Randall S. Jones
Ken Nibayashi
OECD Economic Surveys: Viet Nam 2025
Abstract
Economic growth is projected to face headwinds from weaker exports and foreign investment in 2025 and 2026 and will be driven by domestic demand. Inflation fell below 3% in late 2024 but monetary policy should remain vigilant to inflation risks against the backdrop of a 16% target for credit growth in 2025. The monetary policy framework could benefit from stronger central bank independence and a move from the current quantity-based monetary policy towards a more price-based approach, relying more on interest rates as the main monetary policy tool. A high level of corporate debt and non-performing loans (NPLs) reflect potential financial sector risks. An effective insolvency framework and decisive measures to reduce NPLs will be required to contain such risks and improve resource allocation. The fiscal stance is accommodative, due in part to rising public investment, and should gradually move towards a more neutral fiscal policy stance while standing ready to provide policy support if growth weakens. An improved fiscal framework could help to guide fiscal policy. Current tax revenues of 20% of GDP will be insufficient to improve social protection and prepare for population ageing.
Viet Nam has rebounded from negative external and domestic shocks that slowed growth to 5.1% in 2023 (Figure 1.1, Panel A). A slowdown in world trade reduced exports and imports as a share of GDP by 9 and 12 percentage points, respectively. The domestic economy was hit by financial-sector turbulence following the failure of the country’s fifth-largest bank, the Saigon Commercial Bank, in October 2022 and turbulence in the real estate sector. In 2024, GDP increased by 7.1%, surpassing the government’s 6.5% target. Viet Nam has overcome Typhoon Yagi, the most powerful storm to hit the country in 30 years. The typhoon unleashed devastating floods and landslides across northern provinces that are home to 111 industrial parks and nearly 5 000 FDI enterprises in key sectors, including electronics.
Note: In panel B, “Other” covers the change in stocks and the statistical discrepancy.
Source: CEIC; General Statistics Office of Vietnam; and OECD calculations.
Private consumption was a major driver of growth, accounting for nearly half of the increase in GDP in 2024 (Figure 1.1Panel B). Retail sales rose 9.0%, supported by a 2 percentage-point cut in the VAT. Real wage growth of nearly 3% during the first three quarters of 2024 (Panel C), buoyed by a 21% rise in public-sector wages in July 2023, also supported private consumption. In addition, the unemployment rate has remained steady at around 2¼ percent since mid-2022. Fixed capital formation accounted for another third of GDP growth in 2024, although public investment fulfilled only two-thirds of the government’s 2024 plan (Vietnamnet, 2024a). Buoyant domestic demand contributed to a rebound in industrial output, which was 8.9% higher at the end of 2024 than a year earlier.
Following a large decline in 2023, export growth of 14.3% (in USD value) in 2024 made a major contribution to the rise in industrial output (Figure 1.1, Panel D). Imports, though, increased even faster (15.4%), resulting in a negative contribution to GDP growth from trade. Viet Nam is one of Southeast Asia’s most open markets following its accession to the World Trade Organisation in 2007 and the conclusion of 17 bilateral and plurilateral free trade agreements (FTAs), with three more under negotiation. These agreements cut Viet Nam’s average applied tariff on manufactured goods from 16.6% to 1.1% (World Bank, 2024c). Viet Nam’s share of world trade climbed from 0.1% in 1996 to 1.5% in 2023, making it the world’s 19th largest exporter.
Viet Nam’s increasing share of world trade has been driven by foreign-owned companies operating in Viet Nam. Between 2015 and 2023, foreign direct investment (FDI) inflows amounted to 4.8% of GDP, a higher share than in other ASEAN countries, as well as China and India. Buoyant FDI inflows reflect in part the shift of production out of China, in part to avoid the high US tariffs resulting from the US-China trade dispute. Viet Nam has gained more FDI inflows from this diversification strategy than any other country (Kahn et al., 2024). Overall, FDI has accounted for more than half of fixed investment in Viet Nam during the past decade (see Chapter 4).
Foreign-owned firms in Viet Nam account for nearly three-quarters of the country’s exports, with a large share of them shipped to the United States. Viet Nam has gained significant market shares in US product lines where China has lost market share (Kwon, 2022). In 2024, Vietnamese exports to the United States, its top market, increased by 23.3%, boosting its share of Vietnamese exports from 23% in 2021 to 30% in 2024 (Figure 1.2, Panel A). Meanwhile, Viet Nam’s imports from China rose by 30%, indicating that some goods that China had previously exported directly to the United States are now produced in and exported from Viet Nam. Vietnamese exports to China, its second biggest export destination, grew by only 5.3% in 2024. Viet Nam’s bilateral trade surplus with the United States topped USD 100 billion in 2024, making it the third-largest bilateral deficit for the United States after China and Mexico.
Foreign-owned firms in Viet Nam have also promoted trade with other Asian countries, which account for about half of Vietnamese exports (Figure 1.2, Panel A). Indeed, the top foreign direct investors in Viet Nam are Korea (18.2% of the total stock), Singapore (15.9%), Japan (15.5%), Chinese Taipei (8.4%), Hong Kong, China (7.3%) and China (5.9%). FDI inflows have also helped Viet Nam move up the value chain in its exports, which were dominated by agricultural products and oil in the 1980s, before shifting to textiles and footwear in the 1990s and 2000s. In 2024, electronics and electrical products, telephones and parts, machinery and equipment, and transport vehicles and parts accounted for almost half of Vietnamese exports (Panel B). Viet Nam has achieved the fastest growth of medium and high-tech manufactured exports among ASEAN countries while textile, apparel and footwear exports remain significant at 15%. However, exports’ economic benefits are limited by the large share of foreign inputs, which account for about half of the value added of Viet Nam’s exports and limit the scope for productivity spillovers (see Chapter 4).
Headline consumer price inflation picked up from 3.3% in 2023 to nearly 4½ percent by mid-2024, driven in part by prices for pork, healthcare services, and housing as well as depreciating exchange rate during the first half of the year (Figure 1.3). In addition, Typhoon Yagi increased domestic production costs. Meanwhile, core inflation, which fell sharply in 2023 from its peak of more than 5%, remained below 3% throughout 2024. The decline in core inflation while headline inflation increased reflects the fact that food prices (which are excluded from core inflation) were a major factor in the rise in headline inflation, while strong wage growth may also have played a role. Headline inflation fell below 3% in the final quarter of 2024 but reached 3.1% in April 2025.
Share of total exports in 2024
Source: CEIC.
Note: Core inflation excludes food and foodstuff; energy and such items managed by the state as healthcare and education.
Source: CEIC; General Statistics Office of Vietnam; and OECD calculations.
GDP is projected to increase by 6.2 percent in 2025 and by 6.0% 2026, led by domestic demand. This reflects significant headwinds from higher US tariffs and weaker external demand that are bound to limit Viet Nam's exports (Table 1.1). A new US baseline tariff of 10% on all goods and sector-specific tariffs that will add approximately another 3 percentage points of effective tariffs on Vietnamese exports to the US are assumed to stay in place over 2025 and 2026. Even higher tariffs on Vietnamese exports remain a possibility, as these were announced but later temporarily suspended to allow time for bilateral negotiations. These higher tariffs are not part of the assumptions underlying the growth projections presented in this Economic Survey, but they constitute a significant downside risk. Private consumption will be supported by continued increases in real wages and employment. Investment will be sustained by strong public-sector capital outlays, while the prospects for foreign direct investment inflows have become more uncertain in the face of higher US tariffs.
