The COVID-19 pandemic brought adverse impacts and strains to Vietnam’s economy, slowing the country’s growth and presenting uncertainties to the country’s recovery. Nevertheless, the country received quite a lot of international recognition for being one of the very few countries to stay on track for growth.
Global media outlets even lauded the country’s economic performance. Dubbed by CNBC as “Asia’s top-performing economy in 2020” and UK’s BBC as “Asia’s shining star during COVID”.
“The economy is expected to grow even more strongly by 6.6%”, reads a World Bank economic report. The International Monetary Fund anticipates the country to project bigger growth in the economy towards the end of this year.
But even with those facts, “further robust and decisive measures are needed to make the most out of the country’s growth potential, exceeding the forecasted growth if possible”.
According to the report released by Vietnam Briefing earlier this month entitled, “Why Reforms are Necessary Despite Vietnam’s Successful Containment of Pandemic”, reforms are indeed an economic imperative in the country.
Over the past 30 years, Vietnam’s development has been remarkable. Launched in 1986, the economic and political reforms under Đổi Mới have spurred rapid economic growth, transforming what was then one of the world’s poorest nations into a lower-middle-income country.
Amidst all the economic chaos of the pandemic, Vietnam has shown remarkable resilience. But even before the coronavirus, the country was in a prolonged period of high growth in terms of gross domestic product (GDP) and foreign direct investment (FDI).
China (2.3%), Myanmar (2%), Taiwan (3.11%), and Vietnam (2.9%) are some of the few countries in Asia with a positive real GDP growth rate in 2020.
Although this is the lowest rate in the last 30 years of Vietnam’s development, considering the global pandemic, it is the highest growth rate among Asian countries and one of the highest growth rates in the world.
In 2020 Vietnam’s economic scale and GDP value reached over US$343 billion, surpassing Singapore (US$337.5 billion) and Malaysia (US$336.3 billion), becoming the fourth biggest economy in Southeast Asia, just behind Indonesia at US$1,090 billion, Thailand US$509.2 billion, and Philippines US$367.4 billion.
Although the pandemic is still to blame, the FDI inflows to Vietnam reported a decline of 25% from last year’s, having reached US$28.53 billion of total FDI registered in 2020. Regarding newly-licensed projects, 2,523 new projects with US$14.6 billion in registered capital were reported, demonstrating a 35% contraction compared to that of 2019.
Processing and manufacturing were the largest invested sectors, receiving US$13.6 billion, which is 47.7% of total FDI capital. Power production and distribution sectors followed with more than US$5.1 billion (18%).
Vietnam’s Ministry of Planning and Investment stated that many foreign investors and corporations in Vietnam have gradually recovered and restarted their operations, even though the total registered FDI capital demonstrated a contraction than last year. The MPI also declared that apart from current investors, many other foreign investors have shown significant interest in investing in Vietnam.
More decisive reforms
In its country analysis, the IMF stated that Vietnam needs to review its policies and enforce more decisive reforms. To make the most of the country’s growth potential, the Vietnamese government should use fiscal policy to focus on supporting vulnerable households, provide liquidity flows to existing corporations, and protect financial stability.
In addition and even if Vietnam is subject to gradually recover from the pandemic, the country’s economic outlook in “2021 still holds some uncertainties regarding weaker labor market conditions, deteriorating corporate financial resources, banking system weaknesses, and tensions in trade policies”, reads the Vietnam Briefing report.
“To aid economic recovery the government should focus on business challenges and unemployment.” Including fiscal policies and enforcing more supportive monetary policies. But due to strains in the banking system because of the pandemic, the government should be cautious when expanding loan restructurings, or when offering opportunities for further monetary policy extension.
Based on the report produced by Dezan Shira & Associates, policies in 2021 should further focus on supporting high-quality public investment projects, protecting labor, improving government revenue, and enhancing effective resource reallocation.
“To be more specific, Vietnam’s fiscal stance should stay neutral or expand moderately in 2021 due to the gradual economic recovery and available fiscal space. Fiscal policies should therefore focus on improving government budget execution, providing further fiscal support to encourage stronger economic recovery,” the report said.
Tax reforms needed across all sectors
A more decisive reform across all sectors is needed to promote production, investment, and export vis-à-vis tax policy. Tax reforms can also enhance changes in the economic structure, and improve government revenue since tax is a major income of the country.
“Specifically, tax reforms should emphasize more on rationalizing tax expenditures, widening the value-added-tax (VAT) base, raising excise duties, and enforcing a unified property tax. The government should also consider improving the tax agency’s organizational structure, focusing on adopting e-tax services, and easing tax registration, filing, payment, and refund procedures,” the Vietnam Briefing team suggested.
Further digital investment needed
Not only the taxes but the further digital investment is also essential. “Public investment should also be improved by utilizing savings, improving efficiency, and adopting adaptive and digital infrastructure. Social protection systems should be strengthened, advancing the citizen identification number to apply cross-linking databases, using more e-payment methods, and enrolling workers in programs that can provide unemployment support,” the report reads.
Simplifying and reducing regulatory and procedure complications to ease business operations, improving access to land and other financial resources are a few things the government should consider doing. Corruption, however small and subtle, should be addressed to ensure a fair and transparent business market, particularly for SMEs. Entry and exit costs should also be reduced to encourage new firms to enter and do business in the country.
Emphasis on labor availability and optimization
As for the labor market, issues on unemployment and other underlying obstacles must be tackled and assessed. The IMF recommends the government to address issues on labor skill mismatches and human capital. The significant gap in educational and vocational training has created skill mismatches in the labor market, resulting in increasing unemployment.
“While the new labor code will cover all workers, including those informally employed by registered firms, the labor market can be strengthened and improved to ensure a more stable and equal labor environment.”
One sure way to improve unemployment is to strengthen the connection among education, training, and skill demand of the labor market.
It’s a fact that Vietnam has been gradually recovering from the pandemic and has been improving its policies for a more free and open business market.
“However, there still remain several areas for improvement, and if the above-mentioned aspects are effectively addressed, Vietnam’s economic stance would be improved considerably, as it continues on its economic growth,” the report concluded.