a greater proportion of permanent members than in the past. A similar trend is noticeable at local levels. A new ordinance on grassroots democracy strengthens information disclosure, public participation, and accountability of officials in the preparation and implementation of commune level policies. Recent legal developments have also aimed at promoting access to justice and recognizing civil society organizations. Under this operation, legal aid mechanisms for marginalized and vulnerable groups were simplified and broadened, whereas policies were adopted to encourage the participation of non-state establishments in the delivery ofpublic services.
60. The determined approach taken by the government in relation to corruption is at present moving into an implementation phase. Key legal documents, including the pivotal Anti-Corruption Law, have been passed by now, and the issue is how to translate a clear resolve into concrete action. Several measures adopted during the period covered by this credit go in that direction. A Steering Committee against corruption, headed by the Prime Minister, has been set up. The committee has the power to suspend high-level officials if suspected of wrongdoing. It is already engaged in investigating certain high profile cases, and the findings are to be made public. The results of investigations against corruption for cases overseen by the Government Inspectorate were disclosed. A legal framework has also been established to protect and reward whistle blowing on corrupt activities.
E. TRIGGERS FOR PRSC 7
61. The negotiation of the proposed credit included reaching an agreement on a list of measures that will in principle be supported by PRSC 7. These measures are inspired in the SEDP 2006-2010 and other key documents and strategies (last column in Annex 2). But among that broader set, the measures discussed at the negotiation phase stand out by their strategic importance to attain the SEDP objectives towards the end of the five-year cycle (Table 7). Those priority measures, or “triggers”, should not be interpreted as conditions. They rather serve as a guide to focus the policy dialogue towards PRSC 7. Progress towards meeting the triggers will be assessed towards the end of 2007 in order to launch the formal preparation ofthe next operation in the series. It is understood that the assessment will be holistic, recognizing that some triggers may not be fully met while other may be exceeded.
62. Establish early warning mechanisms to address the social and environmental impacts of WTO accession. While the entry of Vietnam into the WTO is bound to accelerate economic growth, it may do so at uneven paces across regions and sectors. Early analytical work on the possible social impacts of accession showed how difficult it is to predict which specific groups stand to lose, or to be left behind. In the few cases where adverse impacts can be anticipated with a relative degree of precision, complementary measures to protect those who could be affected should be part of the action plans to implement WTO commitments. Such action plans are currently under preparation and should be completed by end-2007. In most cases, however, it is easier to identify the groups which stand to lose than to determine how much they could lose (or even whether they would actually lose). In those cases, the action plans sl~ouldestablish effective communication channels with the relevant stakeholders, to inform them about the possible impacts of WTO and collect timely feedback from them.
24 TABLE7: AGREEDTRIGGERS FOR PRSC 7
Pillar I:Business development
0 Establish early warning mechanisms to address the social and environmental impacts of WTO accession
0 Assess transparency and scope of related lending and affiliated party transactions of Economic Groups Complete equitization of two SOCBs, with participation ofstrategic investors Adopt market based pricing systems for cost estimates related to state-funded civil engineering investments Pillar 11: Social inclusion Revise tuition fees at secondary and tertiary levels, better reflecting market conditions while protecting the poor
0 Establish affordable health insurance premiums based on user-group demand and address adverse selection problem Introduce voluntary pension program for farmers and informal sector, with support for the poor Adopt guidelines for Gender Equality Law identifying responsibilities, resources and monitoring mechanisms Pillar 111: Natural resources Issue guidelines for forest development based on participatory land-use planning and independent monitoring Enact legal and institutional framework for integrated river basin management Develop unified national sanitation strategy and encourage greater commune and private participation in sanitation Pillar IV: Modern governance Establish clear criteria for selecting public investment projects and mechanisms for their financing and monitoring Issue disclosure regulations on content and timing of SAV report including audits of individual entities Implement asset declaration by senior officials and their immediate families with penalties for non- comuliance
63. Assess transparency and scope of related lending and affiliated party transactions of Economic Groups. The reform of the state sector has been effective in introducing private capital in SOEs, improving their governance, and removing the exercise ofstate rights in them from policy agencies to a profit-oriented asset manager (the SCIC). But several large economic groups directly reporting to the Prime Minister, by virtue of their size and sectoral diversification, potentially raise new corporate governance problems that need to be carefully assessed. Of particular concern is the possibility of affiliated party transactions within the groups, especially as some of them want to take savings deposits directly from the public. This could lead to financial transactions not falling under the direct oversight of either SBV or the State Securities Commission (SSC). Also, some ofthese groups are organized around infrastructure networks, as in the case of electricity and telecommunications. Promoting competition in sectors with network externalities requires a deliberate effort to create a market, and progress is uneven in this respect.
64. Complete equitization of two SOCBs, with participation of strategic investors. The equitization of all SOCBs is part of the banking reform strategy. But it may fail to strengthen their
25 commercial orientation if private ownership is scattered across a large number of small investors. Strategic investors with a solid trajectory in banking are needed to strengthen the credit culture inside the SOCBs and counteract the pressures for directed lending they often face at local levels. The low ceilings in force for participation by individual foreign investors could be dissuasive in a different economic environment. But Vietnam’s dynamism could still make a minority stake in an SOCB valuable enough to attract interest by reputable international banks. The government could further encourage their involvetnent by raising the ceiling for individual foreign investors to its allowed maximum.
65. Adopt market based pricing systems for cost estimates related to state-funded civil engineering investments. A vibrant private sector has emerged in recent years, but the market for civil works remains dominated by SOEs (equitized or not). As a result, collusion is difficult to avoid, even when competitive bidding is used to allocate contracts. Equally important, SOEs and former SOEs tend to use the cost norms of the public sector when formulating their bids. This results in limited price variation across bids, which cannot be easily distinguished from deliberate coll~ision. Because the cost norms are outdated, they also lead to the exclusion of higher-quality bids. The acceptance of such proposals requires exceptions which are in turn vulnerable to corruption. The revision of the cost norms system, so that cost estimates better reflect market conditions, is a crucial measure to make the market for civil works more competitive and transparent.
66. Revise tuition fees at secondary and tertiary levels, better reflecting market conditions while protecting the poor. The education strategy of Vietnam combines broad access to high-quality schooling at primary and lower secondary levels, with increased competition and a drive for excellence at higher levels. However, for higher-level institutions to be able to provide quality education, they need more resources than the education budget can afford, and stronger performance incentives than it can provide. At the same time, there is a clear recognition that mechanisms need to be set up to exempt the poor from higher tuition fees and to provide scholarships for talented children from disadvantaged backgrounds.
67. Establish affordable health insurance premiums based on user-group demand and address adverse selection problem. The strategy for the reform of the health sector relies on a move from supply- to demand-side financing of health care providers, with budget funding for the poor and partial subsidies for the near poor. The expansion of the health insurance program, and in particular the passing of the Health Insurance Law currently under preparation, are cornerstones in this process. For this strategy to work in practice, however, the Health Insurance Law needs to strengthen provider payment mechanisms, so as to create incentives for the containment of health costs. At present, reimbursement to providers is on a fee-for-service basis. The new Law should also set the contribution rate towards health insurance at a level that does not penalize formal sector employment, resisting the temptation to balance the books through an excessively high rate. Last but not least, the adverse selection problem faced by the voluntary health insurance program needs to be addressed, which probably requires greater reliance on group enrollment and a more active role of local authorities and inass organizations in promoting participation in the system.
68. Introduce voluntary pension program for farmers and informal sector, with support for the poor. The development of a modern social insurance system is less advanced in relation to old-age, survivor and disability pensions than it is in relation to health insurance. However a similar approach is gradually taking shape, as reflected in the first ever Social Insurance Law in mid-2006. This law made the compulsory pension system financially viable, although this was at the price of sizeable gaps between the level of benefits allowed and what an actuarially fair program would provide. The Social Insurance Law also introduced a voluntary pension program for farmers and informal sector workers, whose specifics will need to be spelled out in the coming months. Two main challenges stand out. The first one is to make the program “portable”, as Vietnam will most likely experience a considerable formalization of
26 employment as it develops. Tlie second challenge is to allow for subsidies or incentives to encourage the participation ofthe poor, a vast majority of whom would otherwise remain uncovered.
69. Adopt guidelines for Gender Equality Law identifying responsibilities, resources and monitoring mechanisms. Tlie law passed under this operation redresses gender gaps in existing regulations and increases participation by women in decision making. It would be unrealistic to expect that a legal framework can on its own solve problems that go often unreported and are difficult to monitor. However, there is a clear expectation that the law can make a difference if properly implemented. This requires identifying clearly which agencies are in charge, allocating resources so that they can conduct their tasks, and establishing mechanisms to assess progress.