Per cent changes from previous year unless specified
Source: OECD Economic Outlook 117 database and OECD calculations, Viet Nam Ministry of Finance.
A rising number of tourist arrivals will support consumption and investment. The number of tourists entering Viet Nam during 2024 reached 17.6 million, but remains 2.4% below the 2019 peak, suggesting room for further growth (Figure 1.4). The initial recovery in tourist arrivals after Viet Nam re-opened its borders in 2022 was initially driven by Korean and American tourists, while the number of visitors from China, traditionally the largest source of tourists, has remained below pre-crisis levels. Given that foreign tourism accounted for about 8% of Vietnam’s pre-COVID GDP, the rising number of visitors will have a significant positive impact on growth. Tourism’s direct and indirect impact is estimated to exceed 15% of GDP (VinaCapital, 2024).
In recent years, exports have benefited from FDI inflows as higher tariffs on Chinese products made Viet Nam an attractive production site for multinational enterprises, including those based in China. Higher tariffs on Vietnamese exports to the United States will weigh on export prospects as gross exports to that destination account for almost 30% of Viet Nam’s GDP, of which around half corresponds to domestic value added. Against this background, export growth is projected to slow from 15.4% in 2024 to 8.0% in 2025 and 5.4% in 2026 as exports to the United States are expected to contract. The contribution of net exports to GDP growth is likely to be negative in 2025 and 2026, although there is considerable uncertainty around the exact magnitude of higher tariffs on trade and growth (Table 1.1).
Source: CEIC.
Accommodative monetary policy and improvements in banks’ financial position will help consumption and investment to grow in 2025 and 2026. The SBV cut its policy rate from 5.5% to 4.5% during 2023. The inflation rate is projected to rise gradually over 2025 and 2026, while remaining below the target range of 4.5-5.0% amid low unemployment. Fiscal policy will also support growth, in part through increased public investment, as the government offsets past undershooting of investment plans to fulfil the targets set in the Socio-economic Development Plan for 2021-2025. In March 2025, the authorities ordered steps to resolve 1 533 stalled investment projects (Vietnamnet, 2025).
Given Viet Nam’s lack of seasonally-adjusted quarterly national accounts data, the timely assessment of current economic conditions and identification of turning points in key macroeconomic variables, such as quarter-on-quarter changes in GDP, is difficult. Economic variables in all countries are influenced by systematic and recurrent within-year patterns due to weather and social factors. In Viet Nam, the first and third quarters tend to be stronger than the second and fourth. When seasonal variations dominate period-to-period changes in the seasonally-unadjusted series, it becomes difficult to identify non-seasonal effects, which reveal the most important economic signals. Removing the seasonal effects makes short and long-run trends more visible. In the absence of seasonally-adjusted figures, Viet Nam provides annual rates of change (the current quarter compared to the same quarter in the previous year) in its national accounts. However, such an approach gives outdated information and does not fully exclude calendar-related effects, such as the number of working days in a quarter (IMF, 2017). This is particularly important in Viet Nam, which celebrates a number of traditional festivals that are based on the lunar calendar. The publication of seasonally-adjusted quarterly national account data using international best practice would improve transparency and provide a better information basis for macroeconomic policies.
As a trade-dependent economy, and despite the absence of notable macroeconomic imbalances, Viet Nam remains exceptionally vulnerable to developments in global trade. Indeed, its exports jumped from 67% of GDP in 2012 to 87% in 2023 (Figure 1.5). Growth depends to an important degree on external demand, especially from the United States and China, Viet Nam's largest export destinations. Risks are tilted to the downside as the projected slowdown in exports could turn out to be much more pronounced than currently anticipated and lead to lower growth, especially if investment and the labour market were to weaken substantially. Other geopolitical risks also remain elevated. An intensification of the conflicts in the Middle East or Russia’s invasion of Ukraine could disrupt global energy markets, with both direct and indirect negative impacts on Viet Nam. Renewed downward pressure on the exchange rate could pass through into higher inflation, leading to a tighter monetary policy stance.
Source: OECD, Economic Outlook database; World Bank, World Development Indicators database; and CEIC.
Domestic risks are primarily related to financial markets, which are, in turn, linked to the housing market. Effective financial sector reforms could improve resource allocation, leading to faster productivity and output gains. However, the financial sector also poses potential threats to economic stability. The share of loans that are non-performing doubled between the end of 2022 and 2024, due to natural disasters such as Typhoon Yagi, real estate turbulence and the failure of the fifth-largest commercial bank. Deteriorating asset quality, potentially exacerbated by less favourable export prospects, could weaken banks' lending capacity, although recent legislative changes aimed at mitigating these risks have been introduced. Banks also face risks from the rapid growth of corporate debt. Consequently, the share of firms with an interest coverage ratio below one has doubled from 5% to 11%, the largest increase among Viet Nam’s peers (IMF, 2024b). Persistent weakness in the corporate bond market could also limit corporate access to financing. Energy supply constraints are another risk that could hamper the growth of manufacturing exports. In addition to these risks, there are low-probability events that could lead to major changes in the economic outlook (Table 1.2).
Viet Nam’s monetary policy framework is unique in many respects. The central bank – the State Bank of Viet Nam (SBV) – is a ministerial organisation of the central government, and its independence is not explicitly defined. The SBV governor is a member of Cabinet appointed by the National Assembly based on the Prime Minister’s proposal. The National Assembly is responsible for monetary policy, including determining policy targets based on government projections. The 2010 Law on the State Bank of Viet Nam states that its objective is to maintain “the stability of the national currency value, which is denoted by the inflation rate” (SBV, 2025). The National Assembly set the 2025 inflation target at 4.5-5.0%, up from the 2024 range of 4.0-4.5%. The upper limit is considerably above the average annual rate of 3.2% recorded over 2012-24.
The SBV uses a range of instruments to control inflation. Monetary policy is implemented partly by setting annual credit growth targets for banks, both individually and collectively. A December 2024 SBV document stated that “credit growth should be aligned with the Government priorities” (SBV, 2024). Credit growth targets are currently the best indicator of the monetary policy stance. Since 2011, the SBV has also imposed an interest rate ceiling on bank deposits of up to six months, on the grounds that it prevents weak banks from undermining their financial position by competing for deposits. In addition, the SBV caps banks’ short-term lending rates for a number of priority sectors to support individuals and businesses. This also influences credit growth (OECD, 2023b). Furthermore, the SBV sets policy interest rates, namely the refinancing, discount and overnight rates, but the effect of these rate changes is effectively dominated by the explicit quantitative credit targets. The sharp increase in domestic credit relative to GDP during the past decade suggests an expansionary monetary policy stance (Figure 1.6, Panel A). In addition, the central bank periodically intervenes in the foreign exchange market to limit exchange rate volatility.
Source: Panel A -- World Bank, Domestic credit to private sector (% of GDP), accessed 4 January 2025; Panel B – State Bank of Viet Nam.
