Rising Inequality due to COVID-19

1:53:34 PM | 4/14/2022

Vietnam's economy is forecast to grow 5.3% in 2022, according to the World Bank (WB). The forecast is based on the COVID-19 adaptation policy, strong performance of export-oriented processing, manufacturing and a recovery in domestic demand. The poverty rate is expected to decrease in 2022, but at a slower pace than before COVID-19 and inequality in society is increasing.

In 2021, inequality in both monetary and non-monetary dimensions is expected to increase, compounding the increase in inequality that occurred because of the COVID-19 crisis in 2020. Poor households were less able to cope with the impact of income shocks and were more reliant on external sources such as borrowing.

In the labor market, data showed that female workers and workers in the informal sector are more adversely affected than male workers. The COVID-19 outbreak that started in April 2021 and subsequent pandemic control measures produced a significant negative impact on the labor market in the third quarter of 2021. About 60% of the workforce said they have suffered negative labor market impacts, ranging from unemployment to reduced working hours, temporary business closures and reduced wages. By the fourth quarter of 2021, key indicators showed signs of recovery as economic activity resumed in major economic centers but had not yet reached pre-pandemic levels.

However, the crisis is likely to have a heavier impact on the lowest income population. An increase of just 2% in inequality will lead to an increase in poverty. Despite the relatively accommodative monetary policy, the impact of COVID shocks in 2020 and 2021 was exacerbated by the lack of effective countercyclical fiscal policies. The State Bank of Vietnam (SBV) maintains the refinancing interest rate at 4.0% (lower than before the pandemic), encourages banks to exempt and reduce interest rates, and at the same time issues guidelines to allow repayment term extension and ensure ample liquidity in the market. On the other hand, the Government's fiscal policy responses are modest in scale and fragmented, although fiscal space is still quite large. The support package with a total size of about 2.0% of GDP in 2021 mainly includes an extension of tax and land rent payment deadlines while social assistance is limited. Public investment was successfully promoted to support economic recovery in 2020 but fell at a slower pace in 2021.

Outlook for economic recovery

Vietnam’s economy is expected to grow by 5.3% in 2022 from a modest 2.58% last year, and thereafter stabilize at around 6.5% in a scenario with eased mobility restrictions domestically and internationally. The services sector is expected to gradually recover during the year as consumer confidence is restored and foreign tourism is expected to gradually resume from mid-2022 onward. Manufacturing exports are expected to grow at a slower pace mirroring moderating growth in Vietnam’s main export markets (the United States, the European Union and China). However, this outlook also faces increasing negative risks. Slowing growth in major trading partners coupled with trade rate shocks due to the Russia-Ukraine conflict and related sanctions could affect the recovery. These factors may be exacerbated if a new strain of COVID-19 emerges.

In addition, the economic recovery depends on the pace of domestic private demand recovery, which is still relatively slow, mirroring the cautious sentiment of consumers and investors. The current phase of strong infections may lead to temporary disruptions in labor supply and production. Since the economy has recovered strongly since the beginning of the year, if the government deploys a strong fiscal support package, its impact on economic growth can be mitigated.

In particular, the World Bank recommends that Vietnam still needs to loosen its monetary policy but must keep a cautious approach to control risks in the financial sector. Other shocks may lead to a worse scenario in which GDP growth will reach only 4% in 2022, before recovering to 6% and 6.5% in 2023 and 2024, respectively.

Poverty reduction is expected to resume in 2022, assuming GDP growth recovery to pre-COVID-19 rates, but the impact of the crisis may have longer-term effects on rising inequality.

By Anh Mai, Vietnam Business Forum