US embassy cable - 01HANOI686

VIETNAM COMPLETES PRIOR ACTIONS FOR IMF/WORLD BANK STRUCTURAL ADJUSTMENT PROGRAM

Identifier: 01HANOI686
Wikileaks: View 01HANOI686 at Wikileaks.org
Origin: Embassy Hanoi
Created: 2001-03-23 10:37:00
Classification: UNCLASSIFIED//FOR OFFICIAL USE ONLY
Tags: EAID ECON EFIN ETRD PREL VM FINREF SOE
Redacted: This cable was not redacted by Wikileaks.
This record is a partial extract of the original cable. The full text of the original cable is not available.


2001HANOI00686 - UNCLASSIFIED
 
 
 
                           UNCLASSIFIED     PTQ5866

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ACTION SSO-00   

INFO  LOG-00   NP-00    AGRE-00  AID-00   ANHR-00  EAP-00   EB-00    
      TEDE-00  SS-00    STR-00   TEST-00  TRSE-00  SAS-00     /000W
                  ------------------D62AD3  231051Z /38    
FM AMEMBASSY HANOI
TO SECSTATE WASHDC PRIORITY 2341
INFO DEPTTREAS WASHDC PRIORITY
NSC WASHDC PRIORITY
USDOC WASHDC PRIORITY
USDA WASHDC PRIORITY
ASEAN COLLECTIVE
AMCONSUL HO CHI MINH CITY 
UNCLAS SECTION 01 OF 03 HANOI 000686 
 
SIPDIS 
 
STATE FOR E, EB, EB/IFD/ODF, EB/IFD/OMA, EB/TPP, EAP/BCLTV 
STATE PASS USAID/ANE AFERRERA AND DMCCLUSKEY 
STATE PASS USTR 
TREASURY FOR OASIA 
TREASURY PASS USED WORLD BANK, USED IMF 
USDOC FOR 4431/MAC/IEP/OKSA/HPPHO 
USDA FOR FAS/ITP/SCHIKH/HUYNH 
PHNOM PENH FOR USAID LCHILES 
MANILA PASS USED ADB 
 
SENSITIVE 
 
                       UNCLASSIFIED 
 
PAGE 02        HANOI  00686  01 OF 03  231051Z 
E.O. 12958: N/A 
TAGS: EAID, ECON, EFIN, ETRD, PREL, VM, FINREF, SOE 
SUBJECT: VIETNAM COMPLETES PRIOR ACTIONS FOR IMF/WORLD BANK STRUCTURAL ADJUSTMENT PROGRAM 
 
REF: HANOI 239 AND PREVIOUS 
 
1.  (SBU) SUMMARY: WORLD BANK AND IMF REPRESENTATIVES IN 
HANOI CONFIRM VIETNAM HAS SUBSTANTIALLY COMPLETED PRIOR 
ACTIONS/CONDITIONS NECESSARY TO PERMIT THE FUND'S PROPOSED 
POVERTY REDUCTION AND GROWTH FACILITY (PRDF) AND THE BANK'S 
POVERTY REDUCTION SUPPORT CREDIT (PRSC) FOR VIETNAM TO BE 
SUBMITTED TO RESPECTIVE BOARDS FOR APPROVAL.  IF APPROVED, 
VIETNAM COULD DRAW AS MUCH AS USD 800 MILLION OVER THE NEXT 
THREE YEARS UNDER THESE PROGRAMS.  WE UNDERSTAND THE IMF AND 
WORLD BANK BOARDS ARE TARGETING APRIL 6 AND MAY 3, 
RESPECTIVELY, TO CONSIDER THE PRDF AND THE PRSC.  DONORS, AS 
WELL AS BUSINESS PEOPLE AND BANKERS, ARE THRILLED THE IMF 
AND WORLD BANK HAVE SUCCEEDED IN THEIR MARATHON NEGOTIATIONS 
ON A NEW STRUCTURAL PROGRAM. 
 
2.  (SBU) SUMMARY CONT'D: AS WE HAVE STRESSED IN REFTELS, 
EMBASSY FULLY SUPPORTS THESE MUCH-NEEDED REFORMS.  WE THINK 
STRONG SUPPORT FOR THEM BY THE IMF AND WORLD BANK BOARDS 
WILL STRENGTHEN THE REFORM ELEMENT IN THE VIETNAM 
GOVERNMENT.  MOREOVER, IF THE STRUCTURAL PROGRAM CAN BE PUT 
IN PLACE IN TANDEM WITH U.S.-VIETNAM BILATERAL TRADE 
AGREEMENT (BTA) RATIFICATION AND IMPLEMENTATION, WE COULD 
WITNESS A RESURGENCE IN ECONOMIC GROWTH IN THE YEARS AHEAD, 
SIMILAR TO WHAT VIETNAM EXPERIENCED IN THE EARLY TO MID- 
NINETIES.  WE UNDERSTAND WASHINGTON AGENCIES ARE REVIEWING 
                       UNCLASSIFIED 
 