1.3.1. Monetary policy should remain vigilant to potential inflationary pressures
With the outbreak of the pandemic, the central bank reduced the refinancing rate from 6% to 4% during 2020 (Figure 1.6, Panel B). The interest rate cut was quickly reversed in the autumn of 2022 as headline and core inflation increased significantly, driven by rising energy and commodity prices. Viet Nam’s inflation rate is very sensitive to shifts in such prices (OECD, 2023b). With inflation receding in the first half of 2024, the SBV moved to an accommodative stance in June 2023; it raised credit growth targets for banks and cut the refinancing rate to 4.5% (Figure 1.6, Panel B). Despite a spike in headline inflation in the first half of 2024, these policies were maintained. Seeing through these inflationary pressures from volatile items has paid off, as headline inflation slowed in the second half of 2024.
With a robust recovery in place, the focus should be on closely monitoring inflation risks, which could arise from the 15% hike in pensions, the largest ever, in July 2024. At the same time, the minimum wage rose by 6% on top of a 21% increase in 2023. Hikes in administrative prices are expected in 2025. In addition, the accommodative monetary policy stance may lead to exchange rate pressures that could feed into domestic inflation. Other international factors, such as a renewed spike in energy prices and global geopolitical tensions, could also generate higher inflation. Viet Nam’s currency faced downward pressure in 2024 despite foreign exchange intervention.
Viet Nam’s exchange rate arrangement is classified by the IMF as managed floating (IMF, 2024b). The SBV conducts foreign exchange policy to promote macroeconomic stability and support economic growth. In 2021, the SBV stated that “it will continue to manage exchange rate policy within its general monetary policy framework to safeguard the proper functioning of the monetary and foreign exchange markets, to promote macroeconomic stability and to control inflation, not to create an unfair competitive advantage in international trade”. Viet Nam’s exchange rate flexibility has gradually increased, with the SVB widening the exchange rate band from ±1% of the central parity rate to ±3% in 2016 and further to ±5% in 2022. In addition, the central parity rate has been adjusted daily since 2016 based on a weighted average of movements in the VND vis-à-vis the currencies of eight important trading partners and domestic macroeconomic conditions.
Viet Nam’s currency has depreciated by more than 10% in nominal terms against the USD since the beginning of 2022, roughly in line with its ASEAN peers (Figure 1.7, Panel A). The downward pressure on the VND was driven by short-term capital outflows as interest rates in advanced economies increased as they overcame the COVID-19 pandemic and central banks started to fight rising inflation. Downward pressure on the VND continued in the latter part of 2024 as the cuts in Viet Nam’s policy interest rate matched or exceeded those in the United States and Europe. Although foreign direct inflows have so far remained strong, the capital and financial account balance turned negative in 2023 and 2024 (Panel B).
Note: Panel A shows the exchange rates of the currencies of Indonesia, Thailand, the Philippines and Malaysia in addition to the Viet Nam. A decline indicates a depreciation of the currency. In Panel B, loans are medium and long-term. The figure for 2024 is an estimate by the IMF.
Source: Panel A – CEIC; Panel B, IMF (2024b).
The extent of depreciation was limited by the SBV, which intervenes in the foreign exchange spot market when the currency hits the upper bound of the exchange rate band, with the aim of supporting market liquidity and maintaining exchange rate stability over time. The central bank spent an estimated USD 9.4 billion on its interventions in 2024. In addition, the SBV used open market operations to raise the interbank rate towards the policy rate (the refinancing rate).
1.3.2. Improving the monetary policy framework
Viet Nam has a complex monetary policy setup that uses a range of instruments, including credit growth ceilings for individual banks, a policy interest rate, a refinancing rate, interest rate caps on short-term bank deposits of up to six months, exchange rates, reserve requirements, open-market operations, and other instruments. This framework has limited inflation to an annual average growth rate of 3.2% since 2012, in line with SBV targets. Emerging market economies tend to be vulnerable to external shocks, such as swings in cross-border capital flows. Some studies suggest that, under Viet Nam’s current monetary policy framework, the impact of external shocks on inflation and other economic indicators is likely to be smaller compared with a policy of relying solely on interest rates (Epstein et al., 2022). Moreover, credit growth ceilings on individual banks may prevent weak banks from lowering their lending rates in an effort to grow, thereby reducing financial risks. However, reliance on credit ceilings has costs and can be inefficient, in part by delaying the development of financial markets (see below). Such risks would be better managed by fine-tuning regulation and supervision.
International experience suggests that foreign exchange intervention can help smooth excessive short-term fluctuations, thereby contributing to macroeconomic stability. However, if intervention is used to counter longer-term trends, it may negatively influence investors’ assessment of currency risks and heighten financial market vulnerabilities (OECD, 2023b). Intervention may not always effectively stabilise exchange rate movements resulting from structural factors, and risks wasting valuable foreign reserves. While Viet Nam’s foreign debt is in line with its ASEAN peers, its foreign reserves cover only three months of imports (Figure 1.8). According to the IMF, Viet Nam’s foreign exchange reserves “are assessed to be moderately below adequacy at end-2023” (IMF, 2024b). Finally, the multiple objectives in a monetary policy framework based on credit ceilings and foreign exchange intervention reduce clarity in communications and the effectiveness of monetary policy (IMF, 2024b).
Source: OECD (2024), OECD Economic Surveys: Indonesia, OECD Publishing, Paris.
To further enhance its resilience, Viet Nam should continue modernising its monetary policy framework in the medium to long-term as its financial markets develop and become more competitive. A number of Eastern European countries have successfully made such a transformation in their monetary and foreign exchange frameworks (Box 1.1). The priority is to move away from the current quantity-based monetary policy towards a more price-based approach, but the getting the sequencing of reform right is crucial for success. Having a well-developed interest rate setting framework and efficient credit markets in place is key before such a move could be undertaken. Moving towards a price-based approach requires phasing out bank-specific credit growth targets to enhance the efficient allocation of capital through the banking system. Rather than limiting credit growth, the bank-specific ceilings have incentivised banks to extend credit so as to not lose their quota or have it reduced (IMF, 2024b). Banks’ efforts to meet their ceilings thus create distortions by supporting unproductive sectors and weakening balance sheets. At the same time, phasing out the ceilings creates a risk that weaker banks, including those owned by the state, could lend too generously, especially given the traditional reluctance of the SBV to raise interest rates. This, in turn, could attract portfolio inflows and lead to exchange rate appreciation. In December 2024, the SBV reaffirmed that it will create a roadmap to limit and eventually eliminate the practice of assigning specific credit growth targets to individual credit institutions (SVB, 2024). However, no mention was made of phasing out the overall credit growth target, which would be more difficult to achieve in the absence of targets for individual banks. Strengthening the SBV’s supervision of banks and its capacity to manage risks would facilitate the removal of credit ceilings. Macroprudential policies, such as countercyclical capital buffers and loan-to-value and debt-to-income limits on borrowers, would enhance the SBV’s capacity to manage risks, particularly those arising in the real estate sector.
With the collapse of communism, Eastern European countries faced the challenge of integrating into the international monetary and trading systems. The first step was to establish functioning central banks. Mandating central bank independence was one of the most important measures leading to a successful transition. Studies have shown that central bank autonomy is correlated with lower inflation, which in turn is correlated with subsequent real GDP growth. Poland’s central bank law established the independence of its governor in 1989 and Czechoslovakia took similar steps in 1990.
