Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 101008-VN INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$150 MILLION TO THE SOCIALIST REPUBLIC OF VIETNAM FOR THE THIRD ECONOMIC MANAGEMENT AND COMPETITIVENESS DEVELOPMENT POLICY OPERATION April 8, 2016 Macro and Fiscal Management Global Practice Vietnam Country 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 contents may not otherwise be disclosed without World Bank authorization.     VIETNAM-GOVERNMENT FISCAL YEAR JANUARY 1 – DECEMBER 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of March 24 2016) Currency Unit Vietnamese Dong US$1.00 VND 22361 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activity MONRE Ministry of Natural Resources and Environment ADB Asian Development Bank MPI Ministry of Planning and Investment APs Administrative Procedures MTDS Medium-Term Debt Management Strategy APCA Administrative Procedures Control Agency MTIF Medium-Term Investment Framework ASEAN Association of South East Asian Nations NPLs Non-performing Loans ABP Australia-WB Strategic Partnership in Vietnam OECD Organization for Economic Cooperation and Development CFAA Country Financial Accountability Assessment OOG Office of Government CIEM Central Institute for Economic Management PAPI Public Administration Performance Index CIT Corporate Income Tax PCI Provincial Competitive Index CPIA Country Policy and Institutional Assessment PEFA Public Expenditure and Financial Accountability CPS Country Partnership Strategy PFM Public Financial Management DA Deposit Account PFMRP Public Financial Management Reform Project DFAT Department of Foreign Affairs and Trade, Australia PIM Public Investment Management DFID Department for International Development PIR Public Investment Reform DPO Development Policy Operation PPP Public Private Partnership DSA Debt Sustainability Analysis PRSC Poverty Reduction Support Credit EMCC Economic Management and Competitiveness Credit ROSC Report on the Observance of Standards and Codes FA Financial Agreement SAV State Audit of Vietnam FDI Foreign Direct Investment SBV State Bank of Vietnam FSAP Financial Sector Assessment Program SCIC State Capital Investment Cooperation GDP Gross Domestic Product SECO Swiss State Secretariat for Economic Affairs GDT General Department of Taxation SEDS Socio-Economic Development Strategy GCs General Corporations SEDP Socio-Economic Development Program GOV Government of Vietnam SEGs State Economic Groups GSO General Statistics Office SMEs Small and Medium Enterprises IDA International Development Association SOCBs State-owned Commercial Banks IDF Institutional Development Fund SOEs State-owned Enterprises IFC International Finance Corporation TAMP Tax Administration Modernization Project ILO International Labor Organization TWG Technical Working Group IMF International Monetary Fund UNIDO United Nations Industrial Development Organization JICA Japan International Cooperation Agency UNDP United Nations Development Programme MDGs Millennium Development Goals VAT Value-Added Tax MDTF Multi-Donor Trust Fund VASS Vietnam Academy of Social Sciences MOF Ministry of Finance VCCI Vietnam Chamber of Commerce and Industry MOIT Ministry of Industry and Trade VDR Vietnam Development Report MOJ Ministry of Justice WTO World Trade Organization Regional Vice President: Xiaoqing Yu, Acting Country Director: Victoria Kwakwa Global Practice Director: Satu Kristiina J. Kahkonen Practice Manager: Mathew Verghis Task Team Leader: Sebastian Eckardt i        VIETNAM THIRD ECONOMIC MANAGEMENT AND COMPETITIVENESS DEVELOPMENT POLICY OPERATION TABLE OF CONTENTS LOAN AND PROGRAM SUMMARY .................................................................................................................. iii I. INTRODUCTION AND COUNTRY CONTEXT ......................................................................................... 1 II. MACROECONOMIC POLICY FRAMEWORK ..................................................................................... 3 2.1 RECENT ECONOMIC DEVELOPMENTS ................................................................................................... 4 2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................ 10 2.3 IMF RELATIONS .......................................................................................................................................... 15 III. THE GOVERNMENT’S PROGRAM ...................................................................................................... 15 IV. THE PROPOSED OPERATION .............................................................................................................. 16 4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ........................................ 16 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS................................................ 20 4.3 LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY ................................... 34 4.4 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS .................................. 34 V. OTHER DESIGN AND APPRAISAL ISSUES ........................................................................................... 35 5.1 POVERTY AND SOCIAL IMPACT ............................................................................................................. 35 5.2 ENVIRONMENTAL ASPECTS .................................................................................................................... 38 5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS ................................................................................ 38 5.4 MONITORING, EVALUATION AND ACCOUNTABILITY ............................................................... 39 VI. SUMMARY OF RISKS AND MITIGATION ......................................................................................... 40 ANNEX 1: POLICY AND RESULTS MATRIX .................................................................................................. 42 ANNEX 2: LETTER OF DEVELOPMENT POLICY ........................................................................................ 49 ANNEX 3: FUND RELATIONS ANNEX ............................................................................................................ 52  Third Economic Management and Competitiveness Development Policy Operation was prepared by an team consisting of (in alphabetical order): Adu-Gyamfi Abunyewa (Senior Procurement Specialist, GGODR); Anjali Acharya (Senior Environmental Specialist; GENDR); Christopher Fabling (Senior Financial Management Specialist, GGODR); Duc Minh Pham (Senior Economist, GGODR); Sebastian Eckardt (Task Team Leader and Senior Economist, GMF02); Nina Masako Eejima (Senior Counsel, LEGES); Kien Trung Tran (Senior Procurement Specialist, GGODR); Linh Anh Thi Vu (Program Assistant, EACVF), Linh Hoang Vu (Economist, GPVDR); Angkanee Luangpenthong (Program Assistant, EACTF); Chau-Ching Shen (Senior Finance Officer,WFALN); Minh Van Nguyen (Senior Economist, GGODR); Phuong Anh Nguyen (Research Analyst, GGODR); Quang Hong Doan (Senior Economist, MFMDR); Quyen Hoang Vu (Senior Economist, GGODR); Sandeep Mahajan (Program Leader, EACVF);Viet Quoc Trieu (Senior Financial Sector Specialist, GFMDR); Viet Tuan Dinh (Senior Economist, MFMDR); and Yuling Zhou (Lead Procurement Specialist, GGODR). Peer reviewers for EMCC3 are Rashmi Shankar (Lead Economist, ECSPE), Sunita Kikeri (Program Manager, FCMCG) and Manuela Francisco (Program Leader, LCC2C). EMCC3 was coordinated by the International Cooperation Department of the State Bank of Vietnam led by Mr. Ha Hai An. Contributions of colleagues from the Ministry of Finance; the Ministry of Planning and Investment; the Ministry of Justice; the Government Inspectorate; and the State Bank of Vietnam are gratefully acknowledged. Additional contributions gratefully acknowledged from Andrew Shepherd (DFAT-Australia), Nguyen Quang Anh (DFAT-Australia), Alex Maskiell (DFAT-Australia), Nguyen Hong Giang (SECO), Miroslav Delaporte (SECO), Katrin Ochsenbein (SECO), Yuko Naito (JICA), Hoang Thi Tuat (JICA), Motohiro Matsumura (JICA), Chau Nguyen (DFATD-Canada), Nicolas Dourin (DFATD-Canada). Thanks also to DFID, DFAT-Australia, DFATD-Canada and SECO for contributions to the EMCC Programmatic Analytical and Advisory work. ii       LOAN AND PROGRAM SUMMARY SOCIALIST REPUBLIC OF VIETNAM THIRD ECONOMIC MANAGEMENT AND COMPETITIVENESS DEVELOPMENT POLICY OPERATION Borrower The Socialist Republic of Vietnam Implementing Agency The State Bank of Vietnam Financing Data Amount: US$150 million IBRD Loan Terms: US dollars denominated, LIBOR based, fixed spread loan with 29.5 years maturity, including a grace period of 10 years Operation Type The proposed Economic Management and Competitiveness DPL (EMCC 3) is the third in a programmatic series of three Development Policy Operations (EMCC 1-3). EMCC 3 is a single tranche operation. Pillars of the EMCC Program Development Objective: The EMCC series contributes to (i) strengthened Operation financial sector governance and fiscal management; (ii) improved public administration, SOE And Program management and public investment management; and (iii) reduced administrative burden and Development strengthened tax and procurement policies. Objective Result Indicators Pillar I - Strengthened Financial Sector Governance and Fiscal Management RI-1: Reported NPLs Status: n.a. Target (2017): <5 percent RI-2: Number of commercial banks Baseline (2010): 39 Target (2017): <30 RI-3: Number of years during 2011-2015 in which public and publically guaranteed debt to GDP remain below statutory limit (65 percent) Baseline (2010): n.a. Target (2017): 50% iii       RI-8: Reduced investments by SEGs in high risk non-core areas as a share of SEG capital Baseline (end 2012): 2.3 percent Target (2017): 0 percent RI-9: Number of SEGs disclosing their audited financial statements on their websites Baseline (end 2012): 4 SEGs Target (2017): 8 SEGs RI-10: Capital expenditure arrears from the central budget (VND trillion). Baseline (June 2013): VND 43 trillion Target (2017): VND 30 trillion Pillar III-Reduced Administrative Burden and Strengthened Tax And Procurement Policies RI-11: Share of direct contracting over total contracting value (%) Baseline (end 2012): 40 percent Target (2017): 30 percent RI-12:Time needed to comply with tax payment requirements Baseline (2011): (i) 320 hours for VAT; (ii) 217 hours for CIT Target (2017): (i) 220 hours for VAT; (ii) 150 hours for CIT. Climate and disaster (i) Are there short and long term climate and disaster risks relevant to the operation (as identified risks as part of the SORT environmental and social risk rating)? (required for IDA countries) Yes No X If yes, (ii) summarize briefly these risks in the risk section and what resilience measures may help address them? Overall risk rating Substantial Operation ID P157405 iv       IBRD PROGRAM DOCUMENT FOR A PROPOSED THIRD ECONOMIC MANAGEMENT AND COMPETITIVENESS DEVELOPMENT POLICY OPERATION TO VIETNAM I. INTRODUCTION AND COUNTRY CONTEXT 1. This proposed Third Economic Management and Competitiveness Development Policy Operation (EMCC3) in the amount of US$150 million concludes a programmatic series aimed at reinforcing selected structural reform priorities in the Government’s Socio- Economic Development Plan (SEDP) 2011-2015. Initiated in 2012, the EMCC series is designed to support an ambitious structural and economic governance reform program to raise Vietnam’s competitiveness and medium growth potential, thereby laying the foundation for sustained progress in poverty reduction and shared prosperity. Specifically, the development objectives of the EMCC series are to contribute to (i) strengthened financial sector governance and fiscal management; (ii) improved public administration, SOE management and public investment management; and (iii) reduced administrative burden and strengthened tax and procurement policies. Across these reform areas, the EMCC series has served as the central platform for coordinated policy dialogue between the Government of Vietnam and several development partners, including the World Bank, Japan, Switzerland, Australia, UK and Canada.1 2. The operation is being prepared against the backdrop of robust macroeconomic performance. Following a period of slowdown, economic growth accelerated to 6.7 percent in 2015 (up from 6 percent in 2014, 5.4 in 2013 and 5.2 in 2012) driven by a combination of buoyant domestic demand growth and strong performance of export-oriented manufacturing. Despite the pick-up in economic activity, inflationary pressures remain subdued benefitting from low commodity prices and stable core inflation. While sizable fiscal deficits have emerged as a result of countercyclical fiscal policy over the past years, the government has made commitments to restore fiscal discipline and reduce the deficit to contain further increases in public debt. On the external front, Vietnam’s exports –especially of manufactured goods- continue to expand rapidly, but a surge in imports, mainly of capital and intermediate goods is eroding the current account surplus. Exchange pressures were accommodated by a gradual devaluation of the reference rate and a wider trading band. Nevertheless, forex reserves have declined to around two months of import cover. However, balance of payments risks are contained by robust FDI inflows, limited exposure to volatile portfolio investments and low and largely concessional external debt. 3. High economic growth together with socially oriented policies enabled Vietnam to achieve remarkable progress in poverty reduction and shared prosperity. Using the national                                                              1 Several development partners have been engaged in the design and implementation of EMCC: (i) the Japanese International Cooperation Agency (JICA) has provided Yen 30 billion of parallel financing for EMCC1 and EMCC2, and is planning further support for EMCC3; (ii) the Swiss Secretariat for Economic Affairs (SECO) is providing CH 24 million co-financing for the entire EMCC series, including both budget support and funding of technical assistance; (iii) Foreign Affairs, Trade and Development Canada has provided co-financing for EMCC2 and 3 (iv) the UK’s Department for International Development (DFID) and (v) the Australian Department of Foreign Affairs and Trade (DFAT) are funding TA and analysis to inform dialogue on EMCC prior actions. The Asian Development Bank has provided analytical inputs for selected EMCC triggers, and provided parallel financing for EMCC2. 1       poverty line, Vietnam’s poverty rate declined from close to 60 percent in 1993 to 13.7 percent in 2014. Extreme poverty has been all but eliminated. Using the revised international poverty line ($1.90 a day) the poverty headcount was down to about 3 percent in 2012. Moreover, between 1993 and 2012, the average income of the bottom 40 grew at an annual rate of nine percent, exceeding Vietnam’s already high average income growth. Unlike other fast growing economies, Vietnam did not experience major increases in income inequality and its income Gini coefficient of 0.39 remains substantially lower than China, Indonesia, and Thailand. Social indicators have also greatly improved underpinned by wider access to basic services, including health, education, electricity and water and sanitation. Despite remarkable progress in reducing overall poverty, there remains an unfinished poverty agenda in addressing the substantial gap in living conditions, access to basic services and poverty rates among ethnic minorities and other marginalized groups. Sustained inclusive growth –the ultimate objective of this series- is a necessary precondition for achieving these social objectives. 4. Vietnam’s strong growth record and social achievements notwithstanding, there is a growing concern that the current growth model is facing emerging structural constraints. After early market reforms initiated under Vietnam’s economic reforms (Doi Moi) in 1986 boosted structural transformation and productivity growth, growth over the past decade has become increasingly reliant on factor accumulation, underpinned by a rapidly expanding labor force and sustained high investment rates. Meanwhile, the contribution from productivity growth has been falling. Especially labor productivity growth has stagnated and shifting demographics will slow- down labor force growth over the coming years. Meanwhile, at around 30 percent of GDP, Vietnam’s investment rate is already high, making it hard to raise it substantially above current levels. Thus, if Vietnam aspires to sustain its strong growth record, it cannot do so by relying solely on factor accumulation. Instead, the focus needs to shift towards raising the competitiveness of the economy and reigniting productivity-led growth. 5. To reignite productivity-led growth, the government has adopted an ambitious structural and economic governance reform agenda, which is selectively reinforced by the EMCC series. There is a growing recognition that institutional legacies, including a large state owned sector, incomplete market institutions and a cumbersome investment climate have become impediments to more efficient allocation of resources in the economy. Despite recent improvements, available cross-country competitiveness assessments show that Vietnam is lagging behind other countries, especially on dimensions related to the policy and institutional environment.2 Recognizing these constraints, the Government’s development priorities –as set out in its Socio-economic Development Strategy (SEDS) 2011-2020 and the accompanying SEDP (2011-2015) give attention to macroeconomic stability, improved market institutions and administrative reforms for a more competitive business environment. Under this broad theme, the EMCC series reinforces a number of specific reform priorities, including improved economic governance and restructuring of State Economic Groups and General Corporations, improved                                                              2 Vietnam’s performance on structural policies in the Bank’s Country Policy and Institutional Assessment remains slightly below the average for IDA countries, even though it performs better in other dimensions. While Vietnam’s ranking in the Doing Business survey has improved to 90th position in 2016 (from 93rd in 2015) it remains below China, Thailand and Malaysia. In the Global Competitiveness Index, although Vietnam has regained some ground, overall it has fallen from 59th position in 2011-12 to 68th sin 2014/15 assessment. 2       banking supervision and policies for dealing with systemic risks including non-performing loans as well as steps to make public investment management more efficient and effective. 6. Although reform commitment remains strong, program implementation has progressed at a gradual pace, reflecting the complex nature of envisaged reforms. While improved macroeconomic performance and steps to strengthen banking sector supervision have helped ease acute risks of banking sector instability, lingering asset quality problems have not been fully addressed. On reforms of the state owned sector, progress is being made in the divestment of non-core assets of State Economic Groups and in implementing more robust financial disclosures. But the separation of ownership and regulatory functions of the state remains an unfinished agenda. On public financial management reforms, the Government has moved forward with the consolidation of more than 700 bank accounts into a treasury single account arrangement and with the adaptation of implementing regulations of the procurement law. Finally, on the business environment, the Government implemented reforms to ease the compliance burden on tax payers and lifted foreign ownership restrictions, in principle allowing foreign investors to obtain majority stakes in public companies. 7. This final operation is structured around a narrowed, more focused set of nine prior actions with a commensurate reduction in the loan amount to US$150 million (from US$250 million initially planned). This adjustment in the loan amount recognizes that the remaining core program comprises several strong and credible reform measures, while some triggers, envisaged in the original program have slipped. Despite these modifications to the program, the overall objectives and expected impact of the series remain principally relevant. Nevertheless, the project development objectives and result framework have been streamlined, including consolidation of fewer result indicators more directly linked to the policy program. 