70. Issue guidelines for forest development based on participatory land-use planning and independent monitoring. Environmental sustainability will depend not only on the control of pollution but also, crucially, on the adequate management of natural resources. Forest land is among the most sensitive of such resources, with implications for both biodiversity and the livelihoods of local populations. After tlie adoption ofthe forest strategy, the next step is to involve local stakeholders in land- use planning to reach consensus on tlie location of plantations, allocation of forest land, and to identify boundaries with other uses of land. Better site mapping and species matching, as well as improved monitoring of forest cover and quality will be additional areas ofimportance.
71. Enact legal and institutional framework for integrated river basin management and develop unified national sanitation strategy and encourage greater commune and private participation in sanitation. Adequate management of water resources is another priority, as potential tensions exist between their upstream and downstream uses. The most serious obstacle in this respect is institutional, as actions by various ministries, agencies and provinces need to be coordinated in each case. It is thus necessary to clarify the legal and institutional framework through which all of them must operate. The forthcoming decree on integrated river basin management will be a key milestone in this process. Sanitation represents the only MDG where progress has been less than expected. Previous operations supported actions in the area of rural sanitation. However, in a rapidly urbanizing economy fringe areas are emerging where the urban-rural divide is blurred. In order to adequately respond to the sanitation needs ofall groups and regions a unified national strategy is currently under development. The strategy entails close cooperation among various ministries, and also aims to attract private participation in the provision of sanitation services.
72. Establish clear criteria for selecting public investment projects and mechanisms for their financing and monitoring. In recent years there has been a sustained trend towards transferring responsibilities for public investment decisions outside of MPI, to ministries, provinces and elected bodies. However, a common framework for the preparation, appraisal, financing and implementation of public investment projects is still missing. Such framework should strengthen the project cycle at all levels, from the consistency with broader master plans, to the reliance on some form of cost-benefit analysis, to the estimation of operation and maintenance costs, to the enforcement of safeguard mechanisms in relation to the environment and affected populations, to transparency in funding and financial management and to the monitoring and supervision of works.
73. Issue disclosure regulations on content and timing of SAV report including audits of individual entities. While tlie results of audits conducted by the SAV and its annual audit plan were disclosed for the first time under the current operation, a regular routine still needs to be established and the extent of disclosure needs to be enhanced. Among other issues, such routine should ensure access by authorized agencies, including the media, for the detailed audit report, including the audits of individual entities .
27 74. Implement asset declaration by senior officials and their immediate families with penalties for non-compliance. The Anti-Corruption Law passed under the previous operation in the cycle introduced an asset monitoring mechanism, whose specifics were spelled out more recently in a decree on asset an income declaration. While this could be a critically important tool to identify wrongdoers and dissuade corrupt behavior, its effectiveness will very much depend on its implementation in practice. One important unknown is the number of declarers to monitor; if the number is unmanageably large, the declaration process may simply amount to paperwork. Equally important is to determine whether those in charge ofverification are sufficiently removed from the declarers so as to avoid a conflict of interest.
VII. OPERATION IMPLEMENTATION
A. POVERTY AND SOCIAL IMPACTS
75. A reform program as ambitious and comprehensive as the one envisioned by Vietnam for the next five years could have adverse impacts on specific groups. In the short run, activities which were previously protected may stand to suffer from increased competition. In the medium to long term, some groups could benefit more than others from accelerated economic growth. However, while both possibilities are compelling, clearly identifying which groups stand to lose, or to gain less, is not straightforward. For instance, a thorough review offindings in relation to the impacts of WTO accession, conducted as part of the Vietnam Development Report 2006, on Business, showed that most of the predicted impacts were not robust. This inability to clearly anticipate who the potential losers are raised important methodological issues in relation to the handling of the poverty and social impacts of the economic reform program being supported.
76. To address this fundamental uncertainty, a combination of preventive measures and rapid response mechanisms has been gradually established. One important preventive measure is the extension of the safety net for redundant SOE workers beyond its initial expiration date, in 2006. This safety net, whose operation has received positive evaluations, is also being extended to other categories of public sector personnel, namely redundant workers in state-owned farmers, forests and plantations. Another preventive measure is the creation of an unemployment insurance program by the first ever Social Insurance Law, passed in 2006. This program is not scheduled to be formally launched until 2010. But in the event ofan unexpected increase in the unemployment rate, it should be feasible to accelerate its implementation, and to grandfather workers who lose their jobs as a result of restructuring, even if they had not contributed to the program, or had not contributed long enough.
77. Rapid response mechanisms rely on a more robust measurement of poverty rates, a better understanding of its determinants, and the availability of budget allocation norms channeling more resources to poorer areas. The last poverty assessment led by the donor community was the Vietnam Development Report 2004, on Poverty. Since then, the responsibility for such assessments has been gradually handed over to a team of local researchers and practitioners, led by the Vietnamese Academy of Social Sciences (VAS’S). This team is also the main advisor on the implementation of WTO commitments and will be working on identifying the most appropriate complementary measures to mitigate potentially adverse effects of those commitments. The task also involves establishing clear procedures to collect feedback from relevant stakeholders in each case. Local analytical work on poverty has been accompanied by a strengthening of its measurement at various levels, resulting in poverty rates which are reliable at the province level, and improving at district and commune levels. Meanwhile, a system of norms to allocate budget resources to provinces was completed in 2006. These norms are
28 sensitive to poverty, making it possible to channel more government resources to areas which are adversely hit, or simply lag behind in terms of poverty.
78. In the medium to long term, addressing the potentially adverse social impacts of rapid economic reforms requires a strengthening of government systems. One of the objectives of the five- year period ahead is to develop a modern social insurance system, starting by health benefits and gradually moving to old-age pensions, disability pensions and the like. The approach in this respect is to aim for universal coverage, relying on programs with the same structure of benefits for all population groups, but with the contributions or premia of the poor being paid out of the state budget. Another area where progress is expected concerns regional planning. Until recently, regional planning was not too different from producing infrastructure master plans. But there is now a clear determination to ground regional planning inore firmly on considerations related to comparative advantage, land and water use, labor migration and the like. If done properly, this work should result in more coherent regional development policies, helping the laggard areas to catch up with inore prosperous neighbors.
B. ENVIRONMENTAL ASPECTS
79. The proposed PRSC series supports a number of diverse policy actions which could have effects on the country’s environment, forests and other natural resources. Most of those effects are expected to be positive, but some could be negative. Among the actions with the largest potential impact on environmental quality are those related to private sector development, SOE reform, trade integration, and planning processes. Rather than trying to address those potential impacts one by one, the approach taken in Vietnam is to mainstream environmental objectives in the PRSC process. This approach has led to the adoption and implementation of legal framework for land (Land Law, 2003), forests (Forest Protection and Development Law, 2005) and environmental inanageinent (amended Law on Environmental Protection, 2006). The next series of PRSCs will strengthen the iinpleinentation of these legal frameworks to ensure greater impact on the ground.
80. Supporting analytical work has been engaged to identify and address gaps in the existing arrangements and incentives for environmental governance. A Poverty-Environment Nexus analysis helped raise awareness on the interaction between environmental issues and poverty. Its findings have resulted in increased attention on pollution in rural areas and its impact on people‘s health. The Country Environniental Analysis highlighted the need to regulate non-state rural enterprises contributing to water pollution. The Environment Monitor series provides a regular snapshot by thematic area, including solid waste, biodiversity and water quality in river basins. Other studies by the World Bank and other donors have helped fill the gap between SEDP objectives and policy actions supported by the PRSC process.
81. Among the policy actions being adopted, several focus directly on pollution control, others on natural resource management and others on investment planning. The general decree to guide iinpleinentation of the Law on Environmental Protection was been issued in August 2006, during the period covered by this operation. The decree focuses on the application of national environmental standards, and allocates responsibilities for environmental protection in the production and service sectors, as well as in relation to hazardous waste management. The Circular on Wastewater Pollution Coefficients, identifying the volume of pollutants in industrial wastewater as a basis for fees to be levied in application of the “polluter pays” principle, also came into force during the period covered by this operation, in July 2006. A Decree on solid waste management was approved in early 2007, and a new decree on wastewater disposal for urban areas and industrial zones is expected to be issued soon.