To maintain low inflation and a stable currency, the new central banks had a choice of a fixing the exchange rate or targeting money supply growth.
An exchange rate peg had the advantage of being the simplest to implement and easiest for the population to understand. However, this required strict fiscal discipline, which was difficult economically and politically. Moreover, it requires ample foreign exchange reserves to defend the currency.
Targeting a monetary aggregate could help maintain low inflation, while a flexible exchange rate made it easier to adjust to external shocks. However, this approach was susceptible to fluctuations in money demand.
Most transition countries, experiencing a “fear of floating”, chose to fix or manage their exchange rate. In addition, a number of countries opted for a fixed exchange rate to promote integration with the European Union. Poland and Czechoslovakia initially chose a currency peg and later moved to a crawling band. However, the more advanced fixed-rate economies experienced significant capital inflows, putting pressure on domestic demand and making it harder to keep inflation low.
Faced with this new challenge, transition countries, beginning with Czechia (in 1997) and Poland (in 1999), began to choose an inflation targeting strategy, following global trends. The introduction of inflation targets was followed soon after by a shift to a floating exchange in both countries. Other transition countries were slower to introduce inflation targeting as they lacked the necessary prerequisites: i) central bank instrument autonomy, which allows it to make policy decisions without political interference; ii) well developed debt and securities markets; iii) established frameworks for transparency and accountability; and iv) fiscal dominance, which occurs when a country has a large government debt and deficit that forces monetary policy to focus on keeping the government out of bankruptcy rather than achieving the inflation target.
Source: International Monetary Fund (2014).
In addition to strengthening monetary policy transmission and reducing credit distortions, the reform of the monetary policy framework would allow for a more flexible exchange rate arrangement. As Viet Nam’s global trade linkages expand further, such flexibility is essential, as it would allow the currency to depreciate when the terms of trade worsen. This would make exports more competitive and provide a better cushion against external shocks compared to its current managed floating exchange rate system. Consequently, domestic financial conditions would be less affected by global financial shocks under a flexible exchange rate arrangement. Moreover, a more flexible exchange rate arrangement would allow the SBV to focus more on the inflation target, leading to more stable macroeconomic conditions, and would avoid the costs of intervention, which can be significant (OECD, 2023b).
The reforms of the monetary policy framework should be accompanied by greater operational central bank independence. Inflation is lower and more stable in countries where central banks conduct monetary policy independently (IMF, 2024a). In 2018, the National Financial Supervisory Commission’s strategy to 2025 stated that “The Strategy also aims to gradually increase the independence, the autonomy and accountability of the SBV for the purpose of managing monetary policy and controlling inflation at an appropriate level” (NFSC, 2018). The objective should be to clearly mandate the SBV’s operational independence to achieve the policy goals set by the government and the National Assembly (IMF, 2024b). This could be accomplished by establishing a monetary policy committee as a collective decision-making body appointed by the National Assembly and given operational autonomy. Reforming the banking sector is essential to improve the transmission mechanism for monetary policy.
A well-developed financial market is a prerequisite for an effective monetary policy framework. Viet Nam’s economic success has been driven in part by the availability of affordable credit from its financial system. By 2023, credit to the private sector reached 130% of GDP, well above the median for emerging market economies (IMF, 2024b). Outstanding private-sector debt has increased at a 15.5% annual rate since 2013 (Figure 1.9, Panel A). Corporate debt, including both bank lending and bond financing, rose from 43% of GDP in 2014 to 78% in 2023 (Panel B). Viet Nam’s corporate debt ratio exceeds that of Malaysia (55%) and Indonesia (22%), though it is less than Thailand’s (85%) (AMRO, 2024), and the share of firms with an interest coverage ratio below one more than doubled over 2017-23, as noted above. This strong credit growth may hint at loose monetary policy in the past.
The highly leveraged corporate sector has experienced a series of shocks, notably the COVID-19 pandemic, the decline in exports in 2023 and real estate market turbulence. The real estate market had boomed during the decade prior to the pandemic, as rapid economic development enabled the growing middle class to move from the countryside to apartments in urban areas. Real estate firms relied primarily on bank lending to meet the surging demand. By 2022, one-third of corporate debt was in the property and construction sector (Figure 1.10). When the pandemic hit, housing sales plummeted and highly leveraged real estate companies were unable to borrow, prompting them to turn to the bond market, creating new problems (see below). Other factors undermined the real estate sector. First, the default of Evergrande, China’s second-largest property developer, in 2021 further weakened consumer and investor confidence in Viet Nam. Second, SVB’s policy interest rate jumped from 4% to 6% in mid-2022, as the central bank tried to stabilise the currency in the face of downward pressure as high-income countries raised their interest rates in the face of rising inflation. Third, official investigations uncovered fraudulent practices in the real estate industry, which led to the fall of the Saigon Commercial Bank.
Note: Total private-sector debt comes from both bank lending and bond financing.
Source: AMRO (2024).
In 2022, the number of newly licensed and newly completed housing projects both plunged by 90%. In the first two months of 2023, 235 real estate firms went out of business, 20% more than during the same period of 2022. Consequently, numerous housing projects have been put on hold, stranding homebuyers. The 2024 amendments of the Land Law, the Law on Housing, and the Law on Real Estate Business aimed at reducing bottlenecks that constrain new housing projects and limit supply. In addition, the new laws are expected to reduce legal uncertainty and enhance transparency in real estate transactions. Nevertheless, the real estate sector is likely to only fully recover over the medium term, given the severity of its problems (IMF, 2024b). With urban areas accounting for only 40% of Viet Nam’s population, a strong real estate sector is essential to supply housing for further urbanisation.
Source: AMRO (2024).
The troubled real estate sector has contributed to the rise in banks’ non-performing loans (NPLs) and added to financial stability risks. Total NPLs, including restructured loans and those held by the Viet Nam Asset Management Company (VAMC), reached 7.1% of total loans in March 2024 before declining to 5.4% of total loans at the end of 2024. On-balance sheet NPLs, doubled from 2% at the end of 2022 to 4.6% in late 2023, the highest level in ten years. Although it fell to 4% at the end of 2024, it was still well above the ratio in other emerging economies (Figure 1.11) Excluding banks under central bank control (notably the Saigon Commercial Bank), the ratio was below 1.6%.
In April 2023, the SBV issued a circular stating that credit institutions may restructure loan repayment terms, such as the amount and due dates, without changing loan classifications. This policy was prolonged until the end of 2024. The outstanding balance of restructured loans with unchanged classifications fell from VND 114,458 trillion in July 2024 to VND 74,413 trillion (0.2% of total loans) by the end of January 2025. The forbearance policy was designed to assist borrowers experiencing financial distress, particularly those assessed as having the capacity for recovery and debt repayment following a restructuring period. Concurrently, the SBV is in the process of amending the law to incorporate provisions that authorise credit institutions to seize collateral to enhance debt recovery mechanisms, replacing an earlier provision that expired.