8. Impact of the EMCC series continues to be subject to a number of risks. Vietnam’s macroeconomic prospects could be dimmed by potential domestic and external shocks associated with delays in fiscal consolidation, vulnerabilities in the banking sector, volatile global financial conditions and slow-downs in demand in key export markets. Renewed macroeconomic instability and/or dampened growth would, in turn, erode the potential gains in competitiveness. Moreover, despite progress, the structural and economic governance reform agenda, supported by EMCC remains unfinished. While the risk of major policy reversals is mitigated by continuity in the broad reform directions in the new SEDP (2016-2020), impact of the series could be undermined by piecemeal reform implementation either due to lack of resources, capacity constraints, weak policy and implementation coordination or resistance from special interest groups. II. MACROECONOMIC POLICY FRAMEWORK 9. Risks notwithstanding, the macroeconomic policy framework is considered adequate for this operation. Macroeconomic stability and sustainability have been broadly maintained, although rising public debt and low (and declining) forex reserves present some macroeconomic vulnerabilities. Increased exchange rate flexibility introduced at the start of the year to counter volatile external conditions, seems appropriate under current conditions and should be used to support a build-up of reserves to buffer future external shocks. Despite lower inflation, the authorities have also maintained policy interest rates unchanged since late 2014, contributing to low and stable rates of core inflation. However, in light of the recent pick-up in credit growth, 3       renewed overheating in the real estate sector and other forms of excessive risk-taking need to be managed by calibrating macro-prudential policies. Over the medium-term, the multiplicity of the SBV’s objectives has to be reduced, giving it a more explicit price stability focus, while strengthening its operational and research capacity. With regard to fiscal policy, while the countercyclical stance that was introduced in the aftermath of the global financial crisis was appropriate to offset weak domestic demand, the situation now calls for a credible medium-term fiscal consolidation plan. Even though the risk of acute debt distress remains limited (due to Vietnam’s largely concessional external debt), public debt has risen fast and with strengthening of domestic demand the rationale for countercyclical expansionary fiscal policy is diminishing. An acceleration in the resolution of balance sheet weaknesses in the SOE and banking sector would also be important to contain medium-term macroeconomic risks. 2.1 RECENT ECONOMIC DEVELOPMENTS 10. Vietnam’s economy has weathered the recent turbulence in the external environment, reflecting resilient domestic demand and robust performance of export-oriented manufacturing. After slowing down during 2012 and 2013, growth recovered to 6 percent in 2014 and further accelerated to an estimated 6.7 percent in 2015. Rising public spending, low inflation and strengthening consumer confidence supported an uptick in domestic consumption, while investment was lifted by robust FDI and a recovery of credit growth, which benefitted from still supportive monetary policy. Exports of the foreign-invested manufacturing sector also accelerated, but this was offset by a slowdown of commodity exports and a surge in imports of capital and intermediate goods, resulting in a marginally negative contribution of net exports (Figure 1, right panel). On the production side, economic growth was driven by improved performance of the manufacturing and construction sectors, which grew by 10.6 and 10.8 percent, respectively. Service sector performance also picked up, growing by 6.3 percent because of buoyant retail sales, which was only partially offset by weak performance of the tourism sector. By contrast, the agriculture sector recorded a lower growth of 2.4 percent compared to 3.4 percent in 2014, reflecting the falling price of agricultural commodities and unfavorable weather conditions (El Nino) (Figure 1, left panel).       4       Figure 1. Growth Momentum Is Picking Up, Driven by Domestic Demand and Strong Performance of Export-Oriented Manufacturing Contribution to GDP growth: Supply side (%) Contribution to GDP growth: Demand side (%) 6.7 6.7 7.0 6.2 7.0 6.2 6.0 6.0 5.4 0.2 5.4 0.6 5.2 6.0 5.2 1.9 0.9 5.0 1.8 1.7 5.0 0.7 2.4 1.4 1.5 2.8 4.0 2.5 2.4 3.0 2.6 3.0 4.4 4.3 4.8 3.7 3.9 2.0 2.5 3.3 1.0 2.5 2.1 1.0 1.7 0.0 ‐1.0 2011 2012 2013 2014 2015e 2011 2012 2013 2014e 2015f Taxes on products (net) Change in inventories Services Net exports Industry and construction Gross fixed capital formulation Agriculture Final consumption Total GDP GDP growth Source: Bank staff, based official data. 11. Reflecting lower oil and food prices and stable core inflation, headline consumer price inflation has moderated. Average inflation stood at 0.63 percent in 2015 as opposed to 4.1 percent in 2014. Energy price inflation is easing, because of lower international oil prices, which pushed fuel and transport prices down. Food price inflation fell to 1.5 percent in 2015 (Figure 2, left panel). Core inflation has also been stable, but there has been slight uptick in 2016 (1.2 percent, y/y, February 2016), partly reflecting seasonal factors. Figure 2. Record Low Inflation and Turnaround in Credit Growth CPI and Central Bank policy rate (%) Monetary aggregates (%, yoy) 15 30 Refinancing rate (SBV) Headline CPI 25 12 Non-food CPI 20 9 Food CPI 15 6 10 Total credit 3 Total liquidity 5 Total deposit 0 0 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Source: Bank staff, based official data. 5       12. Credit growth picked up markedly underpinned by still supportive monetary policy. Against the backdrop of declining inflation, the State Bank of Vietnam (SBV) has cut its policy rates by a cumulative 850 basis points since 2012, including a 50 basis point reduction in October 2014, with the discount rate and refinancing rate standing at 4.5 percent and 6.5 percent, respectively. Concurrently, the SBV also relaxed macro-prudential measures with Circular 36 (issued in November 2014), which increased the lending limit on short-term deposits (to 60 percent from 30 percent) and lowered risk weights for certain lending activities, including real estate loans. While there has been no further monetary easing this year, credit growth has picked up markedly, measured at around 18 percent in 2015—the highest expansion since 2011 (Figure 2, right panel). 13. Conditions in the banking system have stabilized, benefiting from ample liquidity and the more benign macroeconomic environment. Price and exchange rate stability together with a recovery of the real sector and in particular the property market have alleviated asset quality pressures. Some actions have also been taken to address structural weaknesses, especially with regard to consolidation in the sector (in line with the banking sector restructuring plan supported by EMCC). This has largely happened through mergers and acquisitions, supplemented with the SBV taking over three of the smaller insolvent banks and placing experienced managers in key positions to facilitate a turnaround in their performance.3 14. However, the banking sector continues to exhibit lingering asset quality risks. System- wide nonperforming loans (NPLs) are reported to have declined to about 3 percent of total loans, but this is likely to understate the true level of problem loans. Part of the reduction in reported NPLs is due to transfers of NPLs (equal to about 3.8 percent of gross loans) to the Vietnam Asset Management Company (VAMC).4 While Banks are required to gradually provision against assets transferred to VAMC, the underlying credit and associated capital impairment risks have not been fully eliminated. In addition, resolution of NPLs by VAMC has progressed slowly, with less than 5 percent of the transferred bad debts resolved. Efforts in this regard have been hampered by the absence of an enabling legal framework for insolvency and asset titling as well as for protecting VAMC and commercial bank staff against possible lawsuits arising from potential losses to the state in case a fair-market-price-mechanism cannot be established. However, new regulations that took effect on October 15, 2015, introduced a fair-market-value mechanism for NPL purchase by VAMC and allow greater flexibility in the disposal of NPLs, including through direct sale of bad debts. 15. Building on recent progress in improving prudential reporting standards, further steps could be taken to improve transparency and tackle structural weaknesses in the banking sector. The implementation of Circular 2 (also supported by EMCC3) was an important step forward. It has strengthened the loan classification system by requiring banks to classify loan quality according to the lowest rating assigned to the respective borrower in the central Credit Information Centre. However, underlying accounting and reporting standards are yet to be aligned to international standards and further reforms are needed to strengthen regulatory and supervisory systems. Moreover, special financial audits of banks (an unmet trigger of this operation) could be                                                              3  Despite progress, the target of reducing the total number of commercial banks to 15–17 by 2017 remains a challenging task (there are still 34 commercial banks remaining).  4 VAMC purchases are done in exchange for VAMC bonds and banks are required to provide for provisioning against transferred assets within five years (coinciding with the maturity of VAMC bonds). 6       implemented to provide more accurate and comprehensive assessments of balance sheet risks of systemically important banks, quantify the related recapitalization needs, and provide key information for the design of more credible debt resolution schemes, including restructuring and recapitalization plans. They would also help identify the main patterns of interconnectedness across banks and borrowers, thereby allowing to recognize systemic risks. Figure 3. Exchange Rate Pressures Were Accommodated by Progressive Devaluation, but the Dong Has Gained Relative Strength VND/US$ exchange rate Average exchange rate vs U.S. dollar 23,000 (Dec 2013 = 100) 22,750 Free market 135 Official rate (SBV) Vietnam dong 22,500 Euro 125.7 Upper trading band 22,250 125 Japanese Yen Com. bank (mid) Chinese RMB 22,000 117.4 Singapore $ 21,750 115 Thai bath 111.8 21,500 111.2 105.7 21,250 105 105.5 21,000 20,750 95 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Source: Bank staff, based official data. 16. Amidst volatility in international currency markets, rising exchange rate pressures were diffused with periodic devaluation and greater exchange rate flexibility. Vietnam continues to operate a crawling peg system, with the exchange rate in relation to the U.S. dollar serving as the main nominal policy anchor. Pressures on the currency have built up since early 2015 on account of both a rising trade deficit and weakening currencies across Asia, which exerted pressure on the SBV to follow suit. These pressures were further exacerbated by the depreciation of the Chinese renminbi in early August 2015. Reluctant to raise interest rates and with limited forex reserves at its disposal (less than three months of import cover), the SBV accommodated these growing pressures by devaluing the dong three times, in January, May, and August 2015 by a cumulative 3 percent and by widening the trading band from ±1 to ±3 percent. Overall, in 2015, the dong fell by about 5 percent against the U.S. dollar in nominal terms or roughly 3 percent in real terms (figure 3, left panel). In early January 2016, the SBV moved to a more market-based exchange rate policy by setting a daily reference rate of dong versus the dollar, instead of one-off periodic devaluations as applied in the past. The new mechanism takes into account movements in major foreign currencies that are relevant to Vietnam’s trade and investment activities. This step aims to preserve currency market stability and ward off pressures on export competitiveness associated with the dong’s appreciation against currencies of major trading partners (Figure 3, right panel). 17. Against the backdrop of a strengthening real economy, accumulated fiscal imbalances need to be addressed to ensure sustainable public finances. The average fiscal deficit during 2009–2014 increased to about 5 percent of GDP, markedly higher than the 1.2 percent during 2003–2008. Vietnam’s fiscal deficit (including off-budget items) increased to an estimated 6.6 percent of GDP in 2015 (Figure 4, left panel). Budget pressures partly reflect a countercyclical 7       fiscal policy response that helped avert a sharper slowdown in recent years, but also tax reforms that permanently reduced revenue raising capacity. The revenue-to-GDP ratio has declined steadily to 21.9 percent of GDP in 2014, down from 27.3 percent of GDP in 2010. A cyclical downturn in tax revenue and especially oil-related revenue was compounded by tax policy changes, including Corporate Income Tax (CIT) rate cuts (to improve competitiveness), tax incentives, temporary tax stimulus, and reductions in tariff schedules in the context of the Association of Southeast Asian Nations (ASEAN) and other trade agreements. On the expenditure side, expenditure growth moderated somewhat in 2014 and 2015 after rapid expansion during 2012–2013 driven largely by lower government investment. With domestic demand strengthening, the need for fiscal stimulus is now reduced and a gradual growth-friendly fiscal consolidation would help rebuild fiscal buffers and ensure a sustainable debt trajectory. Figure 4. Accumulated Fiscal Imbalances Have Pushed Up Public Debt Fiscal Aggregates (% of GDP) Public debt (% of GDP 40.0 65.0 30.0 29.4 30.5 28.6 26.9 28.2 11.0 30.0 11.3 45.0 11.1 10.5 10.4 10.6 20.0 27.2 25.9 22.7 23.1 21.9 22.1 25.0 45.0 48.5 10.0 37.6 36.0 37.2 40.5 0.0 5.0 -2.8 -1.0 -10.0 2010 2011 2012 2013 2014 2015e -6.7 -7.4 -6.2 -6.5 2010 2011 2012 2013 2014 2015e -15.0 Provincial debt Fiscal balance Government-guaranteed debt Total revenue and grants Government debt Total expenditure (including off-budget items) Source: Bank staff based official data. 18. Vietnam’s public-debt-to-GDP ratio has increased rapidly over the past few years. Sizable fiscal deficits have raised concerns about the medium-term sustainability of the current fiscal position and corresponding public debt path. Vietnam’s public and publicly guaranteed debt increased markedly from 48.4 percent of GDP in 2010 to an estimated 60.8 percent in 2015 (Figure 4, right panel). Of this, 48.5 percent of GDP is debt directly owed by the central government, 11 percent of GDP is debt guaranteed by the central government, and about 1.3 percent of GDP is debt of provincial governments. The debt level is fast approaching Vietnam’s statutory debt limit of 65 percent of GDP (which was adopted with support of EMCC). The government has mainly relied on domestic debt to meet its growing financing needs. The share of domestic debt in total public debt increased from 45 percent in 2010 to 55 percent in 2015. While reducing exchange rate risks, the greater reliance on domestic debt has increased the average interest rate and significantly shortened the maturity profile of public debt, reflecting a relatively shallow domestic debt market with few participants, mainly from the banking sector. As a result, debt service payments pose an increasing burden on the budget. Interest expenditures have risen sharply, both as share of GDP and share of government revenue. In 2015, the government spent about 9 percent of its total revenue (including grants) on interest payments (up from 4.3 percent in 2010), crowding 8       out more productive spending. Payment of public debts, including amortization, has risen to about 16 percent of government revenue in 2015, highlighting intensifying fiscal financing risks. 19. Vietnam’s export performance remains strong despite a slowdown in export growth in 2015. Against the backdrop of subdued global trade growth since 2009, Vietnamese export performance stands out. Exports expanded rapidly, at an average of 21.5 percent, over the past five years (2010–2014), reflecting strong foreign direct investment in expanded manufacturing capacities in major labor-intensive sectors. Overall export growth moderated somewhat, to 8.1 percent in 2015, mainly due to slowing traditional exports of the domestic sector reflecting a sharp fall in export prices as well as declining volumes in key commodities such as crude oil, coal, rice, coffee, and rubber. In contrast, the foreign-invested manufacturing sector, which now accounts for about 70 percent of Vietnam’s total export value, continued to expand rapidly by 18.5 percent in 2015. As such, Vietnam’s export performance stands out, not only in comparison to other countries in the region but globally. 20. Meanwhile, imports, especially of capital goods, continued to surge, reflecting the uptick in investment activity and high import content of some of Vietnam’s exports. Imports grew by 12 percent in 2014 and kept the same growth rate of 12 percent in 2015, resulting in an emerging trade deficit of nearly US$3.2 billion compared to a surplus of US$2.4 billion in 2014. On the one hand, the growth in imports indicates ongoing capacity extension of production facilities, reflecting positive investor sentiment. On the other hand, the emerging trade deficit also points to underlying structural weaknesses in Vietnam’s export sector, where its major exports— garments, electronics, and footwear—have high import content requiring imports of raw material and intermediate inputs. Figure 5. Current Account Surpluses and Robust FDI Have Allowed for a Gradual Buildup of Reserves, Albeit from a Relatively Low Level Balance of payments (% of GDP) Foreign reserves 12 40 4 9 7.7 30 3 6 4.6 3 20 2 1.1 0 0.2 -1.2 10 1 -3 -6 0 0 2011 2012 2013 2014e 2015f Q3-11 Q3-12 Q3-13 Q3-14 Q3-15 Curent account Capital account Reserves (accumulated, US$ billion, LHS) Error & omissions Overall balance Import covers (month) Source: SBV and Bank estimates 21. Due to the weakening of the trade position, Vietnam’s current account has narrowed significantly during the first half of 2015. After posting a current account surplus of about 5.4 percent of GDP in 2011–2014, the current account narrowed to 0.01 percent of GDP at the end of 9       the first three quarters of 2015. An emerging trade deficit (for goods and services) and transfer payments related to the repatriation of profits in the FDI sector were only partially offset by robust remittance inflows. 22. Despite a weakening current account balance, external financing risks are mitigated by robust FDI inflows and Vietnam’s largely long-term concessional external debt. Strong and diversified FDI inflows and external loans bolstered the financial account and allowed for further buildup of reserves. FDI disbursement increased rapidly by 17.4 percent to about US$14.5 billion in 2015. External debt rollover rates also remained solid, aided by stable official inflows and by credit rating upgrades as both Moody’s and Fitch upgraded Vietnam’s sovereign rating by one notch due to its stable outlook. However, interventions by the SBV in the third quarter put pressure on international reserves, which declined to 2.2 months of import cover at the end of September 2015 compared to 2.8 months of imports at the end of 2014 (Figure 5). 2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 23. The medium-term outlook for Vietnam is broadly positive. Forward-looking indicators suggest that economic recovery will remain on track. GDP growth is expected to moderate to 6.2 percent in 2016, due to slow-down in exports and domestic demand and especially investment growth. On the supply side, growth is expected to continue to be led by manufacturing and construction. GDP growth is forecasted to stabilize at around 6.3 percent in the outer years (in line with potential growth) (Table 1). The baseline scenario assumes fiscal and monetary prudence as well as continuation of structural reforms to improve efficiency in resource allocation across the economy and strengthen competitiveness, including those supported by the EMCC series. 