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Document of The World Bank FOR OFFICIAL USE ONLY Report No: 35793-VN INTERNATIONAL DEVELOPMENTASSOCIATION PROGRAMDOCUMENT FOR A PROPOSED CREDIT THE AMOUNT OF SDR 68.4 MIL (US$lOO.O MILLION EQUIVALENT) TO 0 THE SOCIALIST REPUBLIC OF VIETNAM FOR A FIFTH POVERTY REDUCTION SUPPORT OPERATION May 24,2006 Poverty Reduction and Economic Management Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content may not otherwise be disclosed without World Bank authorization Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

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Document of The World Bank

FOR OFFIC IAL USE ONLY

Report No: 35793-VN

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR

A PROPOSED CREDIT

THE AMOUNT OF SDR 68.4 MIL

(US$lOO.O MILLION EQUIVALENT)

TO

0

THE SOCIALIST REPUBLIC OF VIETNAM

FOR A FIFTH POVERTY REDUCTION SUPPORT OPERATION

M a y 24,2006

Poverty Reduction and Economic Management Unit East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s content may not otherwise be disclosed without World Bank authorization

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ADB AECI AFD Aus AID CAS CEA CFAA CG CIDA CPAR CPRGS DA DAF DATC DFID DONRE E C EL4 FA FDI FSQL GC GDP GSO HCFP HI JAS ICA IDA IMF I-PRSP JBIC JSA JSAN JSB LRO L U C LSDS MARD MDG MDTF MHB MOET

Government Fiscal Year January 1 to December 3 1

Currency Equivalents Currency unit = Dong

One US$ = 16,000 Dong (May 2006)

ACRONYMS AND ABBREVIATIONS

Asian Development Bank Agencia Espafiola de Cooperaci6n Internacional Agence Franqaise de DCveloppement Australian Agency for International Development Country Assistance Strategy Country Environmental Analysis Country Financial Accountability Assessment Consultative Group Canadian International Development Agency Country Procurement Assessment Review Comprehensive Poverty Reduction and Growth Strategy Deposit Account Development Assistance Fund Debts and Assets Trading Company Department for International Development Department o f Natural Resources and Environment European Commission Environmental Impact Assessment Financing Agreement Foreign Direct Investment Fundamental School Quality Level General Corporation Gross Domestic Product General Statistics Office Health Care Fund for the Poor Health Insurance International Accounting Standard Investment Climate Assessment International Development Association International Monetary Fund Interim Poverty Reduction Strategy Paper Japan Bank for International Cooperation Joint Staff Assessment Joint Staff Advisory Note Joint-stock Bank Land Registration Office Land-Use Right Certificate Legal System Development Strategy Ministry o f Agriculture and Rural Development Millennium Development Goals Multi-Donor Trust Fund Mekong Housing Bank Ministry o f Education and Training

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M O F M O H MOHA MOJ MOLISA MONRE MOT MPI MTEF NGO NPL NPV NSC NTP ODA OOG oss PCU PEC PER-FA PIP PRGF PRSC QR RWS SAV SBD SBV SCIC SDC SEA SEDP SIDA SOCB SOE SSN TABMIS TRIPS VASS VBF VBSP VDG VDR VHLSS VSI WTO

Ministry o f Finance Ministry o f Health Ministry o f Home Affairs Ministry o f Justice Ministry of Labor, Invalids, and Social Affairs Ministry of Natural Resources and the Environment Ministry of Trade Ministry of Planning and Investment Medium-Term Expenditure Framework Non-Governmental Organization Non-Performing Loan Net Present Value National Steering Committee National Targeted Program Official Development Assistance Office o f Government One-Stop Shop Program Coordination Unit Party’s Economic Commission Public Expenditure Review-Integrated Fiduciary Assessment Public Investment Program Poverty Reduction and Growth Facility Poverty Reduction Support Credit Quantitative Restriction Rural Water and Sanitary State Audit o f Vietnam Standard Bidding Document State Bank of Vietnam State Capital Investment Corporation Swiss Development Cooperation Strategic Environment Assessment Socio-Economic Development Plan Swedish International Development Cooperation Agency State-Owned Commercial Bank State-Owned Enterprise Social Safety Net Treasury and Budget Management Information System Trade-Related Aspects o f Intellectual Property Vietnam Academy o f Social Scienses Vietnam Business Forum Vietnam Bank for Social Policies Vietnam Development Goals Vietnam Development Report Vietnam Household L iv ing Standards Survey Vietnam Social Insurance World Trade Organization

Vice President (acting) - Jeffrey Gutman, EAPVP Country Director - Klaus Rohland, EACVF Chief Economist and Sector Director - Homi Kharas, EASPR Tank ManaQer - Vivek S u i . EASPR

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I. 11. 111.

IV.

V.

VI. VII.

VIII.

SOCIALIST REPUBLIC OF VIETNAM FIFTH POVERTY REDUCTION SUPPORT CREDIT

Table of Contents

INTRODUCTION ........................................................................................................................... 1

THE REFORM PROGRAM .................................................................................... 3

PROGRESS ACCOMPLISHED.. ....................................................................................... 4 A. ECONOMIC GROWTH AND POVERTY REDUCTION ................................................ 4

B. OTHER DEVELOPMENT OUTCOMES ......................................................... 9

THE CONTRIBUTION OF PRSCs ......................................................................................... 20

A. PROCESS AND CONTENT.. ........................................................................................ 20

B. RESOURCES MOBILIZED AND COST OF REFORMS ........................................ 21

C. DEVELOPMENT IMPACT ....................................................................... 24

THE PROPOSED CREDIT .......................................................................................................... 25

A. ASSESSMENT OF TRIGGERS..:. ............................................................................. 25

B. TRANSITION TO A MARKET ECONOMY. ................................................................ .29

C. SOCIAL INCLUSION AND ENVIRONMENTAL SUSTAINABILITY. ................... ..35

D. BUILDING MODERN GOVERNANCE.. ....................................................................... 38

POVERTY AND SOCIAL IMPACTS ......................................................................................... 41

OTHER CREDIT FEATURES. ................................................................................................. 44

A. STEERING AND MONITORING ................................................................ 44

B. ADMINISTRATION ............................................................................... 45

C. BENEFITS AND RISKS ........................................................................... 48

D. TOWARDS PRSCs 6 TO 10 ...................................................................... 50

COORDINATION WITH DONORS AND STAKEHOLDERS..... .......................................... 53 A. THE IMF ............................................................................................................................ 53

B. OTHER MULTILATERAL AND BILATERAL DONORS ............................................ 53

C. CIVIL SOCIETY ............................................................................................................... 54

ANNEXES

Annex 1: Annex 2: Annex 3: Annex 4:

IMF Staff Assessment o f Recent Developments and Near-Term Outlook.. ...... 58 Overview of Policy Actions under the PRSC Program. ............................ .61 Vietnam at a Glance.. ..................................................................... 73 Vietnam: Key Economic Indicators 2000-2008. ..................................... .75

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Annex 5: Annex 6: Annex 7: Annex 8:

Statement of Loans and Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76 Selected Indicators of World Bank Portfolio Performance and Management.. ..77 Letter from the Government on the Reform Program.. . . . . . . . . . . . . .. . . . . . . . . . . . . . ... 78 M a p (No. 335 11)

TABLES IN TEXT

TABLE 1: KEY ECONOMIC INDICATORS ..................................................................... 5

TABLE 2: TRENDS IN POVERTY ...................................................................................... 8

TABLE 3: PR~GRESS TOWARDS DEVELOPMENT OUTCOMES ............................................ 10

TABLE 4: PRSC C~MM~TMENTS AND DISBURSEMENTS.. . . . . . . . . . . ... . . . . . . . . . . . . . . . . . . . . . , . . , , . . . . . . . .23

TABLE 5: PRSCS AND THE FINANCING GAP.. . . . . .. . . . . . . . . . . . . . . .. . . . . . .... . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

TABLE 6: TRIGGERS FOR PRSC5 ............................................................................. 26

TABLE 7: OVERVIEW OF POLICY ACTIONS UNDER PRSC5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

TABLE 8: CLASSIFICATION OF SOES BY PERFORMANCE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 34

TABLE 9: ASSESSMENT OFPRIMARY SCHOOLS BY QUALITY ........................................... 36

TABLE 10: DONOR SUPPORTTO THE PRSC PROCESS .................................................... 55

FIGURES IN TEXT

FIGURE 1 : KEY STEPS IN THE POLICY REFORM AGENDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

FIGURE 2: SUPPORTING THE IMPLEMENTATION OF SEDP 2006-2010.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..52

Task Team

Core Team: Vivek Suri (task manager), Martin Rama (co-task manager), Hoi-Chan Nguyen (senior legal counsel).

Contributors: Noritaka Akamatsu, Ahsan Ali, Phillip Brylski, Viet Tuan Dinh, Quang Hong Doan, Hung Viet Le, Samuel S. Lieberman, Simon Lucas, Thanh Thi Mai, Robin Mearns, Laurent Msellati, Dzung The Nguyen, Minh Van Nguyen, Duc Minh Pham, Cuong Hung Pham, Hoa Thi Mong Pham, Thomas A. Rose, Michael Seager, James Seward, Richard Spencer, Rob Swinkels, Jennifer Thomson, Thang-Long Ton, Phuong Thanh Tran, Son Thanh Tran, Carolyn Turk, Binh Thanh Vu, Jefsrey Waite.

Peer Reviewer: N. Roberto Zagha

Team Assistants: Hang Thu Nguyen and Dung Thi Ngoc Tran.

Overall Guidance: Homi Kharas, Chief Economist and Sector Director, East Asia and the Pacific; and Klaus Rohland, Country Director, Vietnam.

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SOCIALIST REPUBLIC OF VIETNAM: FIFTH POVERTY REDUCTION SUPPORT CREDIT

Credit and Program Summary

Borrower: The Socialist Republic o f Vietnam.

Amount: SDR 68.4 mill ion (US$ 100.0 mil l ion equivalent).

Terms: Standard IDA terms: 40-year maturity with a 10-year grace period.

Description: A fifth Poverty Reduction Support Credit (PRSC 5) for the implementation o f Vietnam’s Comprehensive Poverty Reduction and Growth Strategy (CPRGS), approved in May 2002 and expanded in December 2003.

Benefits: The present operation provides further support to Vietnam’ s reform program. The current cycle o f PRSCs i s a vehicle for the World Bank, and the donor community more broadly, to stay engaged with a client that has delivered an outstanding performance in terms o f economic growth and poverty reduction. The reform program i s strengthened on several fronts:

Transition to a market economy. The present operation promotes greater internal and external competition and improves efficiency and resource allocation in the economy. Policy actions under the credit help improve the regulatory framework for private sector development, and enhance transparency and accountability in State-owned enterprise (SOE) operations and in the banking sector. The credit supports the initiation o f fundamental changes in the financial sector, designed to transform the State bank o f Vietnam (SBV) into a modern central bank, to strengthen the commercial orientation o f State-owned commercial banks (SOCBs), and to develop capital markets.

Inclusive and sustainable development. The proposed credit also promotes human development through upgrading the quality o f education (especially in poor zones), promoting inclusive education for children with disabilities, improving the access o f the poor to health services, and helping secure asset ownership through the implementation o f the new Land Law. The proposed credit also encourages important policy measures leading to more sustainable management o f natural resources, including through strategic environmental assessments.

Building modern governance. The proposed credit supports actions to implement the government’ s public financial management reform agenda. More effective public resource allocation i s being achieved through better coordination plans and budgets and through the adoption o f Medium- Term Expenditure Frameworks (MTEFs). New budget allocation norms increase the coherence between capital and recurrent expenditures. An anti-corruption law targets greater accountability in public finance and

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public administration. The credit also supports the ambitious agenda o f the legal system development strategy (LSDS).

Risks: At the same time, i t s own success confronts Vietnam with new challenges. Some o f them entail important r isks that the proposed operation alone may not be able to mitigate:

Transition to a market economy. Benefits from accession to the World Trade Organization (WTO) wi l l accrue only if complementary reforms take place in areas such as trade logistics, infrastructure and financial services, taxes and the investment climate. While many o f these reforms are in train, their pace would need to keep up with the demands of international integration. Another risk relates to macroeconomic management in a phase of rapid financial integration with the world economy. Increased opportunities to borrow abroad could lead to increased government liabilities, whereas asset price bubbles cannot be ruled out. A strong implementation drive and strengthened macroeconomic management are needed.

Inclusive and sustainable development. Disparities between urban and rural areas, and between the Kinh majority and ethnic minorities, could widen. Inequality could increase and new forms o f urban poverty could emerge. Reaching the latest group o f children out o f school i s proving difficult. Health care remains under-funded. The incentives given to service providers to charge fees have not been matched by sufficient accountability on the delivery o f basic services. And an increasingly sophisticated environmental legislation s t i l l needs to translate into effective tools for natural resource management and pollution control. However, this risk i s mitigated by the strong commitment o f the government of Vietnam to keep growth inclusive and sustainable.

Building modem governance. In a rapidly growing economy the opportunities for graft could outpace improvements in anti-corruption policies for some time. While there has been considerable progress on enhancing budget transparency, the emerging institutional architecture for managing and investing state capital faces governance risks. Further, rapidly emerging and fast-growing provincial investment funds could contribute to the development o f infrastructure at the local level, but their transparency and accountability are s t i l l matters o f concern. Policies aimed at strengthening governance need to be at the center o f the next PRSC cycle.

Disbursement: The credit w i l l be disbursed upon declaration o f effectiveness.

Co-financing: Numerous bilateral and multilateral donors have expressed their support to the PRSC process in Vietnam. Nineteen o f them have participated in the preparation o f this credit, and have been actively involved in the policy areas where they are stronger. Subject to confirmation, the following donors intend to contribute resources to the PRSC 5 operation through grant finance or parallel lending: the Asian Development Bank (ADB), Australia, Canada, Denmark, the European Commission, Germany, Ireland, Japan, the

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Netherlands, Spain, and the United Kingdom. Switzerland, while not co- financing, provided financial support to the coordination o f the process.

Project ID number: PO86361

V

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INTERNATIONAL DEVELOPMENT ASSOCIATION

PROPOSED CREDIT TO THE SOCIALIST REPUBLIC OF VIETNAM FOR

A FIFTH POVERTY REDUCTION SUPPORT OPERATION

I. INTRODUCTION

1. The drive of the government of Vietnam towards relying on market mechanisms, building a multi-stakeholder economy, and enhancing international integration accelerated noticeably in 2001. The vision underlying this drive was endorsed by the ninth congress o f the Communist Party. I t was articulated in several strategic plans and documents, including the Ten- Year Socio-Economic Development Strategy 2001 -2010, the five-year Socio-economic Development Plan (SEDP) 2001-2006 and the CPRGS. These strategic plans and documents aimed at creating a market economy with a socialist orientation. They built on the successes o f the renovation process initiated in the late 198Os, with Doi Moi, while also preserving the strong poverty focus which has characterized the reform process o f Vietnam.

2. The proposed credit i s the last one in a five-year cycle aimed at supporting the implementation of the reform strategy articulated in CPRGS and other key planning documents. The focus o f the policy actions under each o f the credits in the series has broadened over time, from the mainly structural reforms included in PRSC 1 towards increasingly encompassing social and institutional changes, thus reflecting the comprehensive agenda o f the government o f Vietnam. The proposed credit supports the policy dialogue around 46 policy actions, selected because o f their importance in implementing the reform agenda. Fifteen of them, considered the most strategically important, are documented in the Financing Agreement (FA). In the meantime, the number o f donors co-financing each o f the credits expanded considerably, from four under PRSC 1 to possibly 11 in the proposed credit. The number o f donors involved i s actually larger, as several o f them jo in the coordinated policy dialogue before they are in a position to actually provide financial support. Overall, co-financiers are expected to provide in excess o f 120 mil l ion dollars in support o f the proposed credit, o f which around two- thirds could be on grant terms.

3. Reliance on direct budget support has been made possible by the sustained strengthening of public financial management in Vietnam. Building on a long trajectory o f joint analytical work on public expenditures between the government o f Vietnam and the World Bank, a program to modernize public financial management was launched in 2001. I t has led to the full disclosure o f the budget, greater transparency in relation to off-budget expenditures, considerable strengthening o f budget planning and execution at al l levels o f government, as well as greater financial accountability and supervision. This i s being buttressed by the creation o f a single treasury account, the adoption o f international public accounting standards, and the introduction o f a modem information management system. This process i s supported by the World Bank and the UK Department for International Development (DFID) through an investment credit, and by a large group o f donors through a Multi-Donor Trust Fund (MDTF) for public financial management modernization. In parallel, important measures were adopted to

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increase the transparency of all units using budget resources, and to enhance participation in relation to commune-level budgets, in the context o f the so-called “grassroots democracy” initiative.

4. The performance of Vietnam during the five years covered by PRSC cycle has been remarkably strong. The country fully recovered from the slowdown caused by the East Asian crisis, with i t s annual Gross Domestic Product (GDP) growth rate accelerating steadily, from 6.8 percent in 2001 to 8.4 percent in 2005. Vietnam also proved itself to be a resilient economy, having maintained impressive growth in the face o f recurrent shocks stemming from commodity price hikes, SARS, avian influenza, poor weather and antidumping suits. Macroeconomic balances remained at manageable levels through the period, and inflation was contained within single digits. The poverty rate, which stood at 58 percent in 1993 and s t i l l at 37 percent at the beginning o f the East Asian crisis, fell to 29 percent in 2002 and below the 20 percent mark in 2004. With a l l 28 bilateral agreements signed or concluded in-prinicple, Vietnam could become a member o f the WTO before the end o f 2006. Meanwhile, there was solid progress on most other Millennium Development Goals (MDGs).

5. However, a reform program as comprehensive as the one embraced by Vietnam cannot be expected to deliver even progress across all fronts. Not surprisingly, public sector reform has been slower, partly reflecting resistance by vested interests. While the share o f SOEs in the economy keeps declining, the quality o f lending by SOCBs remains a concern, due the absence o f a strong commercial interest, especially at provincial levels. More progress i s also needed to strengthen the management o f natural resources and to build modern governance.

6. The proposed credit supports important policy measures to lock-in and in some cases accelerate reforms in the laggard areas. The commitments made by Vietnam in the preparation to i t s accession to the WTO wi l l establish a level playing field, foster competition in areas formerly dominated by the state sector, and lead to a rapid modernization o f the institutional foundations for business. The banking reform roadmap endorsed by the politburo in August 2005 should lead to the creation o f a modem central bank, focused on monetary policy and banking supervision, and the equitization o f SOCBs, within the next five years. Progress i s being made on the development o f economic and administrative tools for environmental protection, strategic environmental assessments are being piloted, and efforts are being made to strengthen rural water supply and sanitation. The proposed credit also recognizes the adoption o f an anti-corruption law including a mechanism to monitor the assets o f c iv i l servants and their immediate families. This measure comes at a time when two reliable diagnostic studies reveal a more nuanced (and complex) picture o f corruption than i s generally assumed. The credit supports a new procurement law that brings greater disclosure and addresses bidders’ complaints. The emphasis on laggard reform areas i s not to the detriment o f social inclusion, however. Under the proposed credit, the mechanisms for financing the provision o f health care to the poor are being strengthened. The quality o f education, especially in poor areas, i s being improved, while policies for inclusive education for children l iving with disabilities are adopted. Budget allocation norms are being revised to enhance their pro-poor focus.

7. The proposed credit also paves the way for the next five-year cycle of PRSCs, in support of the SEDP 2006-2010. B y now, the principles underlying the preparation o f CPRGS have been fully endorsed by the government o f Vietnam. Unlike previous five-year plans, the preparation o f the SEDP 2006-20 10 has involved broad-based consultations at the grassroots level, with the business sector and with the overseas Vietnamese community. For the f i rst time, a monitoring and evaluation framework i s being developed to track progress in implementation. Equally important, the SEDP represents a move away from material production targets towards

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development objectives, with a strong poverty focus. This transformation reflects the lessons learned in the process o f preparing the CPRGS and, subsequently, o f “rolling it out” to provinces. The donors behind the PRSC process, as well as the CPRGS “roll out”, have actively supported the SEDP 2006-2010, which i s seen as a defensible poverty reduction strategy for the coming years. Joint work on translating SEDP 2006-2010 into a series o f strategic, well-prioritized policy actions to be supported by PRSCs 6 to 10 wi l l be discussed with the government o f Vietnam at the Consultative Group (CG) meeting o f December 2006.

11. THE REFORM PROGRAM

8. The CPRGS, approved in 2002, represented a breakthrough compared to earlier planning documents based on a “command and control” view of the economy. Rather than spelling out detailed sector-by-sector production targets, the CPRGS focused on development outcomes such as poverty reduction and other Vietnam Development Goals (VDGs). Empirical evidence and a broad consultation process were used to identify the policies best suited to attaining those development outcomes. Efforts were also made to “cost” these policies and to align resources towards their attainment. A set o f indicators (admittedly partial and rudimentary) was developed to monitor progress in implementation. Broadly speaking, the reform agenda in the CPRGS i s structured around three main pillars: completing the transition to a market economy, ensuring social inclusion and environmental sustainability, and building modern governance. The CPRGS was “expanded” in December 2003 so as to better address policies related to large-scale infrastructure.

9. Other important policy developments have influenced the reform agenda o f Vietnam more recently, and are bound to accelerate the pace o f change in the coming years. After several years o f hesitation and delays, by mid-2003 the government decided to aim for a rapid accession to the WTO. In late 2003, a new anti-corruption strategy started to emerge, with the emphasis shifting from punitive measures to increased transparency and the strengthening o f the systems through which the government operates. The year 2004 saw the coming into effect o f the new Budget Law, which makes the National Assembly and People’s Councils at al l levels responsible for resource appropriations.