82. In relation to natural resources management, an important step towards implementing the 2005 Forest Protection and Development Law is the approval of the National Forest Development Strategy for
29 2006-20 10 which strengthens the linkages between protection and economic functions of forests. This is accomplished through improved forestland tenure, particularly for communities, an enhanced contribution of forestry to economic growth and local livelihoods, and a more sustainable management and conservation of the forest estate. A country-wide reclassification of forest, coupled with the reform of state forestry enterprises (SFEs), is underway, sliould lead to the handover of a larger area of production forest to local households and communities. Accompanying policies for production forests are also under the preparation. Participatory land-use planning will be used to ensure that the expanded production forest estate is allocated equitably, managed in a sustainable way, and contributes to environment protection. Furthermore, the Five Million Hectare Program is being revised to better balance forest protection, multi-purpose forestry and incentives for farmer participation.
83. In the water sector, steady progress is being made on promoting integrated river basin management. One of the major obstacles to progress in this area was the overlap in responsibilities between government agencies. Those responsibilities were clarified in 2007, when the Ministry of Natural Resources and the Environment (MONRE) was given the coordinating role and the mandates of the Ministry of Home Affairs (MOHA), MONRE and the Ministry of Agriculture and Rural Development (MARD) were revised accordingly. It is expected that the decree formalizing the new, streamlined institutional framework for integrated river basin management will be enacted it1 the second half of 2007. Lessons from the pilots will be incorporated into the development of detailed implementation guidelines for strategic environment assessments (SEAS). Downstream, mandatory consultation with local communities has been introduced during this PRSC period for investment projects requiring an EIA. Consultation guidelines are in preparation for hydropower projects.
84. The government is undertaking a substantial program of environmental capacity building. This program includes institutional strengthening, environmental and land use planning, and physical investment projects addressing environmental issues. Donor assistance to Vietnam is strong in these areas, particularly for some of the issues addressed through the PRSC process, such as improvements in environmental policies and their implementation, pollution prevention and control, and sustainable management offorest and water resources.
C. STEERING AND MONITORING
85. The National Steering Committee (NSC) for the implementation of PRSC operations was established in 2002. It is chaired by the first Deputy Prime Minister, Nguyen Sinh Hung, and brings together representatives from key economic ministries and agencies, such as MOF, the Ministry of Trade (MOT), the State Bank ofVietnam (SBV), the Ministry of Labor, Invalids and Social Affairs (MOLISA), the Ministry ofJustice (MOJ), MARD, the Ministry of Education and Training (MOET) and the Ministry of Health (MOH), among others. Members ofthe NSC thus have authority over the entire range ofpolicy areas covered by the PRSC process. The participation of the Office of Government (OOG) and the Party's Economic Commission (PEC) in the NSC also allow for a better coordination of policy decisions, and to elicit sufficient support for the most critical reforms. SBV is assigned as the agency responsible, in close collaboration with the World Bank, for preparation and implementatioti of PRSCs. A Deputy Governor of SBV acts as Standing Vice Chairman ofthe NSC. Representatives from a total ofmore than 20 line ministries and government agencies participated in the preparation ofthe proposed credit.
86. Given the intensive and complex coordination that is required to manage this very comprehensive reform program, SBV has created a Program Coordination Unit (PCU) with dedicated staff from SBV. The PCU has helped facilitate the policy dialogue of the World Bank and donors with line ministries.
30 The Department for International Development of the United Kingdom (DFID), Switzerland (SECO) and the World Bank have provided financial support for the PCU during the preparation of PRSCs 4 to 6.
D. ADMINISTRATION
87. Strengthening the management of public expenditures has been a priority of the Government over the last decade and significant progress has been made in this respect. A first Country Financial Accountability Assessment (CFAA) was undertaken in 2000-0 1 . A Public Expenditure Review-Integrated Fiduciary Assessment (PER-IFA) carried out in 2004 and published in 2005, provided an update and review of the implementation of the recommendations of the 2001-CFAA and also suggested reforms in other areas. The government has made steady progress in implementing the 2004 PER-IFA recommendations. Major developments in public financial management include empowering the National Assembly with increased government accountability for the use of public resources; increasing transparency for all agencies using budget resources, including SOEs, public investment projects and statutory funds; establishing the SAV as a technically independent unit under the National Assembly; and gradual integration of capital and recurrent expenditures through forward-looking budgets and resource allocation norms. Twenty-six national private sector accounting and 37 auditing standards, consistent with international practice have been issued. The government is currently undertaking a major investment in a new and integrated Treasury and Budget Management Information System (TABMIS). Progress is being made in developing new business processes for TABMIS, including a unified Chart of Accounts, further integration of recurrent and capital budget execution processes, clarifying issues related to reporting ODA on budget, and developing standard reports to strengthen budget execution.
88. A CFAA Update has been commenced and will be available later in 2007. The Update will provide an assessment of the public financial management through examining budget development, budget execution - accounting, internal and external reporting, internal controls, internal and external auditing, monitoring and legislative oversight and scrutiny, financial management capacity and financial accountability risks.
89. Disbursement, reporting and auditing arrangements. The Credit will follow the International Development Association (IDA) disbursement procedures for development policy lending operations, and the Credit proceeds will be disbursed in compliance with the stipulated release conditions. Various measures have been taken to ensure that the overall fiduciary policies and institutions are adequate to proceed with support from IDA and other development partners. Analytical underpinnings for the operation include the 2002 Country Procurement Assessment Review (CPAR), the 2005 PER-IFA and the CFAA under preparation. Disbursement will not be linked to any specific purchases and no procurement requirements will have to be satisfied.
90. Fiduciary arrangements. The fiduciary risks of the current public financial management systems, (budgeting, accounting, reporting and auditing) are assessed as moderate. Since the International Monetary Fund (IMF) does not currently have a program in Vietnam, it is not possible to rely on its assessment ofthe control environment of the SBV. However, the enactment ofthe Audit Law of 2005 helps address the issues related to audit and accounting arrangements. The Audit Law has established the SAV as an independent institution reporting the National Assembly with the Auditor General being appointed and dismissed by the National Assembly. Audit reports were made public for the first time in 2006. The SBV will be subject to auditing by SAV on an annual basis.
91. Deposit account. To address fiduciary risks in the foreign exchange control environment, the Borrower will open and maintain a dedicated deposit account (DA) in US dollars for the Borrower's use once the Credit is approved by the Board. The DA will form part of the country's official foreign
31 reserves. An equivalent amount will be credited to an account of the government available to finance budgeted expenditures. If after deposit in the DA the proceeds of the Credit or any part thereof are used for ineligible purposes, as defined in the Financing Agreement, the Bank will require the Borrower to either return that amount to the DA to be used for eligible purposes, or refund the amount directly to IDA.
92. Through SBV, the Borrower will report the exact sum received into the DA, ensure that all withdrawals are for “eligible” expenditures, indicate to IDA details of the Treasury account to which the Vietnamese Dong equivalent of the Credit proceeds will be credited, and submit a report on receipts and disbursements for the DA. The Government will, if considered necessary by IDA, allow an independent external audit of the dedicated foreign currency DA. These processes and controls are intended to provide assurance that IDA funds have arrived at their intended destination to be used for their intended purposes, and are subject to the Borrower’s rules and regulations.
E. BENEFITS AND RISKS
93. The present operation is a vehicle for the World Bank, and the donor community more broadly, to stay engaged with a client that has delivered an outstanding performance in terms of economic growth and poverty reduction. It also recognizes the commitment of the government to pursue and deepen its reform strategy, as reflected over the last few months in major milestones, including the entry into the WTO, the approval ofan ambitious banking reform roadmap and the adoption of a determined stance in the fight against corruption. Active engagement should strengthen the coherence of the program, especially because the effectiveness of sectoral policy actions hinges on the success of more fundamental governance reforms in areas such public financial management, public administration reform and legal and judiciary development. Engagement should also help improve the content of specific policy actions, to ensure the timeliness of their adoption, and to monitor the impact of the overall program on broader development outcomes. The value of this engagement is all the more important given that this would be the last cycle of general budget support operations in concessional terms, hence providing an exceptional window for high-level policy access in a country that is not aid dependent.
94. At the same time, its own success confronts Vietnam with new challenges. The reform agenda has not progressed at the same pace across all fronts, and private sector response has been much stronger in some areas than in others. As a result, the country is facing potentially dangerous imbalances. The biggest risks faced by Vietnam are related to the sustainability of its remarkable performance, economically, socially and institutionally.