24. Inflation is expected to remain low on account of low global energy and food prices before rebounding somewhat in the medium term. Moderate inflation expectations decrease the likelihood that the SBV will tighten monetary policy over the short term. In this context, banks’ lending is forecasted to continue to accelerate in the near term, in response to increasing demand for credit and improved banks’ balance sheets. Given the increasing demand in the fourth quarter of 2015, credit growth is projected to exceed the annual target of 15 percent set by the SBV. In addition, a program to consolidate or close small, weak banks should further strengthen the financial system. 10       Table 1. Vietnam Key Economic Indicators 2013 2014e 2015e 2016f 2017f 2018f Real economy Real GDP (% change) 5.4 6.0 6.7 6.2 6.3 6.3 Agriculture 2.6 3.4 2.4 1.0 1.5 2.0 Industry and construction 5.1 6.4 9.6 9.0 8.8 8.5 Services 6.7 6.2 6.3 6.4 6.3 6.3 Index of industrial production (year-on-year change, 5.9 7.6 9.5 8.5 8.2 8.2 %) Unemployment rate (%, urban areas) 3.6 3.4 3.5 3.5 3.5 3.5 Prices Consumer price index (% change, period-end) 6.0 1.8 0.6 3.3 4.0 4.2 Consumer price index (% change, annual average) 6.6 4.1 0.6 3.5 3.8 4.0 GDP deflator (%, change) 4.8 3.7 -0.2 3.2 3.3 3.3 Fiscal accounts (% GDP) Total revenue and grants 23.1 21.9 22.1 22.2 22.1 22.2 Total expenditure (including off-budget items) 30.5 28.2 28.6 28.1 27.8 27.7 Fiscal balance -7.4 -6.2 -6.5 -5.9 -5.7 -5.5 Public and publically guaranteed debt 52.4 57.2 60.8 62.2 63.2 63.9 External public and publically guaranteed debt 28.2 27.1 26.5 27.6 27.9 28.2 External accounts Exports of goods (fob, % GDP) 77.4 80.7 84.6 88.3 93.7 99.8 Exports of goods (% change) 15.3 13.8 8.1 10.1 11.9 12.2 Imports of goods, (cif, % GDP) 77.4 79.4 86.5 91.9 98.4 106.5 Imports of goods (% change) 16.0 12.0 12.0 12.4 12.9 13.9 FDI (Inflows, US$, billions) 8.9 9.2 9.7 10.6 11.5 12.8 Current account balance (% GDP) 5.5 4.9 0.0 -0.6 -0.5 0.2 Reserves, including gold (US$, billions) 25.8 34.4 31.7 38.9 47.6 58.4 Reserves (in months of imports) 2.3 2.8 2.3 2.4 2.6 2.8 Monetary Credit to the economy (% change, period-end) 8.8 12.7 18.0 18.0 18.0 16.0 Short-term interest rate (3-month deposits, period- 6.5 5.5 5.0 --- --- --- end) Stock market - Vietnam index (Jul 2000 =100) 505 546 579 --- --- --- Memo items GDP (nominal, VNG, trillions) 3,584 3,938 4,193 4,610 5,055 5,538 GDP (nominal, US$, billions) 171 186 192 --- --- --- Source: Bank staff, based on official data. Note: cif = cost, insurance, and freight; fob = free on board. 25. The trade balance is projected to continue weakening due to a combination of moderating exports and sustained import growth stoked by stronger domestic economic activity. However, robust remittances will contain the current account deficit. Over the medium term, robust export growth is expected to be sustained, especially as Vietnam is expected to reap the benefits of the recently concluded Transpacific Trade Agreement, the EU Free Trade Agreement, and ASEAN Free Trade Area. Imports are also expected to continue to expand rapidly, 11       due to strong demand for imports of intermediate and capital goods as well as pick up consumer goods, in particular those for which import tariffs will be reduced (for example, cars). Despite volatility in capital flows in emerging markets, FDI inflows to Vietnam are expected to remain resilient, reflecting robust investor confidence and Vietnam’s favorable economic prospects. Portfolio inflows, which until now have been negligible, are also expected to pick up gradually over the medium term, as a result of recent steps to liberalize foreign ownership restrictions in Vietnam’s capital market and greater reliance on international bonds to meet fiscal financing needs. Overall, foreign reserves are expected to increase gradually over the projection period. However, given low reserve levels, more exchange rate flexibility may be needed in case capital outflows occur, especially in the context of fragile global financial conditions.  Table 2. Balance of Payments Financing Requirements and Sources (US$, billions) 2014e 2015e 2016f 2017f 2018f Financing requirements 20.5 30.7 33.6 34.2 34.5 Current account deficit −9.1 −0.3 1.2 1.2 −0.4 Long-term debt amortization 4.7 4.1 5.4 6.1 6.5 Short-term debt amortization 17.3 19.0 20.6 19.6 20.0 Other capital outflows (including 7.6 7.9 6.4 7.3 8.4 deposits) Financing sources 20.5 30.7 33.6 34.2 34.5 FDI and portfolio investment (net) 8.1 8.7 9.8 10.9 12.2 Long-term debt disbursement 9.7 9.8 9.2 8.6 8.1 Short-term debt disbursement 19.0 18.6 18.6 19.0 19.2 Other capital inflows (including −1.4 −2.1 3.2 4.5 5.7 deposits) Change in the reserves −8.6 2.3 −7.1 −8.7 −10.8 Errors and omissions −6.3 −6.6 0.0 0.0 0.0 Source: Bank staff, based official data. 26. The fiscal deficit is expected to start adjusting through consolidation efforts to avoid further increases in public debt. In the socio-economic development plan (SEDP) 2016-20, the government has made commitments to restore fiscal discipline over the medium term to achieve a fiscal deficit of 4 percent of GDP by 2020. In line with this commitment the approved 2016 budget targets a headline fiscal deficit of 5.8 percent of GDP and the deficit is expected to be gradually reduced to about 4.8 percent of GDP in 2018. As a result, the underlying primary deficit will decline from 4.5 percent of GDP in 2014 to 3 percent of GDP in 2018. As such, the size of the planned adjustment is sufficient to stabilize the debt-to-GDP-ratio over the medium, but it is important that this deficit reduction is achieved through a quality and growth-friendly adjustment. Strengthening revenue collection, in particular from the non-oil sector, will require continued efforts to reduce tax evasion and broaden the revenue base of major taxes, such as VAT and CIT, including through the withdrawal of various tax incentives introduced over the past years. On the expenditure side, civil service reform and employment rationalization would help restrain further growth of the wage bill. Investment, especially off-budget, is also expected to decline further reflecting withdrawal of stimulus measures, but given Vietnam’s infrastructure investment needs is crucial to sustain adequate levels capital spending. 12       Table 3. Key Fiscal Indicators (% of GDP) 2013 2014e 2015e 2016 p 2017f 2018f Total revenue and grants 23.1 21.9 22.1 22.2 22.1 22.2 Revenue (excluding grants) 22.8 21.8 22.0 22.1 22.0 22.2 Tax revenue 19.5 18.2 17.9 17.8 17.9 18.2 Oil revenues 3.4 2.5 1.5 1.2 1.1 1.0 Non-oil tax revenues 16.1 15.7 16.4 16.6 16.8 17.2 Corporate income tax 5.6 4.9 4.6 4.4 4.3 4.2 Trade taxes 2.2 2.4 2.3 2.0 1.9 1.8 VAT 6.2 6.1 6.3 6.4 6.6 7.0 Other taxes 2.2 2.2 3.2 3.9 4.0 4.2 Non-tax and capital revenues 3.3 3.5 4.1 4.4 4.1 4.0 Grants 0.3 0.2 0.1 0.1 0.0 0.0 Total expenditure 30.5 28.2 28.6 28.1 27.8 27.7 Current 21.2 20.3 21.2 20.7 20.7 20.7 Administrative 2.7 2.5 2.6 2.6 2.5 2.4 Economic 2.0 1.9 2.0 1.8 1.8 1.8 Social 9.9 10.9 9.6 9.0 9.0 9.0 Education and training 4.7 4.5 4.5 4.2 4.2 4.2 Health and population 1.7 1.6 1.7 1.6 1.6 1.6 Pension and Social protection 3.0 2.8 2.9 2.6 2.5 2.5 Interest payment 1.3 1.7 2.0 2.1 2.3 2.5 Others 5.2 3.4 5.0 5.2 5.2 4.9 Capital 7.6 5.3 5.1 5.8 5.8 5.9 Off-budget expenditures 1.7 2.5 2.3 1.6 1.3 1.2 Overall fiscal balance -7.4 -6.2 -6.5 -5.9 -5.7 -5.5 Primary deficit -6.1 -4.5 -4.5 -3.8 -3.4 -3.0 Source: Bank staff, based official data. 27. Public debt is assessed as sustainable but hinges on successful implementation of the envisaged fiscal consolidation program and remains subject to substantial risks. Large fiscal deficits over the past few years have eroded fiscal buffers, shortened the maturity profile, and increased the debt service burden on the budget. Without adjustment of the current fiscal position, Vietnam’s debt path will quickly enter the territory of increased risk of distress and pose headwinds to growth and macroeconomic stability. It is therefore crucial that fiscal consolidation plans in line with current government commitments are consistently implemented to ensure the public debt trajectory returns to a sustainable path. The need for fiscal restraint is especially important in the context of the prospective decline in access to concessional external financing. In the baseline scenario, which is based on the overall macroeconomic framework and predicated on successful implementation of the planned adjustment, public debt will peak at 63.9 percent of GDP in 2018, then stabilize, and gradually decline from there onward. This baseline assessment is subject to considerable risk, including in particular delays in fiscal consolidation and persistent primary deficits exceeding the debt stabilizing level as well as growth and exchange rate shocks. 13       Figure 6. Public Debt Is Sustainable but Subject to Considerable Risks Gross Nominal Public Debt Public Gross Financing Needs (in percent of GDP) (in percent of GDP) 74 16 72 14 70 12 68 66 10 64 8 62 Baseline Baseline 6 60 Primary Balance Shock Primary Balance Shock Real GDP Growth Shock 4 Real GDP Growth Shock 58 Real Interest Rate Shock Real Interest Rate Shock Real Exchange Rate Shock 2 Real Exchange Rate Shock 56 Constant Primary Balance Constant Primary Balance 54 0 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Source: Bank staff, based official data. 28. The baseline outlook for Vietnam is positive, but there are downside risks. On the domestic front, slow structural reform progress poses significant risks to medium-term growth prospects. Structural reforms remain critical for Vietnam’s competitiveness and medium-term growth prospects, in particular given its gradual reform path and remaining institutional legacies with incomplete market institutions. Risks of reform slippages are somewhat mitigated by the recent conclusion of the Transpacific Trade Agreement, which is expected to serve as an external anchor for structural reforms, including in difficult reform areas such as competition, State Owned Enterprise (SOE) management, public procurement, and liberalization of services, including financial services and telecommunications. Fiscal risks are also substantial and delays in implementing fiscal consolidation would pose a serious risk to debt sustainability. Growing expenditure pressures deriving from high recurrent expenditures, including on the wage bill, can make efforts to reduce the deficit challenging. Fiscal risks are further aggravated by contingent liabilities associated with SOE debt and state-owned banks. With credit growth accelerating, risks in the banking sector, including possible overheating, are also intensifying and, if not managed prudently, can result in renewed instability with adverse impacts on growth. On the external front, slower-than-expected growth in key export markets, notably the United States, EU, Japan, and China, may pose a risk to export performance and growth. In addition, with the anticipated policy rate liftoff in the United States, financial market volatility is expected to remain relatively high, leading to capital outflows from emerging markets and causing sovereign spreads to rise, with the latter being of particular concern to Vietnam, given its large gross public financing needs that are expected to partially be met by international bond issuances. 14       2.3 IMF RELATIONS 29. While there is currently no active IMF program, the IMF maintains regular macroeconomic surveillance and policy dialogue in the context of its Article IV consultations. The previous IMF Poverty Reduction and Growth Facility ended in April 2004. Since then, the engagement with the IMF has focused on regular macroeconomic surveillance, policy dialogue and technical assistance support, including in fiscal policy, debt management, banking sector supervision, macroeconomic modeling and monetary policy. The World Bank and the IMF team are collaborating and exchanging views on pertinent fiscal and macroeconomic policy issues. III. THE GOVERNMENT’S PROGRAM 30. The Government’s development priorities are set out in its Socio-Economic Development Strategy (2011-2020). The SEDS has a long-term growth strategy focused on structural reforms, environmental sustainability, social equity, and macroeconomic stability to minimize vulnerability to shocks. It identifies three areas of ‘strategic breakthrough’: (i) improved market institutions and administrative reforms for a more competitive and equitable business environment; (ii) development of human resources and investment in science and technology; and (iii) improved infrastructure. Policy actions and programs to achieve the SEDS’ development goals are further elaborated in two Socio-economic Development Plans (2011-15 and 2016-20). The structural reform agenda specified by the SEDP 2011-15 aims to achieve the first breakthrough and put emphasis on the restructuring of three areas of economic governance: financial system, SOEs and public investment. 31. Complementing the SEDS, the government in 2013 also adopted a Master Plan for Restructuring of the Economy. On SOEs, the government has prioritized the restructuring of State Economic Groups and General Corporations, acceleration of equitization and the divestment of SOEs from the non-strategic sectors, strengthening corporate governance including information disclosure, and improving the regulatory environment for SOEs. On the banking sector the government has committed to restructure weak banks, prioritize policies for dealing with systemic risks including Non-Performing Loans, and improve banking supervision. On public investment management, it has committed to improve public investment planning, reduce fragmentation in capital spending, and enhance the efficiency of projects through strengthened appraisal, accountability and oversight. 32. To help steer national competitiveness efforts, the Prime Minister established a National Council on Sustainable Development and Competitiveness Capacity Enhancement. The National Council was set up on May 31, 2012 by Decision 641 of the Prime Minister. It is chaired by a Deputy Prime Minister. The Ministry of Planning and Investment (MPI), the Ministry of Labor, Invalids and Social Assistance (MOLISA); and the Ministry of Natural Resources and Environment (MONRE) play lead roles. But the Council has government-wide membership to advise the Prime Minister on priority actions to enhance national competitiveness. One of the Council’s tasks is to monitor progress on a regular basis. 33. Signaling continuity in the broad policy directions, the new SEDP 2016-20 sustains major economic reforms initiated under the current SEDP 2011-15. The Government is in the process of finalizing the SEDP 2016-20 which places emphasis on the continuation and 15       acceleration of the reform agenda set out by SEDP2011-15. The reform efforts aim to address critical binding constraints to productivity growth and to transform Vietnam’s growth model to achieve higher productivity growth. The SEDP2016-20 includes a medium-term investment plan and sets a target for completion of SOEs restructuring by 2018. IV. THE PROPOSED OPERATION 4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 34. The EMCC policy program is designed to reinforce selected structural and economic governance reforms of the SEDP 2011-15. Aligned to the targets and measures, identified in the SEDP 2011-15, the program is structured around three main pillars: (i) strengthened financial sector governance and fiscal management for macroeconomic stability; (ii) improved public administration, SOE management and public investment management for more transparency, efficiency and accountability in the public sector; and (iii) reduced administrative burden and strengthened tax and procurement policies for an enabling business environment. The EMCC policy program and specific prior actions are firmly placed under the first break-through area of the SEDP 2011-15. 35. The EMCC3 policy program has been narrowed to focus on a selected set of nine prior actions. This compares to eleven EMCC3 triggers that were presented in the EMCC2 board document. The modifications of the program were guided by three main objectives. First, given the relatively large number of initial triggers, the modifications aim to streamline the program and focus on core reform measures. Second, the modification reflect feasibility of actions in light of an evolving reform environment. The EMCC policy program is addressing technically complex and politically challenging reforms and some triggers originally included the program are no longer feasible. Third, the modifications seek to selectively strengthen the policy content and in particular ensure direct links to the stated program objectives. The main modifications are as follows:  Trigger 1.6 “GOV has initiated a specialized audit of the portfolio/credit quality of at least one systemically important bank” (Dropped): This trigger was intended to support the pilot implementation of special financial audit of at least one systemically important bank to help to identify systemic risks and potential recapitalization needs. While the authorities undertook audits in several banks, these were conducted according to the outdated loan classification (Decision 493) limiting the quality of the results and the audit. As such, these audits did not constitute fulfillment of the requirements to mark it as completed. There are currently no plans by the authorities to undertake special audits.  Trigger 4.4 “GOV has submitted a draft Law to NA setting out rules, regulations and oversight for investment and management of state capital in State Enterprises including consolidation of state accountabilities” (Dropped): The Law on Management of State Capital was passed by the NA in November 2014. The law is a significant step forward in strengthening the framework for management of SOE and state equity holdings. However, the law does not address the issue of consolidation of accountabilities and separation of regulatory and ownership functions. There are many legitimate reasons for this, in particular the challenge 16       of finding a suitable model for a more consolidated ownership function that is workable in the context of Vietnam with a large number of remaining SOEs. Given that stated original objectives of the trigger are not feasible in the short term, the related trigger has been dropped from the program. The authorities are now exploring alternative institutional models to achieve a stricter separation of regulatory and ownership functions. Moreover, since the remaining triggers related to reform of the SOE sector (pertaining to divestment of non-core assets and disclosure) are strong, the overall objective of this pillar remains relevant and feasible.  Trigger 6.4 “The Administrative Procedures Control Agency has adopted a Monitoring and Evaluation system for administrative procedures control” (Replaced): While the implementation of the Monitoring and Evaluation System has been achieved, this trigger is replaced with the adoption of resolution 19 on investment climate reforms which constitutes a stronger policy action towards the EMCC objective of improving the business environment and competitiveness by streamlining administrative and tax procedures. Table 4: Program Modifications Initial EMCC3 Triggers Revised EMCC3 Prior Actions Reasons for change PILLAR 1: STRENGTHENED FINANCIAL SECTOR GOVERNANCE AND FISCAL MANAGEMENT 1.5 Public reporting on the ratio 1.5 The Borrower, through State Bank of The second part of the trigger of NPLs across the banking Vietnam, has publicized publicly disclosed related to reporting of provisioning system based on through its official website the level of non- data was dropped from the action. implementation of Circular 02 performing loans in commercial banks by While the first part of the trigger on loan loss classification and end of 2015 in accordance with Circular related to public disclosure of provisioning. The SBV has 02/2013/TT-NHNN dated January 21, 2013 NPLs is a policy action that is reported to the World Bank the on asset classification and provisioning as expected to improve transparency level of provisioning in amended by Circular 09/2014/TT-NHNN and monitoring of NPLs, reporting commercial banks in dated March 18, 2014 as evidenced through of provisioning data to the World accordance with Circular 02 a letter dated March 22, 2016 provided by Bank on a one-off basis does not based on audited financial the State Bank of Vietnam to the Bank contribute to a systematic statements received by SBV for improvement in banking the year ending December 31, supervision and would not 2014. substantially contribute to achievement of the associated PDO. 1.6 GOV has initiated a Dropped Trigger no longer feasible. While specialized audit of the the authorities undertook audits in portfolio/credit quality of at several banks, these were least one systemically conducted according to the important bank. outdated loan classification (Decision 493) limiting the quality of the results and the audit. As such, these audits did not constitute fulfillment of the requirements to mark it as completed. There are currently no plans by the authorities to undertake special audits. 