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IMF report shows economic improvement in Vietnam, recommends not lowering CIT

As part of its 2014 Article IV consultation with Vietnam, the IMF has released a Staff Report containing an analysis of the current economic developments and policies taking place within the country

Posted by Vietnam Briefing

The report also contains a number of recommendations aimed at helping Vietnam improve its economic growth.

In a surprising move, and of key concern to foreign investors, the IMF has recommended that Vietnam not move forward with its plans to lower the corporate income tax (CIT)to 20 percent in 2016 (the current rate is 22 percent). Vietnam has already recently lowered its CIT rate from 25 percent.

The IMF explained their reasoning by stating that Vietnam would be able to save revenues amounting to around 0.33 percent of the country’s gross domestic product. In 2013, as a result of tax incentives and exemptions, tax revenues fell short of their target by 1.5 percent of GDP. The country’s deficit now stands at 6.5 percent of GDP.

The IMF therefore suggests that a medium-term plan be implemented in order to return public debt to around 45 percent of GDP, this is intended to provide room for further bank and state-owned enterprise (SOE) restructuring costs. According to the IMF, “Raising revenue would allow consolidation to take place while safeguarding social spending and well-targeted capital expenditure to support growth and inclusiveness. This is achievable with a strategy to broaden the base, improve administration, forego further corporate income tax rate reductions, and institutionalize SOE dividend payments to the budget.”

In its report, the IMF noted that economic performance in the country continues to improve; however, the weak banking system and the lumbering SOEs are still holding back the economy.  Additionally, there has been a decline in inflation, there is a substantial current account surplus, and international reserves have increased.

Looking to the future, the IMF predicts that Vietnam’s current account will return to a deficit, however, inflation levels will be maintained. Key risks that foreign investors should be aware of include:

  • Weaker trading partner growth
  • Geopolitical tensions
  • Slow structural reforms
  • Delayed fiscal consolidation

Additional recommendations from the IMF included:

  • Broadening the tax base through the introduction of a property tax
  • Including pensions income in the personal income tax base
  • Pushing forward with the equitization process

Vietnam has seen positive economic news on many fronts in 2014.  For example, the country’s stock market has been the best performer in Southeast Asia for 2014, and the main market, the Ho Chi Minh Stock Exchange’s VN Index, is up around 24 percent for this year. Additionally, in a bid to attract more foreign investment, Vietnam is preparing to relax its foreign equity limits and is lobbying to have its market status at New York based index provider MSCI Inc. upgraded from frontier-market to emerging-market status.

If the government heeds the advice of the IMF, Vietnam could well find itself back on the track of strong economic growth for some time to come.

 

This article was first published on Vietnam Briefing.
 
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