95. Three different risks of a diverse nature need to be considered. In the short term, the biggest vulnerability stems from possible turbulence in the financial sector. The development of capital markets has vastly outpaced that ofthe supervisory and regulatory capacity of monetary authorities. This calls for a rapid upgrading of policies related to the banking sector, the securities market and the management of public debt, all of which are part of the proposed reform program. Success in global integration, resulting in massive inflows of FDI to the growth poles of the country and increased competition in formally protected sectors, may also test the ability of Vietnam to preserve social inclusion. There is a risk that some groups could lose in the short term, and a clear prospect of a widening urban-rural gap. Rapid feedback channels from affected stakeholders, inclusive policies in the social sectors, and transparent mechanisms to transfer resources to the poorer regions are among the mitigating measures supported by the proposed series of operations. Other imbalances are related to rapid urbanization and infrastructure development, in a context where transparency in land zoning and land compensation are still partial. Cases of corruption and social strife are increasingly related to land. Tackling this risk requires rapid progress in transparency at various levels, from regional planning to infrastructure master plans to land
32 use to appropriate taxation to the monitoring of assets of the relevant civil servants. These are also areas receiving special attention in the proposed series of operations.
VIII. COORDINATION WITH DONORS AND STAKEHOLDERS
A. THE IMF
96. The IMF has not had a lending arrangement in Vietnam since the expiry of its Poverty Reduction and Growth Facility (PRGF) in April 2004. However, the IMF remains fully committed to continuing an effective partnership with the government of Vietnam. It maintains a regular policy dialogue with the government through Article IV consultations, interim staff visits, and its resident representative office in Hanoi, and seeks to build capacity through training activities in Vietnam and abroad. It supplements this dialogue with technical assistance in areas of core Fund expertise, including tax policy and administration, budget management, monetary and financial sector policy, and macroeconomic statistics. The IMF continues to cooperate closely with the World Bank in Vietnam, and to contribute actively to the broader dialogue between the government and its development partners. In relation to the proposed credit, the IMF is expected to provide a Letter of Assessment before the Board Meeting. A joint Bank- Fund DSA was completed in October 2006.
97. Under the framework of enhanced collaboration, the staffs of the two institutions have consulted closely with one another across a broad range of issues, and have sought to maintain appropriately- aligned positions in their areas of policy engagement. While the World Bank has taken the lead in supporting the government’s structural and institutional reforms in a number of sectors, the IMF has taken the lead in the policy dialogue on macroeconomic policies. It has also assumed responsibility for advising on the monetary policy functions ofthe SBV.
B. OTHER MULTILATERAL AND BILATERAL DONORS
98. A total of 11 bilateral and multilateral donors co-financed operations in the previous PRSC cycle, and more are expected to contribute to this and subsequent credits (see Table 8). Apart from co-financing PRSC operations, bilateral and multilateral donors have played an important role through their involvement in the policy dialogue with the government. Donors participating in the process contributed human and financial resources to assess the policy challenges, coordinate their approaches, and discuss the options with government, across a range of policy areas. These were chosen in accordance with their priorities and comparative strengths.
33 TABLE8: DONORSUPPORT TO PRSC 6
Donor Co-financing amount Main areas of involvement Asian Development $15,000,000 Global integration, State sector reform, Financial sector Bank (ADB) reform, Private sector development, Infrastructure, Education, Health, Land and forests, Water, Environment, Planning process, Public administration reform, and Fighting corruption. Agencia Espaiiola de €5,000,000 Education, Social protection, Gender, Land and forest and Cooperacion Planning processes. Internacional (AECI) Australian Agency for AUDl 0,000,000 Global integration, Health, Gender, Land and forests, International Water, and Fighting corruption. Development (AusAID) Canadian International CDN7,500,000 Financial sector reform, Education, Gender, Environment, Development Agency Legal development, and Fighting corruption (CIDA) Danish International DKr6 1,000,000 Global integration, State sector reform, Financial sector Development Agency reform, Private sector development, Health (HIV/AIDS), (DANIDA) Gender, Land and forest, Water, Environment, Public financial management, Legal development, Public administration reform, and Fighting corruption. Department for &20,000,000 Global integration, Private sector development, Education, International Gender, Social protection, Water and sanitation, Public Development (DFID, financial management, Legal development, and Fighting United Kingdom) corruption . European €20,000,000 Global integration, Private sector development, Health, Commission (EC) Education, Public financial management, Land and forests, and Environment. Germany €6,000,000 Land and forests, Infrastructure, Water, and Environment. Ireland €7,500,000 Education, Health, Gender, Financial sector reform, Private sector development, Public financial management, and Fighting corruption. Japan Bank for TBD Global integration, State sector reform, Financial sector International reform, Private sector development, Infrastructure, Cooperation (JBIC) Education, Health, Social protection, Gender, Land and forests, Water, Environment, Planning processes, Public financial management, Legal development, Public -- administration reform, and Fighting corruption. Netherlands Directorate €12,000,000 Health, Gender, Land and forests, Water, Environment, Senera1 for Public financial management, Public administration reform, International and Fighting corruption. Zooperation (DGIS) - Note: All amounts are subject to confirmation as the co-financing support is processed.
99. The preparation of this credit was conducted in a joint manner since its inception, with regular donor meetings taking place to reach consensus on how to proceed. The initial stage involved the joint preparation of a major piece of analytical work, the Vietnam Development Report 2007, entitled Aiming High. This report, presented at the CG Meeting of December 2006, sought to “translate” the SEDP 2006- 2010 into a workable set of policy actions, with proper prioritization and sequencing. It also led to the
34 identification of a set of indicators to monitor progress towards development outcomes across all pillars of the reform agenda. The preparation of the Vietnam Development Report was launched shortly after the approval of PRSC 5, in June 2006. Several donors contributed think pieces and background notes all over the process, and especially in preparation for a major workshop in October, 2006. In the end, the Vietnam Development Report was co-signed by 16 multilateral and bilateral donors.
100. Preparations for PRSC 6 have built on the foundations of the existing strong donor commitment to support Vietnam’s reform agenda in a coordinated manner. This commitment was re-asserted in the Hanoi Core Statement on Aid Effectiveness. It is reflected in the intense meeting frequency of the different working groups that were established to coordinate the views of co-financiers and share information pertaining to the PRSC process. Joint working groups of donors, government and international NGOs that meet on a regular basis have helped carry the discussions on government’s plans for reforms to a wide group of stakeholders. With the formation of working groups organized by policy area, donors have had the opportunity to engage in discussions on reform with government counterparts on an ongoing basis. Such an arrangement is also helping to ensure coherence across donors’ programs of support, and to mobilize funding for high priority tasks in each policy area.
101. Building on the effective way donors have worked together in the preparation of PRSCs in Vietnam, and on their analytical underpinnings, a consensus has emerged on the steps to prepare subsequent operations in the series. This consensus includes an early start of the policy dialogue, with a roadinap being drawn up at the end ofthe summer to set up the various stages and requirements from the initial formulation of the policy matrix to the assessment of triggers to the policy dialogue on specific actions to the negotiation ofthe credit.
C. CIVIL SOCIETY
102. With the support of the NGO Resource Center, civil society organizations participated actively in the preparation of the VDR 2007, which served as the analytical foundation for the proposed series of credits. The VDR 2007 helped “translate” the SEDP 2006-2010 into a set of prior actions for PRSC 6 and subsequent operations in the series. The NGO contribution focused on infrastructure (especially in the relation to the needs of PWD), the social sectors and legal development. Substantive inputs were provided on the interpretation of the key development issues in each area, the identification of the main strengths and weaknesses of the government’s strategy to address those issues, the prioritization of policy actions within the SEDP framework, and the selection of the most appropriate outcome indicators to measure progress in each area.
103. A well-functioning mechanism is in place in Vietnam to conduct consultations with business associations. Prior to both the year-end CG meeting between government and donors and the informal mid-year CG meeting, the Vietnam Business Forum (VBF) gathers to discuss the issues of concern to a range of chambers and associations representing the interests of enterprises. The discussion is organized around topics such as investment promotion, transparency, tax, labor and land. In each of these areas, a list ofmain concerns is assembled, and the focus is on assessing progress towards solving them. Many of those concerns are addressed through policy actions supported by the PRSC process. At the last VBF, in December 2005, the current cycle of PRSC operations was discussed, and feedback from the participating chambers and associations was sought.
35 Download Date: 5/31/2007 - 6:38 PM Current Classification: FOR OFFICIAL USE ONLY
VIETNAM
INFORMAL MID-YEAR CONSULTATIVE GROUP MEETING
Statement by the Representative of the International Monetary Fund
Ha Long City, June 1,2007
This statement updates the IMF stafs assessment of Vietnam's current economic situation provided to the Consultative Group (CG) Meeting held in Hanoi on December 14-15, 2006.
1. Vietnam's economic performance has remained strong during the first few months of 2007. Exports have continued to grow briskly, investment and consumption growth have remained strong, and industrial production has continued to expand at double-digit rates. With market sentiment bolstered by Vietnam's much-awaited accession to the WTO on January 11, foreign direct investment (FDI) and portfolio capital inflows have been particularly buoyant, and the overall balance of payments has recorded a sizable surplus.