2.4 The Borrower, through the 2.4 The Borrower, through the Ministry of No material change. Ministry of Finance, has Finance, has prepared an updated medium- 17       prepared an updated medium- term debt management program for the term debt management program period 2016-20, with strengthened risk for the period 2016-20, with analysis based on additional scenarios and strengthened risk analysis based updated macroeconomic assumptions as on additional scenarios and evidenced through a letter provided by MOF updated macroeconomic to the Bank assumptions as evidenced through official letter of Ministry of Finance and excerpt of report 111/BTC-NSNN, dated February 19th 2016 2.5 GOV has fully implemented 2.5 The Borrower, through State Treasury, No material change. Treasury Single Account (TSA) has implemented Treasury Single Account arrangements at SBV, procedures in the State Bank of Vietnam, Vietcombank and Vietnam Vietcombank, and Vietnam Bank for Bank for Agriculture and Rural Agriculture and Rural Development as Development. evidenced through a number of official letters on implementation provided by the Ministry of Finance to the Bank. PILLAR 2: STRENGTHENED PUBLIC ADMINISTRATION, SOE MANAGEMENT AND PUBLIC INVESTMENT MANAGEMENT 4.4 GOV has submitted a draft Dropped Law was enacted but consolidation Law to NA setting out rules, of ownership function is not regulations and oversight for feasible. There are many legitimate investment and management of reasons for this, in particular the state capital in State Enterprises challenge of finding a suitable including consolidation of state model for a more consolidated accountabilities. ownership function that is workable in the context of Vietnam with a large number of remaining SOEs. The authorities are now exploring alternative institutional models to achieve a stricter separation of regulatory and ownership functions. 4.5 At least five SEGs have 4.4 The Borrower, through the Ministry of Scope of Prior Action was aligned completed the divestment of Finance and State Economic Groups, has with new government target. five high-risk non-core implemented divestment of eighty (80) businesses consistent with percent of five high-risk, non-core relevant Prime Ministerial businesses in six State Economic Groups decisions (ref prior action 4.2 in consistent with Instruments on EMCC2). Restructuring of State Economic Groups, as evidenced through a report on implementation provided by the Ministry of Finance to the Bank. 4.6 GOV has implemented 4.5 The Borrower, through its Government, No material change. Decree 61 with publication of has implemented Decree Number key financial performance of all 61/2013/ND-CP, dated June 25, 2013 which SEGs. has been replaced by Decree Number 87/2015/ND-CP, dated October 6, 2015, adopting the audited reports on the public dissemination of the key financial performance of all State Economic Groups, as evidenced through a report on implementation provided by the Ministry of 18       Finance to the Bank. 5.4 A Public Investment Law 5.3 The Borrower, through National No material change, but has been issued, establishing a Assembly, has adopted the Public formulation was modified to focus comprehensive legal Investment Law Number 49/2014/QH13, on the substance of the law as framework to improve dated June 18, 2014 to establish a opposed to outcomes (reduced efficiency of capital spending; comprehensive legal framework to improve leakage and waste) reduce fragmentation in public capital spending efficiency; reduce public investments; align public investment fragmentation; align public investments to national investments with national development development plans; address plans and improve public disclosure and leakage and waste; and improve transparency. public disclosure and transparency. PILLAR 3: REDUCED ADMINISTRATIVE BURDEN AND STRENGTHENED TAX AND PROCUREMENT POLICIES 6.4 The Administrative 6.7 The Borrower, through Government has Strengthened the policy content of Procedures Control Agency has adopted Resolution 19/NQ-CP/2015, dated the business environment pillar of adopted a Monitoring and March 12, 2015, on key duties and solutions the program Evaluation system for to improve business environment and administrative procedures national competitiveness in 2015 – 2016 and control. enhance the Borrower’s business environment through the simplification of tax procedures for taxpayers. 6.5 GOV through MPI has 6.6 The Borrower, through its Government, No material change adopted decrees and circulars has adopted appropriate Implementation for implementation the Instruments in accordance with the amended Procurement Law. Amended Law on Procurement. 7.3 GOV has adopted a 6.8 The Borrower, through its Government, No material change Decision to increase the has adopted Decree 60/2015/ND-CP dated percentage of foreign investors’ June 26th 2015, eliminating limitations on participation in selected areas foreign investors’ participation in public in the stock market companies in selected areas of the stock market. 36. Reflecting the adjustments to the program, the loan amount for EMCC3 has been adjusted to US$150 million (compared to US$250 originally planned). This adjustment in the loan amount recognizes that the remaining core program comprises several strong and credible reform measures, while at the same time reflecting that some important triggers, envisaged in the original program have slipped. 37. Despite these program modifications, the overall objectives and expected impact of the program remain relevant. However, given the more protracted program implementation, the timeline for the results framework has been recalibrated to reflect that impact of the program may take longer to materialize. In addition, the project development objectives and results framework has been streamlined to reduce the large number of initial results indicators and to focus on key indictors to assess impact and outcomes of the series, in line with recommended good practice for DPO result frameworks.5 All changes to the results framework are summarized in annex 2.                                                              5 Revision of the results framework and reduction of the number of indicators was a key recommendation of the concept review meeting for this operation. 19       38. The EMCC builds on extensive experience and reviews of the Poverty Reduction Support Credit series in Vietnam, and lessons from DPO Retrospectives. The PRSC Implementation Completion Review noted that the series provided a strong basis for policy dialogue, enabled better alignment of donor programs to government priorities and, as a result, leveraged more resources for the country. However, some of the challenges in the latter part of the series included: maintaining momentum and commitment across the entire breadth of the program. Despite the broad range of policy areas under EMCC, compared to the PRSC this series is more narrowly focused on priority, inter-linked economic management issues. For example: the Anti- Corruption Law has provisions on the transparency of SOEs; the resolution of NPLs in the banking sector is directly linked to the SOE agenda; the efforts to prioritize and monitor the simplification of administrative procedures are linked directly to tax administration and business registration reforms. The final operation further narrowed the policy program on a more focused set of prior actions. 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS 39. Marking completion of both the current SEDP as well as the EMCC programmatic series, this final operation seeks to consolidate reform gains while putting increasing focus on implementation and results. Reflecting the maturing program, the focus of the series has increasingly shifted towards implementation. While several major legislative and regulatory changes were adopted with support of EMCC1 and EMCC2, under EMCC3 the majority of prior actions are focused on implementation and enforcement of policy changes adopted with support of its two predecessors. All prior actions of the program have been completed. 40. Across all three pillars the EMCC program and policy dialogue is underpinned by deep technical assistance and advisory engagements. A parallel trust-funded program of dedicated technical assistance (EMCC AAA) informed the design and implementation of the overall program. This main program was completed by ongoing sectoral technical assistance and advisory work that underpinned the policy dialogue and implementation support on detailed policy actions in the areas of financial sector reforms (FSAP and Programmatic AAA on Financial Sector Soundness and Institutional Capacity Building), debt management (MTDS and debt management technical assistance), SOE reform (VDR 2012 on Market Economy for a Middle Income Vietnam), and Public investment reform (Public investment management TA). Analytical underpinnings are summarized in table 5. Table 5: Prior Actions and Analytical Underpinnings EMCC3 Prior Action Analytical underpinnings 1.5 The Borrower, through State Bank of Vietnam, has publicized  2014 Financial Sector Assessment publicly disclosed through its official website the level of non- (FSAP) performing loans in commercial banks by end of 2015 in  Programmatic AAA on Financial Sector accordance with Circular 02/2013/TT-NHNN dated January 21, Soundness and Institutional Capacity 2013 on asset classification and provisioning as amended by Building (P130197) Circular 09/2014/TT-NHNN dated March 18, 2014 as evidenced  Programmatic AAA on Economic through a letter dated March 22, 2016 provided by the State Bank Management and Competitiveness of Vietnam to the Bank. (P143405) 20       2.4 The Borrower, through the Ministry of Finance, has prepared  Vietnam Debt Management TA an updated medium-term debt management program for the period (P150800) 2016-20, with strengthened risk analysis based on additional  World Bank/ IMF Medium Term Debt scenarios and updated macroeconomic assumptions as evidenced Management Strategy Report 2015 through official letter of Ministry of Finance and excerpt of report 111/BTC-NSNN, dated February 19th 2016. 2.5 The Borrower, through State Treasury, has implemented  Programmatic AAA on Economic Treasury Single Account procedures in the State Bank of Vietnam, Management and Competitiveness Vietcombank, and Vietnam Bank for Agriculture and Rural (P143405) Development as evidenced through a number of official letters on  World Bank EMCC Policy Note implementation provided by the Ministry of Finance to the Bank. Implementation of Treasury Single Account and Strengthening Cash Management in Vietnam 4.4 The Borrower, through the Ministry of Finance and State  Programmatic AAA on Economic Economic Groups, has implemented divestment of eighty (80) Management and Competitiveness percent of five high-risk, non-core businesses in six State (P143405) Economic Groups consistent with Instruments on Restructuring of  World Bank 2010 Vietnam State Economic Groups, as evidenced through a report on Development Report Modern implementation provided by the Ministry of Finance to the Bank. Institutions 4.5 The Borrower, through its Government, has implemented  Programmatic AAA on Economic Decree Number 61/2013/ND-CP, dated June 25, 2013 which has Management and Competitiveness been replaced by Decree Number 87/2015/ND-CP, dated October (P143405) 6, 2015, adopting the audited reports on the public dissemination  World Bank 2010 Vietnam of the key financial performance of all State Economic Groups, as Development Report Modern evidenced through a report on implementation provided by the Institutions Ministry of Finance to the Bank.  World Bank EMCC Policy Note Transparency of State Owned Enterprises in Vietnam 5.3 The Borrower, through National Assembly, has adopted the  Programmatic AAA on Economic Public Investment Law Number 49/2014/QH13, dated June 18, Management and Competitiveness 2014 to: establish a comprehensive legal framework to improve (P143405) capital spending efficiency; reduce public investment fragmentation; align public investments with national development plans and improve public disclosure and transparency. 6.6  The Borrower, through its Government , has adopted  Programmatic AAA on Economic appropriate Implementation Instruments in accordance with the Management and Competitiveness Amended Law on Procurement (P143405) 6.7 The Borrower, through Government has adopted Resolution  Programmatic AAA on Economic 19/NQ-CP, dated March 12, 2015, on key duties and solutions to Management and Competitiveness improve business environment and national competitiveness in (P143405) 2015 – 2016 and enhance the Borrower’s business environment through the simplification of tax procedures for taxpayers. 6.8 The Borrower, through its Government, has adopted Decree  Programmatic AAA on Economic 60/2015/ND-CP dated June 26th 2015, eliminating limitations on Management and Competitiveness foreign investors’ participation in public companies in selected (P143405) areas of the stock market. 21       PILLAR 1: STRENGTHENED FINANCIAL SECTOR GOVERNANCE AND FISCAL MANAGEMENT 41. The first pillar aims to contribute to maintaining macroeconomic stability in Vietnam. The pillar seeks to achieve two objectives (i) strengthened policies for management of non-performing loans and promote the restructuring of banks and (ii) strengthened debt and treasury management. Sub-Objective 1 Strengthened policies for management of Non-Performing Loans and promoting the restructuring of banks Reform context and results 42. Vietnam’s banking system has experienced considerable stress in recent years. After a long period of rapid growth, Vietnam’s economy experienced episodes of corporate and financial distress, and weaker growth in recent years. Increased macroeconomic volatility, especially during 2009-2013 further compounded these problems and contributed to deterioration in the quality of loan portfolios of banks. Several segments of the corporate sector have exhibited poor performance and financial distress, and have affected the health of the banking system. Large state owned enterprises (SOEs) have defaulted on their obligations and several others appear to be overleveraged. As a consequence, the banking system has accumulated a significant amount of non-performing loans (NPLs), with and many small banks have experienced more serious liquidity and solvency problems in the same period, leading to interventions by the State Bank of Vietnam (SBV). 43. To contain banking sector risks the government announced a comprehensive reform program and banking sector restructuring plan (with EMCC1 support). The reform program was officially documented in the Socio-Economic Development Plan (SEDP) for the period 2011– 2015, approved by the National Assembly in November 2011. To operationalize the broad objectives of the SEDP, PM Decision 254/2012 (EMCC1 prior action) laid out a comprehensive and detailed banking sector restructuring plan focused on stabilizing the banking sector, reducing risks of systemic crisis, and strengthened oversight and regulation. 44. The State Bank of Vietnam (SBV) also strengthened its supervision in this phase in order to restore the safety and soundness of the sector (with support of EMCC1 and EMCC3). Towards these objectives, the regulators have concentrated on by promulgating stricter prudential regulations, applying better risk management for the system (by gradually phasing in Basel II principles. Loan classification and provisioning were improved towards international good practices with the issuance of Circular 2 in early 2013 (EMCC1 prior action). After effectiveness of the circular was postponed several times to allow banks to give banks sufficient time prepare for compliance with the new requirements, Circular 02 finally became effective in April 2015 (EMCC3 prior action). 45. In parallel, the restructuring plan aims to consolidate the banking sector. The SBV has encourage several M&As between banks reducing the numbers of licensed commercial banks to 35 (from 42 prior to the reform) with the aim to consolidate the banking system and address cross-ownership between banks, hence reduce some systemic risks. The SBV also took over 3 22       smaller banks and placed experienced SOCBs management in key positions to facilitate a turn- around of their operations. Despite adoption of Decree 01 (EMCC2 prior action) allowing foreign investment to acquire more than 30 percent stakes in special cases (e.g., restructuring of weak banks) participation of foreign investors in domestic banks is still limited. 46. The Government and the SBV also introduced a new asset management company (the VAMC) to handle accumulated NPLs (with support of EMCC2). The VAMC is responsible for the purchase, recovery, and restructuring of bad debt. Until now, VAMC has absorbed more than $8 billion (VAMC bond issuance) in bad assets since its establishment in July 2013. The transfer of bad debt to VAMC has played a key role in reducing the NPL ratio along with the renewed credit expansion in 2015. However, the process only temporarily provides relief to the banks as banks have five years to provision against NPLs sold to the VAMC for non-tradable bonds. Moreover resolution of bad debts has been challenging. Efforts in this regard have been hampered by the absence of an enabling legal framework for insolvency and asset titling, and for protecting VAMC and commercial bank staffs against possible lawsuits arising from potential losses to the State in case a fair market price mechanism cannot be established. As of May 2015, the VAMC had only resolved approximately $400 million of the bad assets, i.e. less than 5 percent of the total. New regulations that took effect on October 15, 2015 introduced a fair-market-value mechanism for NPL purchase by VAMC and allows it to be more flexible in the disposal of NPLs, such as through direct sale of bad debts. 