PAGE 03        HANOI  00686  01 OF 03  231051Z 
THE APPLICABILITY OF THE 1983 GRAMM AMENDMENT TO THE 
PROPOSED PRGF WHICH MAY, DEPENDING ON INTERPRETATION, LIMIT 
THE ADMINISTRATION'S ABILITY TO ENDORSE THE PRGF AT THE IMF 
BOARD MEETING.  WE URGE WASHINGTON AGENCIES TO TAKE WHATEVER 
STEPS ARE POSSIBLE TO VOTE IN FAVOR OF THE PRSC AND THE PRGF 
WITHOUT, HOWEVER, SEEKING A DELAY IN BOARD CONSIDERATION OF 
EITHER.  FINALLY, IN ORDER TO AVOID FUTURE SIMILAR 
COMPLICATIONS, WE RECOMMEND THE ADMINISTRATION SEEK 
ELIMINATION OF THE GRAMM AMENDMENT AT THE EARLIEST POSSIBLE 
OPPORTUNITY. END SUMMARY 
 
THE PROGRAM 
---------------- 
 
3.  (SBU) WHILE WE HAVE YET TO SEE THE DETAILS OF THE 
PROPOSED PRGF AND PRSC, WE HAVE MET OFTEN AND AT LENGTH WITH 
BOTH IMF AND WORLD BANK ECONOMISTS TO DISCUSS THE `IN 
PRINCIPLE' AGREEMENTS.  THE AGREEMENTS CALL FOR A MAJOR 
REFORM UNDERTAKING INCLUDING THE FOLLOWING BASIC ELEMENTS: 
 
A) BANKING REFORM: RESTRUCTURING THE STATE-OWNED COMMERCIAL 
BANKS (SOCB'S) AND THE JOINT STOCK BANKS (JSB'S), WHILE 
ADDRESSING THE STOCK OF NON-PERFORMING LOANS AND IMPROVING 
INTERNAL PROCESSES FOR BETTER MANAGEMENT AND ACCOUNTABILITY. 
SOCB'S WILL BE RE-CAPITALIZED AND BALANCE SHEETS CLEANED OF 
BAD LOANS GRADUALLY AS THEY MEET PERFORMANCE TARGETS. 
CRITICALLY IMPORTANT, THERE WILL ALSO BE A PHASE-OUT OF 
POLICY LENDING BY SOCB'S.  THE PROGRAM ALSO PLANS TO IMPROVE 
THE LEGAL, REGULATORY AND SUPERVISORY FRAMEWORK AND LEVEL 
THE PLAYING FIELD FOR BANKING SERVICES. 
 
                       UNCLASSIFIED 
 
PAGE 04        HANOI  00686  01 OF 03  231051Z 
B) STATE-OWNED ENTERPRISE (SOE) REFORM: THE SOE REFORM PLAN 
CONTEMPLATES EQUITIZATION, DIVESTITURE AND LIQUIDATION OF 
1800 SOE'S OVER THE NEXT THREE YEARS.  THOSE SOE'S REMAINING 
GOVERNMENT-OWNED WILL BE SUBJECT TO DIAGNOSTIC AUDITS, 
RESTRUCTURING, AND REPORTING REQUIREMENTS.  THE GOVERNMENT 
WILL ESTABLISH A FUND SOLELY FOR THE PURPOSE OF FINANCING 
SEVERANCE PAYMENTS TO SUPPORT WORKERS MADE REDUNDANT BY SOE 
CLOSINGS OR RESTRUCTURING. 
 
C) TRADE REFORM: RELATES IN LARGE PART TO REMOVAL OF 
QUANTITATIVE RESTRICTIONS IN PHASES ON A MULTILATERAL BASIS, 
BY EARLY 2003 AT THE LATEST, FOR CEMENT, STEEL, GLASS, 
PAPER, VEGETABLE OIL, CERAMIC AND GRANITE TILES, AND 
FERTILIZER.  THE PROGRAM WOULD ALSO REQUIRE THE GVN TO 
FOLLOW THROUGH WITH COMMITMENTS MADE IN AFTA AND THE U.S.- 
VIETNAM BTA. 
 
THE PRGF AND THE PRSC WILL ALSO INCLUDE REQUIREMENTS 
RELATING TO PUBLIC EXPENDITURE AND PRIVATE SECTOR REFORM. 
 