10. The CPRGS, though approved by the Prime Minister, was formulated on the margins o f mainstream planning processes and coexisted with the five-year SEDP 2001-2005 which was discussed by the Party Congress and approved by the National Assembly. But the process of formulating the CPRGS, implementing it and monitoring i t s outcomes has initiated permanent changes in the approaches to socioeconomic planning. In late 2004 i t was decided that the coming SEDP 2006-2010 would be drafted according to the same principles that had governed the preparation o f the CPRGS. The last year has seen concerted efforts to reform the planning process and incorporate these principles. The World Bank and other donors expect to use the new SEDP 2006-2010 as a basis for their development assistance.

11. The implementation of the ambitious reform agenda spelled out in CPRGS and other government strategies and plans has been supported through four PRSC operations so far. PRSC 1, a two-tranche operation for US$250 million, was approved by the Board in June 2001, based on an Interim Poverty Reduction Strategy Paper (I-PRSP). The focus o f PRSC 1 was mainly on the structural reform agenda, with policies articulated around five main areas:

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liberalizing trade, reforming SOEs, strengthening the banking sector, creating an enabling environment for the private sector, and improving management and transparency in public finances. The second tranche o f PRSC 1 was released in December 2002. PRSC 2, a one-tranche operation for US$lOO million, was approved by the Board in June 2003, based on the CPRGS. Under PRSC 2, the range o f economic reforms supported by the international community was considerably broadened. In addition to the mainly structural reforms covered by PRSC 1, this second credit included various policy actions aimed at keeping development inclusive and building modern governance. Measures related to education and health sectors, environmental sustainability, land management, legal development and public financial management, were all part o f PRSC 2. PRSC 3 and 4 were also one-tranche operations o f US$lOO mil l ion each. These were approved by the Board in June 2004 and June 2005 respectively, and had the same broad sectoral coverage as PRSC 2.

12. In addition to providing resources to the budget, PRSC operations have served as an effective coordination device, supported by an increasingly large number of donors. The Steering Committee for PRSCs i s led by the Deputy Prime Minister in charge o f economic reforms, and brings together representatives from more than 20 line ministries and government agencies. On the donor side, PRSC operations have been co-financed by several bilateral and multilateral agencies, either through grants or through parallel lending. More importantly, the process saw a transition in the role o f co-financiers, from providers o f finance to partners substantially engaged in the preparation o f the operations and the policy dialogue with government. This dialogue i s organized by policy areas, in which donors engage selectively, based on their interests and technical capacity on the ground. The number o f donors participating in this process has increased from four in PRSC 1 to seven in PRSC 3 to nine in PRSC 4 and to possibly 11 in the proposed credit. All donors who seriously consider the possibility to partner up in this process are invited to participate in the preparation o f PRSC operations, even if they cannot commit to co-finance them in the short term. Nineteen o f them have actively contributed to the preparation o f this operation.

13. The implementation o f Vietnam’s ambitious reform agenda was initially supported by the International Monetary Fund (W) as well, through a Poverty Reduction and Growth Facility (PRGF) credit approved at the same time as PRSC 1. However, PRGF disbursements were suspended at the end o f 2002 due to a disagreement between the IMF and the government on the auditing o f the SBV. The PRGF credit expired in April, 2004. The IMF has remained engaged in several policy areas, and especially in the monitoring o f macroeconomic policies. In the absence o f an active PRGF, the IMF has provided an assessment o f the macroeconomic framework as part of the preparation o f each o f the PRSC operations.

111. PROGRESS ACCOMPLISHED

A. ECONOMIC GROWTH AND POVERTY REDUCTION

14. The period 2001-2005 was characterized by strong economic growth, with GDP rising by an average of 7.6 percent per year in real terms (Table 1). Vietnam has also proven itself to be a resilient economy, as this solid performance took place despite shocks such as avian influenza, rising o i l prices, poor weather and antidumping suits. In per capita terms, GDP grew

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by an annual growth rate of 6.1 percent during 2001-2005. The progress accomplished i s actually bigger when measured at international prices, as opposed to constant domestic prices. This i s because of the real appreciation o f Vietnam’s currency, as the economy develops and the price o f i t s non-tradable goods becomes more aligned with those o f richer countries. Between 2001 and 2005, consumer prices increased by 5.1 percent per year whereas the dong depreciated by 1.8 per year against the dollar, resulting in a gap o f 3.3 percent per year. The gap i s even wider if domestic prices are measured through the GDP deflator. In this case, it can be estimated at 5.0 percent per year. The combination o f rapid real growth and an inflation rate above the nominal depreciation rate has resulted in a rapid increase o f GDP per capita measured in dollar terms, from 415 in 2001 to an estimated 635 in 2005. If Vietnam were to sustain this pace over time, i t w i l l have surpassed the 1000 dollar per capita threshold by 2010.

TABLE 1: KEY ECONOMIC INDICATORS

Indicator Real GDP (percent change)

Industrial output value (percent change)

Inflation (percent, by year end) Nominal depreciation (percent, by year end)

Credit to the economy (percent change)

General government budget (percent of GDP) Total revenues and grants Total budgetary expenditure

Current expenditure Capital expenditure

Budget balance (excluding on-lending)

Extra-budgetary outlays (percent of GDP) On-lending of ODA On-lending of domestic resources (DAF) Off-budget investment spending

Current account balance (in US$ billion) Current account balance (in percent of GDP)

Export growth (nominal, percent change) Imports growth (nominal, percent change)

Total external debt (US$ billion) Total external debt (percent of GDP) Debt service ratio (percent of exports)

Reserves, including gold (US$ billion) Reserves (weeks of goods and services imports)

2001 2002 2003 2004 2005e 6.9 7.0 7.2 7.7 8.4 14.6 14.5 16.1 16.0 17.2 0.7 4.0 2.9 9.5 8.4 3.9 2.1 1.6 0.8 0.9

21.4 22.2 28.4 41.6 31.7

21.4 22.7 24.9 25.2 25.1 24.2 24.2 26.1 26.0 26.6 15.9 15.7 16.7 17.3 18.3 8.3 8.4 9.4 8.8 8.4 -2.8 -1.4 -1.2 -0.8 -1.5

1 .o 0.9 1.5 0.9 1 .o 1.2 1.5 1.7 1 .o 0.5 0.0 0.0 1.6 1.0 2.0 0.7 -0.4 -1.9 -1.7 -0.2 2.0 -1.1 -4.9 -3.1 -0.3 4.0 11.2 20.8 31.4 22.4 2.3 22.1 27.8 26.7 15.7 12.5 12.3 13.4 15.4 17.0 38.5 35.0 33.8 33.9 33.2 10.6 8.6 7.9 6.2 5.2 3.4 3.7 5.6 6.3 8.6 9.8 8.9 10.9 9.7 11.5

Note: Figures for 2005 are preliminary estimates.

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15. GDP growth has been led by a dynamic manufacturing sector which recorded an average annual increase o f 11 percent during 2001-2005. While the most rapidly expanding activities, such as garments and footwear, have been oriented mainly to the export markets, domestic sales have also been robust. The agriculture and fisheries sectors countered poor weather and wide fluctuations in commodity prices to grow by more than 3.5 percent per year on average. The services sector picked up in the last two years to record an average increase o f 7.2 percent over 200 1-2005. Tourism-related services have been especially buoyant.

16. Investment, as recorded in the national accounts, increased from 31 percent of GDP in 2001 to 36 percent in 2005. Equally encouraging i s the change in the ownership pattern of investment. The share o f the domestic private sector in total investment has risen f rom 23 percent in 2001 to over 32 percent in 2005, while that o f the state-owned sector has declined from about 60 percent to 52 percent. Foreign investment has picked up strongly in the last two years. After reaching a seven-year high o f 4.2 bil l ion dollars in 2004, Foreign Direct Investment (FDI) commitments soared to 6.3 bil l ion dollars in 2005. FDI disbursements, including domestic borrowing by joint ventures, stood at 3.3 bil l ion dollars (or 6 percent o f GDP) in 2005.

17. From a slow beginning in 2001, export growth accelerated to average 21 percent per year during 2001-2005. In the same period imports grew by 23 percent per year. The trade balance switched from a surplus o f 1.9 percent o f GDP to a deficit o f 6.6 percent over 2001-2003, reflecting the import needs o f a rapidly expanding economy. Bulk o f the rise in imports came from capital goods and inputs for export production. In the last two years, however, the trade deficit has narrowed. Strong remittance flows have also been a feature o f this period. Those operating through formal channels rose from a l itt le over 1 bi l l ion dollars in 2001 to nearly 3 bi l l ion in 2005. As a result the current account deficit has been narrower than the trade deficit, declining from 4.9 percent o f GDP in 2003 to around 0.3 percent in 2005. Importantly, the current account deficit has been mainly financed by FDI inflows and concessional lending. As a result Vietnam’s external debt stood at a manageable 33 percent in 2005, wi th debt service at around 5 percent o f exports. External reserves rose to 8.6 bil l ion dollars (about 11 weeks o f imports o f goods and services) compared with 3.4 bil l ion at the end of 2001.

18. Vietnam successfully issued i t s f i r s t international bond in October, 2005. The government had decided to raise 500 mil l ion dollars, but given a stronger than expected market interest, the amount was increased to 750 mil l ion dollars. The ten-year dollar-denominated bonds were priced at 7.125 percent or 256 basis points above comparable ten-year U S Treasuries. Since then the spreads have tightened with the yield coming down to 6.416 percent in mid-May.

19. Inflation, which stood below 4 percent per year up to 2003, rose sharply to 9.5 percent by the end o f 2004. This was mainly due to supply shocks, stemming from the outbreak o f avian influenza outbreaks, bad weather conditions, and hardened international commodity prices. The result was a sharp spike in food prices, which account for nearly 50 percent o f the consumption basket. The effects o f the supply shocks abated somewhat in 2005, while demand pressures possibly emerged due to wage hikes. The difficult task o f macroeconomic policy was to support the government’s ambitious growth target o f 8.5 percent without overly exacerbating inflationary pressures. The final outcome o f 8.4 percent growth in 2005, and an inflation rate which had fallen to 7.3 percent by April 2006, suggests a measure o f success.

20. The fiscal deficit, including Official Development Assistance (ODA) on-lending, stood at 1.7 and 2.5 percent o f GDP in 2004 and 2005 respectively, and was financed entirely through public debt. In both 2004 and 2005 revenue collection exceeded budgeted amounts owing to buoyant o i l revenues. As a result, despite higher expenditures, the deficit remained below the

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budgeted levels. However, to get a fuller picture o f the level o f public expenditure, extra budgetary outlays need to be considered. Off-budget investment expenditures represented 1 and 2 percent o f GDP in 2004 and 2005 respectively. Such expenditures, chiefly related to roads, irrigation, and upgrading o f education facilities, have been presented alongwith the government budget, and are approved by the National Assembly. In addition, they include bonds issued mainly by H o Chi Minh City and Hanoi to fund municipal infrastructure. The Development Assistance Fund (DAF) on-lends resources raised domestically for investment purposes. Such on-lending amounted to 1.0 and 0.5 percent o f GDP in 2004 and 2005 respectively. Public debt, including realized contingent liabilities from banking sector reform, off-budget and guaranteed items, stood at around 43 percent o f GDP at the end o f 2005. In net present value (NPV) terms, it only amounted to 33 percent o f GDP, as a large fraction o f public debt i s on concessional terms.

21. A joint Bank-IMF Debt Sustainability Assessment (DSA) placed Vietnam at a low risk of external debt distress. Under the baseline scenario, the stock o f total external debt i s expected to rise modestly to about 40 percent o f GDP by around 2015 before declining to about 32 percent in 2025. This scenario assumes a gradually narrowing current account deficit, reflecting a steady deceleration in the growth o f exports and imports from the current high levels and continued buoyant remittances and tourism receipts. I t also assumes a slight increase, followed by a gradual decline, in ODA inflows, as well as an increase in FDI and commercial borrowing. Under the scenario the ratio between the NPV o f public debt and exports falls from 28 percent in 2005 to 18 percent in 2025. The ratio o f debt service to exports falls from 5.3 percent in 2005 to 4.7 percent in 2025. The main r isks on the external front are a significant deterioration in the terms of financing and a weaker-than-projected export performance.

22. Under the baseline scenario of the DSA, public and publicly-guaranteed debt increases slightly from about 41 percent o f GDP in 2004 to around 43 percent in 2009, before stabilizing. In NPV terms, the debt increases from 28 percent o f GDP in 2004 to about 29 percent o f GDP and stabilizes at that level over the long-term. The main risk to medium-term debt sustainability stems from contingent liabilities associated with SOCB reform. Given the uncertainty surrounding bank balance sheets, two alternative reform scenarios were considered in the DSA, associated with contingent liabilities o f 8 percent and 20 percent o f GDP. In these two scenarios, the NPV of public debt reaches peaks o f 35 percent and 49 o f GDP respectively, before declining to 30 percent and 33 percent over the long term. The DSA, which was completed in August 2005, w i l l be updated for the forthcoming CAS for Vietnam. I t w i l l reflect the impact o f the investment program contemplated in the SEDP 2006-10, which may be more expansionary than the above baseline scenario. I t w i l l also incorporate the effects o f a somewhat higher overall deficit in the period since the DSA was conducted.

23. The rapid pace of credit growth, which became a concern in 2004, has slowed. The high credit growth in part reflects a rapidly monetizing economy. I t i s not the result o f faster growth in base money but rather o f a better mobilization o f resources by commercial banks. From this perspective, credit growth should not be seen as the main factor behind inflation. I t s pace has slowed from about 42 percent year-on-year at end-2004 to around 24 percent in February 2006. But the ability o f large SOCBs to allocate the rapidly growing credit volume in an efficient way i s a concern, and the quality o f bank portfolios might have suffered, adding to the contingent liabilities o f the government.

24. Broad-based growth has been accompanied by a continuation of Vietnam’s remarkable record in poverty reduction. Data collected through the Vietnam Household Living Standard Survey (VHLSS) shows that general poverty rate has fallen from 58.1 percent in 1993 to 19.5 percent in 2004, implying an average decline o f 3.5 percentage points per year

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(Table 2). The proportion o f poor people now i s just above one-third o f what it was 11 years ago. Measures used to track inequality suggest that there has been only a modest increase in inequality over time. The Gini index stands now at 0.37, compared to 0.34 in 1993, 0.35 in 1998 and 0.37 in 2002. Admittedly, the Gini index i s not very sensitive to substantive increases in income or expenditures at the very top o f the distribution, and this i s a relatively visible trend in Vietnam. However, the ratio o f per capita expenditures between the richest and the poorest quintile has not increased dramatically. This ratio stands at 6.27 in 2004, compared to 4.97 in 1993, 5.49 in 1998 and 6.03 in 2002. This inclusive growth pattern explains the unusual speed at which Vietnam has managed to reduce poverty.

62.0

73.4

29.3

48.1

34.5

52.4

12.2

36.9

31.1

75.2

TABLE 2: TRENDS IN POVERTY

38.4 29.4

68.0 58.6

22.4 12.1

43.9 31.9

25.2 19.0

51.8 33.1

10.6 5.4

23.4 15.9

23.1 13.5

69.3 60.7

Poverty headcount

North East

North West

Red River delta

North Central coast

South Central coast

Central Highlands

South East

Mekong delta

Kinh and Chinese population

Ethnic minorities

All of Vietnam

All of Vietnam (food poverty)

1993 86.1

81.0

62.7

74.5

47.2

70.0

37.0

47.1

53.9

86.4

58.1

24.9

1998 I 2002 1 2004

Note: General Statistics Office (GSO) and World Bank staff estimates. The poverty headcount indicates the percentage of the population with expenditures below the food and non-food consumption bundle needed to sustain an intake of 2100 calories per person per day. The food poverty rate refers to expenditures below the value of the food component of that bundle.

25. These impressive achievements sit alongside slower progress for ethnic minorities. Poverty reduction has been more rapid for the Kinh and Chinese population, even in remote and mountainous areas. In 2004, only 14 percent o f the majority group was l iving in poverty, compared to 61 percent o f the ethnic minorities. Though the latter account for only 13 percent o f the total population, they now constitute 39 percent o f the poor. Their level o f deprivation i s also more severe than for other groups. As of 2004, the poverty gap for ethnic minorities was 19.2 percent, while that for poor Kinh people was only 2.6 percent. Uneven progress in poverty reduction between the Kinh majority and the ethnic minorities translates into important gaps in the extent and depth o f poverty across regions. While there has been progress across all eight o f them, poverty remains much higher in some. For instance, the poverty gap in the North West i s 19.1 percent, or nine times larger than in the Red River delta.

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26. Poverty reduction has accelerated in the past two years, a feature consistent with other developments during the period. This acceleration could be amplified by a quirk o f the data. The household survey for 2002 was much larger in scale then the previous ones, but was conducted with less supervision and training o f enumerators. However, the faster reduction in poverty i s in line with the acceleration in economic growth during 2002-2004 compared with the period 1998-2002. The sharper reduction in poverty might actually reflect the increasing size o f budget transfers to poorer provinces, especially since tax-revenue sharing arrangements and equalization grants were introduced in this period. The public investment program (PIP), with i t s greater emphasis in remote areas during the current five-year plan, might have contributed as well. Rural infrastructure development has benefited farmers by increasing their access to markets. The proportion o f the population l iving within two kilometers o f an all-weather road increased to 83 percent in 2004, from 76 percent in 2002. Rapid poverty reduction in recent years i s also likely to reflect the rise in the world prices o f agricultural export commodities such as coffee and rice, which are important sources o f income for many among the rural poor.

B. OTHER DEVELOPMENT OUTCOMES

27. Progress under the PRSC process can be measured against the specific development objectives spelled out in the CPRGS and other plans and strategies of the government. Unfortunately, a comprehensive system o f indicators to monitor and evaluate the impact o f economic reforms was not yet in place at the beginning o f the PRSC process. The focus varied across government plans and strategies, and the definition o f goals and targets was not always precise, or totally pertinent. This i s not surprising at a time when the “command and control” view o f the economy was more entrenched, and the statistical system was only starting to develop. In spite o f these limitations, based on the CPRGS and other planning documents o f the government it was possible to assemble a set o f development objectives covering the three main areas o f the reform program. In practice, these indicators were compiled gradually, as the scope o f PRSCs expanded to cover an ever-increasing number o f policy areas. Because o f the five-year planning cycle o f Vietnam, most o f those objectives were spelled out for end-2006 (Table 3). Progress against each outcome i s given one o f the following ratings: Highly Satisfactory (HS), Satisfactory (S), Partially Satisfactory (PS) or Unsatisfactory (U). The rating utilizes the latest available data to assess the progress to date. And based on recent trends, i t also includes a judgment as to the outcome expected by end-2006. For those development outcomes where a quantitative target had been specified, a rating of HS reflects meeting or surpassing the target. On the other hand no improvement or backsliding would have resulted in a U rating. The intermediate ratings of PS and S do reflect a level o f judgement about associated policies, exogenous constraints, and sustainability o f the progress achieved.

28. Progress under the first four PRSC operations has been strong, though achievements across policy areas are uneven. Given the comprehensive nature of Vietnam’s reform agenda some areas are bound to register faster progress than others. The assessment i s also affected by differences in the quality and frequency o f the available indicators. However, substantive progress has occurred in the structural, the social and the governance pillars o f the reform agenda, making i t difficult to identify any o f them as a systematic laggard. The speed at which progress i s made towards the attainment development outcomes within each o f these pillars crucially depends on the political w i l l to implement the reforms. The contrast between rapid progress in the integration with the world economy on the one hand, and the reform o f SOEs and SOCBs on the other hand, i s revealing in this respect.

9

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VI VI 113 .4

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3

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29. Vietnam’s transition to a market economy has gone hand in hand with growing international integration. Export growth has exceeded 21 percent per year over the period 2001-2005, and exports now account for 61 percent o f GDP. While rising commodity prices, especially oil, have boosted export values over the last two years, key manufactured products (chiefly garments and footwear) now account about 48 percent o f non-oil exports, compared with 41 percent in 2001. FDI recovered from the slump related to the East Asian crisis, with new commitments reaching 12 percent o f GDP in 2005. Progress in integrating with the world economy has been faster than in other reform areas. But to a certain extent, th is contrast reflects a strategy, whereby political effort was initially directed at gaining a consensus on WTO accession. Integration with the world economy i s now being used as a mechanism to “lock-in” the reforms, and gradually create the incentive for changes in areas where the inertia i s stronger. Accordingly, as WTO accession nears the final stage, a much bolder approach to reform the banking sector has finally been adopted, and a new approach to SOE reform i s emerging.

30. The number of SOEs has declined steadily over the period, from 5,600 in 2001 to around 3,000 at the end of 2005, guided by master plans for each line ministry and province, approved by the Prime Minister. From an initially slow start, transformations picked up in the second half o f 2003 and through 2004. The reduction in SOEs has been mainly through equitization, whereby the SOE after a sale o f shares i s converted to a joint stock company that operates under the Enterprise Law, rather than the SOE Law. Other forms o f SOE transformation have been mergers, conversions to limited liability companies, outright sales, and liquidation. Initially, the focus o f equitization had been on smaller SOEs, but in 2004 the l i s t o f sectors where 100 percent state ownership i s to be retained was substantially shortened. Since then, the average size o f the SOEs transformed has been rising. The equitization process has itself undergone major improvements with appraisals being conducted by outside evaluators, and the share sales taking place at market values through auctions at the securities trading centers. The percentage o f shares sold to non-employees or to outsiders (including foreigners) has also been increasing. The percentage o f SOEs that did not sell any shares to outsiders has come down from 52 percent in 2003 to 29 percent in 2005. In 2004, the proportion o f equity sold to outsiders amounted to no more than 9 percent o f the total equity in these enterprises, but it rose to 14 percent in 2005.

31. A survey o f 550 equitized SOEs was conducted in 2005, following a similar one undertaken two years earlier. Almost 90 percent of those sampled reported an improvement in their financial performance, starting promptly on equitization. Although tax incentives available to equitized SOEs tend to inflate post-tax profits, there i s sufficient evidence that actual performance improved. Turnover increased by 13 percent on average and pre-tax profits by 9 percent. These gains are higher than those observed among non-equitized SOEs. Investments and salaries increased as well. Most equitized SOEs continue to be managed by the same individuals as in the past, though with greater autonomy from supervising ministries or agencies. The survey results also suggest that performance improved faster when the reduction in the state share o f capital was larger.