47. While macroeconomic stability eased acute pressure on the banking sector, piecemeal implementation of deeper structural reforms has left the financial sector susceptible to shocks. Robust deposit growth together with refinancing by the SBV has helped sustain ample banking sector liquidity. At the same time, system-wide non-performing loans have declined to about 3 percent of total loans, due to the recovery of credit growth and –to a larger extent- transfers of NPLs to the Vietnam Asset Management Company (VAMC). However, resolution of NPLs has progressed slowly, with less than 5 percent of the total bad debts being resolved. EMCC3 Prior Actions Prior Action 1.5 The Borrower, through State Bank of Vietnam, has publicized publicly disclosed through its official website the level of non-performing loans in commercial banks by end of 2015 in accordance with Circular 02/2013/TT-NHNN dated January 21, 2013 on asset classification and provisioning as amended by Circular 09/2014/TT-NHNN dated March 18, 2014 as evidenced through a letter dated March 22, 2016 provided by the State Bank of Vietnam to the Bank. 48. This prior action supports public reporting of NPLs in accordance with the requirements of Circular 2. Proper loan classification standards are the basis for the reporting and managing of NPLs. Circular 02/2013/TT-NHNN on loan classification and provisioning – which was supported under EMCC1- was an important step in the direction of introducing more prudent standards for the classification of loans. Enforcement of the Circular was delayed several times. This provided commercial banks with ample lead time to prepare for the requirements of the new system. Circular 02 took full effect on April 01, 2015 and the SBV is now required to publicize the system-wide NPL ratio on the SBV website on a quarterly basis according to the new reporting requirements in Circular 48/2014/TT-NHNN dated December 31, 2014 (replacing Circular 35/2011/TT-NHNN and Circular 18/2012/TT-NHNN). Circular 48 allows for four 23       channels of information dissemination: (i) Quarterly press releases; (ii) Government website; (iii) Inter-ministerial information sharing; and (iv) SBV website. Since January 2015, the NPLs ratio has been regularly published on the SBV website and SBV reports to the National Assembly as well as press releases have also contained NPL ratio. As of April 1 2015 the reported figures are based on the reporting standards, stipulated in Circular 2. Sub-objective 2 Strengthened debt and treasury management Reform context and results 49. Vietnam faces important debt management challenges. Vietnam has seen a rapid increase in public debt over the past decade, and faces substantial financing needs over the medium-term at a time of global macroeconomic uncertainty associated with anticipated tightening of global liquidity and associated rise in sovereign spreads. Sizable fiscal imbalances have emerged over the past few years as a result of countercyclical fiscal policy. At the same time, Vietnam will also need to confront declining access to highly-concessional financing from multilateral creditors and become increasingly reliant on semi-concessional donor financing and commercial borrowing over the medium-term. Having benefited from access to highly concessional long-term multilateral financing over recent decades, standard cost and risk indicators are generally favorable. The overall debt portfolio is low cost, with a weighted average interest rate of 5.1 percent reflecting the large share of concessional debt. The average time to maturity on the external portfolio is a comfortable 12.4 years, while the average time to maturity for domestic debt is moderate, at 4.3 years. Interest rate risk is low (reflecting limited use of external variable rate debt), and arises primarily from the rollover of short-term domestic instruments. Foreign exchange risk is moderate, with 44.4 percent of the total portfolio denominated in foreign currencies. Overall, Vietnam is unlikely to be able to maintain such favorable indicators as it moves towards less concessional debt, and must now confront important policy trade-offs between costs and various risks. 50. To ensure debt sustainability the Government has established a statutory debt threshold of 65 percent of GDP. The government adopted prudential debt thresholds through the PM Decision 929 (EMCC1 prior action). The public debt level has remained below the current statutory limit, but fiscal consolidation is needed to stabilize and then reduce debt levels going forward. The primary deficit has increased rapidly both as a result of large headline deficits and rising interest expenditures, with the latter reflecting both higher debt and increasing financing cost. 51. The government has also started to move towards more strategic management of its debt portfolio (with support of EMCC2 and EMCC3). In addition, the government has started to prepare a medium term debt strategy to ensure consistency in decisions regarding the use of different financing sources and to clearly assess costs and risks associated with different debt portfolio choices. This is particularly important given the existing fragmentation in debt management activities in Vietnam. Development and implementation of a strategy becomes more important as Vietnam transitions form concessional to commercial borrowing. More borrowing on commercial terms opens broader borrowing options using a range of financial instruments. In this environment, it is important to have a strategy based on a proper cost/risk trade-off to steer borrowing decisions and other market transactions. In this regard the Government adopted PM 24       Decision 689 on the Medium Term Debt Management Program 2013-2015 (EMCC2 prior action) which provided quantitative analysis of costs and risks of the current and future proposed composition of the debt portfolio. This will be followed by adoption of the medium-term debt management plan 2014-2016 (EMCC3 prior action). 52. In parallel the Government has taken steps to consolidate its operational bank accounts to enhance cash management and reduce short-term liquidity needs. Spending units are no longer permitted to maintain their own bank accounts. Instead, all cash balances were moved to bank accounts held at the SBV and four State Owned Commercial Banks: Vietnam Bank for Agriculture and Rural Development (VBARD), Vietnam Bank for Industry (Vietinbank), Vietnam Bank for Foreign Trade (Vietcombank); and the Bank for Investment and Development of Vietnam (BIDV). This reduced fragmentation in handling government receipts and payments but since cash was held at different branches of the SBV and SOCBs substantial idle cash holdings remained in about 700 separate accounts, leading to inefficiencies in cash management. EMCC2 supported the consolidation of 150 Treasury accounts to two accounts at the Joint Stock Bank for Investment and Development of Vietnam and the Vietnam joint Stock Commercial Bank for Industry and Trade. EMCC3 further advances implementation of the TSA with consolidation of remaining 550 accounts held at the Vietnam bank for agriculture and rural development, Vietcombank and 64 accounts held at the SBV. Concentration of cash balances provides the basis for better cash management thereby reducing the need to borrow to meet liquidity shortfalls. EMCC3 Prior Actions Prior Action 2.4 The Borrower, through the Ministry of Finance, has prepared an updated medium-term debt management program for the period 2016-20, with strengthened risk analysis based on additional scenarios and updated macroeconomic assumptions as evidenced through official letter of Ministry of Finance and excerpt of report 111/BTC-NSNN, dated February 19th 2016 53. This prior action supports preparation of a debt management strategy to enhance cost-effective borrowing for a given level of risk. Lack of a formal debt management strategy can easily lead to poor choices and amplify risks associated with government debt management. Building on the Medium Term Debt Management Plan, adopted under EMCC2, this prior action supported an updated debt management strategy. The Ministry of Finance has prepared an updated Medium Term Debt Management Strategy for the period 2016-20 which will be adopted by the National Assembly. The report is based on an updated macroeconomic framework and identifies overall Government Gross financing needs as well as potential sources of financing. The report also articulates the risks and costs associated with various financing sources (concessional and semi-concessional external debt, external bonds and domestic bonds) and formulates a specific financing strategy. Prior Action 2.5 The Borrower, through State Treasury, has implemented Treasury Single Account procedures in the State Bank of Vietnam, Vietcombank, and Vietnam Bank for Agriculture and Rural Development as evidenced through a number of official letters on implementation provided by the Ministry of Finance to the Bank   25       54. This prior action supports implementation of single treasury account arrangements. The establishment of the TSA aims to strengthen oversight and control over state budget resources and minimizing idle cash balances across a large number of Treasury accounts. Accounts in two commercial banks –Vietin Bank and Bank for Investment and Development- were consolidated under an EMCC2 prior action. Building on this the Government has already consolidated accounts held with Vietcombank and Bank for Agriculture and Development in fulfillment of the EMCC3 trigger. Up to now, 7 treasury accounts holding the majority of cash balances in SBV have also been connected. The consolidation of the remaining about five percent of cash balances held in 57 provincial SBV branches will be completed following agreement reached between SBV and the State Treasury on the collateral requirements for transactions processed through the accounts in the SBV.   PILLAR 2: STRENGTHENED PUBLIC ADMINISTRATION, SOE MANAGEMENT AND PUBLIC INVESTMENT MANAGEMENT 55. The second pillar aims to contribute to a more transparent, efficient and accountable public sector. The pillar seeks to achieve three objectives (i) Increased transparency and improved tax administration for public sector accountability and reduced corruption (ii) Improved regulatory environment and corporate governance reforms for more transparency in and restructuring of SOEs and (iii) Strengthened policies for public investment management for more efficient capital expenditure. Sub-Objective 3 Increased transparency and improved tax administration Reform context and results 56. An effective and accountable public administration is crucial to creating an enabling environment for investment and growth. Vietnam has taken successive steps to modernize its public administration and mitigate corruption, some of which were supported by the EMCC series. The amended anti-corruption law marked an important step of the GoV to strengthen public administration by imposing stricter transparency guidelines to sectors that are most vulnerable to corruption (EMCC1 prior action). EMCC1 also supported the revised Tax Administration law with key policy reforms to streamline procedure and improve transparency in tax administration. To implement the anti-corruption law, EMCC2 supported the adoption of Decree 59, Decree 78 and Decree 90. Decree 59 provides guidelines on the transparency provision; Decree 78 stipulates asset and income declaration of public officials and Decree 90 strengthens accountability of public agencies and officials to provide better access to information to citizens. These regulations contributed to increased transparency and accountability of the public sector. EMCC3 Prior Actions 57. There are no prior actions related to this objective under EMCC3. Sub-Objective 4: Improved regulatory environment and corporate governance reforms for more transparency in and restructuring of SOEs 26       Reform context and progress 58. Enhancing incentives and creating an enabling environment for the restructuring of the state owned sector remains an important economic reform priority for Vietnam. State owned enterprises remain important players in the economy. State owned enterprises account for about one-third of all business assets, one third of output, and one-eighth of employment in the enterprise sector. Sustained implementation of SOE restructuring, further improvement of corporate governance practices and steps to level the playing field and create hard budget constraints could all help enhance SOE performance and overall growth prospects. The government’s SOE reform program, as outlined in PM Decisions 929 adopted in 2012 (EMCC1 prior action) consists of three main components: (i) strengthening the regulatory framework; (ii) restructuring of individual SOEs with a focus on equitization and divestment from non-core assets; and (iii) improving corporate governance. Efforts especially during the initial years of the SEDP 2011-15 were focused predominantly on strengthening the institutional and regulatory environment for SOEs, although the focus has recently shifted towards implementation. 59. Overall, the SOE legal framework has improved markedly with the issuance of a number of Laws, Decrees and other legal documents in the last five years. Following Decision 929, the Government has issued various regulations to facilitate the SOE restructuring progress, including Decree 99 that regulates the decentralized roles of the State in managing SOEs and Decision 71 on the investment and management of state capital in SOEs, supported by EMCC2. The Government also issued Decree 61 on financial supervision and disclosure of SOEs to improve SOE corporate governance through better transparency (EMCC2 prior action), followed up with the related EMCC3 prior action reinforcing compliance with the decree. Important changes were introduced by the amendments to the Enterprise Law, passed in 2014 which aims at ensuring more equal treatment of enterprises irrespective of ownership types as well as improved corporate governance of SOEs. In 2014 the Law on Management and Use of State Capital Invested in Production and Business and its associated Decrees laid the legal foundation for a more effective ownership function and strengthened the overall management framework for SOE, including restrictions on SOEs investment in non-core assets, such as real estate, banking, insurance and securities (unless these sectors are their main lines of business). 60. Following improvements in the legal framework, implementation remains a key priority. While improvements in the legal and regulatory framework are important, the focus now needs to shift towards ensuring consistent implementation. This includes further progress in equitizing remaining SOEs, continued divestment from non-core assets, enhanced transparency and elimination of any preferential treatment of SOEs. Implementation has progressed at a gradual pace and remains uneven. 61. The government continued the equitization process. Equitization -converting SOEs into joint stock companies with limited liability- remains a major focus of SOE reform efforts. Until the end of September 2015, Vietnam equitized 344 SOEs, including several mother companies of the large State Economic Groups and General Corporations. While it is unlikely that Vietnam will meet its target of 531 newly equitized SOEs in 2011-15, performance is considerably better than the achievement in the previous SEDP2006-10. At the same time, for most SOEs only minority stakes are equitized, limiting impact both in terms of attracting private investment and changes in the management of companies. 27       62. Given the complexity of the cross ownership in the five high risk non-core businesses, the divestment process has been slower than expected. SEGs hold positions in non-core assets that are considered high risk, including banking, insurance, real estate, securities trading, and investment funds. Divestment from the high risk non-core assets is key step in SOE restructuring and would also help to reduce financial risks, including fiscal bailout. All SEGs6 have adopted restructuring plans (EMCC2 prior action) containing a list of non-core assets for divestiture with a clear timeline. However, implementation has been challenging, both due to unfavorable market conditions and also some restrictions in the legal framework. Targets set in the restructuring plans were largely not achieved. According to data provided by MOF total non-core assets of all SOEs were valued at approximately VND 22 trillion by the end of 2014. As of October 2015, cumulatively SOEs have divested VND 9.9 trillion or 43% of non-core assets. Further progress in unwinding investment in non-core assets is supported by the related EMCC3 prior action. EMCC3 Prior Actions Prior Action 4.4 The Borrower, through the Ministry of Finance and State Economic Groups, has implemented divestment of eighty (80) percent of five high-risk, non-core businesses in six State Economic Groups consistent with Instruments on Restructuring of State Economic Groups, as evidenced through a report on implementation provided by the Ministry of Finance to the Bank. 63. This prior action reinforces further progress in the divestment of non-core assets of five SEGs. Progress in divesting from non-core assets has been hampered by the fact that SOEs were not allowed to sell non-core assets below their book value. To overcome this impediment, the Government has issued Decision 51, which allows the SOEs to sell these non-core assets at the market price. In addition, State Capital Investment Cooperation (SCIC) can also buy these non- core assets from SOEs at market price if they choose to make the investments. MOF has also issued a Decision to sell of shares in block to speed up the divestment progress. This prior action will be monitored closely by EMCC result indicator. Underpinned by these measures, the prior action support MOF in achieving the target of divesting at least 80 percent of non-core assets in six selected SEGs. Overall, SEGs are performing better than the whole SOE sector in terms of divestment of non-core assets, by December 2015 eight SEGs have divested about VND 6.8 trillion, accounting for 56% of their total non-core assets (See Table 5 below).                                                              6 Vinatex, Vinarubber, Vinachem, Petro Vietnam, Viettel, Vinacomin, EVN, VNPT 28       Table 5: Status of non-core asset divestment by SEG, in Billion VND State Economic Group Non-Core Assets by (SEG) 2012 Divested by 12/2015 Completion Rate EVN 1,959 1,959 100% VNPT 803 54 7% PetroVietnam 4,997 812 16% Vinachem 261 261 100% VinaRubber 356 356 100% Viettel 1,780 1,460 82% Vinachomin 1,546 1,532 99% Vinatex 521 432 83% Total of all SEGs 12,222 6,866 56% Source: MOF (Corporate Finance Department) Prior Action 4.5 The Borrower, through its Government, has implemented Decree Number 61/2013/ND-CP, dated June 25, 2013 which has been replaced by Decree Number 87/2015/ND- CP, dated October 6, 2015, adopting the audited reports on the public dissemination of the key financial performance of all State Economic Groups, as evidenced through a report on implementation provided by the Ministry of Finance to the Bank. 64. This prior action supports implementation of strengthened financial disclosure requirements for SEGs. Decree 61 –which became effective in August 2013- strengthened the framework for monitoring financial performance and public disclosure of SOEs but implementation remains key. The Ministry of Finance has issued two circulars to guide the implementation of the Decree. According to the regulation, all SOEs need to report their annual financial statements to line ministries, provincial People’s committees and to the public via their websites. MOF has taken steps to ensure better compliance, including training, regular compliance monitoring and follow up with non-compliant SEGs. By the end of 2015, all eight SEGs have published their audited financial statements on their websites7. Furthermore, Decree 61 has been revised to align with the Law on management and investment of state capital in SOEs, which was issued in October 2014. The revised Decree 87- issued on October 6, 2015 and becoming effective from December 1, 2015- unifies disclosure requirements across all types of audience (MOF, Line Ministries/Provinces, lenders/investors, employees and the public) and provides specific provisions for monitoring of financial performance of various types of subsidiary firms of SOEs.                                                              7 Out of eight SEGs, Viettel (a military SOE) and Vinatex (which completed IPO and became a public company) have disclosed their financial information in accordance with Decree 93/2015/ND-CP and Circular 155 which regulate financial disclosure of defense and security SOE and public companies, respectively. 29       Sub-objective 5: Strengthened policies for public investment management Reform context and results Figure 7: Capital spending has become 65. The government continued to increasingly constrained  implement public investment 40.0 management reforms in the context of 35.7 29.4 increasingly constrained capital 30.0 spending. Capital spending has been on 22.7 20.0 decline since 2009 both as a share of GDP 10 16.5 and total expenditure (Figure 8). New rules 8.3 for prioritizing the allocation of scarce 10.0 4.5 resources for public projects have been in 0.0 place since 2011. The adoption of these 2009 2010 2011 2012 2013 2014 9M2015 new rules for allocation priority coincided K/GDP K/Exp with the phasing out of the economic Source: MOF stimulus package has contributed to consolidation of investment while safeguarding funding for priority projects. First priority will be given to projects that are likely to be completed on time and for repayment of capital expenditure arrears, whereas new projects will only be implemented if there are residual resources. 