Policy tools should be applied flexibly to support struggling enterprises: Fulbright expert

Vietnam needs to flexibly apply policy tools that have a legal basis to remove difficulties for struggling businesses in all economic sectors, Do Thien Anh Tuan, lecturer from the Fulbright School of Public Policy and Management, tells The Investor.

What is your assessment of the country’s economic context in the first quarter of 2023 and the effectiveness of ongoing policies to support economic growth?

Vietnam's Q1 growth rate clearly showed the difficulties of most industries and economic sectors, including the FDI group and economic sectors associated with foreign or domestic trade. Industries that mainly serve exports declined sharply due to lowered global demand. The service sector was not as good as expected because tourism has not yet made a significant breakthrough. Other factors like household consumption and private investment were weak. This context requires the fiscal policy to be countercyclical, focusing on two policy groups: tax exemption, reduction and extension; and increasing public spending.

However, we see that the fiscal policy for both the pandemic and current periods has not shown a clear countercyclicalness. Post-pandemic, countries accepted overspending of 7-10%, even 14% of GDP. Vietnam's 3-4% GDP deficit target is too low compared to the requirements of a countercyclical fiscal policy. In reality, because support packages could not be disbursed, in 2021-2022, the state budget even saw a continuous surplus. Therefore, the fiscal policy still has great room to implement stimulus packages.

Why haven’t many support policies been put into practice?

I think funding cannot be disbursed mainly because of non-economic issues, but due to the fear of taking responsibility. These support packages are all very new, but they are not designed clearly, without a detailed guiding process that leads to different understandings, thus hard for the doers. Everyone is afraid of doing things wrongly. A person in charge of implementation finds out a breakthrough solution, but he is afraid of facing risks. Everyone sees "sticks" but not "carrots" anywhere. They would rather accept being reprimanded for doing things late than being disciplined or punished. A detailed guiding process will help reduce these risks.

Why does the whole system have to wait for a new Land Law?

This requires the government and relevant ministries to create a specific, detailed and transparent guiding process to implement these support policies. When competent authorities follow these guides, they cannot be blamed for wrongdoings. If any ministry or agency fails to do so, it can be assessed as failing to meet the requirements and tasks.

The issue related to public investment disbursement is the same. The problem is not new, it has been there for many years. In 2022, disbursing public investment was also lower than planned despite the government's continuous efforts. In the first quarter of this year, performance was less than 10% of the year's target. Meanwhile, many projects have been completed but are still waiting for payments.

Some projects face problems related to site clearance compensation. Why does the whole system have to wait for a new Land Law? A law that has not been replaced means it is working. If we stop enforcing the law when amendments are being drafted, it will cause the whole system to come to a halt.

The government has recently approved Decree 12 on extending the deadlines for payment of value-added tax, corporate income tax, personal income tax, and land rent in 2023. It has also agreed with a Ministry of Finance proposal to cut VAT by 2 percentage points. What do you think about the moves?

By the end of 2022, the State Treasury had nearly VND1 quadrillion ($42.6 billion) deposited at the State Bank of Vietnam and commercial banks. In 2022, the state budget surplus was VND222.5 trillion ($9.48 billion). Then, the ones who manage the national financial conditions must play the same role as the chief financial officer in a super corporation. They must balance capital sources and allocate them effectively to reduce opportunity costs.

I see that these policies are appropriate in the current context because the debt of enterprises is overlapping. This enterprise owes to that enterprise, which also owes another. There is such a matrix of overlapping debt. Just fixing one link will remove bottlenecks for the whole chain.

Besides, reducing VAT is also an effective policy as this tax has a great impact on the economy. However, VAT reduction must be done on a large scale for the highest efficiency. The tax postponement, reduction, or exemption can provide temporary financial resources for businesses to pay for employees, and suppliers, and pay the bills. When suppliers are paid, they will have money to pay their creditors. So this policy will create a spillover effect. In short, I want to say that we must nurture businesses with tax support policies so that they can survive.

Interest rates must be reduced to create new production capacities. To promote growth, will the fiscal policy play a key role in the coming time?

Yes. However, loosening would put pressure on interest rates. At this time, the fiscal policy should be harmoniously and effectively combined with the monetary policy. In the current context, the monetary policy also plays an important role as the fiscal policy in creating production capacities in the economy, which is now in need of money. Debt rescheduling policies are necessary and important, but only temporary. Enterprises do not have money to reproduce or rotate capital, nor to pay debts. For many businesses, the economic downturn has disrupted their cash inflow, so debt repayment scheduling is necessary.