32. The flip side of SOE reform, and a key aspect of the transition to a market economy, has been the rising role of the private sector. Between 2000 and 2005, the share o f the private sector in non-oil exports rose from about 50 percent to over 70 percent, while i t s share in manufacturing production rose from 57 to 65 percent. Over the same period private investment increased from 14 percent o f GDP to over 18 percent, with the domestic private sector being especially buoyant in recent years. In the last five years about 146 thousand new domestic enterprises were registered, with the number being nearly 40 thousand alone in 2005. The average capital o f these enterprises, at around 160 thousand dollars in 2005, remains small by international standards. Private But i t has more than doubled in comparison with 2001.

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enterprises, excluding farmers and non-farm self-employment, now account for about 22 percent o f the employed labor force, compared with 13 percent in 1998.

33. Progress along all areas of banking reform has been significant, especially in the last two years. In 2001, the banking reform program aimed at restructuring joint-stock banks (JSBs) and making them comply with regulatory standards. As for SOCBs, it involved phasing out their policy lending, resolving their existing non-performing loans (NPLs), conducting International Accounting Standard (IAS) audits o f all o f them, and re-capitalizing them. The pace o f reform along all these areas has picked up after an initially slow start. The N P L s identified as o f end- 2000 were resolved, but mainly through write-offs. SOCBs received phased recapitalization payments totaling 10.8 trill ion dongs. By 2006, at least f ive I A S audits have been conducted for each large SOCB. Audit quality, though initially weak, has improved considerably over time. Policy lending was separated from the commercial banking system but i t initially continued to expand rapidly through the DAF. However, the introduction o f sounder regulation o f DAF in 2004 has led to a slow down in such lending. The share o f credit to the private sector has risen to 67 percent, from 58 percent in 2001.

34. SOCBs compliance with banking regulations, though having improved since 2001, i s s t i l l short o f requirements. But the regulations for prudential ratios and asset classification were strengthened, and are to be complied with in a phased manner over the next three years. There has already been measurable progress towards their attainment. An important benchmark was the production o f a f i rst estimate o f N P L s based on criteria which are close to international standards, in early 2006. This estimate, which after large write-offs i s in the range o f 8 to 10 percent of total credit, i s lower than many observers expected. But it i s more than twice as high as previous estimates based on local accounting standards. While questions s t i l l surround the accuracy of the new loan classification, the public announcement o f more credible figures on a regular basis should mark a change from the past. In addition, as part o f their equitization plans the SOCBs are taking steps to help market participants obtain a better picture o f their worth. Vietcombank and Mekong Housing Bank (MHB) are in the final stages o f hiring external consultants to value the banks, while the Bank for Investment and Development o f Vietnam (BIDV) has already obtained a rating from Moodys.

35. Vietnam continues to make impressive improvements in access to education at all levels, while improving the quality of its primary schools. Net enrolment rates reached 94 percent for primary, 80 percent for lower secondary and 45 percent for upper secondary in the school year ending in 2004. More importantly, the gap between the r ich and the poor continues to narrow. Between the school years finishing in 1993 and in 2004, the net primary enrollment rate for the poorest income quintile increased from 70.5 percent to 90.7 percent. For children from ethnic minorities, it increased from 61.8 percent to 87.7 percent. Fundamental School Quality Level (FSQL) standards have been adopted as a key tool for monitor the performance o f the education sector and link resources to needs. FSQL standards combine indicators related to the management o f a school, the training o f i t s teachers, the quality o f i t s infrastructure and the availability o f classroom material, among others. An annual audit o f primary schools nationwide was launched in 2004 to assess progress in the quality o f education. By 2005 the average FSQL index had increased substantially, especially in poorer districts.

36. Considerable gains have also been made towards achieving the MDGs on health, especially in relation to infant and child mortality. The Vietnam Demographic and Health Survey for 2002 reports infant mortality to have declined to 18 per thousand l ive births, compared with 30 at the time o f the 1997 survey. The corresponding numbers for under-five child mortality are 40 per thousand and 24 per thousand. While these estimates are subject to large measurement

17

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errors, the hypothesis o f rapid declines cannot be rejected. Gains have also occurred in relation to communicable diseases. There has been progress with regard to malaria, and successes in diagnosing and curing a high proportion o f new TB cases.

37. The setting up o f Health Care Funds for the Poor (HCFPs) in al l provinces significantly increased the level o f funding provided by the central government to support the health care expenditures o f the poor. A survey conducted in two provinces found an increase in the utilization o f health services after the implementation o f the HCFF’s, especially for inpatient care. A significant increase in health services sought at the commune health stations was reported as well. Although average out-of-pocket expenditures on outpatient and inpatient care were s t i l l substantial, they fell considerably among the poor.

38. Land tenure i s being made secure through a rapid increase in the allocation of Land-Use Right Certificates (LUCs). For agricultural land, LUCs had been issued for nearly 76 percent o f all plots as o f 2004, compared with 42 percent in 1998. For urban land, the corresponding figures were 68 percent and 34 percent respectively. As o f 2004, 18 of agricultural land titles were in the name o f women, and an additional 12 percent had the names o f both spouses on them. In spite o f these developments, the role o f land rental markets in agriculture remains relatively minor. In 2004, 10.7 percent o f rural households had rented-in land, compared with 7.9 percent in 1998. The development o f land sales i s limited too, with only 2.7 percent o f households reporting that they had sold land in 2004. While interpreting the above numbers it i s important to note that 2004 was the first year o f the new land law, so it i s unlikely that the above numbers reflect i t s impact.

39. Forest cover, including both natural forest and plantations, has risen from about 35 percent o f the total land area o f the country in 2001 to 37 percent in 2005, but i s quality has been problematic. About 18 percent o f the total area i s plantations. Of the natural forests, over two- thirds are considered low quality or regenerating. While the share o f r ich and closed-canopy forests was only about 4.6 percent in 2004, i t did record an increase from 3.4 percent in 2000. Efforts to stabilize the area under mangrove forests appear to be bearing results. The last comprehensive national inventory o f mangroves was conducted in 1999, but a range o f site- specific data suggests that combined control and replanting programs have slowed their decline. The prevention o f degradation o f wetlands and coral reefs has not been equally successful.

40. The planning process itself has been substantially improved during the CPRGS period, moving away from a “command and control” approach towards a more strategic approach, involving strengthened policy analysis and broader consultation. Both at the national and subnational levels, participatory workshops on the draft SEDP for 2006-2010 have drawn in stakeholders from inside and outside the government. Over a period o f several months, consultations were conducted with officials from local governments, the domestic private sector, local associations, international non-governmental organizations (NGOs) and development partners, researchers and representatives o f the overseas Vietnamese. There was a particular effort to solicit the views o f women. And teams o f local researchers have gathered feedback at the grassroots level.

41. The implementation of the revised Law on the State Budget, which became effective in 2004, i s one of the cornerstones of the public financial management reform program. The law clearly delineates the roles o f the National Assembly and the Provincial People’s Councils in budget approval and streamlines budget execution. I t also assigns the Treasury Department as the lead agency responsible for budget execution and for financial management information. In 2005 the entire State Budget Plan was disclosed for the f i rst time, including an aggregate amount for

18

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defense expenditures. In November 2004, the trend towards disclosure was reinforced by the Prime Minister’s Decision 192, which mandates that details o f budgets at all levels o f government be published within a stipulated time period. Importantly, the Decision introduces financial transparency in capital projects that use state budget resources. Allocation o f funds to such projects must be based on approved investment plans, and details o f the bidding process need to be made publicly available. Decision 192 also covers the disclosure o f information on the financial situation o f SOEs. A related development was the transformation o f the State Audit of Vietnam (SAV) into an independent institution reporting the National Assembly, rather than to the government. The Auditor General w i l l be appointed and dismissed by the National Assembly and audit reports w i l l be made public. The SBV wi l l also be subject to annual auditing and the disclosure o f the audit reports.

42. To help strengthen medium-term expenditure planning, the government has piloted the development o f MTEFs in four sectors and four provinces. The f i rst MTEFs, covering the ministr ies o f education, health, transport, and agriculture and rural development, have been submitted. These contain scenarios for sectoral spending and i t s allocation over a period o f three years. Estimates for the capital and recurrent sides o f the budget have been prepared in an integrated way, with reference to the development goals o f the sectors. These MTEFs have been developed within the context o f a sustainable medium-term fiscal envelope.

43. A diagnostic study of corruption and i ts modalities was recently completed and i ts results were presented publicly. The independently conducted Investment Climate Assessment (ICA) survey corroborates the results o f the study. Both sources identify the same set o f agencies as being the most corrupt ones; land administration, customs, traffic police and tax offices come at the top o f the l ist. But it also appears that some o f the key agencies businesses need to deal with (in particular, district level people’s committees) tend to be relatively “clean”. Average bribes to each o f the most corrupt agencies are in the order on 100 dollars. Given that th i s i s close to an average salary in manufacturing, this finding i s not comforting from a social and moral point o f view. I t makes i t clear why the Vietnamese society i s so outraged at corruption. At the same time, the cost o f corruption for the conduct o f business, estimated at 0.4 percent o f sales, i s low by international standards. The I C A also suggests that corruption i s a less severe constraint for businesses in Vietnam than in most other countries in the region, bar Malaysia. The drafting o f implementing decrees for the anti-corruption law could benefit greatly from the results o f these newly available diagnostic studies. The main initiatives for fighting and controlling corruption include increased public disclosure and transparency in areas such as public procurement, c iv i l works, management and equitization o f SOEs, auditing o f the state budget, management and use o f land, and personnel management.

44. The adoption of the One Stop Shop (OSS) model nationwide has been an important step towards simplifying administrative procedures and enhancing their transparency. In general, the OSSs have provided an accessible and recognizable entry point for people in need o f administrative services. Procedures have been published and fees have been made more transparent. B y now, 63 out o f 64 provinces have established OSSs in the four compulsory departments, namely Labor and Social Affairs, Natural Resources and Environment, Planning and Investment, and Construction. Overall, 98 percent o f al l districts and 65 percent o f al l communes have set up their OSS.

45. Legal transparency has improved with the issuance of a Decree stipulating that the sanction for non-publication of legal normative documents in the Official Gazette i s non- effectiveness. While the requirement to publish in the of f ic ia l Gazette had been made in the Law on the Promulgation o f Legal Documents, the implications o f non-publication were not explicit

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until now. Moreover, th is new Decree, passed in 2005, sets clear guidelines for the collection of comments from stakeholders directly affected by legal normative documents. A minimum period o f 20 working days i s stipulated for consultation. The latter can take place through mass media or through the internet.

IV. THE CONTRIBUTION OF PRsCs

A. PROCESS AND CONTENT

46. PRSCs are a well-suited aid instrument in the case of Vietnam, given the strong government ownership of the reform agenda and its capacity to deliver in practice. Conditionality has not been a central feature o f PRSCs in Vietnam, except at their inception. PRSC 1 included a series o f conditions for the release of the second tranche (one o f them had to be waived) and PRSC 2 had a limited number o f effectiveness conditions. As the policy dialogue around PRSCs matured, however, incentive mechanisms were softened, with the assessment o f a set o f forward-looking triggers being used to launch the preparation o f the next operation in the series. I t was agreed that progress towards meeting al l triggers would lead to a higher volume o f lending (high-case scenario), progress towards most and no backtracking in any to the stability o f lending (base case) and serious backtracking to the halting o f the process (low case). Since the introduction o f triggers, all the operations in the series actually fell in the base-case scenario. On the other hand, each o f the operations was backward-looking, in the sense of reckoning the actual progress accomplished in the implementation o f the reform agenda up to that point.

47. Over time, PRSC operations in Vietnam have become broader undertakings, both in terms of the number of policy areas covered and in terms of the number of donors involved. PRSC 1 supported economic reforms in five policy areas, al l but one related to structural adjustment. A considerable expansion in coverage took place under PRSC 2, as a result o f the adoption o f the CPRGS, which tackles growth and poverty from the structural, social and institutional angles at once. The expansion o f CPRGS to address large-scale infrastructure issues further broadened the scope o f the policy dialogue under the umbrella o f PRSCs. Meanwhile, the number o f donors involved expanded from four in the case o f PRSC 1, to nine for PRSC 4. Nineteen o f them participate by now in the preparation o f PRSC operations. This number includes donors who are considering joining the process, either for th i s operation or during the next PRSC cycle. As more donors joined, i t also became possible to tap the technical expertise o f several o f them on specific issues, thus bringing more line ministries and government agencies into the policy dialogue supported by the PRSC process. The current operation in the series covers 19 policy areas, involving more than 20 line ministries and government agencies.

48. The increasingly broader scope of the policy dialogue raises important logistic challenges. PRSCs require an effective coordination mechanism if they are to be delivered on an annual basis. One o f the potential strengths o f direct budget support i s to provide a predictable flow o f aid resources to the government. But the predictability would be lost if operations were to slip as a result o f their administrative complexity. The institutional arrangement established at the onset o f the process, whereby PRSCs fal l under the direct responsibility o f the f i rs t Deputy Prime Minister, proved effective in this respect. In practice, a PRSC secretariat operating in the SBV, under the leadership o f one o f i t s Deputy Governors, has been instrumental in translating

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this empowerment into a workable schedule o f meetings and exchanges o f documents between line ministries and government agencies on the one hand, and donors on the other.

49. PRSCs have also become an important donor coordination mechanism, in the spirit of the harmonization agenda. Discussions with government in each o f the policy areas are jointly conducted with all the co-financiers and potential co-financiers with an interest in them. From the government’s perspective, th i s arrangement reduces transaction costs. From the donor’s perspective, i t increases the coherence o f the support to economic reforms. Donors jointly make key decisions, including whether a policy action satisfies the criteria required to be addressed through the PRSC process, whether triggers are met, and how satisfactory i s the progress towards attaining each o f the development outcomes. PRSCs also allow a better coordination o f technical assistance and analytical work in support o f the reform agenda o f the government. At the same time, there i s a scale effect, allowing each the participating donors to be involved in the policy dialogue to a larger extent than they could individually. Since PRSC 3, donors have jointly contributed more resources than the World Bank. The gap i s actually larger than it appears, as more than two thirds o f donor co-financing i s under the form o f grants.

50. On the other hand, the broadening scope of PRSC operations has created some overlap between the teams involved in each o f the policy areas and pre-existing partnership or international support groups. The overlap i s not perfect, given that not a l l donors active in Vietnam participate in the PRSC process. Moreover, arrangements differ between those partnership groups and the PRSC teams. The former tend to have a leading line ministry, government agency or donor, whereas al l PRSC teams have the SBV Secretariat as the coordinator on the government side and the World Bank as the coordinator on the donor side. Effective coordination on both sides has been instrumental in delivering complex operations, supporting substantive reforms, under tight deadlines. Because o f these differences, pre-existing partnership groups and PRSC teams by policy area might co-exist in the foreseeable future.

51. PRSCs also complement, rather than replace, other initiatives of the World Bank and other donors, including the analytical program, the policy dialogue and investment credits (Figure 1). A relatively efficient division of labor has been achieved in th i s respect, whereby PRSCs carry through high-level policy reforms, whereas investment credits and technical assistance focus on their implementation. There i s also a clear complementarity between PRSCs and the analytical program. The annual Vietnam Development Reports (VDRs) are joint donor documents presented at the year-end CG meeting. They update government and donors on the assessment o f the development challenges faced by Vietnam. The VDR released at the end o f 2002 helped translate the CPRGS into recommendations for action in each policy area. The VDRs of end 2003,2004 and 2005 provided a more comprehensive diagnosis o f the situation in each o f the three pillars covered by CPRGS.

B. RESOURCES MOBILIZED AND COST OF REFORMS

52. The PRSC process has led to disbursements to the budget on an annual basis, thus meeting the objective of aligning aid to domestic budget cycles. Since PRSC 2, commitments are made in June o f each year, which i s the time when the preparation o f the state budget starts. The state budget i s approved by the National Assembly towards November, for the following calendar year. The submission to the National Assembly already factors in the amount o f resources expected from PRSCs. Because such credits are disbursed fully within a few months o f

21

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their signature, PRSCs have been a relatively predictable source o f funds. Disbursements by co- financiers, either under the form o f grants or parallel lending, take place over a longer period of time. But there has been progress in speeding up those disbursements. Combined with the increasing number o f co-financiers, and the regularity o f PRSC operations, the result has been an increasingly smooth transfer o f aid resources to the government (Table 4). At present, there i s almost no gap between the volume o f resources jointly committed by donors when a PRSC i s approved, and the volume o f resources disbursed to the budget in the corresponding calendar year.

Committed (US$ million)

Operation World Bank financiers co-

PRSC 1 (I) 150 22 PRSC 1 (II) 100 23 PRSC 2 100 30 PRSC 3 100 113 PRSC 4 100 125

Disbursed (US$ million) co-

Year World Bank financiers 200 1 150 0 2002 100 22 2003 100 23 2004 100 106 2005 100 118

Note: World Bank staff estimates.

53. In spite of the increasingly large volume of aid resources disbursed through PRSC operations, the combined contribution of the World Bank and donors is modest compared to the financing needs of Vietnam (Table 5). Some o f the reforms supported through the PRSC process entail substantial costs to the budget. The restructuring o f SOCBs initiated under PRSC 1 led to a phased-in re-capitalization financed by government bonds. The social safety net (SSN) to assist workers who become redundant as a result o f SOE equitization and restructuring has became more active over time, and has provided by now a reasonable compensation package to some 120,000 workers. The PRSC process also supported additional spending in the social areas, under the form o f HCFP at the provincial level, and a steady increase in the budget for education. Even if al l other actions under the PRSC process were budget-neutral, the additional cost o f the reforms would be in the order o f US$400 mil l ion per year. The total resource contribution by PRSCs during this five-year cycle represents less than half of th is amount. From this perspective, the PRSC process can be seen as an effective cost-sharing arrangement between the government o f Vietnam and the donor community.

54. The contribution o f PRSCs i s even more modest when compared to government spending at the aggregate level. The total amount o f resources contributed represents less than a quarter of the total budget deficit, and less than 2 percent o f total government spending in Vietnam. I t i s therefore clear that the donor community plays a supporting role, one that the government o f Vietnam can afford to do without. This real possibility o f opting out sustains a healthy policy dialogue, as donors are not in a position to “buy” any economic reforms. Building consensus between the two sides, often on the basis o f high-quality analytical work, i s necessary to successfully bring new policy initiatives into the process. The main contribution o f PRSCs has been their ability to serve as a platform for a continued policy dialogue on a broad range o f issues with key government counterparts.

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TABLE 5: PRSCS AND THE FINANCING GAP

Cost of key reforms (US$ million) SOCB Recapitalization Social safety net Health care funds Education budget

2002 2003 2004 2005e 307 292 101 0 2 34 83 95 0 29 45 86 0 0 197 348

I 309 I 355 I 426 I 529 1 I Total PRSC contribution (percent) Cost of key reforms Budget deficit Government expenditure

2002 2003 2004 2005e 48.5 34.3 28.9 37.8 29.7 15.4 19.4 26.6 1.8 1.2 1.1 1.6

C. DEVELOPMENT IMPACT

55. The solid performance of Vietnam in terms of economic growth, poverty reduction and the attainment of other development objectives, suggests that the policy actions supported through the PRSC process so far have been effective. Rapid development i s taking place, and i s accompanied by reforms which will contribute to sustain i t over time. The annual growth rate o f GDP increased by almost two percentage points between the beginning and the end o f the five-year period covered by this PRSC cycle. Growth i s leading to higher government revenues, which are in turn being used to provide social services and assist laggard areas. Poverty reduction could have been expected to slow down after the easier gains had been made, but i t actually accelerated in the second half o f th is period. Moreover, these impressive gains appear to be sustainable. A current account deficit emerged, but i t was financed mainly through ODA and FDI. Inequality in expenditures has increased only modestly. While environmental degradation i s a concern, sound policies are being put in place to manage natural resources and control pollution. The fiduciary environment i s improving and a program i s in place to bring i t up to international standards. A strong governance agenda i s leading to better planning processes, more transparent public financial management, a simplification of administrative procedures and, for the f i r s t time, a clear strategy in the fight against corruption. In most o f these areas, important challenges remain. But it i s difficult to claim that Vietnam’s progress i s “borrowed” on i t s future.

56. While i t i s difficult to attribute success in the attainment of specific development outcomes to particular policy actions under the PRSC process, the latter i s likely making an important contribution. A truly rigorous impact evaluation analysis cannot be conducted in circumstances where no obvious counter-factual exists. While it i s possible to describe what happened in Vietnam during this period, assessments of what would have happened in the absence of the policy actions supported through the PRSC process are to some extent hypothetical. However, an independent evaluation o f budget support operations in seven countries, conducted by a team at the University o f Birmingham, was very positive in Vietnam’s case. And a closer look at the mechanisms through which economic growth and poverty reduction took place during this period suggests that those actions did play an important role in practice. The evidence i s especially compelling in relation to poverty reduction.

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57. Policy actions under the PRSC process contributed to the generalization of market mechanisms, a massive creation of wage employment and a strengthened delivery of public services. These have been identified as the main drivers o f poverty reduction in Vietnam. Most o f the poor l ive in rural areas. The distribution o f farm land to rural households, in the early 1990s, combined with stronger incentives for the commercialization o f agricultural products, rapidly raised incomes among the poor. While only 48 percent o f the output by household farms was sold to the market in 1998, the fraction had increased to 70 percent in 2002. Integration with the world economy, the development o f banking credit, and the declining role o f SOEs contributed to this trend. The move from farming and self-employment to wage employment represented another major contribution to household incomes. Wage employment increased from 21 percent o f total employment in 1998 to 32 percent in 2004. A more conducive environment for the creation and formalization o f domestic private enterprises and the attraction o f massive FDI inflows have made it possible to create jobs in a large scale and absorb large number o f entrants into the labor market. Service delivery has also contributed to better health and education outcomes, while local infrastructure has developed rapidly. By 2004, 93 percent of the population had access to electricity, compared to 77 percent in 1998. These outcomes have been made possible through sustained investment programs and increasingly effective inter- government transfer mechanisms favoring the poorest provinces.

