Why Reforms are Necessary Despite Vietnam’s Successful Containment of Pandemic
Vietnam’s economic landscape
Pre-COVID-19
Before COVID-19, Vietnam was in a prolonged period of high growth in terms of gross domestic product (GDP) and foreign direct investment (FDI). Vietnam implemented market-oriented reforms in the past three decades, transforming from one of the poorest countries in the world to a position among lower-middle-income countries.
Post-COVID-19
However, 2020 has been challenging for Vietnam due to the drastic impact of the pandemic. Nevertheless, Vietnam has been able to control the pandemic effectively and has kept the economy moving. According to CNBC, Vietnam surpassed other regional countries, including the powerful economy of China, to be one of the top-performing economies in Asia in 2020.
GDP rate remained positive despite pandemic
Due to the adverse impact of the pandemic, China, Taiwan, Myanmar, and Vietnam are some of the few countries in Asia with a positive real GDP growth rate in 2020 (China 2.3 percent, Vietnam 2.9 percent, and Taiwan 3.11 percent).
According to Vietnam’s General Statistics Office (GSO), Vietnam saw a GDP growth rate of 2.91 percent, having outperformed China’s 2.3 percent growth in 2020. Although this is the lowest rate in the last 30 years of development, it is the highest growth rate among Asian countries and one of the highest growth rates in the world due to the pandemic.
As of economy scale and GDP value, in 2020 Vietnam 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.
Vietnam’s trade surplus in 2020 was recorded at $19.06 billion, with average consumer prices increasing by 3.23 percent. The country’s processing and manufacturing sector experienced a growth of 3.98 percent, continuing to be the country’s major driving force and contributing largely to the economy’s performance in 2020.
FDI experiences decline but interest positive
Due to the pandemic, foreign direct investment inflows to Vietnam reported a decline of 25 percent compared to last year, having reached US$28.53 billion of total FDI registered in 2020. Regarding new licensed projects, 2,523 new projects with US$14.6 billion in registered capital were reported, demonstrating a 35 percent contraction compared to that of 2019.
Of the 19 sectors that foreign investors invested in, the largest invested sectors were processing and manufacturing, contributing US$13.6 billion, which is 47.7 percent of total FDI capital. Following those two sectors, power production and distribution accounted for more than US$5.1 billion (18 percent) of total FDI capital.
Even though the total registered FDI capital demonstrated a contraction compared to last year, the Ministry of Planning and Investment (MPI) of Vietnam stated that many foreign investors and corporations in Vietnam have gradually recovered and sustained their operations. The MPI also declared that apart from current investors, many other foreign investors have shown significant interest in investing in Vietnam.
COVID-19 pandemic containment
Being a developing country, Vietnam encountered several challenges in coping with the COVID-19 outbreak due to inadequate resources and substandard technological competency. However, as of April 2, 2021, the country only had a total of 2,617 cases of COVID-19, of which 2,359 cases have already recovered and been discharged from hospitals.
This achievement of controlling the outbreak can be attributed to the country’s effective and strict government systems and strategies.
Vietnam responded very early to the pandemic, and took severe action in early January 2020, even before the virus entered the country. The Vietnamese government implemented strict policies of wearing face masks, using hand sanitizer, social distancing, health declaration, and even enforcing strict quarantine measures.
Due to the government’s swift decision-making, effective communication, and extensive contact tracing, Vietnam has been successful in controlling the pandemic compared to other countries in the region.
Vietnam’s economic outlook in 2021
According to the International Monetary Fund (IMF), Vietnam’s GDP growth is forecast to reach 6.5 percent in 2021, provided the COVID-19 pandemic is controlled and business activities recover.
Regarding the current account surplus, in 2020 this figure contracted considerably due to the declining amount of tourism receipts and remittances. However, Vietnam’s current account surplus is expected to improve modestly in 2021, and financial inflows are also expected to strengthen along with the recovery in business activities and investment.
In 2021, the IMF expects Vietnam’s fiscal deficit to narrow compared to that of 2020 as the government effectively prioritizes their expenditures to support the economic recovery, while government revenue enhances due to recovered business activities in the country.
Although Vietnam is subject to gradually recover from COVID-19, 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.
On the other hand, the distribution of effective COVID-19 vaccines could benefit Vietnam’s economic confidence and growth prospects in the coming years.
More decisive policies needed to achieve potential
To fully achieve its growth potential, the IMF in its country report stated that Vietnam needs to review its policies and enforce more decisive reforms.
Firstly, to aid economic recovery the government should focus on business challenges and unemployment. Further, focus should also be on fiscal policies and enforcing more supportive monetary policies. However, 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.
Therefore as per the IMF, 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.
Further, policies in 2021 should 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.
Tax reforms needed across all sectors
Regarding tax policy, a more decisive reform is needed to promote production, investment, and export. Also, tax reforms can enhance changes in the economic structure, and improve government revenue since tax as 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.
Further digital investment needed
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 government should consider simplifying and reducing regulatory and procedure complications to ease business operations, improving access to land and other financial resources. Corruption 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
To tackle the issue of unemployment and other underlying obstacles in the labor market, the IMF recommends the government to address issues on labor skill-mismatches and human capital. The significant gap in educational and vocational training have 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.
For example, enhanced collaboration and data sharing between agencies to improve labor-market governance would facilitate a reduction in skill mismatches for the workforce. Further, agencies should focus on strengthening the connection between education, training, and skill demand of the labor market to improve unemployment.
Economic development on track but domestic reforms necessary
Through the reported GDP and FDI of Vietnam in 2020, it is possible to say 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 its continues on its economic growth.