 
PRIOR ACTIONS COMPLETE 
---------------------------- 
 
4. (SBU) OVER THE PAST SEVERAL WEEKS, EMBASSY OFFICERS AND 
USAID COUNTRY MANAGER HAVE MAINTAINED CLOSE COORDINATION 
WITH LOCAL IMF AND WORLD BANK REPRESENTATIVES AS THEY HAVE 
WORKED WITH THE GVN TO `CLOSE' THE PRIOR ACTIONS/CONDITIONS 
TO THE PRGF AND PRSC TO PERMIT CONSIDERATION OF THIS 
IMPRESSIVE REFORM AGENDA TO TAKE PLACE AT IMF AND WORLD BANK 
HEADQUARTERS IN WASHINGTON.  USAID, IN PARTICULAR, HAS SHOWN 
EXEMPLARY LEADERSHIP WITHIN THE DONOR COMMUNITY BY PROPOSING 
TO UNDERWRITE A DIAGNOSTIC AUDIT OF ONE OF VIETNAM'S FOUR 
STATE-OWNED COMMERCIAL BANKS USING INTERNATIONALLY 
RECOGNIZED AUDITING STANDARDS.  AS OF MARCH 23, WE 
UNDERSTAND THE GVN HAS COMPLETED SUBSTANTIALLY ALL PRIOR 
ACTIONS/CONDITIONS.  WE SAY SUBSTANTIALLY BECAUSE IMF AND 
WORLD BANK EXPERTS CONTINUE TO STUDY GVN SUBMISSIONS.  STATE 
BANK OF VIETNAM GOVERNOR LE DUC THUY HAS SIGNED A LETTER TO 
THE IMF ACKNOWLEDGING VIETNAM'S LIST OF COMMITMENTS UNDER 
THE PROPOSED STRUCTURAL PROGRAM. 
 
UNIQUE ALIGNMENT OF THE PLANETS 
--------------------------------------- 
 
5. (SBU) IT IS EMBASSY'S VIEW THAT VIETNAM IS UNIQUELY 
                       UNCLASSIFIED 
 
PAGE 03        HANOI  00686  02 OF 03  231051Z 
STAGED TO UNDERGO A DRAMATIC POTENTIAL REFORM EFFORT WHICH 
COULD TRANSFORM THE WAY THE COUNTRY DOES BUSINESS OVER THE 
NEXT DECADE.  ESSENTIALLY THERE ARE TWO PARTS TO THIS REFORM 
EFFORT: ONE, THE FINANCIAL SECTOR AND SOE RESTRUCTURING; AND 
TWO, THE TRADE COMMITMENTS VIETNAM HAS AGREED TO, INCLUDING 
THOSE CONTAINED IN AFTA AND ONES IN THE YET-TO-BE RATIFIED 
U.S.-VIETNAM BILATERAL TRADE AGREEMENT (BTA).  IN ESSENCE, 
THE BTA'S IMPLEMENTATION WILL FORCE VIETNAM TO RESTRUCTURE 
RADICALLY ITS TRADE REGIME.  AT THE SAME TIME, AS A RESULT 
OF THE NORMAL TRADE RELATIONS STATUS IT WILL BRING TO 
VIETNAM'S GOODS IN THE U.S. MARKET, IT WILL PROVIDE A 
STIMULUS TO MAKE THE STRUCTURAL REFORMS WORK.  WHILE THE IMF 
AND WORLD BANK FUNDING WILL HELP VIETNAM MEET ITS GROWTH 
NEEDS AS IT RESTRUCTURES, THE ACCESS TO THE U.S. MARKET WILL 
SERVE TO ATTRACT FURTHER MARGINAL INVESTMENT IN DOMESTIC 
PRODUCTION AND ATTRACT ADDITIONAL FOREIGN DIRECT CAPITAL. 
CONSEQUENTLY, WE THINK WASHINGTON AGENCIES AND OTHER DONORS 
SHOULD FULLY SUPPORT THE IMF AND WORLD BANK PROGRAMS. 
RARELY DO OPPORTUNITIES LIKE THIS PRESENT THEMSELVES. 
 