66. At the same time, the Government also took steps to tackle expenditure arrears that had arisen in investment projects. Inefficient implementation of investment projects caused large capital arrears. To address the issue of expenditure arrears the Government adopted of Directive 14 (EMCC2 prior action). The policy aims to further tighten the requirement for capital budget allocations to help free up resources for arrears clearance. Implementing agencies need to clear arrears before any new project is accepted. While expenditure arears were reduced by one half, from VND 91 trillion in 2011 to 44 trillion in 2014, they still equal about 20 percent of capital spending. 67. The more medium-term agenda for restructuring public investment focuses on strengthening accountability, improving efficiency and reducing fragmentation. Vietnam continues to operate a dual budgeting system where MOF is responsible for recurrent expenditure and MPI is responsible for capital expenditure. Coordination between the two agencies seems weak and this issue of fragmentation caused inefficient management of expenditure where spending units operated on a relative soft budget constraint. The adoption of the Medium-term investment plan 2013-2015 (MTIP) was a first step to curb the issue of inflated budget allocation, cost-overruns and accumulation of capital arrears (EMCC1 prior action). Major improvements in the regulatory framework for the management of public investment came with the promulgation of the Public Investment Law (EMCC3 prior action) and the amendment of the Construction Law. The Public Investment Law institutionalizes a medium-term investment planning cycle, clarifies the roles and responsibilities of involved agencies in decision making for investment projects, and strengthens prioritization and appraisal process. The law aims to tackle allocative efficiency by clearly stipulating the sources of public investment and how they are aligned with the national priorities. The law also helps to increase disclosure and transparency of public investment and hold implementing agencies more accountable to their investment decisions. The Construction Law 30       2014 aims to improve the quality of construction master plans and project implementation, through measures such as professionalize the PMUs, or improvement of transparency in the issuance of construction permits, or improved accountability in construction management. Both laws are in effect from January 2015. EMCC3 Prior Actions Prior Action 5.3 The Borrower, through National Assembly, has adopted the Public Investment Law Number 49/2014/QH13, dated June 18, 2014 to: establish a comprehensive legal framework to improve capital spending efficiency; reduce public investment fragmentation; align public investments with national development plans and improve public disclosure and transparency. 68. This prior action supports the adoption of unified legal framework to regulate public investment management. Before the issuance of the Public Investment Law, public investment management in Vietnam was regulated by different rules and regulations leading to inconsistencies and overlaps across regulations, especially with regards to the preparation, appraisal, and monitoring and evaluation of projects. The law is expected to help increase efficiency of capital spending in Vietnam. It institutionalizes the preparation of the medium-term investment plan, which aligns with the Social-economic development plan of the country. This will address the existing problem of mismatch between annual capital budgeting and longer term project implementation. The law also requires the preparation and approval of the project concept note larger projects before feasibility studies are done. The project concept note has to clearly specify the project cost and funding source. This will minimize the implementation of the project without fund allocation, which is the common practice in the past. The law also stipulates criteria for project selection and prioritization but detailed guidelines on how to prioritize projects should be specified in subordinate regulations. Following the public investment law, the government has issued a Decree on Medium-term investment plan to guide the implementing agencies to prepare medium- term capital budget for the period of 2016-2020. PILLAR 3: REDUCED ADMINISTRATIVE BURDEN AND STRENGTHENED TAX AND PROCUREMENT POLICIES Sub-Objective 6 Streamlined administrative procedures, and strengthened tax and procurement policies Reform context and results 69. The third pillar of the program aims to contribute to improvements in the business environment. Vietnam continues to attract significant FDI and has made efforts to improve its investment climate as reflected in improved World Bank Doing Business indicators. But challenges remain. Legislative reforms do not always translate into effective implementation, reflected in discretionary application of laws and regulations. In particular, the tax administration remains cumbersome and imposes high compliance costs on the private sector. While the process for obtaining business permits has improved, weak investor protection and insolvency framework continue to undermine incentives for productive firms to invest. Despite Vietnam’s trade openness and the move toward the ASEAN single window, border clearance procedures remain less efficient 31       than in other ASEAN economies. Figure 8: Despite recent improvements challenges remain across several dimensions of the business climate DB2016: Vietnam vs. ASEAN 5 DB 2016 ‐ Ranks of ASEAN countries (Distance to Frontier) Timor‐Leste 173 Starting a Myanmar 167 Business Dealing with Lao PDR 134 Resolving Construction Insolvency Cambodia 127 Permits Enforcing Getting Indonesia 109 Contracts Electricity Philippines 103 Trading Across Registering Vietnam 90 Borders Property Brunei Darussalam 84 Thailand 49 Paying Taxes Getting Credit Malaysia 18 Protecting Minority Singapore 1 Investors Vietnam ASEAN‐5 Average 0 189 Source: World Bank Doing Business 2016 70. The government continued to take concrete steps to improve the investment climate. Vietnam revised several key business environment laws including the Enterprise Law, the Investment Law, and the Bankruptcy Law. The adoption of Decision 263 to review the impact of administrative procedures on the business environment and reduce burden of APs on the businesses (EMCC1 prior action). In addition, the launch of the government’s online business registration portal in April 2013 directly helped to reduce burden on the businesses. Meanwhile, the revised procurement law (EMCC2 prior action) helped to modernize the existing procurement law and bring it closer to international good practice. The new law introduced a number of innovative and modern procurement practices such as competitive selection of investors under PPP projects and online procurement. By reducing opportunities for direct contracting and preferential procurement the law is an important step in creating a level playing field for all players in the market. At the same time, revision to the CIT law introduced a reduction in corporate tax rate from 25% to 22% and 20% by January 2016 to attract new investment to Vietnam (EMCC2 prior action). The VAT law was also revised to exempt small businesses from having to register for VAT under the invoice credit method to reduce administrative burden (EMCC2 prior action). Under EMCC3 these actions are followed up measures to ease administrative procedures for tax payments and steps to move forward with the implementation of the procurement law. EMCC3 Prior Actions Prior Action 6.6 The Borrower, through its Government, has adopted appropriate Implementation Instruments in accordance with the Amended Law on Procurement. 71. The prior action supports the preparation of implementation regulations for the newly 32       adopted procurement law. Significant progress has been made in putting in place the necessary implementation regulations for the procurement law. On June 26, 2014, the Government officially issued the Decree regulating contractor selection (Decree 63/2014/ND-CP) and this Decree became effective on August 15, 2014. This Decree provides detailed guidance on a number of important articles in the Procurement Law including scope of application, competition assurance, application of preferences in bidding, detailed procedures for various procurement methods, centralized procurement, online bidding, responsibilities and accountabilities of government agencies involved, resolution of complaints, examination, monitoring and supervision. The government has also issued a Decree on public private partnership investment (Decree 15//2015/ND-CP), dated February 14 2015. Later on March 17, 2015, the Government issued the Decree on Investor Selection (Decree 30/2015/ND-CP). The Decree then became effective on May 5, 2015. This Decree details a number of articles in the 2013 Procurement Law regarding the procedures for selection of investors. Specifically, it provides detailed guidance on bid evaluation for competitive selection of PPP investors, application of preferences in selection of PPP investors and record keeping. In addition the Government has also issued circulars to enable implementation of the law. Specifically, the Government issued six (6) circulars. These include (i) Circular 01/2015/TT-BKHDT dated February 14, 2015 detailing guidance on preparation of requests for expression of interest, bidding documents, and request for proposals for consulting services; (ii) Circular 03/2015/TT-BKHDT dated May 6, 2015 detailing the preparation of bidding documents for civil works; (iii) Circular No.03/2015/TT-BKHĐT date June 16, 2015 detailing the preparation of bidding documents for procurement of goods; (iv) Circular giving detailed guidance on information required for publication; bidder selection through e-procurement, Circular No.07/2015/TT-BKHĐT dated September 8, 2015; (v) Circular No.10/2015/TT-BKHĐT dated October 26, 2015 giving detailed guidance on bidder selection plan; and (v) Circular No.11/2015/TT-BKHĐT dated October 27, 2015 detailing guidance on preparing Request for Proposals in direct contracting and shopping. Together with these Circulars, the Government also officially issued the Standard Request for Proposals (for consulting services) and Standard Bidding Documents (for civil works and goods). Prior Action 6.7 The Borrower, through Government has adopted Resolution 19/NQ-CP, dated March 12, 2015, on key duties and solutions to improve business environment and national competitiveness in 2015 – 2016 and enhance the Borrower’s business environment through the simplification of tax procedures for taxpayers. 72. This prior action supports further measures to reduce the compliance burden imposed on taxpayers. The government made significant progress in this area with issuance of Resolution 19/NQ-CP on key duties and solutions to improve business environment and national competitiveness in 2015 – 2016 on March 12, 2015. Resolution 19 requires concerted efforts from all ministries and agencies to work together to reduce time and number of procedures that businesses have to comply. The general department of taxation, general department of customs and relevant ministries jointly issue legislation to achieve the targets8 set in Resolution 19. In addition to revising the legislations, administrative procedures are also monitored to measure how resolution is implemented. The resolution aims to lower tax payment period to 121.5 hours/year as maximum, develop and disclose the database on VAT refunds and rapidly decrease processing time for clearance of exports and imports of goods to 13 and 14 days respectively.                                                              8 Target indicators are based on Doing Business, paying tax indicator 33       Prior Action 6.8 The Borrower, through its Government, has adopted Decree 60/2015/ND-CP dated June 26th 2015, eliminating limitations on foreign investors’ participation in public companies in selected areas of the stock market. 73. This prior action supports the lifting of foreign ownership restrictions in Vietnam’s stock market, paving the way for foreign participation in key sectors of the economy. In the past, foreign equity participation in public companies is currently limited to 49% in the aggregate. This foreign ownership cap posed a major impediment to foreign investment on the Vietnamese stock markets. With decree 60/2015/ND-CP which was issued on June 26th 2015 and entered into force from 1 September 2015 removes the general foreign ownership restriction for all public companies, except for those operating in sectors which are subject to foreign ownership limitation in international treaties and/or subject to specific foreign ownership limitations in the Law on Investment or relevant specific sector laws. A number of sectors are covered and restricted by this clause, including banking, telecoms and logistics. The Decree also stipulates that for public companies operating in sectors subject to specific conditions applicable to foreign investors but where no specific ratio on foreign ownership limitation has yet been issued, the maximum ratio of foreign ownership will remains 49%. For public companies operating in sectors not affected by specific sectoral provisions, no foreign ownership restriction apply unless they are included in a company's charter. The gradual liberalization of ownership restrictions –together with the recent rationalization of the Law on Investment and the Law on Enterprises effective 1 July 2015- are intended to attract more foreign investment in the private and State-owned sectors in Vietnam. While decree 60 shifts the paradigm, remaining uncertainties about the scope of sectoral restrictions may dampen its impact, at least in the short term. 4.3 LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY 74. The EMCC is closely aligned to the objectives of the first pillar of the Country Partnership Strategy (CPS), which focuses on improving competitiveness. More specifically, it will support measures to strengthen CPS Outcome 1.1: Improved Economic Management and Business Environment. This includes reforms to strengthen Vietnam’s macroeconomic policy framework, public financial management (PFM), the financial sector, and market-based regulations. Reforms under EMCC should help Vietnam raise its potential growth rate and through this contribute to the twin goals of reducing extreme poverty and raise the incomes of the bottom 40 percent. As noted in section 5.1, economic growth in Vietnam continues to remain pro-poor. 4.4 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS 75. Broad consultations and partnerships helped build the EMCC program and facilitated implementation. Extensive consultations were held both during design and implementation of the program, including with SBV and concerned line ministries (MOF, MOJ, MOIP). Moreover, individual policy measures supported under the EMCC have undergone extensive consultations with a wide range of stakeholders. Draft laws and regulations are circulated within government agencies but also published on ministry or agency websites for public comments. The government has held dedicated seminars and workshops with relevant stakeholders to discuss early proposals on all the prior actions under EMCC. In addition, the EMCC AAA program, which complemented 34       the DPO series, supported a number of consultation workshops in key prior actions. For example, the program supported a consultation event on the Public Investment Law with provincial authorities, which informed PIM provisions in the final law that could be realistically implemented. The program also supported workshops on decree 67 on SOE transparency that enabled the MOF to engage and consult with SOEs, to inform the design pf a reporting system that was suited to SOE reporting capacity. Equally, the on the Procurement Law and accompanying implementation regulations, the AAA program financed workshops with provincial governments and private sector representatives to gather feedback and inform the provisions of the law. 76. EMCC has been developed and implemented in close consultation with Development Partners. From the onset, the EMCC series has served as a central platform for coordinated policy dialogue between the Government of Vietnam and several development partners, including IDA, Japan, Switzerland, Australia, UK and Canada. Throughout the preparation and implementation of the three operations of the series, all development partners participated actively in the policy dialogue. This has helped align policy messages, build consensus on and reinforced support for reforms among the country’s main development partners around a core set of reform measures. The World Bank has also coordinated on major structural reforms through regular staff level exchange with the IMF. 77. Co-financing for the operation is provided by the Swiss Secretariat for Economic Affairs (SECO) and the Department of Foreign Affairs, Trade and Development Canada (DFATD). SECO is providing co-financing for EMCC3 with an indicative amount of CHF8 million. DFATD Canada is providing co-financing with an indicative amount of CAD6 million. V. OTHER DESIGN AND APPRAISAL ISSUES 5.1 POVERTY AND SOCIAL IMPACT 78. The EMCC will support policy and institutional reforms to help Vietnam raise its potential growth rate and through this achieve further poverty reduction. Financial sector reforms should contribute to getting the banking system on a stronger footing and enable better intermediation of savings for productive investments by the private sector. Fiscal reforms should contribute to greater transparency and efficiency in the use of government budged and enhance macroeconomic stability. Strengthened public administration and state-owned-enterprise management will enable more increased efficiency in the allocation of productive public investment and the use of public resources. Reducing administrative burden and strengthening tax and procurement policies will improve business environment and enable a dynamic and viable private sector that can contribute significantly to economic growth and job creation – a prerequisite for sustainable increases in living standards, including of the poor. 79. Economic growth in Vietnam continues to be inclusive and pro-poor according to estimates from the Vietnam Household Living Standards Survey. Official survey data show that growth in 2010-2012 boosted the welfare of Vietnamese across the socioeconomic distribution. In particular, consumption grew for the entire bottom 90 percent of the population (Figure 1). Expenditure levels in rural areas rose at every point on the economic spectrum, for both the rich and the poor. In urban areas, however, the welfare improved for the bottom 60 percent, while 35       declining for the upper 40 percent. This pattern of broad-based growth generated a drop in the poverty rate, which was more pronounced in rural areas than urban, and also corresponds to a decrease in inequality. Preliminary analysis of new data from the 2014 Vietnam Household Living Standards Survey confirms the continued poverty reduction and enhanced shared prosperity process. Extreme poverty using the new $1.90 2011 PPP line is below 3% in 2014. Between the period from 1993 to 2014, the welfare of the bottom 40 percent increased by an annual growth rate of 6.9%, just slightly lower than the average growth in welfare of the whole population of 7.3%. Figure 9: Growth Incidence Curves, 2010-2012 a) Vietnam overall b) Rural only c) Urban only Rate of growth of consumption Percentile of consumption Percentile of consumption Percentile of consumption   Note: 2010-2012 figures are estimated based on survey data. 2013-2017 figures are projections based on neutral distribution method with a pass-through of 0.87. GDP per capita measured as constant 2011 PPP, base 2010 year. Source: WB staff estimates 80. Ethnic minority welfare has improved greatly over time, even though poverty remains concentrated among this group. In 2012, ethnic minorities comprised approximately 15 percent of the population, just over half (51 percent) of the poor, and three out of four of the extreme poor in Vietnam. It is important to recognize, however, that the welfare of ethnic minorities has improved substantially over time. Between 1993 and 2014, the poverty rate for ethnic minorities fell from nearly 90 percent to 58 percent. Poverty rates for ethnic minorities are currently much higher than for the Kinh majority because they started out much poorer and because their gains have lagged behind the spectacular gains in welfare in the country overall. 