58. The PRSC process has had a direct influence on the adoption of policy actions conducive to higher economic growth and poverty reduction, rather than simply rewarding policies that would have been adopted anyway. While PRSCs have involved little conditionality, and only in the initial stages, it can be argued that the process followed to support their preparation has contributed to the quality of economic policies. There has been agreement among donors that this dialogue should focus on government actions meeting four criteria: they have to be part o f nationally-owned strategies and plans, including CPRGS; they have to be grounded on solid economic analysis; they have to be strategic in importance; and they have to be defined in an unambiguous way. This focus has allowed to prioritize and to sequence the wide range o f policy initiatives considered in Vietnamese development strategies and plans. The tight deadlines resulting from the annual cycle for the delivery o f PRSCs have also established an incentive to complete the key policy actions in time. The discussion o f those actions with the relevant line ministries and government agencies has also nurtured a more systematic exchange o f draft documents for consultation and comments, and fostered a increased openness in the policy making process.

V. THE PROPOSED CREDIT

A. ASSESSMENT OF TRIGGERS

59. The assessment o f triggers for the current operation points towards base-case lending. The 15 triggers chosen for the preparation o f PRSC 5, spelled out in the PRSC 4 program document, were evenly distributed across the structural, social and governance areas o f the reform program (Table 6). These triggers should not be interpreted as conditions, and their evaluation involves an element o f judgment, in the spirit o f a “bottom-line” assessment.

25

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60. The proposed operation, while following up on policy measures and development outcomes related to the triggers, also supports other actions in key policy areas (Table 7). These actions further the reforms that had been implemented under previous PRSCs (Annex 2). All o f the 46 actions recognized by the proposed credit have been completed. Those taking the form o f policy measures have effectively been adopted, whereas those reflecting development outcomes have been attained. Engaging in the policy dialogue around a relatively large number o f actions i s justified in a reform program as comprehensive as that o f Vietnam, covering 19 policy areas at once. However, as in the previous operation in the series, only a critically strategic subset o f actions (highlighted in bold) i s detailed in the FA. Fourteen o f the critically strategic prior actions were triggers for PRSC 5 or are directly related to those triggers. The one trigger that did not translate into a prior action relates to the regulatory framework for provincial infrastructure funds. Even though satisfactory progress has been achieved on th i s trigger, it was felt that i t could be further refined through continued policy dialogue and that i t should be included as a prior action only after the regulations are finalized.

B. TRANSITION TO A MARKET ECONOMY

61. A new Intellectual Property Law was passed by the National Assembly, consistent with WTO requirements. A number o f Vietnam’s trading partners have identified strengthening the protection o f intellectual property as a key factor for enhancing trade and investment relations. Vietnam has stated that i t w i l l be in compliance with the TRIPS agreement o f the WTO upon accession. While the WT.0 requirements could have been met through amending existing pieces o f legislation, this approach would have had the disadvantage o f scattering the changes over many legal documents. The government i s currently taking steps to remove overlaps between the responsibilities o f different agencies in order to smooth the implementation o f the law and ensure i t s effective enforcement.

62. A comprehensive roadmap for banking sector reform was issued through Prime Minister’s decision 112 of M a y 2006. The reform o f the banking system entails fundamentally re-writing the Law on Credit Institutions and the Law on the SBV. The issuance o f the revised laws, initially planned for 2010, has been brought forward to 2008 or earlier. The new laws w i l l be designed to transform the SBV into a modern central bank charged with executing monetary policy and supervising the banking system. They wil l also be shaped by the international commitments that Vietnam takes on as part o f WTO accession. At present, the SBV i s responsible for exercising the ownership (or shareholding) rights o f the state in the SOCBs, a function which conflicts with i t s role as supervisor o f the same banks. Under the proposed changes to the legal framework, the ownership role o f the SBV i s to be eliminated. The supervision functions o f SBV wi l l be separated from i t s management functions in relation to SOCBs, and the operation o f SOCBs on a commercial basis w i l l be ensured.

63. The planned restructuring o f the SBV wi l l also see a reduction in the number o f i t s branches. Key functions o f provincial offices w i l l gradually be transferred to regional ones, thereby containing the interference o f provincial governments in the operations o f the banking system at the branch level. Such interference has limited the effectiveness o f banking supervision and rendered the control o f policy lending less effective. The reform program w i l l also include a transformation o f central bank governance to clarify and enhance management and accountability structures.

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TABLE 7: OVERVIEW OF POLICY ACTIONS UNDER PRSC 5

Trade integration

SOE reform

Financial sector reform

Private sector

Infrastructure

Pillar I: Transition to a market economy

0

0

Issue Intellectual Property L a w in accordance with WTO requirements

Eliminate quantitative restrictions on imports in accordance with WTO requirements

Classify SOEs by performance in accordance with Decision 271

Approve plans for the restructuring o f selected large SOEs based on the holding company model

Establish State Capital Investment Corporation (SCIC) to exercise state ownership rights in equitized “independent SOEs” instead o f ministries and provinces

Require valuation o f assets for a l l transactions b y the state by independent appraisal enterprises, unless through auctions

Issue a comprehensive roadmap for the reform of the banking sector

Complete the Base1 Core Principles self-assessment to identify weaknesses in banlung supervision

Complete the preparations for the equitization o f MHB, with a strategic investor

Issue plan for the equitization o f Vietcombank, allowing the participation o f a strategic investor

Increase provisioning for N P L s in SOCBs based on their classification in line with international practice

Submit a Securities Law for capital markets development and strengthened disclosure for publicly held companies

Increase the cap for foreign share holding in listed companies to 49 percent

Issue a unified Enterprise L a w leading to equal treatment for firms regardless of ownership

Issue an Investment Law applicable equally to domestic and foreign investors

Establish an independent competition authority to address restrictive commercial practices

Establish a regulator for electricity, responsible for guidance on prices, licenses and market organization

Prepare pilot MTEF for transport sector to better balance maintenance and capital expenditures

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

(Continued)

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TABLE 7: OVERVIEW OF POLICY ACTIONS UNDER PRsc 5 (CONTINUED)

Education

~

Health

Land and forests

Water

Environment

Gender

Pillar 11: Inclusive and sustainable development

0

0

Issue regulations fo r inclusive education fo r children w i t h disabilities

Use the pilot MTEF in preparing the education sector budget

Raise average FSQL index of primary schools by 6.4 percent, with faster progress in poorer districts

0 M a k e health insurance compulsory fo r the poor, w i th greater coverage and increased budget allocation

Employ MTEF on a pilot basis to address the under-funding of key programs

Revise Program 135 to support the development of communes facing extreme hardship in ethnic minor i ty and mountainous areas

Set up provincial land registration offices in compliance with the 2003 Land L a w

Pilot a MTEF for agriculture and rural development

0

0

0

0 Assign institutional responsibilities to implement the national targeted program o n rural water and sanitation

Issue the National Water Resources Strategy

Adopt cost recovery principle for the water supply sector with provisions to assist the poor

Develop economic tools and pi lot strategic environmental assessments fo r environmental protection

Issue implementing guidelines for the Clean Development Mechanism under the Kyoto protocol

Pilot the planning manual for selected ministries and provinces including the mainstreaming o f gender

0

0

0

(Continued)

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TABLE 7: OVERVIEW OF POLICY ACTIONS UNDER Pmc 5 (CONTINUED)

Planning processes

Pillar 111: Modern governance

Submit SEDP based on broad consultation, with a poverty focus and develop monitoring tools

Initiate assessment of social and economic impacts o f WTO accession, identifying counter-measures

Public financial management r-

Financial accountability

Legal development

0 Require all ministries and provinces to prepare forward-looking budgets in support of SEDP

Monitor service quality, introduce user feedback and cap salary bill in public service delivery entities

Reformulate n o m for allocating recurrent and capital budget to provinces with a pro-poor focus

Unify the management o f foreign debt and reckon al l government guarantees on it

Scale up autonomy for government entities under the block grant modality for administrative expenditures

Issue all relevant accounting and auditing standards consistent with international practice

Require stakeholders’ consultation and condition the effectiveness o f legal documents on publication

Approve strategies for the improvement and development o f the legal and judiciary systems

Public administration

32

0 Issue action plans for simplification and greater transparency of administrative procedures

Anti-corruption Issue Anti-Corruption Law including denunciations and monitoring of assets

Complete and make public a diagnosis o f corruption and i t s modalities

Issue Procurement Law focused on publicity and addressing bidders’ complaints

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64. The strengthening o f banking supervision i s expected to happen in two phases. In the f i r s t one the banking supervision department o f SBV w i l l be upgraded. The focus o f i t s activities wi l l mainly be on banks as they are likely to remain dominant players in the financial sector in the medium term. In the second and longer-tern phase, an independent financial supervision board w i l l be established. The SBV has already undertaken measures to begin upgrading i t s supervision functions. In October 2005, i t initiated an assessment o f i t s supervision practices against international standards, the Base1 Core Principles. The assessment i s scheduled for completion in the f i rs t half of 2006 with the production o f a comprehensive supervision development plan. I t has been stressed that the pace o f reform wi l l be tailored to the human resource capacities within the SBV and the SOCBs. As the envisaged changes are fundamental in nature, they w i l l need to be accompanied by an equally major development o f human resources and a realignment o f the incentives structure to the objectives o f the institutions.

65. The organizational and financial restructuring of SOCBs to support their commercial orientation is to happen alongside the opening up of their capital. All SOCBs are due to be equitized by 2010. The process has been set in motion for two o f them. Vietcombank has already sold convertible bonds worth 1.36 trill ion dong to boost i t s capital before equitization. Share sales are to take place through auction at the securities exchange and w i l l begin towards the end o f 2006 or in early 2007. MHB wi l l be equitized with a strategic investor. The state’s shareholding in these two banks i s to be gradually reduced: to no less than 70 percent by end-2006 and eventually to 51 percent by 2010. Under current regulations total foreign holding o f shares wi l l be limited to 30 percent with a single institutional investor allowed to hold a maximum o f 10 percent. But these l imi ts , especially the latter may be revised upwards to accommodate strategic investors. The valuation o f both banks i s to be conducted through reputed external advisors selected through a competitive process. The external advisors w i l l also help in selecting strategic investors.

66. SOEs have been classified according to their performance. Decision 271 set up a mechanism to monitor SOE performance and apply sanctions in the case o f consistently poor performance. SOEs are to be classified into one o f three groups (A, B, or C) based on four criteria: turnover, profitability, solvency and compliance with laws and regulations. For the f i rs t three criteria, quantitative benchmarks are established, so that SOEs with a strong performance are classified as A whereas those with a weak performance are rated C. These four criteria are combined into a single ranking. Only those SOEs with a strong performance in al l four criteria are ranked as A, whereas weak performance on any single indicator leads to a C ranking. Enterprises ranked as C for two consecutive years are in principle subject to reorganization, including changes in management. Until recently, few SOEs had complied with the reporting requirements under Decision 271 and government agencies in charge had not made serious enforcement efforts. But over 2005 and early 2006, the MOF compiled reports on the performance o f most SOEs during 2004, and i s now conducting an in-depth evaluation o f the reliability o f those reports (Table 8). Meanwhile, an application o f the three quantitative criteria o f Decision 271 to individual SOE records from the enterprise census yields a similar ranking. More SOEs are classified as B when using census data, compared to Decision 271. But few large SOEs fall in the C category, and overall solvency appears better than i s usually assumed, in spite o f cautious assumptions regarding the valuation o f assets. While the implementation o f Decision 27 1 needs to be strengthened, preliminary results for 2004 are encouraging.

67. The new Enterprise Law paves the way for equal treatment of firms, regardless of ownership. Under the new Law which w i l l be effective f rom July 1, 2006, domestic and foreign enterprises w i l l be governed by the same corporate legislation. Foreign enterprises wil l be subject to the same registration procedures as domestic firms, and w i l l be able to choose the form

33

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o f corporate entity that i s most suitable on business grounds. At present, they are only allowed to operate as limited liability companies. Foreign enterprises w i l l be allowed to restructure, expand, or diversify their business rather than being limited to the specific lines in which their business was initiated. Alongside the Enterprise Law a new Investment Law has also been issued which introduces a common investment regime for domestic and foreign investors. I t opens the possibility of foreign investment into a wider range of sectors, and also makes Vietnam’s investment policies consistent with current and prospective international commitments.

By turnover (percent)

TABLE 8: CLASSIFICATION OF SOES BY PERFORMANCE

By profitability By solvency Average debt (percent) (percent) (billion VND)

~

Performance classification

A (strong)

B (good) C (weak)

Unknown

Performance classification

A (strong)

B (good) C (weak)

Unknown

~~ ~ ~~ ~

Based on Decision 271 I ~ Based on enterprise census

100 largest (percent) (number) (percent) (number)

100 largest

44.0

38.7

15.6

1.6

64

29

7 - _ _

12.2

27.6

56.2

4.1

20

73 7

- _ _

51.5

2.0

46.1

0.5

46.3

29.8

20.8

3.1

61.7

18.4

16.4

3.5

109.4

123.3

49.6

24.5

Note: MOF for Decision 271 and World Bank staff estimates based on GSO data for the enterprise census. The census does not allow implementing the fourth criterion in Decision 271, related to compliance with laws and regulations. The solvency criterion i s implemented by comparing total liabilities with the sum o f liquid assets and the present value o f future profits (assuming constant profits over time and a real interest rate o f 10.7 percent per year). Some o f the largest General Corporations (GCs) are not included in the census data.

I

68. The new Enterprise Law also requires that all SOEs be transformed into limited liability companies or joint stock companies within a period o f four years. Under these corporate forms the SOEs w i l l move under the corporate governance models o f the new law alongside private enterprises, rather than be governed by a separate law as at present. The law also provides for principles to guide the exercise o f ownership rights by the state. These should provide significantly greater autonomy to the transformed enterprises in defining their business strategies, and making investment and personnel-related decisions. At present business decisions are often directed by line ministries or provinces, often in inconsistent ways.

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69. Seven decrees are currently being drafted to provide guidelines for implementing the two laws. The content o f these decrees w i l l greatly shape the investment climate in Vietnam in the coming years. For the Enterprise Law these include regulations governing the re-registration of foreign invested enterprises, as well as for SOE transformations. Under the Investment Law, one o f the decrees being drafted governs build-operate-transfer (BOT) projects, considered crucial for attracting private participation in the infrastructure sectors. As with the two laws themselves, the government has followed a consultative drafting process involving domestic and foreign businesses, as well as donors.

C. SOCIAL INCLUSION AND ENVIRONMENTAL SUSTAINABILITY

70. Regulations for inclusive education for children living with disabilities have been issued, aiming for equal access to education services. The regulations apply to all educational institutions in the public education system. The preparation o f these regulations i s the result of effective coordination among ministries such as the Ministry o f Education and Training (MOET), Ministry o f Health (MOH), and the Ministry o f Labor, Invalids and Social Affairs (MOLISA), and agencies dealing with child protection. The regulations address the special needs o f children l iving with disabilities in terms o f classrooms, school facilities, equipment, and textbooks. Individual education plans w i l l be prepared with materials and methodological designs tailored to their special requirements. The regulations allow for educational institutions to hire specialized staff and helpers, and entitle them to make investments in facilities and equipment which meet the special needs o f children l iving with disabilities. Inclusive education staff w i l l be entitled to training and refresher courses and to reduced norms for teaching hours. Early intervention i s promoted by the regulations in order to minimize disability-caused constraints. People l iving with disabilities wil l also be given priority in entrance exams for vocational secondary schools and institutions providing continuing and higher education services.

71. A sustained effort i s under way to raise the quality of primary schools nationwide, with an emphasis on schools in poorer areas. A baseline assessment o f compliance with FSQL standards, nationwide, had been compiled at the end o f the school year ending in 2004. The annual audit conducted one year later allowed assessing the progress accomplished. The comparison, finalized at the end o f 2005, showed that the average FSQL ratio, across all the quality indicators considered, had increased from 62.1 to 66.1, out o f a maximum o f 100. This represents an annual increase by 6.4 percent in the average FSQL index. A subsequent analysis, combining the results o f the FSQL audits with a poverty map, showed that gains were more important in poorer districts (Table 9).

72. A larger, increasingly diversified and decentralized education system has made sector governance, planning and budgeting more complex. The on-going work on the education sector MTEF and provincial planning i s aimed at rationalizing the planning and budgeting processes. These tools reinforce the roles o f different stakeholders in sector governance: the Ministry o f Planning and Investment (MPI) for the provision o f a clear economic framework for planning; MOF for integrating planning and deployment o f resources, and balancing sectoral spending; MOET for a sector stewardship role in setting and guaranteeing service quality and facilitating provinces to achieve national objectives; the provinces for integrating investment and recurrent funding for school system operations, and being accountable for sector output and outcomes.

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Districts by quintile

kchest

Near Richest

Middle

Near Poorest

Poorest

Note: World Bank staff estimates, based on data from GSO and MOET. The classification of districts by poverty rate i s based on the 1999 poverty map.

Poverty Average FSQL index Change rate in (on a scale of 0 to 100) (percent, 1999 relative

(percent) 2004 2005 to 2004)

12.4 68.7 69.6 1.28 32.3 67.5 69.3 2.58

41.3 64.9 67.8 4.39

51.5 62.8 65.5 4.41

73.7 55.9 60.5 8.30

73. The financing of healthcare for the poor and near-poor has been considerably strengthened. Politburo Resolution 46 of February 2005 urged the government to finance curative care for the poor, children under the age of six and other social policy beneficiaries, in order to create a “springboard” for upgrading health care and to advance towards universal health insurance by 2010. These aspects of the Resolution were operationalized by Decree 63 on health insurance, in effect from July 1, 2005. The Decree represents a key step in shifting from the direct funding of health care providers to demand-side funding. I t mandates compulsory health insurance (HI) for several groups, including workers on fixed term contracts of three months and above, pensioners, children under the age o f six and beneficiaries under Decision 139 on the provision of health care to the poor. Health services can be received from public or private providers as long as they are contracted by Vietnam Social Insurance (VSI). Compulsory HI holders wi l l be entitled to both in-patient and out-patient services. Transportation costs wi l l be covered in case of referral for the poor and those in remote areas. Voluntary HI i s available to all, including those under compulsory HI who wish to obtain a higher coverage. VSI i s the agency in-charge of the implementation of the health insurance policy. M O H wi l l issue technical standards against which VSI wi l l assess and contract providers. M O H and MOF wi l l provide guidance on the management of insurance funds. M O H wi l l deal with complaints relating to health care, while MOF wi l l deal with complaints on fund management.

74. At the same time Decision 139 i s being revised to expand the number o f households who are eligible for benefits. The new, substantially higher poverty line wil l be employed to define poor households. Such households wil l be entitled to compulsory HI with a premium of 60,000 dong provided by the state budget. Near-poor households with an income level o f up to 1.5 times the poverty line wi l l be provided a subsidy to enroll in the voluntary HI scheme. In addition to these budgetary outlays, provincial HCFPs wi l l support treatment costs, not covered by compulsory HI, up to a maximum of 10 million dong per hospital stay. For the near poor these funds wi l l provide support to cover catastrophic illnesses.

75. Program 135 has been revised to more effectively support the development of communes facing extreme hardship in ethnic minority and mountainous areas. Program 135 i s one of the National Targeted Programs (NTPs) that Vietnam employs to ensure that national

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goals are met in the context o f increasing decentralization. Under the program, which was first approved in 1998, communes receive a resource allocation that i s most often used to develop local infrastructure, such as roads, irrigation systems, schools and health centers. Seven years o f implementation have seen both successes and shortcomings o f the program. The revision to the design, components, and procedures o f the program builds on the success and addresses the shortcomings. The main objective o f the program i s to eliminate food poverty and achieve a poverty rate o f less than 30 percent in the selected communes by 2010, thereby also reducing the widening poverty gap between ethnic minorities l iving in remote areas and the rest o f the country. In i t s second phase the program i s better targeted. In the past only the poorest communes were targeted, but now the aim i s to reach the poorest and most remote villages within the poorest (Zone 3) and less poor (Zone 2) communes. This should also help in reaching a higher proportion o f remote ethnic minority communities. The budget allocation for agriculture and forestry extension and support has been considerably increased, from around 3-4 percent to around 20 percent. This reflects the recognition that infrastructure investments alone were not enough to reduce poverty among ethnic minorities and that greater effort was needed to improve their livelihood opportunities. The allocation for operation and maintenance o f infrastructure has also been raised to about 10 percent. This w i l l enable a reduction in the burden of local contributions borne by already poor communes. The revised program w i l l devolve greater control over investment decisions to commune (and even village) level, w i th measures to increase participation and capacity in scheme selection, siting, technical design and construction supervision. Increased effort w i l l be devoted to promoting public access to information as a key tool in achieving greater transparency and accountability.

76. Land registration offices (LROs) have been set up in nearly all provinces in compliance with the 2003 Land Law. A major shortcoming o f land management in Vietnam has been the lack o f an effective land registration system. One o f the significant changes introduced by the new Land Law i s to address th is deficiency through the creation o f LROs. The law requires such offices are to be set up at the provincial level and, if deemed necessary on the basis o f demand, at district level as well. B y April 2006 LROs had been set up in 62 out o f 64 provinces, and in 20 percent o f the high-demand districts. Fifty o f the 62 offices have received land records that were previously maintained by the Departments o f Natural Resources and the Environment (DONRE), and the process o f transferring the records i s to be completed by June 2006. LROs are responsible for registering al l land transactions, managing land files, and carrying out land-related administrative formalities. Decree 18 1 empowers the offices to provide information on land to any land user to promote transparency in land transactions.

