Vietnam should look to fiscal policy for supporting economic activity: IMF

Fiscal policy should take the lead in supporting Vietnam’s economic activity if needed, given ample fiscal space and limited room for monetary policy loosening, says the International Monetary Fund (IMF).

In its conclusions of the 2024 Article IV Consultation with Vietnam, the IMF said it welcomed the authorities’ plans to speed up the implementation of public investment, which will require tackling bottlenecks, and stressed the importance of expanding social safety nets to support the most vulnerable.

The fund recommended strengthening the fiscal framework and budget process and increasing revenue mobilization over the medium term to support the ambitious development agenda.

The country’s total external debt is projected at 32.6% of GDP at the end of this year and 32.8% in 2025. Meanwhile, public and publicly guaranteed debt is forecast at 33.8% of GDP at end-2024, down from 34.4% at end-2023.

The fund commended the authorities’ swift actions to maintain macro-financial stability as the economic recovery from the pandemic faced domestic and external headwinds.

However, it noted that risks remain elevated, and that further efforts are required to safeguard macro-financial stability and deepen reforms to address vulnerabilities and ensure robust, green, and inclusive growth over the medium term.

The IMF commended the authorities for effectively containing inflation risks but stressed that monetary policy should continue to be cautious under a complex environment and limited policy space.

Given easy monetary conditions, if exchange rate pressures were to persist for longer, it could lead to a larger pass-through to domestic inflation.

The fund forecast Vietnam’s inflation, measured by the consumer price index (CPI), at 4.1% this year, accelerating from 3.3% last year but still staying within the government’s target of 4-4.5%.

They welcomed steps toward greater exchange rate flexibility and encouraged continued progress in this area, along with modernizing the monetary policy framework.

The fund underscored the importance of strengthening the resilience of the financial system by bolstering capital buffers, phasing out regulatory forbearance, and addressing rising non-performing loans.

They also stressed the need to enhance the authorities’ toolkit to prevent and manage banking crises by strengthening the resolution and emergency liquidity frameworks, and welcomed the ongoing revision of the law on credit institutions. Efforts to strengthen bank regulation and supervision should continue, it suggested.

The fund also acknowledged the authorities’ swift actions to contain risks in the real estate and corporate bond market. It urged decisive steps to address remaining risks, including by strengthening the insolvency framework, bolstering institutions, and increasing transparency in the corporate bond market.

The IMF welcomed the authorities’ anti-corruption efforts and emphasized the need to continue strengthening governance.

In its latest update, the IMF revised up its GDP projection for Vietnam to 6.1% this year from 5.8% forecast in April. The country's GDP is projected to reach $468.5 billion this year and $506.4 billion next year.

Credit to the economy is forecast to grow 12.9% this year before slowing to 9.5% in 2025, versus 13.7% in 2023, according to the IMF.

Gross international reserves are expected to dwindle to $84 billion in 2024 from $92.3 billion in 2023.