81. Prior actions in the pillar of State Enterprises Management, i.e. trigger 4.4, 4.5 and 4.6, will help speed up the SOE restructuring process. In the long run, SOE restructuring should help increase economic growth, employment and poverty reduction through more efficient allocation of resources. Whilst the EMCC is not directly engaged in individual SOE transactions, it does support the overall restructuring agenda, some of which involves divestment of state shares in SOEs, particularly in non-core businesses. It is therefore important to keep track of employment issues, which may be impacted by this broader restructuring effort. A study funded by the Asian 36       Development Bank and the World Bank prepared for the previous EMCCs examined SOE employment and retrenchment policy issues in Vietnam and estimated that SOEs may have nearly 33 percent overstaffing. This means that SOE restructuring may lead to some downsizing in SOEs. The government has an established set of policies and institutions to deal with SOE redundancies including unemployment insurance (economic, matching, and training benefits), compensation for structural redundancy, and eligibility for early pension. The ADB/WB study found that such procedures are generally followed, and that workers are generally satisfied both that they receive what they are entitled to, and what they are entitled to is more or less acceptable. The rapid development of the informal economy in transition economies in Europe caused by a lack of formal employment has not happened in Vietnam. However, the economy has limited capacity to absorb further shed labor without reforms in labor market institutions and in boosting the private sector. 82. Results from the Labor Force Survey shows that the employees in the SOEs are much more educated and have higher wages than the ones in non-State enterprises. In 2014, 39% of employees in SOEs have college degrees or above, while the corresponding numbers in private domestic and in FDI enterprises are 25% and 12% respectively. Yet, even after control for education, ethnicity, age and location, the wage of SOE employees are still statistically higher than those in private domestic firms and in household enterprises. Labor downsizing in the SOEs may have wage-equalizing effects on the labor market. As SOE employees are generally better educated than those in the non-State sector, there is a high opportunity that the retrenched workers would find jobs in the FDI or the domestic private enterprises rather than working in the informal sector. Findings from the ADB/WB study confirm that labor informalization is not a critical risk from SOE restructuring. 83. The new Public Investment Law (prior action) will contribute to improve efficiency of public investment; thereby contributing to the provision of more cost-effective public services to the population in general and the poor in particular. Given that a substantial amount of the public investments are aimed to reducing poverty and improve the infrastructure and access to social services, this trigger will likely generate favorable effects on reducing poverty and improving shared prosperity. 84. The prior action on simplification of tax procedures to lower the compliance burden for tax payers will help reduce transaction costs for enterprises and have favorable effects on economic growth and employment. According to the World Bank’s Doing Business Report 2015, Vietnam still ranks very low (168/189) in terms of time spent for tax procedures. An average enterprise in Vietnam spends 770 hours a year for tax procedures. Therefore, reduction in the tax compliance burden will contribute to higher growth and increased employment, contributing to poverty reduction and enhanced well-being. 85. Gender differentiated impacts and/or risks, associated with the operation are limited. The majority of reforms supported by this operation are cross-cutting in nature and therefore expected to equally affect men and women in Vietnam. Reform to simplify the tax administration and reduce the compliance burden may in particular affects women entrepreneurs. The 2006 IFC Report "Voices of Vietnamese Women Entrepreneurs" notes that women entrepreneurs complained about illogical tax laws and collection practices (encouraging "unofficial payments"). Lack of access to information on tax regulations and linked to that lack of networks for women 37       entrepreneurs is stated as one of the reasons. In addition, a UNIDO/VCCI study (Gender Related Obstacles to Vietnamese Women Entrepreneurs) found that while 20 percent of male entrepreneurs in their study had paid someone (unofficial) to facilitate taxation, only 9 percent of women entrepreneurs had made unofficial payments to facilitate taxation. Therefore simplification of tax administration reforms should help remove obstacles faced by women entrepreneurs and provide a more level playing field. 86. Similarly, the prior action on implementing the amended Procurement will help to create a level playing field for the private sector and for small and medium enterprises. As the private sector in Vietnam is more labor-intensive and employ more less-skilled workers than the SOEs9, the prior action would be expected to enhance employment and improve income of the poorer population. 5.2 ENVIRONMENTAL ASPECTS 87. Policy actions supported by the EMCC series are not expected to have negative effects on the country’s environment and natural resources. Like the first two operations, the EMCC3 supports measures that help shift towards macroeconomic stability; transparency, efficiency, and accountability of the public sector; and business enabling framework. Overall, several of the policy actions under the EMCC3 program may contribute indirectly to positive environmental externalities. For example, policy actions relating to the restructuring of SOEs (which are typically relatively inefficient in terms of resource use) have the potential to result in productivity and competitiveness gains from adopting cleaner production technologies. Other examples are measures intended to improve the efficiency of the business environment. The public investment law through its provisions on environmental impact assessment and monitoring (Article 21, 34, 35, 36, 81 and 82) is expected to mitigate environmental risks associated with major public investment projects and therefore likely to lead to positive externalities. 5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS 88. Public Financial Management. The risk to proper use, control and reporting of funds that are managed through Vietnam PFM system is assessed as Substantial. This is confirmed by the Bank-led Fiscal Transparency Review in Vietnam, the government-led Public Expenditure and Financial Accountability assessment and the ongoing Vietnam Public Expenditure Review 2015. The main recommendations of those reports focused on: i) preparation of the Government financial statements prepared in accordance with International Public Sector Accounting Standards (IPSAS) – central level and country wide level; ii) audits of public sector financial statements in accordance with International Organization of Supreme Audit Institutions (INTOSAI) standards; iii) enhancement of the budget system including introduction of medium term budget framework and integration of budget information into financial reporting information system; and iv) strengthening the debt and contingent liability management system.                                                              9 Only 25% employees of SOEs are unskilled labor while 45% of employees in non-state domestic enterprises and 55% of FDI enterprises are unskilled (World Bank staff calculation from Enterprise Survey 2011) 38       89. Public disclosure of government budget. The government of Vietnam discloses the government budget after approval by the National Assembly. 90. The Government has maintained strong ownership of the PFM reform agenda and continues to lead a coordinated reform program in consultation with the development partners. Issuance of accounting standards for public sector in accordance with INTOSAI and piloting the preparation of central government financial statements is among the top priorities that Ministry of Finance to work with donors in the coming years. The Government is also working with donors in strengthening the country budget system, with the launch of medium term budget framework for the fiscal year 2016. State audit of Vietnam, with the support from the Bank, has issued a couple of auditing standards and guidance based on INTOSAI principles, and will continue to complete the remaining standards in the next 2 years with assistance from donors. 91. Dedicated Foreign Currency Bank Account (DA). Because of the unavailability of IMF Safeguard Assessment and the annual audited financial statements of State Bank of Vietnam, to address the potential residual fiduciary risks related to the foreign exchange control environment, the Borrower will open and maintain a designated account (DA) at SBV in US dollars for the Borrower’s use once the Loan is approved by the Board. The DA will form part of the country's official foreign reserves. However the Borrower uses the Loan proceeds, they should always become a part of the country’s budget resources. Therefore, the Borrower shall ensure that upon each deposit of an amount of the Loan into the DA, an equivalent amount is accounted for in the Borrower’s budget management system, in a manner acceptable to Bank. If after deposit in the DA, the proceeds of the Loan or any part thereof are used for ineligible purposes, as defined in the Loan Agreement, the Bank will request the Borrower to refund the amount directly to the Bank. Amounts refunded shall be cancelled. 92. Reporting and Auditing. Through SBV, the Recipient will report the exact sum received into the DA, ensure that all withdrawals are for “eligible” expenditures, indicate to the Bank the details of the Treasury account to which the Vietnamese Dong equivalent of the Loan proceeds will be credited, confirm that the Loan proceeds were received into an account of the government that is part of the country’s foreign exchange reserves and that an equivalent amount has been accounted for in the country’s budget management system and submit a report on receipts and disbursements for the DA. All those confirmations and submissions are to be made to the Bank within 45 days after disbursement. The Government will, if considered necessary by the Bank, allow an independent external audit of the dedicated foreign currency DA. 93. Disbursement. The proposed operation will follow IBRD/IDA disbursement procedures for DPOs, and the loan proceeds will be disbursed in compliance with the stipulated release conditions, i.e. satisfactory carrying-out of the Program and adequacy of macroeconomic policy framework. 5.4 MONITORING, EVALUATION AND ACCOUNTABILITY 94. Implementation arrangements for EMCC originally envisaged a three tier structure to ensure broad-based accountability, major elements of the envisaged implementation arrangement proved ineffective. At appraisal of the first EMCC operation it was expected that a 39       high level Steering Committee chaired by the Deputy Prime Minister would review and endorse the proposed areas of focus for operation. A Technical Working Group (TWG) would lead technical discussions and analysis for triggers and policy actions. The TWG was expected help oversee the preparation of the operation, discuss the technical elements of policy actions, decide on analytical work, and brief the Steering Committee and Development Partners. This should help build greater ownership for the EMCC operation among the lead technical staff both in Government and among Development Partners. The SBV was expected be responsible for overall coordination of the program. While the SBV coordinated the program at the technical level and facilitated the policy dialogue, neither the steering committee nor the technical working group were constituted in practice. 95. Monitoring and evaluation of the program is largely undertaken as part of regular progress reviews tied into the EMCC programmatic framework. Through the preparation of the series, in consultation with the authorities, a set of indicators were identified together with baselines and targets to assess the impact of the policy program. These include indicators that have been drawn directly from the Government’s own strategies, and independent sources and surveys (e.g. Provincial Competitiveness Index and Provincial Governance and Public Administration Index). Jointly with the SBV and concerned line ministries, regular progress reviews have been undertaken as part of the preparation cycle, focusing on both completion and follow up of prior actions as well as progress toward the agreed result indicators. After completion of this operation, the entire series will also be subject to the implementation completion and results review. 96. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org” VI. SUMMARY OF RISKS AND MITIGATION 97. The overall risk to PDO achievement is assessed as substantial, reflecting high design and implementation risks. The key risks are highlighted below:  Macroeconomic risks are Moderate. The domestic risks include structural reform inertia, possible delays in the necessary fiscal consolidation, and risks of renewed overheating of the credit market. Vietnam’s macroeconomic prospects can also be dimmed by potential external shocks associated with volatile global financial conditions and possible slowdowns in demand in key export markets. These risks are partially mitigated by the ongoing macroeconomic policy dialogue with the authorities (in coordination with the IMF) and the 40       structural reform actions supported by this operation.  Technical design of program risks are high. While the multi-sectoral design, breadth and depth of the supported reform program with a large number of objectives and prior actions reflects a comprehensive agenda, it poses risks of reform slippages due to uneven ownership across the program. Moreover, alignment with the Government’s planning and policy cycle resulted in a program design that is back-loaded in terms of implementation. The two first operations were supporting mostly legal and regulatory changes. Implementation is only coming into focus during this last operation. This entails significant risks as legal changes are necessary but not sufficient to achieving meaningful impacts. This risk is exacerbated by the mixed progress shown in this last operation (see next paragraph). The risk is partially mitigated by the modified program that is recognizing implementation constraints that have emerged in some areas, while focusing the operation on a more limited set of implementation-focused prior actions.  Institutional capacity for implementation and sustainability risks are high. Despite broad commitment to the principal reform agenda, supported by the EMCC program, impact of the series could be undermined by piecemeal reform implementation. In fact, risks of uneven implementation of policy reforms have materialized during implementation of the program, despite efforts to mitigate them. While the government remains committed to the triple restructuring agenda – SOEs, financial sector and public investment – implementation has been tentative and slow. These risks are mitigated by focusing the final operation on areas where ownership is relatively strong and progress is feasible.  Fiduciary risks are substantial. As outlined in detail in section 5.3 there are several weaknesses in the current financial arrangement including lack of consolidated government financial statements and external audit. The financial management arrangement underpinning this operation mitigate these risks through a dedicated Foreign Currency Bank Account for the proceeds; government submitting reports on receipts and disbursements for the Dedicated Accounts to the Bank; and Supreme Audit Institution moving forward INTOSAI implementation with supports from the Bank and other development partners. Risk Categories Rating 1. Political and governance Moderate 2. Macroeconomic Moderate 3. Sector strategies and policies Moderate 4. Technical design of project or program High 5. Institutional capacity for implementation and High Sustainability 6. Fiduciary Substantial 7. Environment and social Moderate 8. Stakeholders Moderate Overall Substantial 41       ANNEX 1: POLICY AND RESULTS MATRIX   Sub-objectives EMCC 1 Prior Action EMCC 2 Prior Action EMCC 3 Prior Action Results Pillar I - Strengthened Financial Sector Governance and Fiscal Management 1.1 GOV has formally adopted a 1.3 GOV has issued Decree Number 1.5 The Borrower, through State RI-1: Reported NPLs comprehensive Credit Institutions 01/2014/ND-CP dated January 3, Bank of Vietnam, has publicized Baseline: n.a. restructuring plan and direction on 2014 replacing Decree Number publicly disclosed through its official Target (2017): <5 percent related policy actions including 69/2007/ND-CP dated April 20, 2007 website the level of non-performing enhancing role of foreign to enable increased foreign investor loans in commercial banks by end of RI-2: Number of joint stock participation in domestic participation in domestic commercial 2015 in accordance with Circular commercial banks commercial banks, incentives for banks. 02/2013/TT-NHNN dated January Baseline (2010): 39 consolidation of banks (especially 21, 2013 on asset classification and Target (2017): <30 1) Strengthened weak banks) and a plan to deal with provisioning as amended by Circular policies for non-performing loan (NPLs) 09/2014/TT-NHNN dated March 18, management of (Decision 254/QD-TTg, March 1, 2014 as evidenced through a letter Non-Performing 2012) dated March 22, 2016 provided by Loans and the State Bank of Vietnam to the promoting the Bank. restructuring of 1.2 SBV has issued a Circular to 1.4 GOV, through Prime Minister has banks improve banking supervision issued Decision Number 843/QD-TTg through strengthened regulations on dated May 31, 2013, and has issued asset classification, internal credit Decree Number 53/2013/ND-CP rating, and loan loss provisioning to dated May 18, 2013, providing a better address credit risks (Circular comprehensive policy framework to 02/2013/TT-NHNN, January 21, address the problem of non- 2013) performing loans across the banking sector. 2.1 GOV has adopted a Decision to 2.2 GOV through Prime Minister, has 2.4 The Borrower, through the RI-3: Number of years during 2010- strengthen the institutional issued Decision Number 689/QD- Ministry of Finance, has prepared an 2015 in which public and publically framework for debt management TTg, dated May 4, 2013, approving a updated medium-term debt guaranteed debt to GDP remain 2) Strengthened and establish prudential debt medium-term debt management management program for the period below statutory limit (65 percent) debt and treasury thresholds for medium-term fiscal program for the period 2013-2015. 