77. The second National Targeted Program (NTP 11) on Rural Water Supply and Sanitation (2006-2010) has been submitted for approval, assigning clearer responsibilities for its implementation. Perhaps the only MDG where Vietnam has not advanced well relates to rural water and sanitation, with weaker progress on the sanitation front. A recent joint government-donor review pointed to a fragmentation and a lack o f coordination between different ministries involved in the sector. Among other objectives, the new NTP seeks to address this shortcoming, by assigning clearer responsibilities. The Ministry of Agriculture and Rural Development (MARD) w i l l perform the state management functions and wi l l be the main agency in charge o f coordinating, monitoring and supervising the implementation o f the NTP 11. Within MARD the lead w i l l be taken by the Department o f Water Resources. MOH wi l l produce guidelines for the provision o f clean water, the construction o f household level sanitation facilities, and personal hygiene. I t w i l l also be in-charge o f monitoring water quality in rural areas. MOET wi l l monitor water supply, sanitation, and hygiene in schools. MONRE will be responsible for addressing issues related to the pollution o f water resources, including in craft villages. NTP I1 improves upon the earlier program by strengthening community participation

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and upgrading the mechanisms for monitoring and evaluation. Specific indicators have been defined and responsibilities have been allocated at the commune, district, provincial, and central levels for collecting and managing information. The program also seeks to accelerate the decentralization process to ensure a more active role for provinces in planning, implementation, and management o f water supply and sanitation facilities. NTP I1 also recognizes the weaker achievement on sanitation, and proposes both technological solutions as well as an enhanced role for households and communities in the provision o f sanitation facilities.

78. Economic tools for environmental protection have been developed and strategic environmental assessments have been piloted. The Law on Environmental Protection (LEP) w i l l take effect from July 1, 2006. The law includes provisions for adoption o f “polluter pays” measures; for instance for waste discharge into water bodies and the disposal o f hazardous wastes. The law also foresees payments for natural resources use and rehabilitation, and reliance on environmental protection funds. The LEP also improves the requirements for Environmental Impact Assessments (EIA) and introduces a requirement for Strategic Environmental Assessment (SEA) o f sectoral and regional development plans.

79. The first decree to guide the implementation o f the LEP has been prepared. I t focuses on the application o f national environmental standards, responsibilities for hazardous waste management, and the procedures for EIA and SEA application. MONRE has also further developed the regulations to implement Decree 67, on Environmental Protection Charges for Waste Water, which w i l l enable improved control o f water pollution. The draft Circular on Wastewater Pollution Coefficients, identifying the volume o f pollutants in industrial waste water as a basis for fees to be levied under Decree 67, was submitted in April 2006, and i s expected to come into force in early July 2006.

80. The government has also adopted provisions for undertaking SEAS to improve the integration o f measures for environment protection into strategies, plans, and programs. Such “upstream” environmental analyses take place “above” the project level. They represent an important step for Vietnam, at a stage o f rapid economic growth and massive public investment in infrastructure, when large cumulative impacts at the regional and landscape levels can be expected. Two SEA pilots were carried out on socio-economic development plans, one for H a Tay province and the other for Dai Tu District, to promote sustainable development and management o f the Tam Dao National Park and i ts buffer zone. Two additional SEA pilots are underway, one for the Vung Tau port development plan, and the other for EVN’s hydropower masterplan, focusing on biodiversity impacts and program level mitigation.

8 1. The National Council on Sustainable Development was established in September 2005 pursuant to Decision 1032. The Council w i l l assist the Prime Minister in implementing the Strategic Orientation for Sustainable Development. Among other tasks, the Council w i l l organize cross-sectoral and cross-regional activities related to sustainable development programs, and support line ministries to develop such programs.

D. BUILDING MODERN GOVERNANCE

82. The government has issued its SEDP 2006-2010 based on broad consultation, with a poverty focus, and i s developing a mechanism to monitor its implementation. The SEDP has been built on extensive consultations not only within government but also with a broader range o f

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stakeholders (including mass organizations, academics, the private sector, c iv i l society and development partners). The National Assembly discussed the draft SEDP in i t s November 2005 session and w i l l formally adopt i t during i t s current session. The SEDP received the endorsement o f the Party Congress in April 2006. The document represents considerable progress in developing an outcome-focused, medium-term plan, which combines the twin objectives o f economic growth and social inclusion, and describes the reforms that w i l l ensure sustainability in the long run. Importantly, the document explicitly recognizes the institutional and regulatory challenges associated with completing the transition to a market economy. I t describes a large number o f planned legislative actions which, together with the reform agenda implied in the accession to WTO, w i l l strongly support this transition. The SEDP should thus serve as a framework to allocate public resources over the medium term and as a mechanism to align donor support to national priorities. A monitoring and evaluation system for the implementation o f SEDP has also been developed, and i s being finalized.

83. New regulations have been issued to strengthen the delivery of public services through improved monitoring, the introduction of user feedback, and l i m i t s on salary expenditure. B y allowing public service delivery units to charge fees, the earlier Decree 10, had introduced powerful incentives to improve quality. However, there were indications that the provision o f basic services to be provided free o f charge, or at low prices established by government regulations, had suffered as a result o f such incentives. Moreover, many service delivery units face limited competition at the local level. Because Decree 10 allowed considerable flexibility to use revenue from fees to pay higher salaries, there was also an incentive to charge excessively high prices for services. The new regulation, Decree 43, makes it compulsory for service delivery units to set aside 25 percent o f their net revenues to improve service quality, thereby limiting the amount available for salary increments. Decree 43 also includes salary caps that are inversely related to amount o f financial support received from the government budget. The decree requires that performance standards be set for service delivery units under guidelines provided by the responsible line ministry. The criteria to evaluate service delivery units wi l l include workload, quality o f the service, time taken to provide the service, and compliance with relevant regulations. Monitoring and evaluation i s to be conducted not only by the line ministries, but also by relevant state inspection and audit agencies. The decree also introduces mechanisms for eliciting feedback from service users that go beyond “mailboxes” to potentially include instruments such as “citizens’ report card” surveys.

84. The circular guiding the preparation of the 2006 budget took an important step towards preparing the government budget within a medium-term framework. While the submission and approval o f the budget by the National Assembly w i l l continue to be done on an annual basis, line ministries and provincial governments were asked to prepare a budget framework for the period 2006-2010, based on the SEDP. The reference to a five-year period should be conducive to a better integration between capital and recurrent budgets. I t should also help ministries and provinces to prepare more realistic plans, to better prioritize their spending, and to improve the overall efficiency o f public expenditures. The draft circular for the 2007 budget also includes instructions to line ministries and provinces to align budget submissions to the SEDP over the next three-year period.

85. Action plans for simplification and greater transparency of administrative procedures are being implemented by several ministries and provinces. Prime Minister’s Directive 09 instructed ministries, government agencies, and provinces to conduct a review o f existing procedures with a view towards reducing bureaucracy and red tape. By the end o f 2005, 17 ministries, five government agencies and 26 provincial people’s committees had submitted actions plans to implement new, simplified administrative procedures. Progress has been made in

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areas such as birth, death, and marriage records; notary services; residential registration permits; business registration and related licenses; LUCs; and customs and tax procedures. In the case o f business registration, investment licenses, and construction permits processing times have generally come down to 7-to-10 days and even 3-to-5 days in some cases.

86. A law on corruption prevention and control was passed by the National Assembly in November 2005, and will take effect in June 2006. In February 2006 the Prime Minister issued an action plan delineating the roles o f various ministries and agencies in ensuring i t s effective implementation o f the law. The law was drafted in parallel with the preparation o f the f i rs t comprehensive diagnostic study on corruption in Vietnam. I t includes chapters on corruption prevention and detection, handling o f corruption, organizations and mechanisms for investigation, prosecution and judicial agencies in anti-corruption, role o f society and media in anti-corruption, international cooperation in anti-corruption, and implementation provisions. The law i s thus more comprehensive than a typical anti-corruption legislation. This comprehensiveness also translates into implementation challenges.

87. The main initiatives introduced for fighting and controlling corruption include increased public disclosure and transparency in areas such as public procurement, c iv i l works, management and equitization o f SOEs, auditing o f the state budget, management and use o f land, and personnel management. The law specifies the contents and modalities o f such disclosure. I t also provides individuals with the right to request for information f rom specified bodies, such as People’s Committees. The law strengthens the accountability o f heads o f organizations and agencies by specifying that they shall be responsible for corruption occurring inside the entities under their management and authority. Greater simplification o f administrative procedures, including increased reliance on electronic interfaces, i s another tool for preventing corruption. The government w i l l also specify and regulate transactions that must be settled through the banking system. The law encourages “whistle-blowing” by the public and other agencies, and the rewarding o f such actions.

88. A key provision o f the law relates to the compulsory declaration o f assets and income o f state employees. The broader definition o f the “declarer”, so as to include “spouses and children in the same residential certificate”, i s commendable. A separate decree w i l l be prepared by the Government Inspectorate to guide the implementation o f t h i s provision. A widespread application o f asset declaration in the initial period could risk overwhelming the capacity o f inspectors, thereby diluting i t s efficacy. To ensure i ts effectiveness a phased approach could be employed, for instance, by piloting asset declaration in the most corruption-prone agencies or for high-ranking public officials. The Ministry o f Home Affairs (MOHA), in coordination with M O F and SBV, has been tasked to prepare a plan on monitoring incomes o f officials o f high-rank or holding a position o f power.

89. Strategies for strengthening the legal and judiciary systems have been approved by the Politburo. Both strategies have been made public and shared widely. The LSDS i s a broad- ranging document which seeks to build legal institutions and systems that wil l ensure the rule o f law. The Judicial Reform Strategy (JRS) to 2020 i s regarded as an important complement to the LSDS. The JRS seeks to improve criminal and c iv i l policy and legislation in line with the transition to a market economy. I t aims at reducing prison sentences considered excessively high, as well as increasing the use o f financial penalties and non-custodial measures rather than imprisonment. The categories o f officials who have the authority to make decisions on the application o f detention measures w i l l be narrowed. The court system w i l l be reorganized to make courts jurisdiction-based compared to their existing geographical affiliations.

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VI. POVERTY A N D SOCIAL IMPACTS

90. Special attention was devoted by the PRSC process to the mitigation of potentially adverse effects of economic reforms. While these reforms hold the key to foster economic growth and accelerate poverty reduction, adverse effects are possible in at least three areas. A more developed land market should increase agricultural efficiency, but could also make it easier for poor farmers to lose their land in the event o f a bad shock. Similarly, in a more open economy, the least competitive sectors (and especially SOEs) could be forced to shed workers in large numbers. And even perfect markets could be unable to address environmental externalities, so that rapid growth could lead to increasing pollution and degradation. To assess the risks in these areas, and design possible counter-measures, the PRSC process was supplemented, since i t s inception, by a series o f analytical activities in each o f these three areas.

91. The init ial allocation o f agricultural land to rural households, in the late 1980s and early 199Os, was remarkably egalitarian. A privatization process o f such a massive scale could have been vulnerable to capture by local authorities, especially given that land was Vietnam’s most valuable asset at the time. And yet, there i s evidence that the annual land allocated by communes was distributed quite uniformly across households. Even in the case o f residential land, allocations were conducted fairly, on the basis o f need. Only in the case o f perennial and forestry land was the initial allocation unequal. But distributing land on an egalitarian basis i s not necessarily good for efficiency. I f more o f it had gone to the most productive (presumably wealthier) households, the overall productivity o f agriculture would have been higher. B y one estimate, total household income ended up being 5 percent lower than an efficiency-oriented allocation o f land would have allowed.

92. As a land market develops, less productive (presumably poorer) households could gradually be forced to sell some of the land they received, while more productive households would stand a chance to acquire more land. So far, however, the total volume o f land transactions remains relatively small. Based on household survey data, only 8.3 percent o f households have bought land during the last decade, and a meager 2.7 percent sold any. Moreover, landlessness i s not necessarily associated wi th poverty. In Vietnam the poor are the least l ikely to be landless, and households at middle levels o f consumption are the most likely. This i s because many families moving out o f poverty also moved out o f farming. I t i s estimated that roughly three quarters o f the overall increase in landlessness over the last decade was due to falling poverty. The trend appears to become stronger over time.

93. There are notable regional differences, however, with the Mekong delta standing out as the exception to the general pattern. There, signs o f polarization are emerging, with higher landlessness being more common among the poor. The Central Highlands display a different pattern too, due to the policies adopted after reunification, to facilitate the migration o f people o f the Kinh ethnic majority into the region. In the process the native hill-tribe people became a minority group. Rapid creation o f wage employment i s necessary for the involuntarily landless households in the Mekong delta to protect their living standards. In the Central Highlands, the main policy response i s to protect ethnic minorities from the encroachment o f their land.

94. The restructuring and equitization of SOEs could lead to large job losses, especially as economic integration faces them with increased competition. In preparation for the first

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PRSC operation in the cycle, a series o f studies were conducted on the extent o f labor redundancy in the state sector, and the overall loss in wellbeing SOE workers could experience in the event o f job loss. Based on the findings o f these studies, a SSN for redundant SOE workers was set up under PRSC 1. This fund has been in operation for three years, with i t s size being scaled up as the equitization process accelerated. The fund has assisted more than 120,000 workers so far, and w i l l have helped a quarter o f mil l ion o f them over i t s l i fe span. The severance pay package made available to those who lose their jobs i s roughly commensurate with the loss in earning and wellbeing they experience. I t s design has paid particular attention to female workers, who stand to lose more from separation. This has resulted in relatively high levels o f satisfaction with the assistance received, as revealed by two tracer surveys o f retrenched workers. Satisfaction has been higher among female and old workers. The tracer surveys have also revealed a relatively successful re-insertion in the labor market over time, although unemployment rates remain higher, and salaried jobs less common, than among comparable workers.

95. Changes in the sectoral composition of output as Vietnam further integrates with the world economy could also have adverse effects on employment. At an aggregate level, global integration should lead to faster economic growth and an overall increase in labor demand. But the process may entail both job creation in the sectors expanding and job destruction in the ones contracting. A flexible labor market, like that o f Vietnam, should reduce the social cost o f this kind o f job churning. Indeed, workers who are retrenched by one employer can hope to get work with a different one within a short period o f time. But jobs are not al l equal; for instance in terms o f their access to social insurance. Churning might thus be associated with some workers losing “good” formal sector jobs and ending up in the informal sector.

96. Unfortunately, knowing in advance which sectors may contract i s not easy. Consider accession to the WTO. The commitments made throughout the process involve an array o f changes in the level o f trade barriers, the extent o f competition in services, and the overall operation o f markets. A recent assessment o f the potential impacts o f WTO accession pooled the findings o f two dozen studies conducted on Vietnam’s integration process, to infer the common patterns. Such studies were based on either computable general equilibrium models or sectoral analyses. Some regularities emerged from this exercise, especially under the form o f a strong expansion in textile and garments, in trade and freight, in petroleum and lubricants, and in paper products. However, the regularities were not really robust. And the predicted impacts on poverty and inequality were both small in magnitude and ambiguous in sign.

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97. The reform of the state sector could potentially lead to the emergence of hidden environmental liabilities. As SOEs are gradually equitized, restructured, or managed more efficiently, their older ways o f handling pollution and natural resource degradation are bound to become more “visible”, and increasingly more unacceptable. Who w i l l bear responsibility to control such pollution and redress the inherited misdoings i s an open question. The second important issue i s related to the growth pattern o f an economy that becomes more globally integrated. The comparative advantages o f Vietnam could favor the growth o f sectors which are more intensive in water or toxic pollution. And low environmental standards could also attract foreign investors to those sectors, in the expectation o f operating at lower costs than elsewhere.

98. The sector with potentially largest environmental liabilities i s coal. An operational review of four SOEs affiliated with Vinacoal, reveals poor standards in areas such as mine water discharge, dust emissions, and waste dump rehabilitation in open-cut mines. Two mines discharge water that i s clearly in the acid range. And their waste dump areas, some o f them directly facing Halong bay, have been subject to little or no rehabilitation work. The quality o f dust management i s uneven too. Near major buildings, around the coal preparation plants and on major internal

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roads, the level o f housekeeping i s good, with these areas generally being clear o f dust and rubbish. Trucks and fixed sprays are used to apply water to internal roadways and stockpiles, thus limiting the amount o f dust. But a build-up o f fine coal, which can be a significant source o f dust, i s noticeable around train tracks and roads.

99. In one mine, a wastewater management system was introduced in 2000. It includes 16 settling ponds, where water i s treated to remove a l l solids, to be then returned with make-up water for re-use in the coal preparation facility. Thanks to th i s system, water i s now re-circulated in a closed circuit and no longer discharged to sea. Environmental monitoring i s conducted at 27 nominated sites. Weather, dust levels and noise are recorded at most locations; vibration, water quality and hazardous gases are checked only at selected ones. Monitoring i s conducted four times per year, as a spot check, by a Hanoi-based private company.

However, there are also indications o f good practice.

100. As for the environmental impacts o f global integration, and o f economic reforms more broadly, they can be divided into three main components. The f i r s t one refers to the way trade patterns affect the overall scale o f the economy; the second one, to the way they influence the techniques o f production; and the third one, to their impact on the sectoral composition o f output. Experience elsewhere suggests that the third effect i s in practice the most important one. Integration into the world economy can substantially modify the specialization pattern o f a country. Expanding the production o f more pollution-intensive goods leads to dirtier environments. Whether this i s actually happening in Vietnam i s unclear. This calls for a strengthening o f environmental policies across the board, a direction the PRSC process has strongly supported, especially through the most recent operations.

101. Based on a systematic review of the available evidence, the foreseeable adverse effects do not appear to be large; except maybe for the environment. This calls for a more systematic use of enforceable environmental standards. But potentially larger social impacts might simply be unforeseeable with the relatively rudimentary analytical tools at hand. I t i s therefore important to put in place effective mechanisms to rapidly cope with the unforeseen. Assistance to ailing firms should not be one o f them. Not just because it i s restricted under WTO rules, but also because i t could lead to rent seeking and disguised protectionism. Assistance to workers who lose their jobs bears more potential, as shown by the successful safety net for redundant SOE workers. But large-scale mitigation policies w i l l require budget transfers, from the provinces benefiting the most from economic reforms to those adversely hit. Transfers o f t h i s sort would not damage efficiency, and could do much to protect social inclusion in a context o f rapid economic growth.

102. T o address the r isks from further integration with the world economy, and rapidly adopt complementary measures if needed, the government i s currently preparing to set up a technical unit in charge o f coordinating al l activities related to WTO accession. This unit i s expected to be located under the Office o f Government (OOG) and i s to be backed up by the authority o f senior leadership. The Vietnamese Academy o f Social Sciences (VASS), which coordinated the technical studies conducted in support of the WTO negotiations, i s actively contributing to spell out the analytical and policy agenda of this technical unit. VASS has also been the focal point for the studies on possible social impacts o f WTO accession. I t s participation in the set up of this technical unit ensures a welcome continuity between the negotiation and the implementation phases, ensuring that the lessons learned and risks identified are not lost to policy makers.

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VII. OTHER CREDIT FEATURES

A. STEERING AND MONITORING

103. The National Steering Committee for the implementation o f the CPRGS and PRSCs (NSC) was established in 2002. I t i s chaired by the f i rs t Deputy Prime Minister, Nguyen Tan Dung, and brings together the heads o f all the relevant line ministries and government agencies. SBV i s assigned as the agency responsible, in close collaboration with the World Bank, for preparation and implementation o f PRSCs. A Deputy Governor o f SBV acts as Standing Vice Chairman o f the NSC. This quasi-advisory body has several representatives from key economic ministries and agencies, such as MOF, the Ministry o f Trade (MOT), SBV, MOLISA, the Ministry of Justice (MOJ), MARD, MOET and MOH, among others. Members o f the NSC thus have authority over the entire range o f policy areas covered by the PRSC process. The participation o f OOG and the Party's Economic Commission (PEC) in the NSC also allow for a better coordination o f policy decisions, and to elicit sufficient support for the most critical reforms. Representatives from a total o f more than 20 l ine ministries and government agencies participated in the preparation o f the proposed credit.

104. Given the intensive and cbmplex coordination that i s required to manage this very comprehensive reform program, SBV has created a Program Coordination Unit (PCU) with dedicated staff from SBV. The PCU has helped facilitate the policy dialogue o f the World Bank and donors with line ministries. The DFID and Switzerland (seco) provided financial support for the PCU during the preparation o f PRSC 4 and 5.

105. An inter-ministerial working group and a secretariat to implement and monitor the CPRGS have also been established at MPI. The inter-ministerial working group includes representatives from key economic ministries, such as MOF, MOT, SBV, OOG, PEC, MOLISA, MOJ, MARD, MOET, and MOH, among others. Three Annual Progress Reports on the implementation o f the CPRGS have been prepared by the CPRGS secretariat under the guidance o f the inter-ministerial working group. Among the goals o f the inter-ministerial working group i s the implementation o f CPRGS at sub-national levels. The CPRGS Secretariat at MPI supports provincial governments in adapting the CPRGS to their own context, and reformulating plans and budgets accordingly. Since 2003, 20 provinces have initiated this process, with financial support from donors. The integration o f the CPRGS approach into the preparation of the next SEDP at all levels amounts to scaling up the process nationwide, this time under clear planning guidelines from MPI.

106. The use o f reliable information and analysis in policy making has improved steadily over the PRSC process. Over the current cycle o f PRSCs, the government has made efforts to improve the quality o f data that can be used for monitoring PRSC outcomes. Key sources o f monitoring information for poverty and program outcomes include the biennial VHLSSs, periodic participatory poverty assessments and local consultations, enterprise surveys, public expenditure tracking surveys, as well as the progress reports from the relevant sector ministries and committees implementing the reform program. In addition, the strengthening o f management information systems for SOEs and for all public spending, both led by MOF, i s an integral part o f the PRSC program. Efforts to implement CPRGS at the provincial level rely on the development o f appropriate monitoring indicators as well. While the number o f indicators presented in the CPRGS i s much larger, these have been reduced to about 40 for monitoring PRSC outcomes at the provincial level. Many o f the indicators in th is narrower set w i l l be generated using the

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household l iving standard surveys that are being conducted biennially from 2002 onwards. At present, work i s underway to define a set o f indicators needed to monitor progress in the implementation o f the next SEDP.