However, experience in many countries shows that a policy of forbearance can pose economic risks as it can hide the true scale of NPLs and the costs they impose. Forbearance can enable non-viable firms to remain in business, but it also has a negative effect on bank profitability. As such, it can also trap capital in low-performing (zombie) firms, resulting in a misallocation of capital. Forbearance always involves trade-offs. Banks should focus their efforts at debt collection and collateral liquidation, which requires enhanced supervision of individual banks by the SBV. The SBV’s recent announcement that it will conduct unscheduled inspections of credit institutions to ensure their compliance with monetary and banking regulations beginning in February 2025 is a welcome step in this regard.
Note: End of 2004 for Viet Nam. EME represents emerging market economies.
Source: CEIC.
The resolution of NPLs could be accelerated by increasing sales to the Viet Nam Asset Management Company (VAMC) and developing debt trading markets. Under current regulations, the VAMC can purchase NPLs from credit institutions through two methods, either at book value in exchange for special bonds issued by VAMC, or -since 2017- at market value using other funding sources. Since its establishment in 2013, the VAMC has played a crucial role in buying NPLs from credit institutions but their role remains somewhat passive, with the transfer of NPLs being only temporary. Unresolved NPLs are returned to the credit institutions after five years (OECD, 2023b). Viet Nam may want to consider the active role played by the Korea Asset Management Corporation (KAMCO), which negotiated the purchase of NPLs from banks at a discount following the 1997 Asian financial crisis. After restructuring, KAMCO sold the loans and recovered the public funds it had used to purchase the NPLs (OECD, 2001).
Enhancing the effectiveness of the debt enforcement and insolvency frameworks remains crucial to deal with highly leveraged firms and help banks promptly address NPLs (IMF, 2024b). Viet Nam’s slow insolvency procedures tend to lower the value of NPLs. The court process for bankruptcy is rarely used as it is cumbersome and time-consuming. Viet Nam could consider creating a fast-track insolvency process (OECD, 2023b). Finally, a real estate market recovery is essential to reduce the number of new NPLs.
Strengthening capital buffers would help to ensure the resilience of banks in the face of rising NPLs (AMRO, 2025). Sufficient capital buffers are key to allow banks to implement effective debt restructuring without jeopardizing their ability to operate. The SBV set their minimum capital adequacy ratio (CAR) requirement at 8% in 2020, in line with Basel II provisions. For commercial banks, the average CAR fell from around 13% in 2013 to 10.5% at the end of 2019 (Figure 1.12). However, since the official introduction of the CAR, the ratio has been rising. For state-owned banks, the ratio was stable before returning to a double-digit level in mid-2024. Overall, the CAR of banks has satisfied the Basel II criteria. However, the CAR for Vietnamese banks remains weak and is much lower than the weighted average of 19.4% in other major ASEAN economies (IMF, 2024b). Given the risk that NPLs will erode their capital, 26 of 27 listed banks had ramped up their provisioning efforts by the end of 2023 (AMRO, 2025). The SBV expects to issue a circular on CAR under the Basel III framework in 2025. Bank capital could be increased by promoting foreign strategic investment in local banks and encouraging banks to introduce Tier-1 capital through retaining profits, reducing dividend payouts and raising equity through public offerings (AMRO, 2025).
Viet Nam’s banking sector plays the dominant role in its financial system: bank-based financing amounts to around 125% of GDP compared to only 30% for market-based financing (Chapter 4). Compared with other ASEAN countries, the evolution of Viet Nam's financial market has been driven primarily by banks (OECD, 2023b). Well-functioning equity and bond markets would improve resource allocation and make the domestic private sector more productive, particularly given that state-owned commercial banks account for 40% of banking-sector assets. The capitalisation of the stock market, which was established in 2001, was 41% of GDP in 2022, below the Philippines (59%), China (64.1%), Malaysia (94%) and Thailand (122%), but nearly on par with Indonesia (46%) (World Bank, 2024d). Former state-owned enterprises account for a majority of listed firms in the Viet Nam stock market. While the Singaporean stock market is classified as a developed market, and the Philippines, Indonesia and Malaysia as emerging markets, Viet Nam remains a “frontier market”. Frontier markets are considered to be too small, risky, or illiquid to be classified as an emerging market. In order to meet the target of achieving emerging market status by 2025, the government has taken steps to restructure the stock market, address the operating methods of member companies in the exchanges, and strengthen supervision and inspection of listed companies since 2022.
Note: There is a break in the series when capital adequacy requirements entered into force in January 2020.
Source: CEIC.
The bond market took off during the pandemic (Figure 1.13, Panel A), boosting its share of corporate debt from around 1% in 2019 to more than 5% in 2023. The growth is attributed to a tightening of bank lending standards and stronger demand associated with investors’ search for higher yields in the low-interest rate environment during the pandemic (AMRO, 2024). Most investors in the bond market are domestic financial institutions, including banks. However, problems in the real estate sector caused a loss of confidence and turbulence in the bond market. Indeed, the real estate sector accounted for a quarter of corporate bond defaults (Panel B). Defaults could rise further as bonds issued by real estate developers account for the bulk of maturities in 2025.
After freezing in late 2022, the corporate bond market has been gradually recovering, with bond issuance resuming in the latter half of 2023. The government launched policies to facilitate payment deferrals and bond restructuring, which centred on the real estate sector. The 2023 Securities Market Development Strategy towards 2030 includes plans to implement higher requirements for issuance, disclosure and credit rating to improve the quality of bond products. This should enhance transparency, the capacity of the regulators, and consumer protection, helping restore investors’ trust in the corporate bond market and promote public offerings. In addition, it is important to limit the contagion of real estate market instability on financial markets, in part by actively implementing the new laws on land, housing and real estate companies, thereby promoting the recovery of the real estate sector.
Another potential source of concern is the government bond market, which is essential for monetary policy transmission. The yield on the 10-year government bond remained below 3% -- negative in real terms -- in 2024 due in part to large purchases by the public pension system. Establishing a strong fiscal framework would help create an active government bond market and attract more investors.
Note: Panel B shows the status of corporate bonds as of 31 May 2024.
Source: Panel A – AMRO (2024); Panel B – FiinRatings (2024).
1.5.1. Moving towards a neutral stance while standing ready to provide support if needed
A decline in government spending since the mid-2010s has reduced the general government budget deficit, which was 6% of GDP in 2013, and government debt (Figure 1.14). In 2022, the federal government budget recorded a surplus, despite the fiscal impact of the COVID-19 pandemic. The relatively modest spending response in 2020-22 reflected the government’s decision to reallocate spending from other areas to address the pandemic and to use state-owned banks and extra-budgetary funds to provide additional financial support to affected households and firms. As a result, government spending’s share of GDP in 2022 was below its pre-pandemic level.
Countercyclical stimulus led to a federal government budget deficit of 3.4% of GDP in 2023, reinforced by a decline in government revenue as a share of GDP, reflecting the downturn in the real estate sector. In 2024, the deficit is estimated to have remained around 3½ percent of GDP (Table 1.1). Government spending edged up as a share of GDP in 2024, as public-sector wages jumped 30%, on top of a large increase in 2023, in an attempt to reduce the gap between private and public-sector wages. The public wage increase is estimated to cost about 1.6% of GDP over 2024-25 (IMF, 2024b).
