Reform or risk stagnation, donors warn Vietnam

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Vietnam risks economic stagnation unless the government can reform its debt-laden banking sector and overhaul inefficient state-run companies, key donors have warned.

The country -- once dubbed an Asian 'tiger economy' -- is on a decelerating growth trend as it grapples with resurgent inflation, falling foreign direct investment and rising fears about toxic loans.

"The economy is losing much of its dynamism and structural constraints are becoming more binding, dragging down the economy's competitiveness and growth," said World Bank's country director for Vietnam, Victoria Kwakwa, at an annual donor-government meeting.

"Vietnam also risks falling over time into the middle income trap," Kwakwa added, citing the country's declining competitiveness in the region, according to a statement released late Monday.

Hanoi expects economic growth of just 5.2 percent for 2012 -- the slowest rate in 13 years.

At the meeting in Hanoi Monday, attended by Prime Minister Nguyen Tan Dung, donors pledged $6.5 billion for Vietnam's development agenda in 2013.

The amount was a reduction on previous years' offers -- donors pledged $7.3 billion for 2012 -- but was still welcomed by Vietnam.

The two biggest individual donors to Vietnam for 2013 were Japan, which pledged $2.6 billion, and the European Union, which provided 743 million euros ($963 million).

Donors particularly emphasized the need to tackle the country's non-performing loans, improve the corporate governance in state-owned enterprises and banks, and raise the level of transparency and disclosure in the state sector.

After a decade of rapid, chaotic bank liberalization, Vietnam has 42 domestic banks, many overloaded with toxic debt from inefficient, poorly-managed state owned companies.

Last year, the government announced aggressive restructuring plans but the drive has stalled.

"In 2013 and beyond, difficult challenges need to be tackled," said Sanjay Karla, Resident Representative of the International Monetary Fund to Vietnam.

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