Cablegate: Vietnam: Progress On Reform Under World Bank and Imf Poverty Reduction Loans

This record is a partial extract of the original cable. The full text of the original cable is not available.

201044Z Nov 01

2001HANOI03054 - UNCLASSIFIED

UNCLASSIFIED PTQ9370

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ACTION SSO-00

INFO LOG-00 AID-00 ANHR-00 EAP-00 EB-00 E-00 TEDE-00
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FM AMEMBASSY HANOI
TO SECSTATE WASHDC PRIORITY 4764
DEPTTREAS WASHDC
INFO USDOC WASHDC
NSC WASHDC
AMEMBASSY PHNOM PENH
AMCONSUL HO CHI MINH CITY

UNCLAS SECTION 01 OF 02 HANOI 003054

SIPDIS

STATE FOR E, EB, EB/IFD/ODF, EB/IFD/OMA AND EAP/BCLTV
STATE PASS TO USAID/ANE AFERRERA AND DMCCLUSKEY
TREASURY FOR OASIA
PHNOM PENH FOR AID: LCHILES
USDOC FOR 4431/MAC/IEP/OKSA/HPPHO

SENSITIVE

E.O. 12958: N/A
TAGS: EAID ECON EFIN PREL VM FINREF SOE
SUBJECT: VIETNAM: PROGRESS ON REFORM UNDER WORLD BANK AND IMF POVERTY REDUCTION LOANS

UNCLASSIFIED

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1. (SBU) SUMMARY: VIETNAM IS GENERALLY MEETING ITS
ECONOMIC REFORM OBLIGATIONS UNDER ITS WORLD BANK AND IMF
POVERTY REDUCTION LOANS ACCORDING TO HANOI-BASED DONOR
REPRESENTATIVES. VIETNAM'S MACRO-ECONOMIC PERFORMANCE IS
CURRENTLY ON TARGET ALTHOUGH AN EARLIER FAILURE TO AGREE ON
CREDIT GROWTH TARGETS HAS DELAYED THE SCHEDULED RELEASE OF
THE SECOND TRANCHE OF THE IMF LOAN. HOWEVER, THE IMF
REPRESENTATIVE IN HANOI EXPECTS THE IMF BOARD WILL APPROVE
THE RELEASE WHEN IT CONSIDERS THE ISSUE AS SCHEDULED ON
NOVEMBER 24. PROGRESS ON TRADE REFORM IS AT PRESENT AHEAD
OF SCHEDULE ALTHOUGH BANKING REFORM IS LAGGING SLIGHTLY.
THE AREA OF GREATEST DIFFICULTY HAS BEEN IN STATE-OWNED
ENTERPRISE REFORM. HOWEVER THE PACE OF WORK ON SOE REFORM
HAS INCREASED SINCE HE COMMUNIST PARTY GAVE EXPLICIT
POLITICAL APPROVAL IN LATE AUGUST TO RESTRUCTURE THE SOE
SECTOR. THERE IS STILL A NEED FOR GREATER GVN AND
INTERNATIONAL COMMUNITY FOCUS AND EMPHASIS ON DOMESTIC
PRIVATE SECTOR DEVELOPMENT AS A NECESSARY AND APPROPRIATE
ACCOMPANIMENT TO ECONOMIC, TRADE, AND FINANCIAL REFORMS.
PRIVATE SECTOR DEVELOPMENT SHOULD BE A CENTRAL THEME FOR THE
USG AT NEXT MONTH'S CONSULTATIVE GROUP MEETING. END
SUMMARY.

2. (SBU) AS NEXT MONTH'S ANNUAL CONSULTATIVE GROUP (CG)
MEETING DRAWS NEAR, HANOI-BASED DONOR REPRESENTATIVES,
INCLUDING IMF AND WORLD BANK OFFICIALS, BRIEFED ECONOFF ON
THE STATUS OF REFORM EFFORTS AND AGREE THAT VIETNAM IS
GENERALLY "ON TRACK" FOR MEETING ITS REFORM OBLIGATIONS
UNDER THE CONDITIONS OF ITS POVERTY REDUCTIONS LOANS IN ALL
MAJOR AREAS INCLUDING MACRO-ECONOMIC PERFORMANCE GOALS,
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TRADE, BANKING AND STATE OWNED ENTERPRISE (SOE) REFORM.