2. Growing access to foreign markets and capital has created new opportunities for cost- effective financing of Vietnam's large investment requirements, but has also created new challenges. The Ho Chi Minh City Stock Market Price Index rose by 144.5 percent in 2006, and by another 50 percent in the first two months of 2007, before retreating somewhat in recent months. With the number of listed companies rising fiom 41 at end-2005 to nearly 200, the market's total capitalization soared fiom less that VND 10 trillion (1.2 percent of GDP) at end-2005 to VND 320 trillion (28 '/z percent of GDP) as of mid-May 2007. This unprecedented boom in stock prices has reduced the cost of capital for firms, boosted the wealth and consumption of domestic investors, and increased Vietnam's appeal to foreign investors. At the same time, however, the need to contain the attendant risks to the financial system has heightened the urgency of policy measures to protect macroeconomic stability, enhance financial system surveillance, and improve the governance of state-owned commercial banks (SOCBs) and state-owned enterprises (SOE).
Short-Term Outlook and Risks
3. The prospects for 2007 remain broadly favorable. GDP is projected to continue to expand at an annual rate of around 8 percent, led by sustained export and investment growth. While a pick-up in imports is projected to shift the trade balance back into a deficit, this is likely to be more than financed by continued strong receipts fiom remittances and capital inflows.
4. However, the outlook is not without risks. Inflation remains stubbornly high, with the twelve-month rate estimated to have risen back above 7 percent since April 2007. Welcome adjustments in electricity and petroleum prices, together with a resurfacing of food supply shocks, have contributed to the recent uptick in prices. However, large increases in the prices of major nonfood items also seem to point to growing demand pressures, which may become more difficult to contain as growing capital inflows complicate monetary management. The Download Date: 5/31/2007 - 6:38 PM Current Classification: FOR OFFICIAL USE ONLY
risk of rising inflation could be heightened if a large positive fiscal impulse were to further add to the demand pressures in 2007.
5. Over the medium term, a slowdown in the global economy or a tightening of global liquidity conditions could expose vulnerabilities in the balance sheets of financial institutions and large SOEs, which may have made sub-optimal investment decisions during the period of booming demand. The resulting contingent government liabilities, together with continued reliance on the state sector to finance the bulk of the country's huge infrastructure needs, could eventually threaten debt sustainability.
Fiscal Policy and Reforms
6. The risk of inflation, and the need to protect medium-term debt sustainability, call for a more cautious fiscal stance. The estimated fiscal deficit recorded a welcome decrease in 2006, but the 2007 Budget appears to be set on an expansionary course. Current expenditure is to be boosted by a sharp increase in social expenditures in 2007, after having been fueled largely by increasing wages and oil subsidies in 2005-06. While a large oil revenue windfall helped to contain the overall deficit (based on the Fund's definition, which includes on- lending through the Vietnam Development Bank (VDB) and off-budget investment) to less than 4 percent of GDP in 2006, full implementation of the investment plans envisaged in the Socio-Economic Development Program (SEDP) for 2006-2010 could raise the deficit to 7 percent of GDP in 2007. The non-oil deficit would rise from 13%percent of GDP in 2006 to 15% percent of GDP in 2007, while the public debt stock would rise from about 44 percent of GDP at end-2006 to around 46 percent of GDP by end-2007. While the concessional terms on most external debt, which still accounts for more than half of total public debt, would help keep the debt service burden manageable, growing recourse to market-based financing through the capital markets could make the fiscal position more vulnerable to changes in market sentiment.
7. Given the projected leveling off of oil receipts, the containment of the fiscal deficit will require a concerted effort to boost non-oil revenues and curb expenditure growth. The reduction in import tariff rates associated with WTO accession, and the constraints posed by planned tax reforms, call for an accelerated effort to improve tax administration. On the expenditure side, we welcome the recent progress toward adjusting domestic oil prices, and support the authorities' decision to remove remaining controls over oil prices by the end of 2008. To curb pressures on the government's wage bill and slow the growth of its pension liabilities, we encourage the authorities to discontinue the indexation of public wages and pensions to the common minimum wage, and adopt instead a more differentiated and merit- based structure of salary increases in the context of civil service reform. Slowing the growth of public investment is likely to be a challenge, given the urgent need to ease the country's serious infrastructure bottlenecks. To ensure continued development of essential public infrastructure, more proactive steps to encourage private participation could be considered. Projects still funded through the issuance of investment bonds or on-lending should be subject to rigorous screening and monitoring, and the credit appraisal and risk management capacities of the Vietnam Development Bank (VDB) strengthened. Effective enforcement of the new laws to curb corruption and prevent the waste of public funds would need to be an integral part of this effort. Download Date: 5/31/2007 - 6:38 PM Current Classification: FOR OFFICIAL USE ONLY
Monetary Policy and Exchange System Reform
8. A more restrained monetary policy will likely be required to contain inflation, and limit the potential expansion of nonperforming loans (NPLs). Credit growth has showed signs of reacceleration in recent months, with the rate of growth of credit to the economy rising from 23 percent in the year to September 2006 to about 29 percent in the year to February 2007. While the authorities' monetary program for 2007 envisages a slowing of credit growth to 20 percent by year-end, the achievement of this objective is threatened by ample excess bank liquidity. The authorities' recent efforts to introduce prudential restraints on commercial bank lending for stock market purchases are welcome steps, which should help reduce banks' exposure to stock market risks and guard against a potentially costly boom-bust cycle in stock prices. The authorities also need to take more pro-active measures to mop up excess liquidity, including by allowing the State Bank of Vietnam (SBV) to exercise adequate autonomy in the issuance of SBV bills.
9. Vietnam's rapid integration into the global economy calls for continued efforts to increase exchange rate flexibility. The authorities have recently taken welcome steps in this direction. In January 2007, the trading band of the dong vis-a-vis the U.S. dollar was widened from +I-0.25 percent to +/-0.5 percent around the daily reference rate set by the SBV, and the dong temporarily appreciated as the pace of inflows peaked in January- February 2007. In the face of continuing large foreign exchange inflows, further steps to increase exchange rate flexibility would serve to stem inflationary pressures while decreasing the need for sterilization. A more flexible exchange rate policy could also mitigate the potential disruptive effects of a possible future reversal of capital inflows by encouraging economic agents to better hedge exchange rate risks and allowing the exchange rate to play a greater role as a shock absorber.
Bank Reform and Financial Sector Supervision
10. Bank reform remains key to improving the allocation of saving and investment and protecting financial stability. The growing possibilities for financing through the capital market, increasing competition from joint-stock banks, and the new regime of liberal entry of filly foreign-owned banks, have increased the urgency of SOCB reform. In this context, the government's renewed commitment to proceed with the equitization of the main SOCBs is welcome, as is the recent increase in the ceiling for participation by individual strategic investors. We also welcome the recent adoption of an SOCB recapitalization plan, and look forward to the upcoming publication of financial reports of the SOCBs based on International Accounting Standards. These steps need to be backed by timely action to improve the corporate governance of SOCBs, including by providing their managers with adequate autonomy to make lending decisions based on purely commercial criteria.
11. The growing scope for securities market operations and portfolio capital movements also calls for hrther steps to strengthen prudential regulation of bank and nonbank financial institutions. We support the authorities' medium-term plans to convert the SBV into a modern central bank, and to grant it adequate authority and independence to carry out an anti-inflationary monetary policy and effective financial sector supervision. In the meantime, it is important that the SBV, the State Securities Commission (SSC), and the Ministry of Download Date: 5/31/2007 - 6:38 PM Current Classification: FOR OFFICIAL USE ONLY
Finance improve the tracking of vulnerabilities associated with stock market-related risks and capital movements. Given the risks posed by related transactions among banks, their securities company affiliates, and the buyers or issuers of securities, a concerted effort is required to regulate stock market-related credit and discourage insider trading. Controls also need to be put in place to prohibit related-party transactions within economic groups involved in a mix of industrial operations and financial services.
State-Owned Enterprise Reform and Private Sector Development
12. The authorities' plans to restructure and equitize SOEs are welcome. However, it will also be important that SOE managers be granted clear incentives and full autonomy to make their own pricing and investment decisions on commercial principles, and the entry of foreign strategic investors should be encouraged to facilitate the needed improvement in SOE governance. The mandates of economic groups of wholly state-owned enterprises, and their relations with government, should be clearly defined, and regulatory safeguards established, where needed, to ensure that their market power will not be used to undermine competition.
