UNDP economist calls for prompt cancellation of ineffective projects

Apr 14, 2008

Jonathan Pincus, senior country economist of the United Nations Development Programme, yesterday urged the immediate cancellation of ineffective public investment projects in Viet Nam as a measure for harnessing runaway inflation and achieving sustainable growth.
"I think what the Government needs to do is to list 10-20 worst public investment projects to be canceled immediately," he told economists, researchers and reporters at a talk at Saigon Times Group in HCMC.

"The reason for that is we are in the process of investment-led growth, which is overheating. So, the investment needs to be reduced immediately, if we are to reduce the level of inflation and avoid the bust."

The best way to do that is to control public investment, and the Government will be able to reconsider those projects when things return to normal, with inflation low and the economy no longer overheating, he noted.

Pincus pointed out Viet Nam's overheating economy as the cause of high inflation, the trade deficit, which widened from US$3 billion in 2006 to US$11 billion last year, the expanding fiscal deficit, the rapid credit growth and the high property prices.

Therefore, Pincus said, canceling ineffective projects would send good signals to the market and inflation could be put under control. "If we do not do that I'm afraid that even the Government tightens monetary policy, fiscal policy will remain very loose."

He said it would not work if Viet Nam wanted to tighten monetary policy and run a big fiscal deficit at the same time. "So the Government should reduce the fiscal deficit today and the best thing to do that is to cancel the lowest-yielding public investment projects."

Pincus stressed the Government need a more careful analysis of each public investment decision, and make the decision more transparent. "Public investment should go into the projects with positive social and economic impacts."

Pincus also urged the Government to reduce the amount of directive lending to State-owned enterprises to avoid a low return of investment. He told the Daily after the roundtable that it was better for SOEs to take out loans with market-based interest rates so that they will manage to use the money effectively.

Regarding a proposal that requires State corporations to reserve at least 70% of their investment for their core business operations, Pincus said it would not work as the investment percentage for non-core operations would increase if they have a bigger budget.

He called for a reduction on State-backed borrowing in foreign currency, and hedge exchange rate risk on foreign loans.

He suggested Viet Nam rely more on interest rates rather than reserve requirements and forced bond sales to control inflation, and restructure the State Bank of Viet Nam to strengthen its authority and policy making capacity.

He explained restructuring the SBV would enable it to manage inflation using a price mechanism rather than through a quantitative mechanism. "That means using interest rates to control money supply," he explained.

He noted that interest rate structure should reward savings and discourage speculative investment. "Making savings attractive will encourage people to put their money in the bank and reduce pressure on asset prices. So, using the price mechanism, interest rates will cool down the property bubble."

Higher interest rates for lending will discourage households and firms from investing in risky and low-return ventures.

Pincus emphasized more exchange rate flexibility around a basket of currencies less closely tied to the U.S. dollar as competitiveness does not depend on the dollar rate, but currency rates of competitors.

As for bank management, Pincus said the SBV must monitor domestic banks. "SBV needs to know the loan portfolio of every bank in Viet Nam, at a very detailed level. So it knows any bank in trouble. and steps in early rather than it is too late. This is extremely important."

If any bank fails or a rumor about this failure, this will have a large effect on Viet Nam because investors will consider Viet Nam much riskier, he said.

By Mong Binh - Photo: Le Toan