Vietnam's post-pandemic recovery uneven: IMF

Spurred by an impressive vaccination drive and accommodative policies, Vietnam’s economy is rebounding from a severe pandemic wave in 2021, but the recovery has been uneven to date, the IMF said.

In the recovery, the service sector still lags, while financial risks and inequality have likely risen, an IMF mission, led by Era Dabla-Norris, noted in a release on Friday (Vietnam time) after their four-day working visit to the country.

Policy support and an impressive vaccination rollout prompting a strategic shift towards living-with-Covid will help Vietnam achieve an economic growth of 6% in 2022. "Inflation is expected to edge up to 3.9% by end-2022. Growth risks are tilted to the downside while inflation risks are tilted to the upside."

Dabla-Norris noted that policy priorities should be to entrench the recovery, preserve macroeconomic stability, and promote inclusive growth. "The size and composition of policy support should be proactively adjusted to the pace of recovery and clearly communicated and implemented to reduce uncertainty."

In another preliminary finding, the mission stated that decisive structural reforms are needed to address longstanding challenges related to the business environment, especially for SMEs, labor quality and skill mismatches, and governance, .

“Other risks include a tightening of global financial conditions and developments in the domestic real estate and corporate bond markets,” Dabla-Norris added.

“Policymaking should be agile, and the size and composition of policy support proactively adjusted to the pace of recovery. Fiscal policy should take the lead in policy support, especially if downside risks materialize as the scope for further monetary easing is limited in light of rising inflation risks.

“Efficient and steadfast implementation of the recently-approved Program for Recovery and Development (PRD) will be key to supporting growth. The PRD appropriately prioritizes health, economic recovery, and medium-term growth prospects."

She said going forward, fiscal policy will need to strike a balance between providing temporary, targeted support and facilitating economic transformation. The headline fiscal deficit is projected to widen moderately in 2022.

“Monetary policy should remain vigilant to rising inflation pressures. If sustained inflation pressures emerge, the State Bank of Vietnam should tighten its monetary policy stance and clearly communicate the underlying drivers to help contain inflation.

“Going forward, credit growth policy must strike a reasonable balance between promoting the recovery and safeguarding financial stability. The team welcomes recent steps towards greater exchange rate flexibility and modernization of the monetary policy framework."

IMF's growth forecast for Vietnam at 6% this year is higher than the World Bank's. The bank in early April lowered its projection to 5.3%, down 0.2% against its prediction in January. The revision is derived from the challenges in terms of rising infections and the country’s vulnerability to external shocks due to its high economic openness.

In early April, ADB stated that it anticipated Vietnam’s growth rate to converge to its pre-pandemic level of 6.5% in 2022 and 6.7% in 2023. Earlier, Fitch Ratings said it expected the figure to accelerate to 6.1% in 2022 and 6.3% in 2023 from 2.6% in 2021.