13. A more transparent and market-friendly legal and regulatory framework would be key to enabling Vietnam to capitalize on its growing appeal to foreign investors. We welcome plans to align energy prices with world market conditions, and urge the authorities to also remove other remaining price controls that discourage private investment. To further level the playing field, simpliQ rules and regulations, and improve the business climate, we encourage the authorities to swiftly adopt pending legislation and associated implementing decrees and circulars in full conformity with Vietnam's WTO commitments.
14. The quality, timeliness, and dissemination of macroeconomic statistics and Financial Stability Indicators will also need to be improved to support informed policy decisions and build enduring investor confidence. In this regard, we support the authorities' ongoing efforts to develop better measures of core inflation and look forward to the issuance of the government's first semi-annual Debt Bulletin. More transparent accounting, reporting, and monitoring of the government's extra-budgetary operations and all publicly-funded projects would also be helpkl in reassuring donors that their assistance is being put to the best use.
Concluding Remarks
15. Vietnam's historic accession to the WTO attests to its impressive economic progress since the launching of the policy of Doi Moi some twenty years ago. In the coming years, deepening economic and financial integration should facilitate achievement of the government's ambitious objectives to lift Vietnam from the ranks of low-income countries by 201 0 and join the ranks of industrial countries by 2020. However, growing exposure to global markets has made it all the more important that macroeconomic policies be kept on a sound footing and the pace of market-oriented reforms accelerated. We have no doubt that, with the continued good judgment of its leadership, Vietnam will successfully meet these challenges, and we wish the authorities every success in these endeavors. . . ** .
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E ANNEX 4
STATE BANK OF VIETNAM Office : 47 - 49 Ly Thai To, HaNoi Tel : (84-4) 8242.479 Fax : (84-4) 8268.765
May 22,2007
Mr. Paul Wolf'owitz President The World Bank Washington, DC
Dear Mr. Wolfowitz:
Over the last five years the World Bank, and the donor community more broadly, supported the economic rcnovation program of Vietnam through a series of five Poverty Reduction Support Credits (PRSCs). During this period, our ccononiy grcw at an annual rate of 7.8 pcrccnt per year in real terms. exports expanded by roughly 22 percent per year in dollar terms, and the fraction ofthe population living below the international poverty line declined by more than three percentage points per year. This period has also seen considerable progress in social indicators, with Victnam now being on a solid track to attain or exceed most if' not all of the Millennium Develclpment Goals. Over these five years, considerable progress was made in public financial nianagement, public administration ref'orm and the strengthening of governance more broadly. These successes retlect the reform drive of our government, as expressed among others in thc Comprchcnsive Poverty Rcdiiction and Growth Strategy (CPRGS). The CPRGS, which was supported by the World Bank and many other donors, jointly with other plans and strategic documents of our government, served as the basis for a contin~iouspolicy dialogue across a range of' policy areas. PRSC operations provided an effective platform to conduct such dialogue. refine the content and articulation of policy reforms and channel resources to our budget to finance their implementation. The usefulness of this approach is confirmed by the increasingly large number of donors participating in PRSCs. The commitment of our government to the process is reflected in the timely completion of the annual operations in the cycle. Building on the successes of economic reforms over the previous five years, Vietnam's Socio-Economic Development Plan (SEDP) for 2006-201 0 was approved by the National Assembly on June 29, 2006. In December 2006, the SEDP was presentcd to the Board of Executive Directors of the World Bank. A key goal or the SEDP is to sustain rapid economic growth so that Vietnam can move out of low income status by 2010 and lay the foundations to become an industrial country by 2020. The SEDP aflirms that rapid growth should go hand in hand with improved sustainability, and improved quality and compctitiveness of the economy. Importance is attached to in-depth development while wider development should not be forgotten. Economic growth should be linked with poverty reduction, cultural development, comprehensive human development, exercise of democracy and social equity. The SEDP also aims to narrow the dcwlopiiient gaps among regions, step by step, while preserving and improving the environment. We would like to draw your attention to the Chapter IV of'the SEDP which provides the Development Orientation of various sectors over the period 2006-20 10.
56 Overall. the objectives, tasks and solutions of the SEDP can be mapped on to three pillars (a) business development (b) natural resources and the environment and (c) social cquity. Chapter 1V highlights thc goals, tasks, and solutions for achieving agricultural development, industrial modernization, and service sector growth. Chapter VI1 of the SEDP identifies the roles of various sectors in business development, including the role of the private sector as a driving force. We aim to create favorable conditions for the development of the private sector without limiting its scales, fields or regions. Chapter 1V.B details the goals, tasks. and solutions for the social sectors, while Chapter 1V.C identifies goals and policies for thc sustainable development of natural resources and protection of the environinent In order to achieve the objectives of cconomic growth, business development, environmental sustainability and social equity we need to improve the institutional framework of the socialist oriented market economy in a comprehensive manner. The measures to this effect are especially highlighted in Chapter IX. The chapter emphasizes legal reforms for supporting a market economy, the importance of improving the q~iality of public administration, and strengthening the fight against corruption. The government’s resolution No. 3/2007/NQ-CP identifies the tasks of various ministries and agencies for implementing the SEDP and the state budget during this year. This resolution affirms our commitment to successfully achieving the targets identified in the SEDP. The tasks listed in this resolution bear a close resemblance with the policy actions and triggers identified in the proposed credit, Jointly with the following operations in the series, the proposed series effectively supports the implementation of the reform agenda outlined in the SEDP. The proposed credit also contributes to harmonization, in the spirit of thc Hanoi Core Statement on Aid Effectiveness. Our government appreciates the technical inputs provided through this process. as well as thc resources to implement policy reforms and the rcduced transaction costs in conducting the policy dialogue with the donor community. Our government therefore requests the Association’s assistance through this sixth PRSC, in recognition for the progress made in the implementation of our development strategy. We recognize that many difficult challenges lie ahead, but we are confident that we will be able to overcome them. We hope that we will count on the support of the Association during this five-yex cycle, as we make progress to implement the reform program, with the ambition of becoming a middle-income country by the end of the decade. We look forward to y0111‘ continued support43
Yours sincerely ,/ f
Governor
57 ANNEX 5: SUPPORTING DOCUMENTATIONFOR PRIOR ACTIONS IN PRSC 6
Pillar I:Business development Sector I Prior Action Documentation Global Grant trading and distribution rights to Decree 23/2007/ND-CP dated February integration all foreign firins in line with internationa 12,2007 commitments
0 Issue regulations to guide the intellectual Decree 56/2006/ND-CP, Decree property law with adequate enforcement 100/2006/ND-CP. Decree 103/2006/ND- mechanisms CP, Decree 105/2006/ND-CP, Decree 106/2006/ND-CP Decision 69/2006/QD-BNN, Decision 3 O/QD-BYT
State sector 0 Further restrict list of sectors where 100- Decision 38/2007/QD-TTg dated March reform percent state ownership is to be retained 20,2007 Use share auctions as the main Decree to be issued before May 3 1, mechanism for equitization, and allow 2007, in replacement of Decree foreign strategic investors 187/2004/ND-CP)
Classify all SOEs according to 0 Decision 224/QD-TTg dated October 6, performance and publish the results 2006. Consolidated report on 2005 SOE classification disclosed on MOF website since April 24, 2007. SCIC to begin receiving state ownership Up to March 3 1, 2007: Total capital of rights in equitized SOEs from ministries 433 equitized SOEs (book value) and provinces received by SCIC is VND 3,411 billion. According to SCIC’s plan, it is going to receive state ownership rights from 760 SOEs in 2007 of VND 4,920 billion (book value).
Financial 0 Require public disclosure of financial Decision 16/2007/QD-NHNN dated sector reforin statements of SOCBs in line with April 18, 2007 internationally accepted standards Notice 3743mHNN-KTTC of the SBV of April 19, 2007 requiring SOCBs to disclose their 2006 financial statements by May 15,2007. Increase equity stake allowed to foreign Decree 69/2007/ND-CP dated April 20, strategic investors in commercial banks 2007
(Continued)
58 ANNEX 5: SUPPORTING DOCUMENTATIONFOR PRIOR ACTIONS IN PRSC 6 (CONTINUED)
Pillar I:Business development
Sector Prior Action Documentation Private sector Introduce investment climate monitoring Report on the results of the Survey on development tool as part of annual enterprise survey Business Environment 2006 Reduce processing times and rationalize Decree 108/2006/ND-CP dated fee structure for business registration September 22, 2006. Decree 88/2006/ND-TTg dated August 29, 2006. Clarify authority on investment Decree 108/2006/ND-CP dated certificates and conditional sectors, and September 22, 2006. standardize related documentation Issue guidelines and options to foreign Decree 10 1/2006/ND-CP dated investors transitioning to new Investment September 2 1, 2006. and Enterprise laws Establish consultative mechanism to Decision 1267/2007/QD-TTg dated streamline licenses and oversee September 25, 2006. implementation of new investment- Consolidated report of the Working enterprise regime Group in January 2007. Establish single-window mechanism for Circular 02/2007/TTLT/BKH-BTC-BCA businesses to cover registration, tax, and dated February 27. 2007. seal formalities in selected provinces The mechanism has been piloted in Hanoi, Haiphong and Laocai. Infrastructure Decentralize investment ownership to Decision 562/QD-BGTVT dated March better integrate capital and recurrent 16,2007 budgets in the road transport sector Decision 748/QD/BGTVT dated April 6, 2007 Clarify contract specifications, investor Decree 78/2007/ND-CP dated May 11, qualifications and treatment of 2007. unsolicited proposals for BOT projects Adopt wastewater charges based on cost Decree to be issued before May 3 1,2007, recovery, with provisions to protect the on wastewater in urban areas and poor industrial zones, as per minutes of negotiation.
