Home    Forum    How Vietnam needs to be prepared in situation of lack of Official Development Assistance (ODA)
Wednesday, 04 January 2017 10:35
2055 Lượt xem

How Vietnam needs to be prepared in situation of lack of Official Development Assistance (ODA)

(LLCT) - To be able to “graduate from ODA” in the next 15-20 years, Vietnam, right from now on, needs to make full preparation for this transition so that its economy will not be disturbed and its stable, sustainable growth will be maintained after it ceases to receive ODA.

1. The actual state of ODA in Vietnam

ODA was first provided for Vietnam in the 1970s and has seen a rapid increase since the country shifted to the market economy. The attraction of capital in Vietnam can be divided into three periods. (1) Between 1993 and 2000, Vietnam promoted international exchanges and cooperation and attracted investment capital from various countries and international organizations. Therefore, multilateral and bilateral ODA experienced a steady rise. However, in this period there was no concrete strategy or project to attract capital. (2) Between 2001 and 2010, the attraction of ODA was more selective while its disbursement accelerated, its use became more effective and there were plans for debt payment. (3) Since 2011, Vietnam has sped up the disbursement of funds for signed projects and has formulated strategies for attracting and using ODA in the new period. Also, it has created comparative advantages in order to draw effectively foreign funds for development investment.

Currently, more than 50 bilateral and multilateral doners provide ODA and soft loans for Vietnam’s industries and socio-economic fields. According to statistics, from 1993 to 2014, the total amount of ODA committed for Vietnam was equivalent to 89.5 billion USD. In this period, signed ODA totaled 73.68 billion USD with 3.5 billion USD per year on average; and disbursed ODA and soft loans amounted to approximately 54 billion USD, accounting for over 73.2 per cent of the total signed ODA(1). The contribution of ODA to Vietnam’s GDP growth tended to increase year on year and was especially high in the years when the national economy was faced with numerous difficulties and challenges (such as the Asian economic crisis in 1997 - 1998 and global financial and economic recession in 2008 - 2009). ODA had a positive impact on the stimulation of investment demands and made a contribution to the continuation of economic growth.

Prior to 2010, Vietnam remained a low-income country and would be entitled to soft and long-term loans. However, after that, it became a middle-income country, so soft loans began to undergo a gradual decrease. If the average term of loans was between 30 and 40 years and interest rates would range from 0.7 to 0.8 per cent per year (including grace periods) in the period before 2010, the average term of loans was only between 10 and 15 years depending on partners and types of loans, and interest rates were at least 2 per cent per year in the 2011 - 2015 period. A number of donors shifted from ODA to mixed loans where there was a combination of development funds and commercial loans subject to numerous binding conditions.

2. Time to “graduate from ODA”              

Termination of receiving ODA is essential for a country who has reached a certain level of development. Experts call this is an effort to “graduate from ODA.” “Graduating from ODA” means that nation has managed to escape poverty, rise above itself and develop the internal capacity of its economy.

The Republic of Korea and Thailand are among the countries which have succeeded in developing their respective economies and “graduating from ODA” in a short period of time. The first received ODA for about 30 years and received a lot of ODA for about 20 years. The latter received ODA for about 40 years and received a relatively large amount of ODA for 25 years. However, their average ODA per capita was only about 15USD.

Vietnam began to receive ODA in the 1970s. Since 1993, it has received a lot of ODA. Its average ODA per capita was 22USD in 2000 and increased to 46USD in 2014. It is time the country devised a plan for “graduating from ODA” in the next 15 or 20 years’ time. This means that the country, starting from now, needs to reduce gradually its reception of ODA so its ODA per capita will have decreased to 0USD by the mid-2030s.

The World Bank has planned to announce the end of its ODA to Vietnam in July 2017. Thus, in slightly more than a year’s time, World Bank ODA will shift to mainly soft loans and ultimately to market-conditioned loans, meaning that debt maturity will be shortened by half or interest rates will increase by between 2 and 3.5 per cent. At present, the World Bank is Vietnam’s second largest ODA provider, whose ODA makes up around 22 per cent of the country’s total ODA (after Japan, who provides about 30per cent of its ODA).

In fact, the proportion of loans to total ODA funds tended to increase from 80per cent in the 1993 - 2000 period to 81 per cent in the 2001-2005 period, 93 per cent in the 2006 - 2010 period, and 96per cent in the 2011 - 2014 period. Since Vietnam became a lower middle-income country in 2010, its loan cost has been on an upward trend. Many of its ODA loans are subject to external binding conditions, thereby increasing input costs and affecting the effectiveness of its investment and the ability to pay back its debts. Given this fact, the use of ODA in the coming time must achieve economic efficiency and ensure sustainable borrowing and payment of foreign debts(2).     