GRAMM AMENDMENT 
------------------------ 
 
6.  (SBU) EMBASSY WAS DISMAYED TO LEARN THIS WEEK OF THE 
GRAMM AMENDMENT, A STATUTE ENACTED DURING THE HEIGHT OF THE 
COLD WAR, WHICH IMPOSES A REQUIREMENT FOR THE ADMINISTRATION 
TO REPORT TO THE CONGRESS WELL IN ADVANCE WHEN IT PLANS TO 
VOTE FAVORABLY FOR AN IMF STRUCTURAL ADJUSTMENT CREDIT. 
WHILE WE DO NOT KNOW WHAT POSITION WASHINGTON AGENCIES PLAN 
TO TAKE ON THE IMF PORTION OF THE STRUCTURAL PROGRAM, WE 
WOULD HOPE THAT IF WASHINGTON AGENCIES ARE FAVORABLY 
                       UNCLASSIFIED 
 
PAGE 04        HANOI  00686  02 OF 03  231051Z 
DISPOSED TO IT THEY COULD FIND A WAY TO INDICATE SUPPORT FOR 
THE IMF PROGRAM.  IF, HOWEVER, THE LEGAL INTERPRETATION 
WOULD NOT ALLOW THIS, WE WOULD URGE QUIET ABSTENTION IN THIS 
UNIQUE CIRCUMSTANCE.  WE DO NOT COUNSEL A REQUEST FOR 
POSTPONEMENT OF THE VOTING AT THE IMF BOARD MEETING.  WE 
THINK THAT THERE SHOULD BE BROAD DONOR SUPPORT FOR THE 
PACKAGE AND WE WOULD RATHER THAT THE PROGRAM BE APPROVED 
EARLY THAN TO STAND THE RISK OF DELAY.  WE WOULD HOPE, 
HOWEVER, THAT WHEN THE SUBSEQUENT WORLD BANK PROGRAM IS 
CONSIDERED IN EARLY MAY THAT THE U.S. EXECUTIVE DIRECTOR 
COULD PREPARE A STRONG ENDORSEMENT OF THE PROGRAM AS A 
WHOLE.  WE NOTE THE GRAMM AMENDMENT WOULD NOT APPLY. 
 
7. (SBU) WE URGE THE ADMINISTRATION TO TAKE STOCK OF THE 
GRAMM AMENDMENT AND LIKE STATUTES WHICH REMAIN, WITH A VIEW 
TO THEIR REMOVAL.  THESE LAWS AND REGULATIONS WERE ENACTED 
DURING THE HEIGHT OF THE COLD WAR AND THE DEPARTMENT EARLY 
ON SOUGHT TO REMOVE THESE PROHIBITIONS FROM OUR AID AND 
OTHER AGENCY ACTIVITIES AS A RESULT OF NORMALIZED RELATIONS. 
IN SHORT, THESE PROVISIONS NOT ONLY NO LONGER SERVE A USEFUL 
PURPOSE, BUT THEY ALSO CAN SERVE AS IRRITANTS IN THE 
RELATIONSHIP.  WHILE LAWYERS MAY DEBATE WHETHER VIETNAM IS A 
`COMMUNIST DICTATORSHIP' FOR PURPOSES OF THE STATUTE, 
ECONOMISTS SEE VIETNAM AS A COUNTRY IN TRANSITION FROM A 
SOCIALIST TO A MORE MARKET-ORIENTED ECONOMY. 
 
COMMENT 
------------ 
 
8.  (SBU) WE APPRECIATE THAT WASHINGTON AGENCIES HAVE NOT 
HAD THE OPPORTUNITY TO REVIEW THE IMF AND WORLD BANK PAPERS 
REGARDING THE PRGF AND PRSC FOR VIETNAM.  NEITHER HAVE WE. 
HOWEVER, FROM OUR VANTAGE POINT, THERE IS A GREAT NEED FOR A 
MAJOR RESTRUCTURING EFFORT OVERSEEN BY THE IMF AND WORLD 
BANK.  WE HAVE COMPARED NOTES WITH THE IMF AND WORLD BANK AS 
THEY HAVE NEGOTIATED THIS VERY DIFFICULT PROGRAM OVER THE 
LAST FIVE YEARS, ESPECIALLY THE LAST FEW MONTHS.  THEY ARE 
PLEASED WITH THE RESULTS.  WHILE THEY RECOGNIZE THE PROGRAM 
IS THE START OF A LONG PROCESS, THEY ARE CONFIDENT THAT IT 
IS ONE WHICH THE VIETNAMESE CAN ACHIEVE AND WILL BRING ABOUT 
SIGNIFICANT, DEMONSTRABLE RESULTS.  WE, AS WELL, ARE QUITE 
EXCITED BY THE PROSPECTS FOR CHANGE WHICH THE STRUCTURAL 
PROGRAM, TOGETHER WITH THE U.S.-VIETNAM BTA, CAN CREATE IN 
VIETNAM, AN EMERGING ECONOMY OF 80 MILLION PEOPLE.  END 
COMMENT. 
                       UNCLASSIFIED 
 
PAGE 03        HANOI  00686  03 OF 03  231051Z 
 
PETERSON 
 
                       UNCLASSIFIED 
 
 


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