(Continued)
59 ANNEX 5: SUPPORTING DOCUMENTATIONFOR PRIOR ACTIONS IN PRSC 6 (CONTINUED)
Sector Prior Action Documentation Education Extend performance standards for Decision 14/2007/QD-BGDDT dated primary teachers nationwide, May 4,2007. including evidence-based assessments Adopt transparent criteria to decide on Decision 693/QD-BGDDT dated university admission quotas on a pilot February 7,2007. basis Guiding Notice No. 1325/BGDDT dated February 9,2007. Health Adopt HIV/AIDS law and prepare HIV/AIDS Law No. 64/2006/QH11 action plans to scale up harm dated June 29, 2006. effective from reduction, fight stigma and January 1, 2007. discrimination. The action plan for education and communication for behavioral changes, approved in Decision 16/2007/QD-BYT dated February I,2007. Draft Action plan for harm reduction. Improve budgetary balance between Decision I2007IQD-BTC dated March 7! health infrastructure, human resources, 2007 approving the Medium Term subsidies and preventive care Expenditure Framework (MTEF) for health sector. Unify legal framework to address gender Law on Gender Equality No. I Gender disparities and increase women’s 73/2006/QH 11 dated November 29, participation in decision making. 2006, effective froin July 0 1, 2007. Pillar 111: Natural resources Prior Action Documentation Land and Issue strategy to strengthen linkages National Forest Development Strategy forests between protective and economic 2006-201 0, approved in Decision functions of forests, and promote local 18/2007/QD-TTg dated February 5, ownership 2007. Clarify resettlement and compensation Decree to be issued before May 3 1,2007 process in cases without LUCs, and on LUC issuance. land acquisition, mechanisms for handling complaints compensation and resettlement procedures and process, as per minutes of negotiation. Environment Mandate public consultation on EIAs at Decree 80/ND-CP dated August 9,2006. commune level with public feedback Circular 08/2006/TT-BTNMT dated incorporated in report to relevant September 8, 2006. I-- authorities (Continued)
60 ANNEX5: SUPPORTING DOCUMENTATIONFOR PRIOR ACTIONS IN PRSC 6 (CONTINUED)
Pillar IV: Modern governance 1 Sector Prior Action Documentation Planning Allocate state capital expenditure Decision 2 10/2006/QD-TTg dated processes transparently, using criteria like September 12, 2006. population, poverty and ethnicity Adopt regulations for master and Decree 92/2206/ND-CP dated Septembei regional plans specifying issues, process, 7,2006. agency responsibility, and require disclosure LPublic Disclose results of audits conducted by SAV’s 2005 consolidated audit report on financial the SAV and its annual audit plan its website. management Decision 916/2006/QD-KTNN ofthe SAV dated December 27, 2006 on its 2007 audit plan. Publish report on budget execution for Quarterly and annual reports on budget current year and budget plan for execution and budget plans disclosed on forthcoming year, on an annual basis MOF website. Issue regulations for periodic disclosure Regulations issued in attachment to of external public debt and its Decision 232/2006/QD-TTg dated composition October 16, 2006. Implement regulation to guide the Decision 46/2006/QD-BTC dated establishment and issuance of benchmark September 6, 2006. government bonds Consolidate administration procedures Law on Tax Management No. for all taxes into a single law, 78/2006/QH11 dated November 29, modernizing assessment and 2006, effective from July 1, 2007. enforcement methods LLegal Establish separate legal, judicial, Law on Organization of the National development economic, and budget committees to Assembly (revised) No. 83/2007/QH11 strengthen NA’s supervisory role dated April 2, 2007. effective from July 1,2007 Simplify and broaden access to legal aid Law on Legal Aid No.69/2006/QH11 for marginalized and vulnerable groups dated June 29, 2006, effective from January 1, 2007. Decree 07/2007/ND-CP dated January 12, 2007. Adopt policies to encourage the Decree 53/2006/ND-CP dated May 25, participation of non-state establishments 2006. in the delivery of public services Circular 91/2006/TT-BTC dated October 2,2006.
(Continued)
61 ANNEX5: SUPPORTING DOCUMENTATIONFOR PRIOR ACTIONS IN PRSC 6 (CONTINUED) j Sector I Prior Action I Documentation I Legal Strengthen information disclosure, Ordinance No. 34/2007/PL-UBTVQHll development public participation, and accountability dated April 20, 2007, effective from July (continued) of officials for commune level policies 1, 2007. Anti- Operationalize Steering Committee Resolution No. 1039/2006/NQ- corruption against corruption with power to suspend UBTVQHl 1 dated September 21, 2006. high level officials if suspected Decision 13/2007/QD-TTg dated January 24,2007. Disclose results of inspections against Report No. 17/BC-CP dated March 14, corruption for cases overseen by the 2007 on the implementation of the Anti- Government Inspectorate corruption Law Establish legal framework to protect and Decree 120/2006/ND-CP dated October reward whistle blowing on corrupt 20,2006. activities
62 ANNEX 6: VIETNAM AT A GLANCE
East POVERTY and SOCIAL Asia& Low- Vietnam Pacific income 2005 -~ -- Population, mid-year (millions) 83.1 1,870 2,343 Development diamond' GNI per capita (Atlas method, US$) 620 1,420 510 GNI (Atlas method, US$ billions) 51.5 2,647 1,188 Life expectancy Average annual growth, 1999-05 Population (%) 1.4 0.9 1.9 Labor force (%) 1.9 1.3 2.2 Gross Most recent estimate (latest year available, 1999-05) - primary Poverty (% of population below national poverty line) 20 +f enrollment Urban population (% of total population) 27 42 31 Life expectancy at birth (years) 70 70 58 Infant mortality (per 1,000 live births) 18 29 79 Child malnutrition (% of children under 5) 25 12 43 I Access to safe water Access to an improved water source (% ofpopulation) 62 78 75 Literacy (% ofpopulation age IS+) 96 91 61 Gross primary enrollment (% of school-age population) 98 113 100 Male 101 114 105 1 -Vietnam I - - Low-income group Female 94 112 94
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1985 1995 2004 2005 Economic ratios* GDP (US$ billions) 14.1 20.7 45.4 52.9 Gross capital formation1GDP 27.1 35.6 35.4 Trade Exports of goods and serviceslGDP 32.8 67.5 70.1 Gross domestic savingslGDP 18.0 28.3 30.2 Gross national savings1GDP 19.2 32.2 34.5 Current account balance1GDP -3.8 -13.5 -3.4 0.4 Interest paymentslGDP 0.0 0.7 0.8 0.8 Total debtiGDP 0.4 122.6 33.8 32.0 Total debt servicelexports 4.7 2.6 Present value of debt/GDP 33.9 Present value of debffexports 50.4 Indebtedness 1985-95 1995-05 2004 2005 2005-09 (average annual growth) GDP 6.5 6.9 7.7 8.4 7.9 -Vietnam - - Low-income group GDP per capita 4.3 5.4 6.2 7.0 6.5 Exports of goods and services 25.2 15.9 27.9 16.5 15.0