B. ADMINISTRATION

107. Borrower and Credit Amount. The Borrower i s the Socialist Republic o f Vietnam and this operation i s a one-tranche Credit o f US$ 100 mil l ion equivalent that would be made available upon credit effectiveness.

108. Country Financial Accountability Assessment (CFAA). The recent integrated Public Expenditure Review-Integrated Fiduciary Assessment (PER-FA) reviewed the accounting and reporting processes in the public sector, the oversight functions in the public sector, and financial reporting and auditing in SOEs. The fiduciary r isks o f the current public financial management budgeting, accounting, reporting and auditing systems o f government are assessed as moderate.

109. The PER-FA identifies areas for continued improvement. Key areas to be addressed include unifying budget classification and accounting to ensure effective and consistent budgeting, accounting and reporting across al l sectors o f government; streamlining the internal control framework and public expenditure accounting processes, strengthening asset management, establishing public sector accounting standards in line with international standards, improving financial management reporting and use of reporting for management control, establishing an effective internal audit review function as part o f the internal control regime, and strengthening the effectiveness o f the SAV. The implementation o f the PER-FA recommendations i s being supported by the PRSC program and grant funds.

110. The PER-IFA also recognizes the recent changes to improve transparency and accountability in Vietnam. Among the most recent ones are the audit law and new anti- corruption law passed by the National Assembly in May and December 2005 respectively. The audit law significantly enhances oversight by the National Assembly and the provincial People’s Councils over public finances, and also increases public access to information on government finances. The new Anti-Corruption Law reflects strong commitment to improve the effectiveness and efficiency in using budgetary funds, including ODA. The MOF and MPI are working with other ministries to review and strengthen management and use o f budgetary and other funds. The data management, financial reporting, and internal control system o f the SBV are also expected to be further improved through a planned IDA credit, in FY08. The preparation for implementation o f the Treasury and Budget Management Information System (TABMIS) over the next few years w i l l improve public financial management and w i l l assist in establishing an integrated financial management system in Vietnam. Implementation of the computerized system i s planned for 2008-2009.

11 1. Public Procurement. Nationwide open competitive bidding in public procurement was introduced in 1996. This system was improved in 1999, by the introduction o f the concept o f the “responsive lowest evaluated bid.” Decree 66/2003/CP o f June 2003, adopted under PRSC 3, established a department o f public procurement and strengthened the procurement process by mandating standard bidding documents (SBDs) and publication o f bidding opportunities in the Public Procurement Bulletin. The SBDs for procurement o f goods were issued in September 2005. The SBDs wi l l promote consistency in the application o f procurement regulations. In

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April 2005, the government also put into use the paper version o f a Public Procurement Bulletin, which i s now proposed to be upgraded to the level o f a Procurement Newspaper, and an e- procurement bulletidwebsite has also been established. The Government has substantially unified and elevated the legislative framework for public procurement by passing a new Procurement Law instead o f the originally expected Procurement Ordinance. A decree for implementing the new law i s at an advanced stage o f preparation and i s planned to be issued shortly. The Procurement Law, which became effective on April 1, 2006, retains the improvements o f the earlier decrees and introduces some further improvements over previous legislation, most notably the establishment o f a complaint handling mechanism, albeit not yet fully independent, provisions against conflicts o f interest, clearer remedies for dealing with fraud and corruption and removing the previous requirement for mandatory joint ventures between foreign and local firms bidding on public contracts. However, i t wil l be important to restrict the use o f lesser competitive methods such as direct contracting and limited bidding, as well as the use o f merit point systems in the evaluation o f bids for goods and works. Another area to be addressed i s the prevention o f collusive practices in public procurement, particularly common place at the local level.

112. Fiduciary arrangements. Since the IMF does not currently have a program in Vietnam it i s not possible to rely on i t s assessment o f the control environment o f the SBV. However, the enactment o f the Audit Law o f 2005 w i l l assist in addressing the issues related to audit and accounting arrangements. The audit law has established the SAV as an independent institution reporting the National Assembly with the Auditor General being appointed and dismissed by the National Assembly. Audit reports w i l l be made public. The SBV w i l l also be subject to annual auditing and disclosure o f the audit reports..

113. To address fiduciary risks in the foreign exchange control environment, the Borrower w i l l maintain a dedicated foreign currency deposit account (DA) for the proceeds o f the Credit, and w i l l report on the funds flow o f the dedicated DA. The Government will, if considered necessary by the International Development Association (IDA), allow an independent external audit o f the dedicated foreign currency DA.

114. Disbursement, Reporting and Auditing Arrangements. The Credit w i l l follow the IDA disbursement procedures for development policy lending operations, and the Credit proceeds w i l l be disbursed in compliance with the stipulated release conditions. Various measures have been taken to ensure that the overall fiduciary policies and institutions are adequate to proceed with support from IDA and other development partners. The analytical underpinnings for the operation are complete: (i) the cross-cutting assessment o f the country’s development policies (social, structural and sectoral) covering the policy reforms and institutional development priorities for sustainable growth and poverty reduction has been discussed with the government in a number o f recent joint reports; (ii) an assessment o f the CFAA has been made in the 2005 PER- F A which updated the 2001 CFAA and 2002 Country Procurement Assessment Review (CPAR). Disbursement w i l l not be linked to any specific purchases and no procurement requirements w i l l have to be satisfied.

115. Deposit Account. The Borrower w i l l open and maintain a dedicated DA in U S dollars for the Borrower’s use once the Credit i s approved by the Board. The DA w i l l form part o f the country’s official foreign reserves. An equivalent amount w i l l be credited to an account of the government available to finance budgeted expenditures. If after deposit in the DA the proceeds o f the Credit or any part thereof are used for ineligible purposes, as defined in the FA, the Bank w i l l require the Borrower to either return that amount to the DA to be used for eligible purposes, or refund the amount directly to IDA.

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116. Through SBV, the Borrower w i l l report the exact sum received into the DA, ensure that a l l withdrawals are for “eligible” expenditures, indicate to IDA details o f the Treasury account to which the Vietnamese Dong equivalent o f the Credit proceeds w i l l be credited, and submit a report on receipts and disbursements for the DA. IDA w i l l maintain the right to request an audit o f the DA. These processes and controls are intended to provide assurance that IDA funds have arrived at their intended destination to be used for their intended purposes, and are subject to the Borrower’s rules and regulations.

117. Environmental Aspects. The proposed PRSC 5 supports a number o f diverse reform and policy activities and some o f them may cause significant effects (both positive and negative) on Vietnam’s environment, forests and other natural resources. Initiatives in private sector development, SOE reform, trade integration, and public sector management have potential implications for environmental quality as well as government’s capacity to address future environmental risks. To address these issues, the government i s undertaking a substantial program o f environmental capacity building. This program includes institutional strengthening, environmental and land use planning, and physical investment projects addressing environmental issues. Donor assistance to Vietnam i s strong in these areas, particularly for some o f the issues addressed through the PRSC process, such as improvements in environmental policies and their implementation, pollution prevention and control, and sustainable management o f forest and water resources.

118. Vietnam has shown strong, pro-poor economic growth, but with weak attention to i t s environmental sustainability. To continuously support Vietnam in i t s efforts to improve environmental sustainability, environmental objectives have been steadily mainstreamed in the PRSC process. These actions have related to the adoption and implementation o f a legal framework for new forest use rights o f households and communities and the transfer o f small- scale irrigation systems to water user groups. Improving environmental management i s also addressed in this and previous PRSCs, particularly as it relates to advances in environmental assessment procedures, regulations that address pollution control (on “polluter pays” fees and regulations on pollution hotspots) and the conservation and sustainable use o f wetlands. The amended LEP has been supported under the PRSC process. This Law which takes effect in July 2006, contains wide ranging improvements in environmental management in Vietnam, among them new policy tools and remedies for pollution prevention and cleanup, adjustments to cover the private sector, improved financial mechanisms for environmental protection, and raising public awareness and support for environmental protection.

119. The proposed credit continues to recognize the links between some o f i t s proposed policy actions and their potential impacts on the environment. Hence it maintains inclusive and sustainable development as one o f i t s pillars, the a im o f which i s to address social inclusion and environmental sustainability in an integrative way.

120. As additional due diligence and to ensure that gaps in the existing institutional arrangements and incentives necessary for improved environmental governance are adequately identified and addressed, the World Bank i s engaged in supporting analytical work in collaboration with the government o f Vietnam which includes the ongoing country environmental analysis (CEA), Poverty-Environment Nexus analysis, and an annual environmental monitoring series, among other analytical work. The CEA specifically targets pollution management issues within the broader context o f industrial development and urbanization (including equitization o f SOEs), environmental aspects o f trade liberalization, public participation and public awareness on environmental issues, policy and institutional capacity development regarding addressing environmental issues. The study on the Poverty-Environment Nexus targets the direct interaction

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between environmental issues and poverty specifically as it relates primarily to natural resource management (e.g. deforestation and fragile lands), and to health (e.g. indoor and outdoor air pollution and lack o f access to appropriate water and sanitation). Finally, the environment monitor series provides a snap shot o f the state of environment primarily as it relates to specific thematic areas. In the recent past, thematic areas included water and solid waste, and the current monitor i s on biodiversity.

C. BENEFITS AND RISKS

121. The proposed operation provides further support to Vietnam’s policy and institutional reforms to maintain high growth and poverty reduction. I t promotes greater internal and external competition and improves efficiency and resource allocation in the economy. Policy actions under the credit help strengthen the regulatory framework for private sector development, and enhance transparency and accountability in SOE operations and in the banking sector. I t supports the initiation o f fundamental changes in the financial sector, designed to transform the SBV into a modem central bank, strengthen the commercial orientation o f SOCBs, and develop capital markets. Overall, the increased efficiency should be reflected in increased private investment and exports. This economic expansion should be associated with additional job creation, thus providing employment opportunities for the young and growing labor force.

122. The proposed credit also promotes human development through upgrading the quality o f education (especially in poor zones), promoting inclusive education for children with disabilities, improving the access o f the poor to health services, and helping secure asset ownership through the implementation o f the new Land Law. Analytical work carried out as part o f the preparation o f the CPRGS emphasizes the importance o f addressing inequalities in health and education outcomes across regions and population groups. The actions undertaken in PRSC 5 tackle an underlying problem o f resource allocation mechanisms in the social sectors to ensure a stronger pro-poor focus. The proposed credit also encourages important policy measures leading to more sustainable management o f natural resources, including through SEAS.

123. The proposed credit w i l l continue to increase transparency and accountability o f public finances, as well as improve legal transparency and accessibility. Lack of transparency undermines effective resource allocation and service delivery at national and local levels o f government. To address these issues the credit supports actions to implement the government’s public financial management reform agenda. More effective public resource allocation i s being achieved through better coordination between five-year plans and budget formulation. And MTEFs are being employed to improve the coordination between capital and recurrent expenditures. The new Anti-Conuption Law targets greater accountability in public finance and public administration. In the legal reform area, the PRSC 5 operation supports the government’s comprehensive and ambitious agenda o f the LSDS.

124. Some o f the most important r isks accompanying the proposed credit relate to slippage in areas related to structural reform. These assume greater importance in light o f WTO accession. Benefits from WTO accession w i l l accrue only if complementary reforms take place in areas such as trade logistics, infrastructure and financial services, tax policy and administration, and reforms targeted at improving the investment climate. While many o f these reforms are in train, their pace would need to keep up with the demands o f international integration. Several new laws that support these reforms have been issued over the last two years, such as, those covering

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intellectual property, competition, investment, and enterprise regulation. I t w i l l be important that the guidelines and institutional changes that accompany these laws are completed in a manner that preserves the intent o f the laws and ensures their effective implementation.

125. The government’s ambitious objectives in terms o f economic growth could conflict with i t s efforts to increase transparency and contain the growth o f contingent liabilities. While some stakeholders emphasize the quality o f growth, the drive towards increasing i t s quantity may result in pressures to expand commercial and policy loans for infrastructure development. These pressures could reduce the overall quality o f lending, thus undermining the banking reform agenda, and resulting in substantial contingent liabilities for the government in the medium-term.

126. Another risk relates to macroeconomic management in a phase o f rapid financial integration with the world economy. In this respect, Vietnam could become a victim o f i t s own success. The strong performance o f the economy coupled with greater international exposure, may lead to excessive and potentially volatile foreign capital inflows. Such volatile capital i s expected to flow into Vietnam’s nascent securities market, and the s t i l l formalizing real estate sector, perhaps leading to irrational asset price bubbles. The ultimate deflation o f these bubbles could easily dent the confidence o f investors thereby stunting the development o f much needed modern capital markets.

127. The ambitious reform agenda supported by the PRSC process, while improving economic efficiency, could also lead to increased inequality and environmental degradation. Rising inequality could result from differential returns to educational attainment at the household level. But th is problem w i l l likely be dwarfed by increasing rural-urban disparities, leading to migration and possibly to increased urban poverty. The government o f Vietnam remains committed to social inclusion, with policies in health and education aimed at channeling more resources to the poor and improving the quality o f the services delivered. However, some key programs are under- funded. The incentives given to service providers to charge fees have not been matched by sufficient accountability on the delivery o f basic services to be provided at low or no fee. Regarding sustainability, an increasingly sophisticated legislation s t i l l needs to translate into effective administrative, economic and information tools to protect the environment.

128. Improvements in data availability and analytical work on issues arising from rural-urban disparities, included as part o f the PRSC process, should help strengthen government policies to address these problems. Similarly, the CEA as well as the policy actions on land, water, and environmental protection under the current series o f PRSCs should help address threats to sustainable resource use and environmental quality.

129. Finally, there i s a risk that in a rapidly growing economy the opportunities for graft could outpace improvements in anti-corruption policies for some time. While there has been considerable progress on enhancing budget transparency, the management o f state assets and liabilities remains weak. The emerging institutional architecture for managing and investing state capital faces governance risks. An important component o f such architecture i s the State Capital Investment Corporation (SCIC) which w i l l absorb state ownership rights in equitized SOEs from line ministries and government agencies. B y moving ownership rights out o f ministries it w i l l alleviate a conflict of interest between ownership and regulation. However, the risk i s that insufficient attention may be paid to the transparency o f i t s dealings and i t s overall accountability as a government agency. Further, rapidly emerging and fast-growing provincial investment funds could contribute to the development o f infrastructure at the local level, but their transparency and accountability are s t i l l matters o f concern.

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130. Initiatives are underway to provide effective counter mechanisms, however. A comprehensive diagnostic of corruption and i t s modalities has been completed and i t s findings publicly disclosed. An Anti-corruption Law was passed by the National Assembly in December 2005 which introduces stronger accountability requirements for heads of agencies, the monitoring of assets of senior government officials and their families, and the introduction o f a more effective whistle-blowing mechanism. The government and the Party have also asked the media to apply a more proactive approach in detecting and reporting on corruption issues. This promising anti-corruption agenda, including the wider efforts to build modem governance, would benefit greatly from continued donor engagement. A second cycle of PRSCs would be a key instrument for coordinating such donor support in an effective manner.

D. TOWARDS PRSCs 6 TO 10

131. The SEDP 2006-2010 could be used as the document of reference for the implementation of economic reforms and the alignment of donor support over the next five- year period. The adoption of the CPRGS principles in the preparation of the new SEDP signals a departure from the traditional “command and control” approach. Broad-based consultation, a strong poverty focus, the identification of the most appropriate policies to attain the chosen development objectives, and the use of a monitoring and evaluation framework, make i t possible to rely on a government planning document as the next poverty reduction strategy. Vietnam would be one of the f i rst countries making this move. The SEDP 2006-10 wi l l be formally approved by the National Assembly in i t s May-June, 2006 session. The final version i s unlikely to be very different from the previous ones, which served as the basis for consultations. The Joint Staff Advisory Note (JSAN) for the latest CPRGS annual progress report notes that staffs of the Bank and IMF are supportive of government efforts to bring these positive reforms to the planning process. This JSAN i s to be presented to the Board at the same time as the current credit. The staffs also expect to submit SEDP 2006-2010 to the Boards of IDA and the IMF for discussion as Vietnam’s next PRS once approved by the National Assembly.

132. Because of i t s broad coverage of policy areas and the multiplicity of decisions reflected in it, the SEDP 2006-2010 needs to be “translated” into a workable action plan. This requires clearly assessing the level expected for key development outcomes in each of the policy areas, as of 2011. It also requires that the key policy actions needed to attain those outcomes be identified, and their budgetary implications be evaluated. Prioritization and sequencing wi l l be essential in th is respect. For instance, the latest version of the SEDP includes three main pillars: economic, social and environmental; but the cross-cutting reforms associated with modern governance are somewhat subsumed in each of these pillars, and need to be given clear prominence. Without those cross-cutting reforms, progress in each o f the three pillars i s bound to be partial. Finally, there i s also a need to select the most appropriate indicators, from the monitoring and evaluation framework but possibly from the broader statistical system as well, in order to assess progress in the implementation of the reform agenda.

133. This “translation” of the SEDP 2006-2010 into a workable action plan should serve as the basis for the discussion of the next PRSC cycle and its contents with the government. Indeed, the SEDP wi l l only be approved by the time th i s proposed credit i s negotiated. And even then, a considerable amount of analytical work wi l l be needed to derive a broad policy matrix in each of the main policy areas. I t i s expected that the “translation” of SEDP into an outline of PRSCs 6 to 10 wi l l be jointly done by the World Bank and the donors co-financing PRSCs during

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the second half of 2006. This exercise wi l l be conducted in close collaboration with policy makers and academic researchers, and the outcome wi l l be brought to the CG meeting of end- 2006. Agreement on the possible contents of the proposed PRSCs 6 to 10 wi l l then play a s imi lar role to that of assessing triggers under the current PRSC cycle. After PRSC 6, however, i t would be possible to move back to the usage of annual triggers as the instrument of choice to decide the preparation of the next operation (Figure 2).

134. The design of the next cycle of PRSCs will also be informed by an evaluation of the current PRSC cycle. I t i s planned that such an evaluation wi l l be conducted by an independent party, and wil l seek views from the government as well as from all donors involved in the PRSC process. A similar evaluation covering the previous PRSCs had been completed in 2005 with funding from a group of donors. That study employed the standard evaluation criteria of the OECD’s Development Assistance Committee namely, relevance, effectiveness, efficiency, impacts, and sustainablility. The proposed evaluation could employ a similar methodology to update the findings of the previous study and cover the entire cycle from PRSC 1-5.

135. While it i s st i l l too early to spell out the contents of the next cycle of PRSCs, the benefits and risks identified for the current operation provide some guidance. In relation to the transition to a market economy, the focus should be on implementation. Vietnam has made a large number o f commitments in the context of WTO accession, and needs to follow through with them. Implementing the ambitious banking reform roadmap wi l l be an equally important challenge. The announced transformation of DAF into a development bank wi l l need to be closely monitored. As for SOEs, the establishment of SCIC opens the prospect of a more efficient and transparent management of state assets, with a clear separation of ownership and regulation functions and reliance on credible performance indicators to allocate capital. However, the large economic groups being created are bound to be powerful global players, and achieving an unambiguous delimitation of responsibilities and liabilities between these groups and the government i s bound to be challenging. Meanwhile, the enormous infrastructure needs of the coming period call for an effective regulation of access to networks and pricing of services. Strong incentives for private participation and transparent regulation wi l l be needed.

136. On the social front, enabling the ethnic minorities to lift themselves out o f poverty wi l l remain one of the most important objectives. Issues related to urban migration and the consequences of the registration system in relation to access to services are bound to become increasingly important. In parallel, there wi l l be a need to build the foundations for more modem social protection systems, combining the coverage of universal programs with reliance on strong economic incentives. The model being adopted for the health sector i s promising in this respect, as it involves various access modalities to the same services, from compulsory but not subsidized coverage for the formal sector, to compulsory but fully subsidized for the poor, to voluntary for the rest of the population, with partial subsidies for the near poor. A s i m i l a r model could be adopted in relation to old-age, survivor and disability pensions. The passage o f the first-ever Law on Social Insurance, in 2006, offers an opportunity to establish a system that i s financially viable and does not distort incentives. But implementing and designing such system wi l l be challenging. Preventing the degradation of natural resources and increasing the efficiency of the tools for pollution control wi l l be the main challenge in relation to the environmental pillar.

137. Last but not least, the governance area i s bound to be central in the next PRSC cycle. The relationship between planning and budgets wi l l have to be strengthened further, and the modernization of the management of public revenues and public expenditures wi l l need to be completed. The fight against corruption wi l l involve better and more accountable systems to manage state assets, especially in relation to capital investments and land conversion. A reliable

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system to monitor progress in the fight against corruption, building on the strengths of the f i rst diagnostic study while extending i t s coverage, could be set up. Streamlined administrative procedures, increased reliance on e-government and more transparent public procurement are also bound to feature prominently in the next PRSC cycle. Some o f the most difficult challenges might be associated with judiciary reform, especially in relation to the reorganization o f courts by jurisdiction and the revamping o f processes so as to enhance access to justice.

VIII. COORDINATION WITH DONORS AND STAKEHOLDERS

A. THE IMF

138. The IMF has not had a lending arrangement in Vietnam since the expiry o f its PRGF in April 2004. However, the IMF remains fully committed to continuing an effective partnership with the government o f Vietnam to support the implementation o f the CPRGS. The IMF maintains a regular policy dialogue with the government through Article IV consultations, interim staff visits, and i t s resident representative office in Hanoi, and seeks to build capacity through training activities in Vietnam and abroad. I t supplements this dialogue with technical assistance in areas o f core Fund expertise, including tax policy and administration, budget management, monetary and financial sector policy, and macroeconomic statistics. The IMF continues to cooperate closely with the World Bank in Vietnam, and to contribute actively to the broader dialogue between the government and i t s development partners. In relation to the proposed credit, the IMF has provided a Letter o f Assessment presented in Annex 1. A joint Bank-Fund debt sustainability assessment was completed in August 2005 and w i l l be updated shortly.