At the present, Vietnam still considers ODA to be an important source of support for its socio-economic development. According to preliminary reports by ministries, industries and provinces, the total demand for the mobilization and use of ODA funds and soft loans in the 2016 - 2020 period is estimated at 39.5 billion USD. Based on the progress of the implementation of signed programs and projects, disbursed funds in this period are expected to reach 25-30 billion USD, or 4-5 billion USD per year, an increase of 14 per cent compared to the 2011 - 2015 period and making up from 55 to 66 per cent of externally mobilized capital for development investment.

In addition, the amount of undisbursed ODA and soft loans of signed programs and projects in the 2011 - 2015 period to be transferred to the 2016 - 2020 period is quite large, at about 22 billion USD. Vietnam’s longest-term loan is due by 2055, and the average maturity of its debts is 12.5 years. Thus, in nearly 40 years’ time. The country will still have to pay back its ODA debts. In light of its cash flow and debts, the time when the country has to pay back most of its debts will be between 2022 and 2025.

What needs to be done for Vietnam to “graduate from ODA”    

To be able to “graduate from ODA” in the next 15-20 years, Vietnam, right from now on, needs to make full preparation for this transition so that its economy will not be disturbed and its stable, sustainable growth will be maintained after it ceases to receive ODA.

Firstly, the country should draw a path to cutting down on ODA and the time when it finally stops to receive ODA. Accordingly, the Ministry of Planning and Investment considers, on an annual basis, demands for the mobilization and use of ODA funds and carefully reviews projects using these funds with a view to following such path. By doing so, it is likely that domestic and ODA funds will be used effectively. As long as domestic funds are wasted or lost and especially unnecessary or ineffective investment projects are in existence, the mobilization of ODA funds will increase the country’s debt burdens and its reliance on foreign assistance.

Secondly, the country should continue to complete its laws on the attraction, management and use of ODA funds and other soft loans. It needs to build soon a legal framework for borrowing funds and paying back debts and provide a mechanism for managing debts in order to prepare for a shift to funds with less favorable conditions. It also needs to develop a mechanism for paying back debts quickly and completely on a case-by-case basis.

Thirdly, the country should channel ODA funds and other soft loans into important public investment programs and projects which are unlikely to attract funds from the private sector or which are not eligible to commercial loans. The state should concentrate ODA funds on pivotal areas and significant projects. It should encourage coordination between donors in their provision of ODA funds within the framework of joint development cooperation programs and co-sponsorship for different industries, areas and localities.

Fourthly, the country should use ODA as a stimulus to increase private investment and diversify forms of public-private partnership. Developed countries’ experience shows that a country can only grow steadily once its private businesses thrive. In Vietnam, although the private sector currently makes up the largest part of the country’s GDP, small-sized and very small enterprises account for 95.3 per cent of all private enterprises and are highly vulnerable to market fluctuations. Therefore, ODA will be much more useful when invested in projects which are capable to stimulating the development of the private sector and increasing public-private partnership possibilities.

Fifthly, the country should narrow down the list of recipients of funds and reduce state subsidization when it comes to the use of foreign loans. It needs to reduce gradually the allocation of ODA funds for projects and shift to relending these funds so that projects have to consider carefully any borrowing. The country should restructure the use of ODA funds so as to increase the percentage of relent funds (in the case of provinces, this percentage needs to increase from 7.8 per cent in the recent period to 25-30 per cent in the coming period). Areas and projects which are capable of returning funds and mobilizing them from different economic sectors need to shift to operating according to the market mechanism. 

Sixthly, the country should intensify its examination, supervision and evaluation of the use of ODA funds and soft loans and ensure the effectiveness of investment and quality of projects. It needs to closely monitor projects and speed up their implementation and increase disbursement rates for ODA programs and projects. It should accelerate the control of corruption in the management and use of ODA funds and be proactive in the prevention and punishment of negative practices, corruption and wastefulness. It should seriously evaluate the effectiveness of investment projects given the fact that it is becoming increasingly difficult to access loans.

Finally, Vietnam should ensure transparent management and use of loans; increase the accountability of all parties related to the management and use of loans; announce its policies to mobilize ODA and prioritized areas and places; provide information about ODA and ODA commitments, signings and disbursements of the entire country and each province and city; and make public the allocation and lending of ODA for each project. Also, the country needs to provide information about the progress and effectiveness of projects using ODA as well as annual debt payment obligations and actual debt payment.

____________________

(1) Ministry of Planning and Investment: Report on the attraction, management and use of donors’ ODA funds and soft loans in 2014.

(2) Documents at the conference “Evaluating Vietnam’s 20 years of mobilizing and using ODA”, DaNang, 2015.

Assoc. Prof., Dr. Le Chi Mai

National Academy of Public Administration

 

Related Articles

Contact us

Links