Vietnam Continues Market Mechanism in 2008

2008 is seen as an important time for the realisation of the five-year social and economic plan. Vietnam will end subsidies for many kinds of products in the year to attract investment. This requires the financial sector to seek and apply drastic measures to control prices, follow a regulated market mechanism and eliminate subsidies.

 

At the 2007 financial sector conference recently held by the Ministry of Finance in Hanoi, Prime Minister Nguyen Tan Dung said the Government must steadfastly carry out the resolutions ratified by the National Assembly for 2008, including holding CPI growth under GDP growth. The Ministry of Finance has demonstrated its important roles in price advisory, management and control. However, the government requires a pricing policy that meets both the market mechanism criteria and Vietnamese conditions to avoid uncontrollable fluctuations.

 

The Prime Minister stressed, “We are building a market economy and we have to accept the impacts of world market prices. For example, the long-standing high oil price forced us to hike domestic retail gasoline prices. Oil compensation this year alone amounts to VND10,000 billion. We only planned VND4,000 billion to offset oil sale losses, and we are unable designate the remaining VND6,000 billion. If we continued to subsidise oil sales, our budget will be seriously imbalanced.” Moreover, according to the Prime Minister, the subsidies reveal a lot of shortcomings. For example, farmers did not benefit from this incentive, while up to 40 per cent of subsidised oil is used by foreign companies. On the other hand, the gasoline price in Vietnam is now VND3,000-4,000 lower than in regional countries and this will widen illegal exports of oil to our neighbours.

 

Thus, according to the Prime Minister, Vietnam will end oil subsidies in 2008. The price of fuel will be set by the market. The money retained from the funds to offset oil sale losses will be used to finance social welfare and infrastructure construction. Regarding electricity price, Vietnam will follow its price rise roadmap.

 

According to the report of the Ministry of Finance, although the this year’s revenue from crude oil fell by some VND3,200 billion against last year, this industry will still pay VND287,900 billion to State coffers in 2007, exceeding initial estimates by 2.1 per cent (or VND6,000 billion). Notably, other sources have also generated more revenue for the State Budget; thus, the collection structure became more sustainable.

 

“Domestic budget revenue in 2007 rose 55.4 per cent, against a 52.1 per cent increase in 2006. The State Budget expenditure reached VND368,340 billion, exceeding estimates by 3.1 per cent and equalling 32.3 per cent of GDP,” said Deputy Finance Minister Tran Van Ta. He said state budget collections in 2008 are estimated to reach VND323,000 billion, up 12.2 per cent against 2007. State budget expenditures are forecast at VND398,980 billion, up 11.6 per cent against 2007 estimates. Overspending is estimated at VND66,900 billion, or 5 per cent of GDP. As of December 31, 2008, the government’s outstanding loans are estimated at 36.6 per cent of GDP and national debt to foreigners is projected at 28.8 per cent of GDP. This is still within safety standards.

 

However, according to Ta, investment capital spending has been too scattered. Improper investment still exists in many localities in 2007. As of late November 2007, the state spent VND53,130 billion for infrastructure investment, fulfilling 55.8 per cent of plan while government bond disbursement proceeds met only 40.5 per cent of plan.

 

Apart from the soaring price of construction materials, which increased 11.32 per cent in 10 months, and sluggish site clearance, the delayed introduction of investment instruction documents also hampered the investment process.

 

To speed up disbursement in late 2007 and in 2008, the Ministry of Finance introduced methods to locate and move capital of unfeasible projects to feasible projects with capital shortages.