Government spending in 2025 is expected to be driven by an acceleration of public investment, which lagged behind schedule in 2024. The Ministry of Finance announced a reduction of other expenditures to allow increased spending on development projects in 2025, especially in infrastructure and national security. Nevertheless, the federal government budget deficit is projected to rise to around 4½ percent of GDP in 2025 and 2026 (Table 1.1). The strong economic growth that surpassed expectations in 2024 suggests reconsidering the need for continued fiscal stimulus and moving to a more neutral fiscal stance. At the same time, recent tariff hikes will weigh on growth outcomes in 2025 and 2026, with substantial downside risks around these projections. Fiscal policy should therefore remain flexible and stand ready to support growth if needed, for example through a further frontloading of public investment.
Source: General Statistics Office of Viet Nam.
1.5.2. Upcoming spending needs will challenge longer-term debt sustainability
In most societies, demand for social protection tends to rise as incomes improve. Despite sustained strong growth over decades, Viet Nam’s social safety networks remain in an early stage both with respect to coverage and benefit levels (Chapter 2). Current social protection instruments are generally weak and will leave many future retirees without an adequate pension, or without any pension at all. Even current pension liabilities will need to be funded by general government revenue once the assets of the under-funded pension system are exhausted.
Demographic developments are likely to reinforce calls for better social protection. At present, Viet Nam has a relatively young population. In 2021, Viet Nam’s elderly dependency ratio (the number of persons aged 65 and over relative to the 15–64-year-old population) was 15%, well below China (20%) and the OECD average (28%) (Figure 1.15). By mid-century, Viet Nam’s elderly dependency ratio is projected to reach 32%. In the absence of improvements in old-age pensions, this would significantly raise the financial burden on families to sustain their elderly relatives, as family support is currently the main source of income of those who are no longer able to work.
Note: The old-age dependency ratio is defined as the number of persons aged 65 and over relative to the 15-64 years old population.
Source: United Nations, Department of Economic and Social Affairs, Population Division (2022). World Population Prospects 2022, Online Edition; World Bank, World Development Indicators database.
Viet Nam’s still relatively small social safety net compared to other countries is reflected in low government spending, which at 20% of GDP in 2023, was only about half of the OECD average (Figure 1.16). Its government debt is also low relative to OECD countries and ASEAN peers, where debt has risen since 2015 (Figure 1.17). By contrast, public debt in Viet Nam fell to 33.5% of GDP in 2023, well below the debt ceiling of 50%, as the declining share of government spending in GDP and robust economic growth led to favourable debt dynamics.
Source: International Monetary Fund, World Economic Outlook Database, October 2024.
The recommendations in this Survey are expected to affect both the expenditure and the revenue side of public accounts, although not all of them can be quantified with sufficient certainty. The fiscal impact of selected recommendations made in this Survey, including in the following chapters, is presented in Table 1.3. The effect on spending over the next three-to-five years is estimated at 6.0% of GDP, while longer-term spending needs in the context of population ageing and the green transition are likely to be larger.
Source: IMF Global Debt Database, December 2024.
Source: OECD estimates.
Safeguarding the sustainability of public debt in the long run, however, is likely to require policy changes in response to Viet Nam’s longer-term spending challenges, as suggested by debt simulations undertaken for this Survey (Figure 1.18). Although hard to quantify and dependent on policy choices, population ageing is likely to have a significant long-run impact on the trajectory of public social spending, which was only 6.4% of GDP in 2016 (the latest available data). One illustrative assumption could be that social spending gradually rises to 10% of GDP by 2060, which is still low in comparison to other countries with age structures and income levels similar to those that Viet Nam will have in 2060. In addition, the debt simulations assume that other expenditures rise by 3 percentage points of GDP, mostly reflecting additional spending needs in education and to finance the transition towards a carbon-neutral economy (Chapter 3). Assuming that there are no additional fiscal measures to compensate increased spending, government debt would exceed 120% of GDP by 2060 in the current policies scenario (Figure 1.18, red line). In other words, current revenue levels are clearly not compatible with fiscal sustainability once future spending pressures are considered.
Note: Nominal GDP and real GDP are assumed to grow by 8.5% and 5.6%, respectively, after 2027, based on their historical averages. The interest rate is constant at 3.1%. Given the lack of recent data, it is assumed that the share of public social expenditures in GDP was constant from 2017 to 2023. All scenarios assume that public social expenditure will reach 10% of GDP by 2060, while other expenditures increase by 3 percentage points of GDP. The current policies scenario assumes that revenues as a share of GDP will converge to their historical average. The fiscal consolidation scenario assumes that tax revenues rise gradually over time, reaching an additional 6.7 percentage points of GDP by 2060. The higher growth scenario assumes that growth-enhancing structural reforms increase GDP growth by approximately 0.6 percentage points per year, reaching a 20% higher GDP level by 2060.
Source: OECD calculations.
Besides striving to maximise the efficiency of public spending, Viet Nam will need to mobilise additional government revenue to keep the debt ratio below the 50% ceiling while meeting emerging spending needs. If revenue-enhancing measures are implemented, gradually reaching around 6.7% of GDP by 2060, the government debt-to-GDP ratio would stabilise at a level of 40% of GDP by 2060 (Figure 1.18 blue line).
Another important factor that will determine the trajectory of public debt relative to GDP is economic growth, which can be strengthened through structural reforms. An illustration of the potential growth impact of structural reforms recommended in this Survey is presented in Table 1.4. These simulations estimate the potential effects of reforms in the areas of economic governance, education attainments, regulation and competition, and state-owned enterprises, based on empirical analysis. The effect of economic governance is typically estimated on the basis of cross-country estimations and may be an upper bound estimate for what can be achieved through policy changes over time. A third debt scenario, represented by the green line in Figure 1.18 assumes that the growth-enhancing structural reforms presented in Table 1.4are implemented and raise GDP by over 20% in the long run, in addition to the fiscal consolidation measures put in place. In this scenario, the debt-to-GDP ratio would decline further to around 30% by 2060, slightly below current levels.
Source: OECD simulations based on the framework of Egert and Gal (2017) and OECD (2024).
1.5.3. Raising government revenues to meet increasing spending needs
Government tax revenue (including social security contributions) in Viet Nam has averaged 19% of GDP during the past two decades (Figure 1.19). While it is above its ASEAN peers, revenue is low compared to the OECD average of 33%. In the long-term scenario (Figure 1.18), a revenue increase of nearly 7% of GDP is necessary to stabilise government debt at 40% of GDP, given the projected increases in spending. Such an increase ideally would come from a number of revenue sources.
The composition of Viet Nam’s tax revenues stands out in several respects (Figure 1.20). First, personal income tax accounted for only 1.7% of GDP in 2022 (Panel A), well below the OECD average of 8.2%. The small share of personal income tax at only 9.0% of total tax revenue (Panel B) in Viet Nam reflects generous tax allowances, which include personal and dependent allowances, as well as deductions of mandatory contributions. As a result, less than 3% of the active population paid personal income taxes in 2019, suggesting significant scope for broadening its base. Although the personal income tax rate schedule has seven tax brackets ranging from 5% to 35%, it has little redistributive impact. Informality also reduces social security contributions; only 40% of the 15-60 age group pays social security contributions (Chapter 2).