139. Under the framework o f enhanced collaboration, the staffs o f the two institutions have consulted closely with one another across a broad range o f issues, and have sought to maintain appropriately-aligned positions in their areas o f policy engagement. While the World Bank has taken the lead in supporting the government's structural and institutional reforms in a number o f sectors, the IMF has taken the lead in the policy dialogue on macroeconomic policies. I t has also assumed responsibility for advising on the monetary policy functions o f the SBV.

B. OTHER MULTILATERAL AND BILATERAL DONORS

140. As many as 11 bilateral and multilateral donors are expected to co-finance PRSC 5, and 15 or more o f them could support the next cycle o f the PRSC process (see Table 10). The first two PRSC operations were co-financed by thee bilateral donors, namely Denmark, the Netherlands, and the United Kingdom. These co-financiers together with Sweden contributed a total o f US$43 mill ion to PRSC 1. For PRSC 2, a total o f US$31 mil l ion was provided as grant finance by these donors to supplement the World Bank's US$lOO million. In addition to these three, ADB, Canada, the EC and Japan supported PRSC 3, mobilizing the equivalent o f US$122 million. ADB and Japan contributed through parallel lending, whereas al l other co-financiers have relied on grants. Other bilateral donors actively participated in the preparation o f this preparation, with a view to jo in the process at some point.

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141. Apart from cofinancing PRSC operations, bilateral and multilateral donors have played an important role through their involvement in the policy dialogue with the government. Donors participating in the process contributed human and financial resources to assess the policy challenges, coordinate their approaches, and discuss the options with government, across a range o f policy areas. These were chosen in accordance with their priorities and comparative strengths. The preparation o f this credit was conducted in a joint manner since i t s inception, with regular donor meetings taking place to reach consensus on how to proceed. Bilateral meetings between the World Bank and specific donors have also proved useful to share information and put to good use the combined insights and knowledge o f all the parties involved. These meetings provided the common ground on sectoral priorities and broad timetables for the present operation.

142. Preparations for PRSC 5 have built on the foundations o f the existing strong donor commitment to support Vietnam’s reform agenda in a coordinated manner. This commitment has been re-asserted, most recently, in the Hanoi Core Statement on Aid Effectiveness. I t i s reflected in the intense meeting frequency o f the different working groups that were established to coordinate the views o f co-financiers and share information pertaining to the PRSC process. Joint working groups o f donors, government and international NGOs that meet on a regular basis have helped carry the discussions on government’s plans for reforms to a wide group o f stakeholders. With the formation o f working groups organized by policy area, donors have had the opportunity to engage in discussions on reform with government counterparts on an ongoing basis. Such an arrangement i s also helping to ensure coherence across donors’ programs of support, and to mobilize funding for high priority tasks in each policy area.

C. CIVIL SOCIETY

143. The nature and contents o f the proposed credit, as well as init ial ideas for the next cycle o f PRSCs, were discussed with civi l society organizations. With the support and cooperation o f the NGO Resource Centre, a meeting was held with both international and local NGOs. The discussion revealed a diverse agenda across organizations, although wi th a common focus on poverty alleviation, human development and community participation. The NGOs participating in th i s meeting endorsed several o f the policy actions supported by the proposed credit. It was felt that the mechanism to elicit their feedback be more intensive for the next cycle o f PRSCs. There were suggestions to appoint one or two contact persons from the NGO side for the sectors covered under the PRSCs, who w i l l act as coordinators for the views of different NGOs. Issues and measures related to community participation and accountability at local levels were also discussed, and were seen as areas where the NGO could contribute more in designing policy actions to be covered under PRSCs.

144. A well-functioning mechanism i s in place in Vietnam to conduct consultations with business associations. Prior to both the year-end CG meeting between government and donors and the informal mid-year CG meeting, the Vietnam Business Forum (VBF) gathers to discuss the issues o f concern to a range o f chambers and associations representing the interests o f enterprises. The discussion i s organized around topics such as investment promotion, transparency, tax, labor and land. In each o f these areas, a l i s t o f main concerns i s assembled, and the focus i s on assessing progress towards solving them. Many o f those concerns are addressed through policy actions supported by the PRSC process. At the last VBF, in December 2005, the current cycle o f PRSC operations was discussed, and feedback from the participating chambers and associations was sought.

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ANNEX 1

VIETNAM

INFORMAL MID-YEAR CONSULTATIVE GROUP MEETING

STAFF STATEMENT

Nha Trang, June 9-10,2006

1. conditions contained in the staff statement to the Vietnam Consultative Group (CG) Meeting held in Hanoi during December 6-7,2005, which was based on the conclusions o f the 2005 Article IV Consultation.’

This statement provides an update o f the assessment o f Vietnam’s macroeconomic

I. RECENT ECONOMIC DEVELOPMENTS

2. Overall macroeconomic performance was strong in 2005 and has remained broadly favorable so far in 2006. Real GDP growth picked up to 8.4 percent in 2005, led by strong consumption and investment. Although non-oil export growth slowed in 2005, exports rebounded in the second half o f the year. With non-oil import growth slowing significantly, an improving current account, together with strong ODA and FDI, helped increase gross official reserves by more than US$2 bil l ion in 2005. These trends continued in recent months, with reserves rising by another US$1.3 bil l ion in the f irst two months o f 2006.

3. driven than in the recent past. Although food price increases that accounted for the sharp acceleration o f inflation in 2004 have subsided, rising nonfuel commodity prices have kept import prices under pressure. In addition, the major increases in public sector wages enacted in the last two years, together wi th expansionary macroeconomic policies, have spurred demand and led to second-round effects on private sector wages. Adjustments in administered prices, which need to be introduced soon, are l ikely to put further upward pressure on inflation in the period ahead.

Inflation remained above 8 percent in 2005 and appears to be more demand-

4. policy will need to remain vigilant in light of recent signs of demand-pull inflation. Credit growth fell from 41% percent in 2004 to 31% percent in 2005, and to 24 percent as o f February 2006, consistent with the SBV’s monetary program that sets this year’s credit growth target at 25 percent. However, reserve money growth picked up in early 2006 due to the sharp increase in reserves. While the SBV raised i t s discount and refinancing rates three times since end-2004, most recently in December, by a cumulative 150 basis points, these rates are s t i l l negative in real terms, and real deposit and loan rates have remained low b y recent historical standards. Even at 25 percent, credit growth i s s t i l l very buoyant, and the quality o f bank credit continues to be a major source o f risk.

Credit growth has decelerated considerably over the last year, but monetary

The 2005 Article IV Consultation was concluded on October 7,2005 and the staff papers for the consultation were published on the Fund’s external web site in January 2006.

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5. ahead. The narrowly-defined official budget deficit edged up to 1% percent o f GDP in 2005, as the large increases in public sector wages and o i l subsidies more than offset reductions in other expenditures. An increase in off-budget investment and net lending widened the overall deficit from less than 4 percent o f GDP in 2004 to about 6% percent o f GDP in 2005. The 2006 budget implies a further expansion o f the overall deficit, wi th the total stock of public debt projected to rise f rom 43% percent o f GDP in 2005 to about 47 percent o f GDP in 2006. Implementation o f the ambitious state sector investment objectives o f the draft Socio- Economic Development Plan (SEDP) for 2006-20 10, which i s currently under discussion b y the National Assembly, would l ikely keep public sector debt (excluding contingent liabilities) on a rising path over the medium term. The pressures on the debt burden would be increased by any contingent liabilities from the SOCB and SOE sectors that the government may eventually have to absorb. The amount of such liabilities i s critically dependent on the progress o f reforms in these sectors in coming years, but i s potentially quite large.

Fiscal policy was eased in 2005, and i s set to be further loosened in the period

6. Vietnam has made good progress over the last year in adopting legislation and market opening measures required for WTO compliance. The Unified Enterprise Law approved in November 2005, which i s to take effect from July 1,2006, has set the stage for a leveling o f the playing field between domestic and foreign f irms, irrespective o f their ownership structures. In addition, a new Common Investment Law, also approved in November 2005, i s expected to introduce a common investment regime for domestic and foreign investors, and should make Vietnam’s investment regime consistent with i t s international commitments. In the trade system, the recent signing o f a bilateral market access agreement with the U.S. should clear the way for the last stage o f negotiations on Vietnam’s WTO accession. With the accession, Vietnam i s expected to lower i t s trade barriers to a wide range o f industrial and agricultural products and services.

7. However, SOCB and SOE reforms have recorded mixed performance. In the banking sector, Decision 493 issued in April 2005 was a major step forward in the SBV’s efforts to bring i t s prudential regulations closer into line with international standards. To enable the authorities to assess the true size o f banks’ non-perfonning loans (NPLs), banks were required to report their N P L s based on the new standards by end-March 2006. On that basis, the SBV planned to prepare a comprehensive strategy to resolve NPLs and recapitalize SOCBs for submission to the government b y end-June. However, difficulties in the proper application o f Decision 493 appear to have delayed this process. The authorities’ announced plans to equitize all SOCBs by 2010 are another important component in their bank reform strategy. However, the state i s to retain a controlling ownership share, and the existing equitization plans provide insufficient room for participation by strategic foreign investors. In the SOE sector, the government issued a new duective in 2005 to step up equitization, established a new State Corporation o f Investment Capital (SCIC) to manage i t s stakes in equitized SOEs, and instructed SOEs to submit to the MoF audited financial reports to be used as the basis o f a performance-based rating exercise. These have all been welcome steps, which should help move the SOE reform process forward in the period ahead. However, progress towards equitizing larger SOEs has remained slow to date, and the recent formation of eight “economic groups” that are to remain wholly state-owned has probably strengthened state control over key industries.

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11. OUTLOOK AND POLICY CHALLENGES FOR THE PERIOD COVERED BY THE SEDP

8. external environment can be expected to spur a sustained pick-up o f Vietnam’s exports in the period ahead. With domestic demand growth remaining buoyant, GDP growth could reach a robust 7% to 8 percent in 2006. The current account deficit would be more than ful ly financed by ODA and FDI inflows, and reserves would increase at a brisk pace. However, expansionary monetary and fiscal policies could fuel sustained high inflation and increase the vulnerability of the fiscal and external positions. In this context, a domestic or regional supply shock or a rapid worsening o f the external environment could expose these vulnerabilities, and trigger costly adjustments, which could jeopardize the new SEDP’s poverty reduction objectives.

The near-term outlook i s broadly positive, but subject to risks. The favorable

9. The favorable external outlook makes this a propitious time for the adoption of an appropriate policy mix to mitigate the risks to the SEDP’s objectives. To promote a higher-quality pattern o f private sector-led growth, we encourage the authorities to interpret the SEDP in a flexible manner, with the main targets viewed as indicative, and policies geared to strengthening macroeconomic discipline and speeding up market-oriented reforms.

Monetary and Exchange Rate Policies

10. prudent monetary policy. The staff supports the SBV’s objective to further scale back credit growth in 2006. To meet that objective, we encourage the authorities to make more active use o f liquidity-absorbing open market operations. At the same time, banks that are rapidly increasing their lending should be required to build up prudentially adequate provisions and/or capital buffers to cover future losses and risks. In order to be effective, the SBV’s efforts to slow liquidity and credit growth w i l l need to be coupled with discontinuation o f the mandate given to the SOCBs to finance government-supported SOE projects, and a broader-based banking system reform.

The risks to inflation and the uncertain quality of S O C B lending call for a

11. A more flexible exchange rate policy i s also warranted. While the recent practice o f limiting the dong’s fluctuations vis-a-vis the U.S. dollar does not seem to have led to any significant exchange rate misalignment, a more flexible policy would serve to protect competitiveness and contain exchange rate r isks as Vietnam progressively opens up i t s trade and financial systems. To cushion the impact o f external shocks, the authorities may want to consider widening the trading band for the dong in the interbank market, and allowing banks to set customer rates freely, while limiting intervention to smoothing excessive fluctuations.

Fiscal Policy

12. T o ensure that the SEDP’s growth objectives can be attained on an enduring basis, fiscal policy needs to be streamlined and refocused on long-run sustainability. According to the staff’s preliminary debt sustainability analysis (DSA), continuation o f the recent loose stance o f fiscal policy, which could result, for example, if the SEDP’s public investment plan i s fully implemented, would probably lead to a rapid increase o f the public debt stock in relation to GDP over the medium term, and a significant expansion in the share

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o f government revenues absorbed by debt service payments. To ensure that the costs that may be incurred down the road to fund SOE and SOCB reform w i l l not crowd out more productive outlays on essential infrastructure and poverty-reduction programs, public investment should be focused on the highest-priority infrastructure projects. Projects that could be commercially viable should be increasingly opened to private participation.

13. medium term to anticipate the pressures on the revenue base associated with the leveling off of oil-related receipts. In light o f high inflation, a good part o f the large o i l windfall should be saved in 2006, and measures taken to curb expenditure growth, with a view to placing the non-oil balance on a declining path. Further increases in public wages should be phased in only in conjunction with c iv i l service reforms, and o i l subsidies scaled down by fully passing through increases in international o i l prices. There should also be room to curtail some investment expenditures b y tightening selection criteria for new projects, especially under the programs o f off-budget investment and non-ODA on-lending.

More specifically, the fiscal stance will need to be significantly tightened over the

Structural Reforms

14. Financial sector reform i s key to medium-term debt sustainability, and to a more productive use of loanable funds. Prompt measures need to be taken to value existing N P L s realistically, so that any existing capital gaps and costs to the budget can be estimated, and credible SOCB reform plans developed. At the same time, i t w i l l be important to guard against a renewed buildup o f N P L s b y eliminating residual policy lending and strictly enforcing the SOCBs’ mandate to operate on a commercial basis. Implementation o f the SOCB equitization plans could help improve SOCB governance, especially if there i s participation b y strategic foreign investors. More effective bank supervision wil l be an important complement to SOCB reforms. In this context, the staff supports plans to push ahead for greater SBV independence, and encourages the authorities to speed up introduction o f legislation to grant the SBV a clear mandate to operate as a modern central bank.

15. Faster and more market-oriented SOE reform will also be essential. We welcome the recent completion o f the first round o f a performance-based SOE rating exercise and urge the authorities to use i t s results as a basis for early equitization o f larger SOEs. We also support the authorities’ plans to adjust key administered prices, and encourage them to effect the needed adjustments soon. Looking ahead, more incentives w i l l need to be given to SOE managers to move operations onto a commercial basis. Reported plans to link the new SOE groups with SOCBs raise concerns in this regard, as such moves could further soften SOEs’ budget constraints. Additional concerns have stemmed from announced plans for other government-facilitated financing of large SOE projects, whose viability may be uncertain in the context o f increasing global competition.

16. Continuing improvements in the legal and regulatory framework and increased policy transparency and accountability would be key to improving the quality of investment and bolstering donor and investor confidence. In this regard, the staff support the government’s efforts to pursue a full investigation o f the illegal activities associated with the misappropriation o f ODA funds in the Mnistry o f Transport’s Public Management Unit (PMU) 18 and look forward to the presentation o f the government’s anti-comption summary

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at this mid-year C G meeting. To set the stage for a more generalized improvement in public sector financial management, all government-funded investment and net lending should be brought on-budget and presented to the National Assembly on a consolidated basis. Further improvements in the quality and dissemination o f data on the monetary and external sectors and the SOCBs’ and SOEs’ accounts would also be desirable.

111. CONCLUDING REMARKS

17. Vietnam has made great strides in its pursuit of growth and poverty reduction since the launching of doi moi twenty years ago, and it i s well-placed to continue to do so in the period ahead, provided that it pursues its SEDP targets with flexibility, care, and pragmatism. The outward-oriented reforms and prudent external debt management policies adopted under previous SEDPs have clearly served the economy well, and should be continued. The staff welcomes Vietnam’s recent acceptance o f Article VI11 o f the Fund’s Articles o f Agreement and i t supports the authorities’ efforts to secure WTO accession. Continuing bold liberalization o f trade and investment flows, coupled with a more prudent mix o f fiscal, monetary, and exchange rate policies and faster-paced and refocused reforms in the banlung and SOE sectors, would be the surest way to meet the new SEDP’s poverty reduction goal. While the challenges ahead may be large, and the building o f political consensus in favor o f needed measures difficult, we are confident that the government and the Vietnamese people w i l l rise to the occasion. We wish the authorities every success in these endeavors.

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ANNEX 3

1984-94 1994-04 *Oo3 2004 (average annual growth) Agriculture 3.3 4.1 3.6 3.5 Industry 6.6 10.3 10.5 10.2

Manufacturing 3.4 11.2 11.5 10.1 7.5 Services 8.2 6.0 6.5

Household final consumption expenditure 5.3 8.0 7.1

Gross capital formation 24.9 10.2 14.1 10.5 General gov't final consumption expenditure 4.0 7.2 7.8

VIETNAM AT A GLANCE

Growth of exports and Imports (YO) 40

30

20

i o o

9.q M ni 02 m 04 ~ Exports - O l l m p o r t s

POVERTY and SOCIAL Vietnam

2004 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1998-04

Population ( X ) Labor force (%)

Most recent estlmate (latest year avallable, 199804) Poverty (X of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live bitths) Child malnutrition ( X of children under 5) Access to an improved water source (% of population) Literacy (% of population age 15+) Gross primary enrollment (56 of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984

GDP (US$ billions) Gross capital formatiorVGDP Exports of goods and servicedGDP Gross domestic savingdGDP Gross national savingdGDP

Current account balance/GDP Interest payments/GDP Total debt/GDP Total debt service/exports Present value of debffGDP Present value of debvexports

1984-94 1994-04 (average annual growth) GDP 5.9 7.0

Exports of goods and services 23.8 166 GDP per capita 3.6 5.5

83.1 540

44.6

1.4 1.7

20 26 70 19 34 73

101 105 97

1994

16.3 25.5 34.0 16.0 14.5

-8.2 0.6

152.3 5.7

2003

7.3 5.9

19.6

East Asla & Pacific

1,870 1,280 2,389

0.9 1.1

41 70 32 15 78 90

113 113 112

2003

39.7 35.4 59.2 27.4 31.5

-4.8 0.7

33.5 7.8

2004

7.7 6.2

27.9

Low- Income

2,338 51 0

1,184

1.8 2.1

31 58 79 44 75 61 94

101 88

2004

45.2 35.6 66.4 28.3 32.2

-3.1 0.7

34.2 6.1

2004-08

7.5 6.1

Development diamond'

Life expectancy

GNI Gross per primar)

enrollmeni capita

i

Access to improved water source

~ Vietnam - - Low-incomegroup

Economic ratios' Tradn

~

Indebtedness

-Vietnam - Low-income group

15.0

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services Manufacturing

2o03 2o04

.. 27.4 22.5 21.8

.. 26.9 39.5 40.1

.. 14.9 20.5 20.3 .. 43.7 38.0 38.2

Growth of capltal and GDP (%) 1984 1994

Household final consumption expenditure .. 75.7 66.3 65.3 General gov't final consumption expenditure 8.3 6.3 6.4 Imports of goods and services .. 43.5 67.0 73.6

Note: 2004 data are preliminary estimates. * The diamonds show four key indicators in the country (in bold) compared with its incomegroup average. If data are missing, the diamond will

be incomplete.

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Vietnam

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall sutpluddeficit

TRADE

(US$ millions) Total exports (fob)

Rice Fuel Manufactures

Total imports (cif) Food Fuel and energy Capital gwds

Export price index (2000=100) Import price index (2000=100) Terms of trade (2000=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of gWdS and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, local/US$)

EXTERNAL DEBT and RESOURCE FLOWS

/US$ miNions J Total debt outstanding and disbursed

IBRD IDA

Total debt service iBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1984

1984

438

923

1984

-1,178

-77 26

-1,229

914 31 5

1994

9.3 17.0

23.2 4.8

-1.2

1994

4,054 429 866

1,355 6,509

696 1,772

101 99

103

1994

5,337 6,509

-1,173

-337 1 70

-1,340

1,812 -472

.. 876 1.0 10,962.1

1984 1994

55 24,799 0 0

47 181

2 306 0 0 0 1

62 449 2 100 0 -29 0 1,944 0 0

0 246 2 126 0 1 2 125 0 1 2 125

2003

3.0 6.7

22.6 5.8

-2.0

2003

20,176 721

3,821 10,748 25,227

2,433 7,984

105 100 105

2003

23,439 26,805 -3,366

-785 2,240

-1,911

3,839 -1,928

5,620 15,463.0

2003

13,293 0

2,472

1,838 0

17

139 1,373 -258

1,894 0

293 567

2 565

15 550

2004

9.5 7.9

23.1 6.6 -1.4

2004

26,705 950

5,671 14,842 31,954

3,574 8,624

107 106 101

2004

30,950 33,888 -2,938

-940 2,485

-1,393

2,087 -694

6,314 15,772.3

2004

15,478 0

3,039

,850 0

37

175 ,917

13 ,763

0

710 444

8 436 29

407

I -GDP deflator +CPl 1

I Export and Import levels (US$ mill.) 3 5 , m 30,Mo 25,wO

20.m

15,wO i 0 , m

5,000 0

Exports Imports " I Current account balance to GDP (%) I

1 98 89 00 01 02 03 04 1

Composition of 2004 debt (US$ mill.)

E: 10,404

A - IBRD B - IDA D -Other mltilaleral F - Private C - IMF

E - Bilateral

G - Short-term

Development Economics 5/25/06

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ANNEX 4

VIETNAM: KEY ECONOMIC INDICATORS, 2001-08

- - Rev. Est. Prqiected 2001 2002 2003 2004 2005 2006 2007 2008

Growth and Inflation

GDP GDP per capita Consumer price index (Dec. to Dec.)