2016-20, with strengthened risk Baseline: n.a. management sustainability (Decision 958/QD- analysis based on additional Target (2017): 5 TTg, July 27, 2012) scenarios and updated macroeconomic assumptions as 42       evidenced through official letter of Ministry of Finance and excerpt of report 111/BTC-NSNN, dated February 19th 2016 2.3 GOV through State Treasury, has 2.5 The Borrower, through State RI-4: Number of treasury accounts implemented the treasury single Treasury, has implemented Treasury Baseline (end 2012): 701 accounts account procedures in the Joint Stock Single Account procedures in the (State Treasury, MOF) Bank for Investment and Development State Bank of Vietnam, Target (2017): 5 Treasury Main of Vietnam and the Vietnam Joint Vietcombank, and Vietnam Bank for Accounts Stock Commercial Bank for Industry Agriculture and Rural Development and Trade, and provided reports on the as evidenced through a number of implementation. official letters on implementation provided by the Ministry of Finance to the Bank. Pillar II - Strengthened Public Administration, SOE Management and Public Investment Management 3.1 GOV has issued Law 3.3 GOV has issued Decree Number RI-5: Number of Provinces that 27/2012/QH13 amending Law 59/2013/ND-CP dated June 17, 2013, disclose information on land 55/2005/QH11 on Anti-Corruption Decree Number 78/2013/ND-CP management and stricter transparency guidelines dated July 17, 2013, and Decree Baseline (2010): 6 out of 63 websites 3) Increased in areas and sectors most vulnerable Number 90/2013/ND-CP dated posted maps of current land use transparency and to corruption (Law 27/2012/QH13 August 8, 2013, to regulate and guide situations (WB Land Information improved tax dated November 23, 2012) the implementation of the Amended Disclosure Surveys) administration Law on Anti-Corruption, including Target (2017): 45 provinces should increased transparency, income and disclose information on land asset declaration of public officials, management by end 2015 and accountability of public agencies and officials. RI-6: Share disclosed public 3.2 GOV has issued Law officials’ income and asset 21/2012/QH13 amending Law declarations (%) 78/2006/QH11 on Tax Baseline (2011): None disclosed Administration to streamline (Annual Anti-Corruption Report to procedures; introduce Advance National Assembly). Pricing Arrangements; increase Target (2017): 50 percent of public risk-based management; and officials’ income and asset declarations improve transparency (Law disclosed by 2015 21/2012, November 20, 2012 amending Law 78/2006/QH11) RI-7: Share of Risk-Based Audits in Total Audits for corporate Taxpayers (%) Baseline (2010): 0 Target (2017): >50% 43       4.1 GOV has issued a Decision to 4.2 GOV through Prime Minister has 4.4 The Borrower, through the RI-8: Reduced investments by SEGs restructure State Economic Groups issued Decision Number 320/QD-TTg Ministry of Finance and State in high risk non-core areas as a share (SEGs) and General Corporations dated February 8, 2013, Decision Economic Groups, has implemented of SEG capital (GCs), which includes a Number 1782/QD-TTg dated divestment of eighty (80) percent of Baseline (end 2012): 2.3 percent classification of these groups and November 23, 2012, Decision Number five high-risk, non-core businesses in Target (2017): 0 percent 4) Improved corporations by level of ownership, 314/QD-TTg dated February 7, 2013, six State Economic Groups regulatory and time bound actions with Decision Number 38/QD-TTg dated consistent with Instruments on environment and responsibilities across government January 5, 2013, Decision Number Restructuring of State Economic corporate agencies (Decision 929/QD-TTg, 753/QD-TTg dated May 17, 2013, Groups, as evidenced through a governance July 17, 2012) Decision Number 2097/QD-TTg dated report on implementation provided reforms for more December 28, 2012, and Decision by the Ministry of Finance to the transparency in Number 46/QD-TTg dated January 5, Bank. and restructuring 2013 on restructuring of state of SOEs. economic groups; the government has also issued Decree Number 71/2013/ND-CP dated July 11, 2013 on state investment in enterprises and financial management of enterprises with 100% of charter capital owned by the state. 4.3 GOV has issued Decree Number 4.5 The Borrower, through its RI-9: Number of SEGs disclosing 61/2013/ND-CP dated June 25, 2013, Government, has implemented their audited financial statements on to regulate financial supervision, Decree Number 61/2013/ND-CP, their websites. performance assessment, and dated June 25, 2013 which has been Baseline (end 2012): 4 SEGs disclosure of financial information of replaced by Decree Number Target (2017): 8 SEGs state owned enterprises. 87/2015/ND-CP, dated October 6, 2015, adopting the audited reports on the public dissemination of the key financial performance of all State Economic Groups, as evidenced through a report on implementation provided by the Ministry of Finance to the Bank. 5.1 GOV has submitted to the 5.2 GOV through Prime Minister, has 5.3 The Borrower, through National RI-10: Capital expenditure arrears National Assembly a Report on the issued Directive Number 14/CT-TTg, Assembly, has adopted the Public from the central budget (VND development investment status of dated June 28, 2013, to accelerate Investment Law Number trillion). 5) Strengthened 2012 and Medium-Term Investment clearance of capital expenditure 49/2014/QH13, dated June 18, 2014 Baseline (June 2013): VND 43 trillion policies for Public Plan for the period 2013-2015 to set arrears and report to the National to: establish a comprehensive legal Target (2017): VND 30 trillion Investment medium-term capital expenditure Assembly the current status and framework to improve capital Management priorities in the State Budget and solutions going forward. spending efficiency; reduce public including off-budget bond financing investment fragmentation; align for 2013 (Submission of Report public investments with national 283/BC-CP, October 19, 2012) 44       development plans and improve public disclosure and transparency. Pillar III. Reduced Administrative Burden and Strengthened Tax and Procurement Policies 6.1 GOV has adopted a Decision for 6.3 GOV through National Assembly, 6.6 The Borrower, through its RI-11: Share of direct contracting ministries and provincial authorities has adopted the Amended Law on Government , has adopted over total contracting value (%) to review the impact of Procurement Number 43/2013/QH13 appropriate Implementation Baseline (end 2012): 40 percent administrative procedures on the to strengthen transparency and Instruments in accordance with the Target (2017): 30 percent business environment and competition in public procurement Amended Law on Procurement. recommend actions to streamline procedures, avoid duplication, and reduce regulatory burden on the private sector (Decision 263/QD- TTg, March 5, 2012) 6.2 MPI has issued a Circular to 6.4 GOV through National Assembly, 6.7 The Borrower, through RI-12:Time needed to comply with 6) Streamlined enable adoption of e-signature and has adopted the Amended Law on Government has adopted Resolution tax payment requirements administrative e-payment procedures to allow the Corporate Income Tax to establish 19/NQ-CP, dated March 12, 2015, on Baseline (2011): (i) 320 hours for procedures, and roll out of e-business registration, competitive corporate income tax key duties and solutions to improve VAT; (ii) 217 hours for CIT strengthened tax and the public disclosure of rates, clarify rules and regulations on business environment and national Target (2017): (i) 220 hours for VAT; and procurement business registration information ( transfer pricing, and introduce competitiveness in 2015 – 2016 and (ii) 150 hours for CIT. policies Circular 01/2013/TT-BKHDT, provisions on deductible expenses. enhance the Borrower’s business January 21, 2013) environment through the simplification of tax procedures for taxpayers. 6.5 GOV through National Assembly, 6.8 The Borrower, through its has adopted the Amended Law on Government, has adopted Decree Value Added Tax to: (a) adjust the 60/2015/ND-CP dated June 26th group of goods and services not 2015, eliminating limitations on subject to value added tax; (b) clearly foreign investors’ participation in specify the goods and services subject public companies in selected areas of to 0% value added tax rate; and (c) the stock market. apply thresholds as appropriate.         45       Summary of changes to result framework EMCC Original EMCC3 Revised Objectives Indictors Objectives Indicators Rationale for Revision Program Development Program Development Simplified and aligned PDO to pillar Objectives: Enhanced Objectives: The EMCC series objectives. competitiveness through contributes to (i) strengthened strengthened financial sector financial sector governance and and fiscal management; fiscal management; (ii) improved strengthened public public administration, SOE administration through anti- management and public corruption, SOE and public investment management; and (iii) investment reforms; and reduced reduced administrative burden administrative burden through and strengthened tax and improved tax and procurement procurement policies policies. Simplified and focused on the part of Pillar I - Strengthened Financial Sector Governance and Fiscal Pillar I - Strengthened Financial Sector Governance and Fiscal the PDO more directly affected by the Management For Macroeconomic Stability Management prior actions of the program.  RI-1: Reduction in reported RI-1: Reported NPLs Dropped Standard and Poor’s Banking NPLs (SBV)10 Industry Country Risk Assessments  RI-2: Improved banking Baseline: n.a. (BICRA) to reduce number of result industry risk score (grouped Target (2017): <5 percent indicators. 1) Strengthened regulatory 1) Strengthened policies for 1-10, from lowest to environment for the management management of Non-Performing highest), measured by Added RI-2 to measure progress in of Non-Performing Loans and Loans and promoting the Standard and Poor’s RI-2: Number of joint stock banking sector restructuring. promoting the restructuring of restructuring of banks Banking Industry Country commercial banks banks Risk Assessments Baseline (2010): 42 (BICRA).11 Baseline (June Target (2017): 30 2012) = Group 8. RI-3: Number of years the RI-3: Number of years during Simplified and streamlined to public debt is below the 2011-2015 in which public and eliminate additional layer of objective 2) Strengthened debt and government target of 65 publically guaranteed debt to (e.g. transparency and efficiency in treasury management for 2) Strengthened debt and treasury percent of GDP. GDP remain below statutory PFM) increased transparency and management limit (65 percent) Eliminated RI related to primary fiscal efficiency in PFM RI-4: The primary fiscal Baseline (2010): n.a. balance as there are no PAs directly balance averaged over the last affecting the fiscal balance.                                                              10 The baseline will be established on the basis of Circular 02 implementation starting June 1, 2014. 11 BIRCA measures the strengths and weaknesses of an economy and banking industry. The BIRCA methodology has two main components: “economic risk” and “industry risk”. RI-2 covers the banking industry risk, which looks at the quality and effectiveness of bank regulations and the track record of authorities in reducing vulnerability to financial crises. 46       three years < 4 percent of Target (2017): 50% 47       RI-9: Reduced investments RI-8: Reduced investments by No change to sub-objective by SEGs in high risk non- SEGs in high risk non-core areas Dropped RI-11 to reduce the number of core areas as a share of SEG as a share of SEG capital separate indictors. Like RI10 it capital. Baseline (end 2012): 2.3 percent measures the impact of EMCC2 PA4.3 Target (2017): 0 percent and EMCC3 PA4.6. RI-10: All SEGs disclose 4) Improved regulatory their audited financial Revised RI-8 based on updated data to 4) Improved regulatory environment and corporate statements on their websites. RI-9: Number of SEGs disclosing reflect SEGs (as opposed to other environment and corporate governance reforms for more Baseline (end 2012) = 4 their audited financial statements SOEs) and aggregated for all non-core governance for more transparency transparency in and SEGs on their websites. asset types since all non-core assets be in and restructuring of SOEs. restructuring of SOEs. Baseline (end 2012): 4 SEGs divested. RI-11: MOF discloses the Target (2017): 8 SEGs reports on financial supervision and financial supervision result of SEGs/GCs on its website. Baseline (end 2012) = 0 RI-12: Reduction in ratio RI-10: Capital expenditure Simplified and streamlined to capital spending to capital arrears from the central budget eliminate additional layer of objective 5) Strengthened policies for budget. (VND trillion). (e.g. efficient capital expenditure) Public Investment Management 5) Strengthened policies for Baseline (June 2013): VND 43 Dropped RI-12 as it is not directly for more efficient capital RI-13: Reduction in total Public Investment Management trillion affected by program actions. expenditure. level of capital expenditure Target (2017): VND 30 trillion arrears from the central budget. III. REDUCED ADMINISTRATIVE BURDEN AND III. REDUCED ADMINISTRATIVE BURDEN AND Simplified and focused on the part of STRENGTHENED TAX AND PROCUREMENT POLICIES STRENGTHENED TAX AND PROCUREMENT POLICIES the PDO more directly affected by the FOR AN ENABLING BUSINESS ENVIRONMENT prior actions of the program. RI-14: Reduced percentage of RI-11: Share of direct Simplified and streamlined to domestic firms spending over contracting over total contracting eliminate additional layer of objective 10 percent of their time value (%) (e.g. efficient, equitable and dealing with bureaucracy or Baseline (end 2012): 40 percent transparent business environment) 6) Streamlined administrative bureaucratic regulations. Target (2017): 30 percent procedures, and strengthened tax 6) Streamlined administrative Dropped RI-14 to reduce the number of and procurement policies for a RI-15: Reduced percentage of procedures and strengthened tax RI-12:Time needed to comply indicators more efficient, equitable and direct contracting over total and procurement policies with tax payment requirements transparent business contracting value Baseline (2011): (i) 320 hours for environment. VAT; (ii) 217 hours for CIT RI-16: Reduced time needed Target (2017): (i) 220 hours for to comply with tax payment VAT; (ii) 150 hours for CIT. requirements. 48       ANNEX 2: LETTER OF DEVELOPMENT POLICY   49       50       51       ANNEX 3: FUND RELATIONS ANNEX VIETNAM—ASSESSMENT LETTER FOR THE WORLD BANK February 4, 2016 The economic recovery gathered pace last year and the near-term outlook is broadly favorable. Real GDP growth reached 6¾ percent in 2015, underpinned by robust foreign direct investment related manufacturing and an increased contribution from domestic demand. Headline inflation fell to around ½ percent owing to lower food and energy prices and declining core inflation. The external current account surplus declined as imports picked up, particularly investment goods, while export growth moderated. Heightened global financial market volatility spilled over into domestic markets, and capital account pressures intensified in the second half of the year. Consequently, gross international reserves have fallen to around 2 months of imports of goods and services, low by international comparison. The outlook is broadly favorable, and growth is projected around 6¼ percent this year on the back of continued improvements in domestic demand and robust FDI, and some continued moderation in exports. Inflation is projected to remain low with a continued small output gap. Downside risks to the outlook arise from delayed fiscal consolidation and rising public debt, slower external demand and global financial volatility, and incomplete banking and state-ownedenterprise (SOE) reforms. On the upside, more rapid reform implementation would support productivity and facilitate gains from the Trans-Pacific Partnership agreement. A growth-friendly fiscal consolidation is needed to ensure public debt sustainability and restore fiscal space for potential costs of bank and SOE reforms. Persistent large fiscal deficits over recent years have supported the economy, but at the cost of rapidly rising public debt. In 2015, the budget deficit rose to 6½ percent of GDP, due mainly to lower oil revenues and higher current spending, while capital spending was reduced. The 2016 budget indicates a deficit of 5¾ percent of GDP, with the reduction coming primarily through planned across-theboard cuts in current and capital expenditure. Revenues are budgeted to continue their trend decline. As a consequence of high deficits, the debt ratio is expected to rise to around 62 percent of GDP this year. Reducing the debt ratio over the medium term remains an appropriate fiscal anchor, with a reduction in the primary deficit of about one percentage point per year. The 2016 budget plans an appropriate amount of fiscal consolidation, however the composition of adjustment could be improved. Measures to strengthen revenue by broadening the tax base, reducing exemptions and introducing a property tax would help reduce the deficit while enhancing space for essential social and investment expenditures. Civil service reform would also help rationalize the large public wage bill. The authorities changed the monetary policy framework at the start of the year to allow greater exchange rate flexibility. The State Bank of Vietnam’s (SBV) official dong exchange rate against the U.S. dollar will now be allowed to change daily. Previously the rate was 52       2 adjusted only 2–3 times per year. The SBV also tightened domestic monetary conditions to support the exchange rate. Moving toward greater exchange rate flexibility is welcome, and the tightening of monetary conditions was appropriate. Making use of enhanced flexibility would help support economic activity, facilitate the accumulation of reserves and provide a buffer against external shocks, in particular heightened global financial market volatility. To better guide market expectations, the authorities should enhance their public communications by explaining more clearly their monetary policy framework, including their goal of maintaining low and stable inflation, the new exchange rate regime, and reforms to facilitate the policy framework transition toward using inflation as the nominal anchor. Continued effort to strengthen the banking system is important. The authorities have taken welcome steps, including phasing out explicit regulatory forbearance, increasing capital for the Vietnam Asset Management Company (VAMC), and allowing it to buy nonperforming loans (NPLs) at market rather than book value. Nevertheless, provisioning for NPLs transferred to the VAMC has been lengthened to 10 years; only a small fraction of these has been restructured or sold, largely because NPL resolution is undermined by legal requirements for borrowers to agree to the sale and transfer of collateral; and banks’ profitability remains low. Continued reform, including: legal reforms to facilitate the recognition and resolution of NPLs; stricter provisioning; and injection of fresh capital for systemically important viable banks and an orderly exit of small non-viable banks, is key to reduce the risk of distress. With more solid domestic demand, the recent acceleration of credit growth to around 19 percent (y/y) raises concerns about the possible buildup of macro-financial risks. The loosening of macroprudential regulations in 2015 should be reversed to prevent a build-up of new vulnerabilities. SOE reform is progressing slowly, and more robust reform implementation is important for a successful restructuring of the corporate sector to improve economic performance. Enhanced corporate governance, wider disclosure of management and financial information of SOEs, operational and management reforms, and better coordination of reform efforts among different agencies and ministries would bolster the reform effort. The dominant position of SOEs in many sectors and their preferential access to resources weigh on private sector growth. The creation of a level playing field for the domestic private sector is essential to reverse the trend decline in productivity growth and to achieve a higher and sustainable growth plane. 53       Vietnam: Selected Economic Indicators Population: 90.7 million Per capita GDP 2015 (US$): 2,088 Quota (current): SDR 460.70 millions/ 100 percent of quotaPoverty rate (as of 2014): 13.5% Main products and exports: electronics, garment, crude oil, rice, coffee, and rubber Key export markets: United States, Euro Area, Japan, Developing Asia 2012 2013 2014 2015 2016 Est. Proj. Proj. Output Real GDP growth (%) 5.2 5.4 6.0 6.7 6.3 Employment Unemployment (%) 2.7 2.8 2.5 2.5 2.5 Prices Inflation (%, end of period) 6.8 6.0 1.8 0.6 2.0 General government finances Revenue and grants (% GDP) 22.6 23.1 21.9 22.1 21.9 Expenditure (% GDP) 29.4 30.5 28.0 28.7 27.5 Net lending (+)/borrowing(-) (% GDP) -6.8 -7.4 -6.1 -6.5 -5.7 Public debt (% GDP) 48.5 52.4 57.2 60.7 62.1 Money and credit Broad money (% change) 18.5 18.8 17.7 16.1 15.4 Credit to the private sector (% change) 8.7 12.7 13.8 19.2 16.4 Nominal short-term lending rate (% less than one 12.4 9.7 8.5 ... ... year) Balance of payments Current account (% GDP) 6.0 4.6 5.0 1.4 0.5 FDI (% GDP) 4.6 4.1 4.3 5.2 6.2 Reserves (months imports) 2.2 2.0 2.4 1.9 1.8 External debt (% GDP) 37.4 37.3 38.3 43.1 44.0 Exchange rate REER (% change) 4.1 6.8 6.2 ... ... Source: Vietnamese authorities and IMF staff estimates. 54