STRUCTURE of the ECONOMY
(% of GDP) Agriculture 402 272 21 8 Industry 274 288 40 1 Manufacturing 205 150 20 3 Services 325 44 1 38 2 38 1 Household final consumption expenditure 73 8 65 3 636 --- General gov't final consumption expenditure 82 64 62 Imports of goods and services 41 9 748 753 -w~* GCF &GDP
1985-95 1995-05 2004 Growth of axportsand impofts (Oh) (average annual growth) Agriculture 35 41 35 Industry 73 100 10 2 Manufacturing 43 111 10 1 Services 84 59 75 Household final consumption expenditure 10 2 12 4 General gov't final consumption expenditure 43 78 79 00 01 02 03 04 05 Gross capital formation 256 100 10 5 10 7 Exports &Imports Imports of goods and services 242 170 25 2 17 6
Note 2005 data are preliminary estimates Group data are to 2004 * The diamonds show four key indicators in the country (in bold) compared with its income-group average If data are missing, the diamond will be incomplete
63 PRICES and GOVERNMENT FINANCE 1985 1995 2004 2005 Domestic prices (% change) Consumer prices 16.8 9.5 8.4 Implicit GDP deflator 17.0 7.9 8.4 Government finance (% of GDP, includes current grantsj -5 Current revenue 23.3 26.8 25.9 00 01 02 03 04 0 Current budget balance 6.0 9.8 7.4 -mwGDP deflator '9-CPI Overall surplus/deficit (excl. on-lending) 0.7 0.9 -1.2
TRADE 1985 1995 2004 2005 Export and import levels (US$ rnlll.) (US$ rn////ons) Total exports (fob) 507 5,489 26,507 32,442 40 000 Rice 547 950 1,407 35 000 Fuel 1,063 5,671 7,373 1 Manufactures 1,785 13,928 17,519 Total imports (cif) 930 8,155 31,954 36,978 Food Fuel and energy 856 3,574 5,024 Capital goods 2,097 9,208 9,688 99 00 01 02 03 04 05 Export price index (2000=100j 100 115 131 Import price index (2000=100) 100 111 120 v Exports IImports Terms of trade (2000=100) 100 103 109 1
BALANCE of PAYMENTS 1985 1995 2004 2005 Current iicountbalance to GDP (US$ millions) 1 Exports of goods and services 7,607 30,352 36,618 16- 1 Imports of goods and services 10,603 33,511 38,560 Resource balance -496 -2,996 -3,159 -1,942 Net income -90 -279 -891 -1,218 Net current transfers 52 474 2,485 3,380 -2 Current account balance -534 -2,801 -1,565 220
Financing items (net) 265 3,301 2,259 2,023 -6 Changes in net reserves 269 -500 -694 -2,243 99 00 01 02 03 04 05 I Memo: Reserves including gold (US$ mlonsj 1,376 6,314 8,557 Conversion rate (DEC, /oca//US$j 8.3 11.038.3 15,704.3 15,850.1
EXTERNAL DEBT and RESOURCE FLOWS 1985 1995 ~- 2004 2005 I Composition of 2004 debt (US$ mill.) (US$ mlions) Total debt outstanding and disbursed 61 25,428 15,360 16,920 IBRD 0 0 0 IDA 54 231 3,039 Total debt service 2 364 780 IBRD 0 0 0 IDA 0 2 37 Composition of net resource flows Official grants 38 348 387 Official creditors 7 58 1,278 Private creditors 0 356 10 Foreign direct investment (net inflows) 0 0 1,610 Portfolio equity (net inflows) 0 0 0 World Bank program Commitments 0 265 710 A - IBRD E - Bilateral Disbursements 7 47 444 B - IDA D -Other multilateral F - Private Principal repayments 0 1 8 C - IMF G - Short-term Net flows 7 46 436 Interest payments 0 2 29 Net transfers 7 45 407
64 ANNEX 7: MAPOF VIETNAM
65
IBRD 33511R
102°E 104°E ToTo 106°E 108°E 110°E ToTo BabaoBabao KunmingKunming ToTo KaiyuanKaiyuan ToTo VIETNAM TiandongTiandong CHINACHINA
HaHa GiangGiang 4 CaoCao BangBang 5 PROVINCE CAPITALS LaoLao CCaiai ToTo NanningNanning PhongPhong ThoTho Re d 9 NATIONAL CAPITAL 1 3 8 BacBac CanCan 22°N ToTo 22°N RIVERS TuyenTuyen 1010 LangLang HepuHepu QuangQuang SonSon Bla 7 ThaiThai 2 ck YenYen BBaiai NguyenNguyen MAIN ROADS 1313 SonSon LaLa VietViet TriTri 1212VinhVinh YenYen 1414 DienDien BacBac GiangGiang RAILROADS BienBien PhuPhu 1111 1515 6 1616 BacBac NinhNinh ToTo HANOIHANOI 1717 HaiHai DuongDuong HaHa LongLong PROVINCE BOUNDARIES MuangMuang XaiXai HoaHoa BBinhinh HaHa DongDong 1919 2020 HaiHai PhongPhong HungHung YenYen 2121 INTERNATIONAL BOUNDARIES 2222 1818 HaHa NamNam 2323 2424 ThaiThai BinhBinh NamNam DinhDinh NinhNinh BinhBinh 2626 M 2525 20°N 2727 a 20°N PROVINCES: ToTo LuangLuang ThanhThanh HoaHoa PrabangPrabang 1 Lai Chau 32 Thua Thien Hue LAOLAO 2 Dien Bien 33 Da Nang PEOPLE'SPEOPLE'S Gulf 3 Lao Cai 34 Quang Nam 2828 HainanHainan I.I. 4 Ha Giang 35 Quang Ngai DEM.DEM. RREP.EP. of 5 Cao Bang 36 Kon Tum (China)(China) A VinhVinh Tonkin 6 Son La 37 Gia Lai n 7 Yen Bai 38 Binh Dinh n HaHa TinhTinh 8 Tu Yen Quang 39 Phu Yen a 2929 9 Bac Can 40 Dac Lac ToTo m 18°N 18°N KhammouanKhammouan 10 Lang Son 41 Dac Nong 11 Phu Tho 42 Khanh Hoa C 12 Vinh Phuc 43 Binh Phuoc DongDong HoiHoi o 3030 13 Thai Nguyen 44 Lam Dong r 14 Bac Giang 45 Ninh Thuan d 15 Quang Ninh 46 Tay Ninh i DongDong HaHa 16 Ha Noi 47 Binh Duong ToTo l SavannakhetSavannakhet l 3131 17 Bac Ninh 48 Dong Nai THAILANDTHAILAND e HueHue 18 Ha Tay 49 Binh Thuan r 19 Hung Yen 50 T.P. Ho Chi Minh a 3232 3333 DaDa NangNang 20 Hai Duong 51 Ba Ria-Vung Tau 16°N 16°N 21 Hai Phong 52 Long An TamTam KyKy 22 Hoa Binh 53 Tien Giang 3434 23 Ha Nam 54 Dong Thap
24 Thai Binh 55 Ben Tre QuangQuang NgaiNgai 25 Ninh Binh 56 An Giang 3535 26 Nam Dinh 57 Vinh Long NgocNgoc LLinhinh (3143(3143 m)m) 27 Thanh Hoa 58 Tra Vinh 3636 28 Nghe An 59 Kien Giang KonKon TumTum 29 Ha Tinh 60 Can Tho 3838 30 Quang Binh 61 Hau Giang CentralCentral 14°N 14°N PleikuPleiku 31 Quang Tri 62 Soc Trang 3737 QuyQuy NhonNhon 63 Bac Lieu HighlandsHighlands 64 Ca Mau 3939 TuyTuy HoaHoa CAMBODIAC A M B O D I A 4040
BuonBuon MaMa ThuotThuot 4242 4141 NhaNha TrangTrang GiaGia NNghiaghia 12°N ToTo DaDa LatLat 12°N KampongKampong ChamCham 4343 DongDong ToTo 4444 4545 KampongKampong XoaiXoai PhanPhan Rang-Rang- ChhnangChhnang M 4646 ThapThap ChamCham e TayTay NNinhinh k 4848 o 4747
n ThuThu DauDau
g 4949
MotMot BienBien HoaHoa 5050 PhanPhan ThietThiet Gulf 5252 5454 HoHo ChiChi MinhMinh CityCity 5151 of 5656 CaoCao LanhLanh TanTan AnAn LongLong XuyenXuyen 5353 MyMy ThoTho Thailand VungVung TauTau Phu VinhVinh LongLong BenBen TreTre VIETNAM Quoc 6060 CanCan ThoTho 5757 5555 10°N RachRach GiaGia a 10°N t 5959 6161 TraTra VVinhinh l ViVi ThanhThanh 5858 e This map was produced by SocSoc TrangTrang D the Map Design Unit of The 6262 g World Bank. The boundaries, 6363 n BacBac LieuLieu o colors, denominations and CaCa MauMau k any other information shown M e 0 50 100 150 200 Kilometers on this map do not imply, on 6464 the part of The World Bank Group, any judgment on the legal status of any territory, 0 50 100 150 Miles or any endorsement or acceptance of such boundaries. 104°E 106°E 108°E
JANUARY 2007