Savine and Investment (percent of GDP) Gross investment

Public Investment Private Investment (including FDI)

Gross national savings

Fiscal (percent of GDP) Government revenues Government expenditures Overall deficit (excl. on-lending) ODA on-lending Extra budgetary outlays

External Export growth (% p.a.) Exports/GDP Import growth (% p.a.) Imports/GDP Current account balance

in US$ mill ion in percent o f GDP

of which public or publicly guaranteed Debt servicelExports of goods and services Reserves (weeks of goods and services imports)

External debt/GDP

Memo: GDP (in US$ billion)

6.9 5.5 0.8

31.2 18.7 12.5 33.3

21.6 24.4 -2.8 1 .o 1.2

4.0 46.2 2.3

48.7

672 2.1

38.5 29.9 10.6

9.9

32.5

7.0 5.6 4.0

33.2 18.8 14.4 31.3

22.7 24.1 -1.4 0.9 1.5

11.2 47.6 23.3 55.7

-672 -1.9 35.0 28.2 8.3

8.9

35.1

7.2 5.8 3.0

35.4 19.1 16.3 30.6

24.9 26.1 -1.2 1.5 3.3

20.8 51.1 27.8 63.2

-1,878 -4.8 33.8 27.6 7.5

10.9

39.5

7.7 6.3 9.5

35.5 19.2 16.3 32.4

25.2 26.0 -0.8 0.9 2.0

31.4 59.5 26.7 70.6

-1,394 -3.1 34.0 27.6 5.9

9.7

45.4

8.4 6.1 8.4

35.4 18.2 17.2 35.1

25.1 26.5 -1.4 1 .o 2.5

22.4 60.9 15.7 69.0

-166 -0.3 32.2 26.5 5.6

11.5

52.9

8.0 6.1 7.5

36.4 18.2 18.2 34.9

25.5 27.1 -1.6 1.2 2.5

18.0 63.6 20.0 73.3

-892 -1.5 32.1 26.5 5.6

13.1

59.8

7.5 6.1 6.5

36.7 17.6 19.1 34.1

25.0 26.5 -1.5 1 .o 2.2

17.0 68.2 18.0 79.2

-1,675 -2.6 32.8 27.0 5.2

13.6

65.3

7.5 6.0 5.5

36.8 17.3 19.5 34.0

24.5 26.0 -1.5 1 .o 2.0

16.0 73.1 17.0 85.0

- 1,999 -2.8 33.2 27.3 5.3

13.7

71.2

Note: Extra budgetary outlays include investment expenditure, DAF on-lending, and provincial bonds. Source: Historical data: GSO, World Bank, and IMF estimates; Projections: World Bank estimates.

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ANNEX 5 STATEMENT OF ON-GOING CREDITS

(As of April 30, 2006) Fiscal Year Purpose I D A Cancellations Undisbursed

1998 2000 2002 2005 2006

2000 2001 2003 2005 2006

1999 2001 2004 2005 2006

2006

1996 2002 2005 2006

1999 2002 2003 2005

2003 2005 2006

1998 1998 1999 2000 2001 2002 2002 2004 2005 2005 2006

Energy Power Transmission and Distribution Rural Energy Energy Efficiency and Equitization Rural Energy I1 2nd Transmission and Distribution Transport Rural Transport I1 Mekong Transport Road Network Improvement Road Safety Rural Transport 111 Urban Development 3 Cities Sanitation HCMC Environmental Sanitation Urban Upgrading Water Supply Development Rural Water Supply & Sanitation I C T ICT Development Health National Health Regional Blood Transfusion HIV/AIDS prevention Mekong Health Support Education Higher Education Primary Teachers Training Primary Education for Disadvantaged Children Targeted Budget Support for EFA PREM Public Financial Management Payment System &Bank Modernization Custom Modernization Rural Development Forest Protection Agricultural Diversification Mekong Delta Water Coastal WetlandsProtection Community Based Rural Infrastructure Northern Mountains Pov. Reduction Rural Finance I1 Water Resources Assistance Forest Sector Development Avian Influenza Emergency Recovery Natural Disaster Risk Management Total -- Current Projects

Total disbursed Total undisbursed

199.00 150.00 225.00 220.00 200.00

103.90 110.00 225.30 31.70

106.30

80.50 166.30 222.50 112.60 45.90

93.70

101.20 38.20 35.00 70.00

83.30 19.84

138.76 50.00

54.33 105.00 65.90

21.50 66.85

101.80 31.80

102.80 110.00 200.00 157.80 39.50 5.00

86.00 3977.3

Active Loans 1,186.00 2,994.17

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00

2.35 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.4

Closed Loans 2,139.58

-

87.80 33.40

193.30 218.00 202.30

15.60 62.20

215.80 29.50

109.70

44.00 159.30 207.60 111.30 46.40

96.00

14.50 38.80 30.20 72.20

3 1.30 13.90

138.40 48.80

54.10 100.30 67.30

5.27 17 .OO 42.20 10.30 65.90 60.20 7 1.90

150.20 38.50 3.40

87.30 2.994.2

Total 3,325.58

17.10 3,011.27

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ANNEX 6

SELECTED INDICATORS OF BANK PORTFOLIO PERFORMANCE AND MANAGEMENT (As of April 30, 2006)

Indicator ~

1999 2000 2002 2003 2004 2005 2006

Portfolio Assessment Number of Projects Under Implementation a

Average Implementation Period (years) Percent of Problem Projects by Number Percent of Problem Projects by Amount a,

Percent of Projects at Risk by Number Percent of Projects at Risk by Amount Disbursement Ratio (%) e

Portfolio Management CPPR during the year (yedno)

Supervision Resources (US$ million) Number of Projects Under Supervision during FY Average Supervision (US$/project)

20 21 2.6 3.0 5.0 0.0 2.4 0.0 5.0 0.0 2.4 0.0

17.3 12.0

yes yes

1.489 1.36

24 25 62042 54400

27 26 3.5 3.5 7.4 15.4 2.6 12.3

11.1 15.4 3.4 12.3

14.5 15.1

yes yes

2.046 2.305

28 32 73071 72031

26 4.2 7.0 7.0 7.0 7.0

16.7

2.387

33 72333

31 4.5 0.0 0.0 0.0 0.0

11.5

Yes

2.425

33 73485

38 4.0 5.3 5.1 5.3 5.1

10.3

0.395

38 10384

Memorandum I tem Since Last FY Five 80 FYs

Proj Eval by OED by Number 17 11

% of OED Projects Rated U or HU by Number % of OED Projects Rated U or HU by Amt

Proj Eval by OED by Amt (US$ millions) 1,879 1,207 0.0 0.0 0.0 0.0

a. At the end o f the fiscal year. b. Average age o f projects in the Banks country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance o f the Banks portfolio at the

beginning o f the year: Investment projects only. * A l l indicators are for projects active in the Portfolio, with the exception o f Disbursement Ratio,

which includes all active projects as well as projects which exited during the fiscal year. f. Actual Supervision expenditures i s as of September 30, 2005

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ANiJEx 7

NGAN HANG NHA NU& VIET NAM D j a c h i : 47 - 49 Lf Thdi Td, HA N 6 i

Tel : (84-4) 8242.479 Fax : (84-4) 8268.765

Hanoi, May 24,2006

Mr. Paul Wolfowitz President The World Bank Washington, D C

Dear Mr. Wolfowitz,

It has been two decades now since Vietnam launched Doi Moi, an ambitious economic renovation program. The objective o f Doi Moi was to rely more systematically on market mechanisms, while maintaining the poverty alleviation focus which has characterized the economic policies o f Vietnam since its independence. This combination of economic incentives and social inclusion reflects Vietnam’s determination to build a market economy for the goal o f a powerful country with a prosperous population and an equal, democratic and civilized society. While much remains to be done, economic developments have confirmed the wisdom o f the reform agenda initiated with Doi Moi. The economy has grown by 7.7 percent per year since 1991, in real terms, with GDP per capita attaining $640 in 2005, compared to $143 in 1991. The poverty rate, measured in internationally comparable terms, declined from 58 percent o f the population in 1993 to less than 20 percent in 2004. Other social indicators, like those monitored under the Millenium Development Goals, have also improved steadily. These accomplishments took place without the major turmoil experienced by several transition economies in the initial stages of their reform process, in the early 1990s. Vietnam also managed to avoid a recession during the East Asia crisis, in the late 1990s.

The proposed Poverty Reduction Support Credit (PRSC), i s the last one in a series o f five operations, fully aligned with our own planning cycle. The Doi Moi agenda for economic renovation has been articulated through a series o f Government strategies and plans. In recent times, the broadest statement was provided by the Ten-Year Socio- Economic Development Strategy 2001-2010. Key planning documents for the period covered by the current cycle o f PRSCs are the five-year Socio-Economic Development Plan (SEDP) 2001-2005, and the Comprehensive Poverty Reduction and Growth Strategy (CPRGS). The CPRGS, approved by the Prime Minister in May 2002, was presented in July 2002 to the Board o f Executive Directors o f the International Development Association, as the strategy to implement the SEDP 2001-2005. The policy actions supported by the proposed credit reflect the reform directions set out in our planning documents and in the CPRGS in particular.

Important developments and policy breakthroughs have also contributed to further shaping the reform agenda along this five-year cycle. In 2003, the CPRGS was “expanded” to include a development policy for large-scale infrastructure and review its

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role in promoting economic growth and poverty reduction. In that same year, the decision was made to accelerate Vietnam’s accession to the World Trade Organization (WTO) and this, in turn, has influenced policy actions related to international trade and the legal framework. There has also been considerable progress regarding public financial management. The Public Expenditure Review-Integrated Fiduciary Assessment o f 2005, jointly prepared by the Ministry o f Finance and the World Bank with support from several donors, is charting the way to increase the efficiency and transparency of public financial management. Since 2004, the Government Inspectorate has been leading a process to make anti-corruption policies and tools more effective. And starting in early 2005, the State Bank o f Vietnam prepared a strategy to substantially accelerate the reform of the banking system.

The proposed credit also supports some of the policy orientations being developed in view o f the next planning cycle. As Vietnam emerges from massive poverty, the focus i s moving in the direction o f becoming a middle-income country towards the end of the decade. Without downplaying the importance o f a continued and effective fight against poverty, the new orientations highlight the need for institutional development, with more appropriate mechanisms to support an increasingly sophisticated economy and modem social protection arrangements to keep development inclusive. These new orientations include the strengthening o f the legal foundations for business, a transparent financing and efficient regulation o f infrastructure, a drive towards universal systems in the social sectors, a much stronger protection o f the environment, a more transparent public administration and reduced corruption. While rapid economic growth remains a priority, the next planning cycle will also focus on the quality o f growth.

The preparation o f the SEDP 2006-2010 has actually built on the strengths o f the CPRGS. The decision to integrate the CPRGS principles and the Millennium Development Goals into the SEDP was made in late 2004. Since then, there has been a large-scale consultation process with stakeholders in and out of Government, and an active involvement o f the donor community. The new SEDP, discussed by the tenth Party Congress last month and submitted to the National Assembly for approval this month, pays greater attention to the attainment of development outcomes, over production targets. A system to monitor and evaluate the progress in attaining those outcomes is currently being set up. And for the first time, forward-looking exercises are being conducted at aggregate and sectoral levels to translate the broad orientations o f the SEDP into the preparation of annual budgets. The integration o f the CPRGS approach into the SEDP removes the need for two separate planning documents.

One o f the main objectives o f Vietnam’s development strategy under the current five-year cycle i s to complete the transition to a market economy, as reflected in Part 111 sections I and 11, and Part IV o f the CPRGS. In this respect, over the last twelve months we have come close to concluding WTO negotiations, and several important laws and regulations have been issued in preparation for accession. A level playing field i s being attained, with all f i rms and investors being treated equally, regardless o f whether they are privately owned, foreign-owned or state-owned, After having equitized a large number o f State-Owned Enterprises (SOEs), including increasingly large ones, the decision has been made to transfer the management o f state shareholder rights out o f line ministries and

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agencies, so as to avoid a conflict between ownership and regulation. In the financial sector, an ambitious reform roadmap has been adopted at the highest level o f Government. Its objective i s to separate the management o f State-Owned Commercial Banks (SOCBs) from their supervision, to create a modem central bank, and to strengthen the commercial orientation o f SOCBs through their equitization.

Another important policy objective i s to ensure that growth remains socially inclusive and environmentally sustainable. In this respect, the proposed credit i s grounded on Part 111 sections I and 111, Part IV section IV and Part V section I of the CPRGS. The credit also builds on recent decisions to combine universal systems in the social sectors, with contributions by beneficiaries towards defraying the cost of service provision, and mechanisms to finance the participation o f the poor. A sustained effort i s under way to increase the quality o f education, with an emphasis on primary schools in poorer districts. The financing o f health care is being revamped, with the introduction of health insurance to separate finding from service provision. Resources are allocated to cover the health insurance premium o f the poor and to improve infrastructure and economic opportunities in the communes facing the greatest hardship. An effort is also under way to complete the issuance o f land-use right certificates and to strengthen the management of water resources. While not as fast as it could be desired, economic and information tools to protect the environment are being developed.

Success in promoting economic growth, and in ensuring the social and environmental sustainability of development, crucially depends on building modern governance. This area i s covered in Part I11 sections I and I1 and Part VI1 section I in the CPRGS. The much strengthened process followed to prepare the SEDP 2006-2010, with its emphasis on stakeholders’ consultation and its reliance on development outcomes, i s in itself an illustration o f the drive towards modern governance. Equally important are the actions aimed at bridging the gap between planning and budgeting, through the preparation of medium-tern frameworks, and between capital and recurrent expenditures, through the development of budget allocation norms. A strategy has been adopted to develop the legal system and reform the judicial system. Its implementation will entail a substantial change in the way courts operate and will strengthen access to justice. Among the policy actions supported by this credit i s the first-ever anti-corruption law in Vietnam, including a mechanism to monitor the assets o f civil servants and their close families.

The speech of Deputy Prime Minister Nguyen Tan Dung at the opening of the ninth session o f the National Assembly, on May 16, 2006, articulated the same themes and reviewed some o f the same actions covered by the proposed credit. Deputy Prime Minister Nguyen Tan Dung i s also the Chairman o f the Steering Committee for the PRSC process. His speech to the National Assembly confirms that the proposed credit i s fully aligned with the reform agenda o f Vietnam.

Over this planning cycle, the Government o f Vietnam has regularly assessed the progress accomplished, and identified the implementation challenges faced, sharing its findings and views with the donor community. The annual CPRGS Progress Reports, presented at the Consultative Group meetings in December o f each year, have been one of the main communication channels in this respect. The latest o f these reports, produced in

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November 2005, i s currently being circulated to the Executive Directors of the World Bank and the International Monetary Fund, alongside an advisory note jointly written by the staff o f the two organizations.

The proposed credit, and the five-year series o f PRSCs more broadly, have also been an effective tool for harmonization. In the spirit o f the Paris Declaration on Aid Effectiveness and the associated Hanoi Core Statement on Aid Effectiveness: Ownership, Harmonization, Alignment, Result, PRSCs have allowed a coordinated policy dialogue between line ministries and Government agencies on the one hand and an increasingly large number o f donors on the other hand. The Government of Vietnam appreciates this increased coherence o f the policy dialogue, and the considerable reduction in transactions costs resulting from the PRSC approach.

In developing and implementing our strategy for economic growth and poverty reduction, we have benefited from assistance from the Association and a broadening range of bilateral and multilateral donors. The Association supported earlier stages o f this process through the first four PRSCs. We request the Association’s assistance through a fifth PRSC, in recognition o f the steady progress in the implementation o f our development strategy. While recognizing that many difficulties remain, we will pursue our reform agenda and plan on key actions to complete the transition to a market economy, keep development inclusive, better protect the environment, and build modern governance. We hope that we will count with the support o f the Association as we enter the next five-year cycle, with the ambition o f substantially reducing poverty and becoming a middle-income country by the end o f the decade.

In this connection, at the Consultative Group meeting o f end-2006 we will hrnish to the Association, for its review and comment, an updated CPRGS Progress Report on achievements and challenges in carrying out the program, We will also discuss with the donor community the specific development outcomes, policy actions and monitoring indicators in each of the areas of the reform program over the next five years. We expect that this discussion will lead to the preparation o f a new cycle o f PRSCs in support o f our poverty reduction and growth strategy.

We request the Association’s assistance with the proposed credit and look forward to its continued support beyond this planning cycle.

Yours sincerely,

Governor

8 1

I

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MAP SECTION

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Ngoc LinhNgoc Linh(3143 m) (3143 m)

CentralCentral

HighlandsHighlands

11

22

33

4455

66

77

8899

1010

11111212

13131414

151516161717

18181919 2020

212122222323 2424

2525 26262727

2828

2929

3030

3131

32323333

3434

3535

3636

3737

3838

3939

4040

4242

4343

4141

4444 4545

4646

4747 48484949

5050

51515252

5353

6464

5454

5555

5656

5757

58585959

6060

6161

62626363

BBllaacckk

RReedd

MMaa

LangLangSonSon

Ho Chi Minh CityHo Chi Minh City

BiBiêên Hn HòòaaThu DThu Dããuu

MMôôtt

DDôôngngXoXoááii

Tan AnTan An

Vi ThanhVi Thanh

My ThoMy Tho˜̃Long XuyLong Xuyêênn

Hai PhongHai Phong

Ha LongHa Long

Phong ThaPhong Tha

DiDiêênnBiBiêên Phn Phúú

LLàào Caio Cai

Play CuPlay Cu

BuBuôôn Man MaThuThuôôtt

Gia NghiaGia NghiaDDàà Lat Lat

VinhVinh

Vinh YenVinh Yen

Nam DinhNam DinhNinh BNinh Bììnhnh

DDôông Hng Hóóii

Kon TumKon Tum

SSóón Lan La

YYêên Bn Bááii

HHààGiangGiang

TuyTuyêênnQuangQuang ThaiThai

NguyenNguyen

`̀Cao BangCao Bang

Bac CanBac Can`̀

CCâân Tho'n Tho'

Cao LanhCao Lanh

BBêên Tren Tre,,Vinh LongVinh Long

TTâây Ninhy Ninh

ThTháái Bi Bììnhnh

Hung YenHung YenHHàà D Dôôngng

HHàà Nam Nam

ViViêêt Trt Trìì

HaHaíí D Dúóúóngng

BBáác Giangc GiangBBáác Ninhc Ninh

HHòòa Ba BììnhnhHANOIHANOI

CHINA

C A M B O D I A

THAILAND

LAOPEOPLE'SDEM. REP.

To Nanning

To Hepu

To Tiandong

To BabaoTo

Kunming To Kaiyuan

To Muang Xai

To Luang

Prabang

To Khammouan

To Savannakhet

To Kampong Cham

To KampongChhnang

An

na

m

Co

rd

i l l er

a

Hainan I.(China)

1

2

3

45

6

7

89

10

1112

1314

151617

1819 20

212223 24

25 2627

28

29

30

31

3233

34

35

36

37

38

39

40

42

43

41

44 45

46

47 4849

50

5152

53

64

54

55

56

57

5859

60

61

6263

LangSon

Ho Chi Minh City

Biên HòaThu Dãu

Môt

Phan Thiêt

DôngXoái

Tan An

Bac Liêu

Vi Thanh

Vung Tàu˜My Tho˜

Cà Mau

Rach Giá

Long Xuyên

Hai Phong

Ha Long

Phong Tha

DiênBiên Phú

Lào Cai

Quy NhonPlay Cu

Buôn MaThuôt

Gia NghiaDà Lat

Vinh

Vinh Yen

Nam DinhNinh Bình

Dông Hói

Dông Hà

Tam Ky

Nha Trang

Tuy Hòa

Kon Tum

Són La

Yên Bái

HàGiang

TuyênQuang Thai

Nguyen

C̀ao Bang

Bac Can`

Sóc Trang

Trá VinhCân Tho'

Cao Lanh

Bên Tre,Vinh Long

Tây Ninh

Quàng Ngai

Dà Nang

Hà Tinh˜

Thanh Hóa

Thái Bình

Hung YenHà Dông

Hà Nam

Viêt Trì

Haí Dúóng

Bác GiangBác Ninh

Hòa Bình

Hué

Phan Rang-Tháp Chàm

HANOI

PhuQuoc

Hainan I.(China)

CHINA

C A M B O D I A

THAILAND

LAOPEOPLE'SDEM. REP.

Mekong

Black

Red

Ma

Gul fof

Tonkin

Gulfof

Thai land

M e k o n g

De

l ta

To Nanning

To Hepu

To Tiandong

To BabaoTo

Kunming To Kaiyuan

To Muang Xai

To Luang

Prabang

To Khammouan

To Savannakhet

To Kampong Cham

To KampongChhnang

An

na

m

Co

rd

i l l er

a

Central

Highlands

Ngoc Linh(3143 m)

22°N

20°N

18°N

16°N

14°N

12°N

10°N

22°N

20°N

18°N

16°N

14°N

12°N

10°N

108°E106°E104°E

110°E108°E106°E104°E102°E

VIETNAM

12345678910111213141516171819202122232425262728293031

Lai ChauDien BienLao CaiHa GiangCao BangSon LaYen BaiTu Yen QuangBac CanLang SonPhu ThoVinh PhucThai NguyenBac GiangQuang NinhHa NoiBac NinhHa TayHung YenHai DuongHai PhongHoa BinhHa NamThai BinhNinh BinhNam DinhThanh HoaNghe AnHa TinhQuang BinhQuang Tri

323334353637383940414243444546474849505152535455565758596061626364

Thua Thien HueDa NangQuang NamQuang NgaiKon TumGia LaiBinh DinhPhu YenDac LacDac NongKhanh HoaBinh PhuocLam DongNinh ThuanTay NinhBinh DuongDong NaiBinh ThuanT.P. Ho Chi MinhBa Ria-Vung TauLong AnTien GiangDong ThapBen TreAn GiangVinh LongTra VinhKien GiangCan ThoHau GiangSoc TrangBac LieuCa Mau

PROVINCES:

0 50 100 150

0 50 100 150 Miles

200 Kilometers

IBRD 33511

NOVEMBER 2004

V IETNAM

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endorsemen t or a c c e p t a n c e o f s u c h boundaries.