3. (SBU) ACCORDING TO THE IMF RESIDENT REPRESENTATIVE SUSAN
ADAMS, PROGRESS IS BEST ON MACRO-ECONOMIC TARGETS. IN FACT,
VIETNAM IS OVER-PERFORMING ON THE FISCAL SIDE DUE TO HIGHER-
THAN-EXPECTED TAX REVENUES. THESE HAVE ALLOWED THE GVN TO
MEET ITS BUDGETARY TARGETS DESPITE LOWER THAN ANTICIPATED
ECONOMIC GROWTH. GVN FOOT-DRAGGING ON SOME REQUIRED PRIOR
ACTIONS IN THE MONETARY SIDE, IN PARTICULAR CREDIT GROWTH
TARGETS, TEMPORARILY DELAYED THE RELEASE OF THE $52.5
MILLION SECOND TRANCHE OF VIETNAM'S $374 MILLION POVERTY
REDUCTION GROWTH FACILITY FROM THE IMF. BUT THE GVN HAS NOW
COMPLETED ALL NECESSARY STEPS, AND THE IMF BOARD IS
SCHEDULED TO CONSIDER RELEASE OF THE TRANCHE AT ITS NOVEMBER
24 MEETING. ACCORDING TO ADAMS, THERE ARE "NO REAL PROBLEMS
NOW."

4. (SBU) ADAMS AGREES WITH WORLD BANK CHIEF ECONOMIST KAZI
MATIN THAT THE GVN IS AHEAD OF THE GAME ON TRADE, WHERE THE
REFORM PACKAGE LARGELY RESTS ON IMPLEMENTATION OF THE U.S.-
VIETNAM BILATERAL TRADE (BTA) AGREEMENT. MATIN POINTED OUT
THAT THE GVN IS MAKING LEGAL CHANGES NEEDED TO MEET
OBLIGATIONS THAT TAKE EFFECT IMMEDIATELY ENTRY-INTO-FORCE OF
THE BTA, EXPECTED SHORTLY AFTER VIETNAM'S NATIONAL ASSEMBLY
APPROVES THE AGREEMENT IN ITS CURRENT SESSION (END NOVEMBER
OR SO). MATIN ACKNOWLEDGED THAT IT IS NOT CLEAR WHETHER ALL
THOSE CHANGES WILL BE EFFECTIVE UPON ENTRY INTO FORCE OF THE
BTA OR WHETHER VIETNAM WILL BE IN COMPLIANCE WITH EACH OF
THE OBLIGATIONS. BUT HE NOTES THE GVN HAS MADE OBVIOUS AND
REAL EFFORTS TO COME INTO COMPLIANCE IN ADVANCE OF BTA ENTRY
INTO FORCE IN A NUMBER OF AREAS AND THINKS THIS MOMENTUM
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BODES WELL FOR THE FUTURE. (COMMENT: WHILE THE GVN MAY NOT
BE FULLY COMPLIANT WITH EVERY OBLIGATION UNDER THE BTA
BEFORE ENTRY INTO FORCE, POST AGREES THAT THE GVN IS MAKING
A REAL EFFORT TO BRING THE NATION INTO COMPLETE COMPLIANCE
WITH ALL ITS OBLIGATIONS. END COMMENT.)

5. (SBU) ADAMS AND MATIN ALSO AGREE THAT IN THE REFORM
PROGRAM'S EARLY MONTHS (THE IMF PROGRAM WAS APPROVED IN
APRIL AND THE BANK PROGRAM IN JUNE), VIETNAM FELL SLIGHTLY
BEHIND ON BANKING REFORM. THE DIFFICULTY HAD BEEN IN
GETTING THE GVN TO APPROVE CONTRACTS FOR OUTSIDE INDEPENDENT
BANKING AUDITS INTENDED TO PROVIDE INFORMATION NEEDED TO
PRODUCE DETAILED RESTRUCTURING PLANS FOR THE FOUR STATE
COMMERCIAL BANKS. THESE WERE COMPLETED EARLIER THIS FALL
SOMEWHAT BEHIND SCHEDULE. THE NEXT BIG CHALLENGE WILL BE TO
MEET YEAR-END DEADLINES ON LOAN CLASSIFICATION, E.G. ON
WHICH LOANS ARE NON-PERFORMING. THE GVN HAS ASSURED THE
BANK AND THE FUND THAT IT WILL MEET THESE TARGETS.

6. (SBU) BUT THE GREATEST DIFFICULTIES FOR THE GVN IN
MEETING ITS AGREED UPON TARGETS HAVE BEEN IN SOE REFORM. IN
THE FIRST SIX MONTHS OF THE POVERTY REDUCTION PROGRAMS, THE
GVN FELL SUBSTANTIALLY BEHIND. AS A RESULT, FEWER FIRMS
WERE "EQUITIZED" (A TERM PREFERRED BY THE GVN TO
"PRIVATIZED") IN 2001 THAN IN 2000 OR 1999. THE REASON,
MATIN SAYS, WAS THAT THE COMMUNIST PARTY LEADERSHIP DID NOT
EXPLICITLY ENDORSE THE GOVERNMENT'S PLAN TO RESTRUCTURE
SOE'S AT THE NINTH PARTY CONGRESS HELD APRIL 2001. HOWEVER,
THE PARTY DID FINALLY GIVE THE NEEDED ENDORSEMENT AT THE
PARTY PLENUM CALLED FOR THAT SPECIFIC PURPOSE IN AUGUST.
SINCE THAT TIME, SUBSTANTIAL PROGRESS IN MOVING FORWARD ON
REFORM HAS BEEN MADE. MATIN PREDICTS THAT THE GVN WILL BE
BACK ON TARGET IN THIS AREA BY THE END OF THE YEAR.