The corporate income tax is a major source of tax revenues in Viet Nam, accounting for 3.6% of GDP and nearly a fifth of tax revenue, compared to an OECD average of 11.4%. The statutory corporate income tax rate of 20% is slightly below the OECD average of 23.5%. There is scope for increasing the effective tax rate by reducing the number of exemptions contained in various incentive schemes, such as tax holidays and reduced rates applied in special economic zones, some of which have little economic merit (OECD, 2018a). Reducing personal and corporate income tax expenditures could raise revenues by 1% of GDP (Table 1.3).
General government revenue, including social security contributions, as a percent of GDP
Source: OECD (2024), Global Revenue Statistics Database.
Source: OECD Global Revenue Database, accessed 31 March 2025.
Taxes on goods and services including the value-added tax (VAT) and special (excise) taxes on certain goods and services accounted for 11.3% of GDP and 43.4% of tax revenue in Viet Nam in 2022, exceeding the OECD average. While the standard VAT rate is 10%, many essential goods and services, including healthcare and education, are either exempt from the VAT or subject to a rate of 5%. The standard rate was temporarily reduced to 8% in the first half of 2024 until June 2025. Viet Nam’s Tax System Reform Strategy to 2030 calls for “gradually increasing VAT rates according to a specific plan and roadmap to meet increasing spending needs”. Raising the VAT rate from its current 10% could be a major source for additional revenue in the long run, while taking steps to limit its regressive impact. The VAT has several advantages. For a fixed amount of tax revenue, relying more on indirect taxes (such as those on goods and services) and less on direct taxes on income has a less negative impact on GDP, as it imposes fewer distortions on employment and investment (Arnold et al., 2011). In addition, the VAT is less affected by economic fluctuations, making it a relatively stable revenue source, and it is relatively difficult to evade.
The amended Value Added Tax Law, which takes effect in July 2025, applies the 5% rate to some sectors that had been exempt from the VAT and there are plans for further reducing the list of items taxed at 0% and 5%, which is a welcome development that should be pursued further. However, the same law doubles the revenue threshold for exemption from the VAT from VND 100 million to VND 200 million (USD 7 874) per year.
As in Viet Nam, many OECD countries have a lower VAT rate for essential items aimed at helping lower-income families. However, Viet Nam’s Tax System Reform Strategy to 2030 aims to move towards a single VAT rate by reducing the number of goods and services subject to the reduced VAT rate and expanding the base. The government should follow through on this plan. Multiple VAT rates are not effective in helping low-income households, as higher income households benefit proportionally more from the reduced rates (OECD, 2018b). The foregone revenue resulting from the lower rate for essential items would be better used to provide a cash transfer that compensates low-income households for their VAT payments. Multiple VAT rates also have other drawbacks. First, they entail higher administrative and compliance costs, especially for SMEs. Second, they create opportunities for fraud through the misclassification of items. Third, they reduce the neutrality of the VAT, thus distorting consumption decisions and decreasing welfare (OECD, 2019b). Raising the VAT rate and broadening its base by eliminating the reduced rate could generate around 3½ percent of GDP in additional tax revenue (Table 1.3).
Another important difference in Viet Nam’s tax system compared to OECD countries is the limited role of property taxes. Although land in Viet Nam is collectively owned by the state, individuals and companies can use land indefinitely by paying one-off levies. Revenue from land use levies is one of the most important non-tax revenue sources of local governments, amounting to 2.0% of GDP in 2019. Given that the supply of land is limited, one-off levies are not a sustainable revenue source. The government also levies recurrent taxes on agricultural and non-agricultural land, though not on buildings. However, land-use taxes on agricultural plots have been exempted or reduce since 2001, although this policy is to be phased out at the end of 2030. Property taxes accounted for only 0.03% of GDP in 2022 according to the OECD Tax Revenue database, well below the OECD average of 1.8%. Viet Nam’s property tax, a recurrent tax on the immovable property of households, has edged down from 0.07% of GDP in 2009 despite sharp increases in property prices. Recurrent taxes on the value of immovable property are typically considered more efficient than other types of taxes, as they have a weaker impact on the decisions of households and businesses on labour supply, production and investment (Brys et al., 2016). Moreover, as with the VAT, recurrent taxes on immovable property are difficult to evade and can generate stable revenues compared with other types of taxes.
Revenue could be increased by extending property taxes to cover buildings and improving the accuracy in the valuation of property. These valuations are made every five years, leaving the tax base 30-70% below the actual market value. More frequent and more realistic revaluations would generate revenue and avoid sudden jumps in the tax burden. The additional revenue from the property tax could amount to 1.0% of GDP (Table 1.3).
Another priority is increasing environmentally-related taxes, which amount to 6.7% of tax revenue in OECD countries. Viet Nam’s Environmental Protection Tax (EPT) on petrol and oil has varied over time and was halved in 2022, with the reduction being extended until end-2025. Restoring the EPT rate in 2026 as planned and defining it in terms of carbon content could help reduce carbon emissions and generate more government revenue. In addition, the deployment of Viet Nam’s mandatory emission trading system should be accelerated (Chapter 3). To enhance political acceptance, it is crucial to earmark the revenue to initiatives that mitigate the impact on vulnerable households. Specifically, carbon tax revenues should be directed toward financing means-tested support for households struggling with higher electricity bills. These funds could also facilitate the transition to clean cooking technologies and low-carbon commuting options, ensuring that the policy fosters inclusivity and equitable access to sustainable solutions.
Increased transparency about tax expenditures, which tend to be less effective than direct expenditures to accomplish government objectives, could guide better policy choices. In addition to the reduction in the VAT from 10% to 8% and the cut in the EPT tax on gasoline, oil, and grease products, tax expenditures In 2024 include extending the deadlines for paying the VAT, the corporate and personal income taxes and land rent, pushing back the deadline for the special consumption tax on domestically produced and assembled cars for three months, and reducing their registration fees by 50%, and cutting various fees and charges by 10% to 50%. The Ministry of Finance projects that these measures will reduce public revenues by VND 195 trillion (3.0% of GDP) to support businesses and households, of which tax, fee, and charge reductions account for about VND 100 trillion and land rental extensions for about VND 95 trillion. As of the end of September, approximately VND 116.4 trillion had been extended or reduced. While such transparency is welcome, current information on tax expenditures does not include measures in place before the approval of the 2024 budget. Efforts to shed light on these permanent tax expenditures remain a priority to assess their impact on government revenue. A number of countries have had success in improving tax expenditure transparency (Box 1.2; Lenain, 2022).
Governments use various types of tax expenditures to pursue a variety of policy objectives. This includes measures such as income exemptions, tax credits, tax allowances, reduced rates, zero rates, accelerated depreciation and other actions, which reduce the revenue collected by governments and thus restrict fiscal space available for growth-enhancing public spending. Estimating the amount of foregone revenue is not straightforward and requires estimating deviations from benchmarks that provide preferential tax treatment to individuals or businesses. Tax revenue losses from tax expenditures can be substantial. According to the Global Tax Expenditures Database (GTED), the global average of revenue forgone due to tax expenditures in the 106 countries that publish such data is 3.8% of GDP and 23.0% of tax revenue over the 1990-2021 period. In some countries, such as Czechia, Finland, Jordan and the Netherlands, revenue forgone from tax expenditures amounts to 10% of GDP or more. When they have a large impact on fiscal receipts, these tax expenditures can have a major influence on socioeconomic developments such as consumption, investment, inequality, or carbon emissions.
