Tough times ahead

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Vietnam is entering an investment cutback phase with difficult decisions to make

Workers repair an electric transformer in the northern Vietnamese province of Son La. Economists say the government needs to continue focusing its capital resource for major projects in the power and transportation sectors.

A new plan to tighten government spending on public works projects next year will require hard decisions after the country has spent years making huge investments to drive growth, economists say.

The government has said that public investment will be focused on urgent works. Other projects will have to find capital from other sources, instead of the state budget, or be postponed.

Nguyen Dinh Cung of the Central Institute for Economic Management said thousands of projects will be affected by the plan.

"If the government wants the plan to succeed, it can't avoid reviewing all projects and making cuts to many of them," he said in an interview published in Thoi Bao Kinh Te Saigon magazine last week.

"That will be a really tough decision to make," he said.

Cung said there will certainly be complaints when ongoing projects are suddenly brought to a halt.

"But we have to ask the question: What will cost more, delaying them or going on with them?" he said.

"It will cost much more to continue building a large port than to halt it, if the port ends up receiving just a few ships a year. Such projects need to be stopped," said Cung.

According to the World Bank, Vietnam has achieved rapid economic growth and fast poverty reduction over the last 20 years. However, there is a growing concern that the momentum of a growth strategy that is largely based on factor accumulation, or increases in labor and capital, may have run its course.

"Vietnam has one of the highest investments to gross domestic product (GDP) ratios in the world, averaging around 43 percent of GDP during the past five years. But the growth rate has not been commensurate with this high investment rate," the bank said in a report in May.

The Washington-based lender, which is implementing a program to help the country improve the efficiency of investment through the end of this year, said public investment decisions have been decentralized to ministries and provinces, except for the largest national projects. "However, the decentralized system carried with it many of the deficiencies that existed at the federal level, such as weak project selection system, slow pace of execution, inadequate emphasis on monitoring and oversight," it said.

Cung said policymakers used to think investment was always good, even if the country had to borrow to invest. "If foreign partners promised to lend more, it was already considered a great success to be excited about, regardless of effectiveness," he said.

Vietnam can't continue on this path, otherwise its debt will mount, Cung said, calling for more incentives to attract investment from the private sector.

Economist Vu Tuan Anh of the Vietnam Institute of Economics said one of his studies showed that the Vietnamese government was the largest investor in East and Southeast Asia. The study did not even take into account investments financed by government bond proceeds and foreign loans, he said.

The spending of the Vietnamese government is around 50 percent higher than that in other regional countries, he said. 

Vietnam has made a distinct policy shift this year, moving toward stabilizing the economy instead of emphasizing economic growth. To this end, the government introduced Resolution 11 in February with a series of monetary and fiscal measures designed to restore economic stability.

But members of the National Assembly, the country's legislative body, said there has been a lack of commitment to implementing the fiscal tightening measures outlined in the resolution.

According to the legislature's finance and state budget committee, while many key projects have not been given enough capital to be completed and put into use, new projects continue to start. Despite plans to cut spending, Vietnam's state budget expenditure has already exceeded the plan for the year by 9.7 percent, or VND70.4 trillion (US$3.36 billion), the committee said in a report last week.

Some legislators said the development of infrastructure in Vietnam is still heavily dependent on public investment and wrong decisions in budget cuts could hurt the progress of important works.

Deputy Trinh Ngoc Thach of Hanoi said investment in general has been ineffective. But when fiscal policies were tightened, essential projects to build schools and hospitals were halted, he said.

"Priority should have been given to school projects," Thach said.

Than Duc Nam, representative of Da Nang, said many transportation projects have been delayed this year without justification, even when many places in the country are still in dire need of new bridges.

For 2012, the transport sector will need some VND14.8 trillion for its projects, but the government plans to provide only VND5.59 trillion. So, the situation will be even tougher, Nam said.

Economist Tran Du Lich said investment cutbacks have not been made in the right places because of the lack of defined criteria.

At first, provincial authorities were reluctant to slash investments, saying all projects were important. Then under growing public pressure, they had to make the cuts, but this time they did so to many projects that were actually effective, Lich said.

Cung from the Central Institute for Economic Management said the government needs to focus its resources only on electricity, school and road projects. It's also necessary to have objective and scientific assessments in the selection of projects, he said.

"Revenues in the government's budget have continued to grow over the years, even amid economic difficulties, so it can't be said that the government doesn't have money," Cung said. "The key issue is how to spend that money."

He said budget revenues rose by VND96 trillion last year and the increase this year is expected to be around VND80 trillion, or nearly 4 percent of the country's GDP.

Vietnam, therefore, is capable of bringing its budget deficit to 3 percent of GDP, as long as it can tighten spending, Cung said.

The government wants to cut the budget deficit to 4.8 percent of GDP next year, from an estimated 4.9 percent this year. It aims to reduce the ratio to 4.5 percent by 2015.

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