We do not deny the efficiency and necessity of debt rescheduling for enterprises but it only solves part of the problems. Another problem is that enterprises do not have access to credit. Therefore, it is necessary to increase capital for the economy at a reasonable cost that meets the rate of return (ROR) of the economy and industries. Many businesses do not dare to take in production contracts as they cannot have credit to perform them, or can borrow but it is not effective because the interest rate is higher than the ROR. In the past, construction enterprises sought every way to obtain projects but now they refuse localities’ offers because they often have to advance money to carry out projects. They are afraid that they cannot access bank loans to do the projects or in case the projects are done, cumbersome administrative procedures sometimes make it impossible to claim money from the budget.

Besides, the real estate and corporate bond markets remain a major bottleneck of the economy, partly because they are simultaneously tightened. Many enterprises have issued bonds in the wrong way to appropriate investors' money, but there are also businesses raising capital to carry out projects. Thus, the SBV must flexibly apply policies that have a legal basis to support businesses. Lending must go hand in hand with cash flow monitoring to disburse it into feasible projects to help businesses soon bring products to market to have money to maintain production and repay loans, thus creating market supply. For such projects, the central bank must think about a refinancing mechanism and promote a certain solution. It cannot say that this is a problem of the corporate bond market under the responsibility of the Ministry of Finance. The ministry and the State Bank must work together to solve these challenges.

Implementing the monetary expansion policy seems to be quite difficult as the SBV still applies an annual credit ceiling to operate the monetary policy. It said the credit ceiling is an indispensable tool to control credit supply and control inflation pressure. What is your view on this matter?

We are in dire need of an effective monetary policy instead of sacrificing it for the exchange rate target. Operating the monetary policy based on credit growth is not stable in terms of theory and practice. Few countries run the monetary policy by controlling credit growth. The monetary policy must be operated based on the money supply target instead of the credit supply. Of course, credit is related to money supply but it is not money supply. Money supply depends on the holding of net foreign assets. Last year, Vietnam’s credit growth was 14.5%, but money supply growth was only about 6.5%. The money supply growth is the decisive variable for inflation, not credit.

Why was the money supply growth only half of credit growth? The main reason was that the U.S. Federal Reserve (Fed) raised interest rates, making domestic money flow out. It forced the SBV to sell foreign currencies for Vietnamese dong, resulting in very low money supply growth. Credit was debt, and businesses did not have money to repay it, because money have run into foreign exchange channels. Finally, businesses and people keep complaining that they have no money. So the regulator must use the right tools in policy monitoring. If the target is inflation, the money supply tool must be used, not credit.

The story here is that many businesses need to borrow capital for real business and production, and there is no reason to refuse them with limited credit room. It is very unreasonable when a project that brings in economic efficiency cannot be implemented due to the credit cap. To solve this, the SBV can refinance loans to commercial banks. When commercial banks lend to such projects, they can create credit documents for rediscounting at the SBV. We need to use policy tools that already have a legal basis. We must think of solutions to apply policies to pump money into the real economy. When the cash flow runs into the right production and business investment projects, creating products and goods to balance the money pumped out, why would we worry about inflationary pressure?

Currently, world interest rates remain relatively high. If domestic interest rates fall, exchange rates must be raised to prevent domestic capital outflows. Does it seem to be a difficult problem for the SBV?

It is true that when interest rates decrease, exchange rates increase because they are related to each other. If the exchange rates hike, we are afraid of macro instability. However, that is not entirely accurate. In operating the monetary policy, there are two important variables: interest rate and exchange rate. Interest rates affect the domestic economy, including people and businesses. Exchange rates mainly affect the foreign trade sector.

The interest rate has a much bigger impact than the exchange rate. Exchange rates mainly affect businesses that carry out import activities. Exporters still earn foreign currencies and can balance supply and demand to reduce exchange rate risks. Meanwhile, interest rates impact all. So should interest or exchange rates be prioritized? I think we must prioritize reducing interest rates to solve the problems of the current economy. Doing so really solves the multi-objective policy story. Allowing more flexible exchange rates also helps the monetary policy become more effective and efficient in an economy with financial openness like Vietnam. But now it is clear that we need an effective and efficient monetary policy instead of sacrificing such a policy just for the exchange rate target.