7. (SBU) COMMENT: EVEN IF THE GVN STARTS MEETING ITS SOE
REFORM TARGETS ON TIME, THE FACT REMAINS THAT VIETNAM'S SOE
REFORM PACKAGE IS MUCH LESS AMBITIOUS THAN MANY
INTERNATIONAL OBSERVERS FELT WAS OPTIMAL. FUND AND BANK
OFFICIALS GENERALLY AGREE WITH THIS VIEW. BUT WHEN IT
BECAME CLEAR THAT LARGE-SCALE SOE PRIVATIZATION WAS NOT
POSSIBLE GIVEN THE GOVERNMENT'S IDEOLOGY, THESE INSTITUTIONS
MADE THE STRATEGIC DECISION TO LOCK IN THE COMMITMENTS TO
SOE REFORM THAT THE GVN WAS WILLING TO MAKE BASED ON THE
FACT THAT SOE REFORMS WOULD BE REINFORCED AND, IN THEIR
VIEW, MADE MORE EFFECTIVE BY THE REFORMS AGREED TO IN TRADE,
BANKING, AND PUBLIC SECTOR FINANCE.

8. (SBU) COMMENT CON'T: EQUALLY NECESSARY TO SUCCESSFUL
REFORM AND POVERTY REDUCTION IS FOCUS ON THE CONTINUED
DEVELOPMENT OF THE DOMESTIC PRIVATE SECTOR. A FLOURISHING
DOMESTIC PRIVATE SECTOR IS NEEDED TO: CREATE GREATER
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DOMESTIC COMPETITION FOR SOES; GENERATE JOBS IN GENERAL AND
ALSO TO ABSORB THOSE MADE REDUNDANT BY DOWNSIZING OF THE SOE
WORKFORCE; AND BECOME THE ENGINE FOR THE FUTURE ECONOMIC
GROWTH TO LIFT VIETNAM'S POOR OUT OF POVERTY. WHILE THE
TERMS OF VIETNAM'S POVERTY REDUCTION LOANS DO NOT CONTAIN
SPECIFIC OBLIGATIONS TO DEVELOP THE PRIVATE SECTOR, THE
IMPERATIVE TO FOSTER PRIVATE SECTOR GROWTH WAS THE
UNDERLYING LOGIC OF THE PACKAGE'S DESIGN.

9. (SBU) COMMENT CON'T: IT IS CLEAR THAT IF VIETNAM IS TO
MEET ITS OWN AMBITIOUS GOALS OF ELIMINATING POVERTY AND
JOINING THE RANKS OF THE WORLD'S INDUSTRIALIZED COUNTRIES BY
2020, THE GVN MUST DO MORE THAN JUST MEET ITS OBLIGATIONS
UNDER THE WORLD BANK, IMF AND BTA AGREEMENTS. IT MUST PUT
ALSO PUT INCREASED EFFORT INTO ACTIVELY FOSTERING THE
PRIVATE SECTOR DEVELOPMENT. THE GVN EXPENDS CONSIDERABLE
RESOURCES, BOTH ITS OWN AND THOSE OF BILATERAL AND
MULTILATERAL DONORS, DESIGNING LONG-TERM STRATEGIES AND
MEASURES TO REACH GOALS IN KEY ECONOMIC AREAS SUCH AS SOE
REFORM. GIVEN THE INHERENT IMPORTANCE OF PRIVATE SECTOR
DEVELOPMENT TO VIETNAM'S FUTURE, IT WOULD BE APPROPRIATE FOR
VIETNAM'S LEADERS (AND THOSE WHO ADVISE THEM) TO DIRECT THE
SAME LEVEL OF ENERGY AT THE PRIVATE SECTOR. THE USG SHOULD
ENCOURAGE VIETNAM TO VIEW SOE REFORM AND PRIVATE SECTOR
DEVELOPMENT AS TWO SIDES OF A SINGLE COIN, BOTH VITAL TO ITS
ECONOMIC FUTURE. WE CAN BEGIN BY MAKING THIS A CENTRAL
THEME IN OUR STATEMENT FOR NEXT MONTH'S CG MEETING IN HANOI.
END COMMENT.
PORTER

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