US embassy cable - 01HANOI3054

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 
 
 
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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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