Despite significant revenue losses associated with tax expenditures, few countries provide comprehensive information on them. Only 109 out of 218 jurisdictions have reported on tax expenditures at least once since 1990 (Redonda et al., 2024). Moreover, the quality, regularity, and scope of these reports vary greatly. Best practices for ensuring transparency include: i) publishing regular public reports on tax expenditures to increase visibility; ii) informing parliament about these measures and their fiscal costs to facilitate informed budget discussions; iii) estimating revenue foregone using peer-reviewed methodologies; and iv) periodically evaluating the impact of these policies. The Global Tax Expenditure Transparency Index (GTETI) ranks Korea, Indonesia, and Canada among the top countries for adopting such best practices. However, Viet Nam is not ranked due to a lack of available information. Initiating a series of transparent tax expenditure reports is critical for Viet Nam, given the evidence that numerous tax exemptions and income deductions significantly influence its socioeconomic landscape.
In sum, Viet Nam could benefit from a comprehensive tax reform. Reforming the property tax system could generate additional revenue without imposing large deadweight costs. In addition to reforming the tax system, it is essential to improve tax compliance by adopting better auditing practices, enhancing inspection and simplifying tax-related procedures, including using digitalised tax administration services. Implementation of the 2020 Law on Tax Administration should help strengthen the enforcement power of the tax authorities against tax evasion. Such measures would help reduce informality, which could generate an additional 1.5% of GDP of revenue from the personal income tax and social security revenue (Table 1.3). Another priority is to increase transparency about permanent tax expenditures noted above that narrow the base of key revenue sources and reduce them over time.
1.5.4. Strengthening the fiscal framework and budget process
In addition to raising additional revenue, reforms to improve the fiscal framework are essential to meet the spending challenges. Viet Nam’s fiscal framework is based on five-year plans that underpin the five-year Socio-Economic Development Plans. Compared to other Southeast Asian countries, Viet Nam has more detailed fiscal rules on government debt, budget balance and expenditures. Viet Nam is the only country with ceilings for expenditures on a programme or sector basis (OECD/ADB, 2019). Such rules may have contributed to the downward trend in spending as a share of GDP. In 2018, the government created the “Medium Term Expenditure Framework” (MTEF), a three-year rolling plan issued each year to monitor consistency between medium-term planning and actual policy implementation (OECD, 2023b).
Resilient and performance-oriented fiscal frameworks can help lead to appropriate policy choices, which are affected by numerous political biases and constraints. OECD research has identified critical elements of such a framework: budget transparency, fiscal rules, medium-term plans and expenditure frameworks (Rawdanowicz et al., 2021). In addition, independent fiscal councils could play a useful role in the future (OECD, 2023b). Evidence suggests strong synergies between fiscal rules, independent fiscal institutions and an effective medium-term budgeting framework.
The transparency of public finances is important to enable external scrutiny of government policies and programmes and their implementation. Public access to fiscal information in Viet Nam has improved in recent years. In 2023, the International Budget Partnership ranked Viet Nam 57th of 125 countries compared to 77th in 2019. However, Viet Nam is still in the “limited transparency” category (IBP, 2023). Viet Nam provides fiscal data on the Ministry of Finance e-portal that is in line with the Government Finance Statistics (GFS) Manual 2001. Moreover, it is gradually bringing it into line with the more recent GFS Manual 2014. Providing fiscal data that covers the general government sector and shows inter-governmental fiscal transfers would further increase transparency. Moreover, a rigorous quantification of tax expenditures could enhance transparency. External audits should play a crucial role in identifying inefficiency in the public sector. While all revenues are audited, expenditures are audited for only half of ministerial agencies. Internal audits are conducted for only six of the 20 central government ministries and agencies. Ministries produce annual financial reports, but they are limited to budget execution and do not contain information on assets and liabilities. Accounting standards used in the reports deviate significantly from International Public Sector Accounting Standards (World Bank, 2024b).
Transparency can also be weakened by the lack of information on fiscal risks, including contingent liabilities, such as guarantees and contingent obligations including private-public partnerships. The OECD has recommended that Viet Nam consider disclosing contingent liabilities arising from state-owned enterprises (OECD, 2023b). Another area where transparency will be key is the publicly-owned Viet Nam Social Securities (VSS), currently the main buyer of government securities. The VSS will become a net payer as the age profile of its beneficiaries shifts, and large contingent liabilities will gradually materialise (World Bank, 2023). The OECD has found that countries with the most advanced management of fiscal risks focus on three channels to improve risk management practices. First, the comprehensive reporting of fiscal risks enhances awareness of the risks, which can lead to more effective risk mitigation and management. Second, fiscal risk stress tests help to identify the channels through which public finances are most likely to be affected during a crisis. Third, fiscal risk assessments can help policymakers set appropriate fiscal targets or objectives (OECD, 2019a).
The large carryover of unspent budget and surplus revenue (the difference between actual and planned) from one year’s budget to the next also reduces the transparency of fiscal policy in Viet Nam, as pointed out in the 2023 OECD Economic Survey of Viet Nam (Table 1.5). Between 2015 and 2019, the average carryover of revenue from the previous year was 18% of actual revenue (OECD, 2023b). Carryovers make it difficult to link the annual budget with the previous year’s estimates and reconcile annual differences in the budget. Consequently, the budget is not a credible indicator of policies and plans, making it difficult to monitor fiscal policy.
Carryover revenue from the previous year should not be treated as actual revenue, but instead should increase the surplus or reduce the deficit in the previous year. Unspent budget should be returned to the national treasury if it is not used within a certain period of delay in the following year. Given that strictly forbidding carryover of unspent budget may cause a spending rush towards the end of fiscal years, a limited amount of spending could be allowed to be delayed until a specified date in the following year. The 2019 Law on Public Investment stipulates that the disbursement period of the annual budget for public investment is up to end-January of the following year (OECD, 2023b).
Fiscal rules in Viet Nam include rules on expenditure, as noted above. Such rules may prompt governments to cut growth-enhancing expenditures, such as public investment, as they are politically less sensitive. In light of significant investment needs, it will be important to protect public investment, based on rigorous cost-benefit analysis. In addition to improving the quantity of public investment, it is essential to promote its quality, in part through ensuring competitive bidding procedures and private-sector participation in infrastructure projects (World Bank, 2021). Furthermore, the lack of information on tax expenditures may induce the use of tax expenditures for various policy objectives for which direct spending might be better suited (Rawdanowicz et al., 2021).
The medium-term perspective in expenditure budgeting in Viet Nam is not effective in supporting budget credibility and predictability. The underlying forecasts in the three-year MTEF are not sufficiently robust for credible medium-term ceilings and estimates. Consequently, it has been ineffective in linking policies, plans and budgets for ministries to implement. The medium-term challenges are most severe in the management of public investment, reflecting difficulties in reconciling the three-year MTEF with the five-year Medium-term Investment Plan (MTIP) created in 2016. Over the five-year span, many of the projects in the MTIP become unrealistic and are dropped from annual budget allocation. With the two plans on separate paths in Viet Nam’s dual-budget system, the selection of investment projects is not based on clear criteria (World Bank, 2024b).
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