Delays in ODA-funded projects drag down Vietnam's economy

By October 18, 2016 | 10:59 pm PT

A worker arranges steel structures at a construction site of an apartment in Hanoi. Photo by Reuters/ Nguyen Huy Kham

Projects that are two or three years late cost 1.5 times more than projected.

Vietnam has received $4.9 billion in official development assistance (ODA) and other forms of preferential loans so far this year, the Ministry of Planning and Investment said in a new report, adding that the amount was 1.8 times higher than the same period last year.

The country is set to spend about $22 billion from ODA and other low-interest loans, including $4.75 billion this year, to boost economic growth in the 2016-2020 period. However, the government had only managed to disburse $2.68 billion as of the end of September, equivalent to 56 percent of the target and down 18.6 percent from the same period last year, according to the investment ministry.

“Chronically low disbursement has hiked up the costs of [ODA-funded] projects and increased the burden on debt services,” Deputy Prime Minister Pham Binh Minh said on Tuesday at a meeting with international donors.

“On average, a project which is one year behind schedule will cost 17 percent more than initially expected. And for those between two or three years late, the cost will be 1.5 times higher than projected,” Minh added.

The country should make full use of ODA and the likes while it still can, said Ousmane Dione, the World Bank’s Country Director in Vietnam.

Official statistics show the Southeast Asian country relies heavily on ODA loans which currently account for 94 percent of the country’s total external debts with average maturity of 10 years and interest rates as low as 2 percent.

However, since Vietnam has become an emerging middle-income country with a $154 billion economy and an average income of around $2,100, according to World Bank statistics, the concession levels for ODA loans will fall sharply in the years to come.

Basically, Vietnam is going to find it increasingly difficult to secure cheap loans.

Prior to 2010, the average repayment period was around 30 to 40 years with borrowing costs between 0.7 and 0.8 percent per year, including a grace period.

In comparison, from 2011-2015, the average repayment period was between 10 and 20 years and borrowing costs were at least 2 percent per year.

After July 2017, Vietnam will have little choice but to turn to loans at market conditions.

Low disbursement takes toll on economic growth

Prime Minister Nguyen Xuan Phuc has officially admitted that Vietnam will probably miss its economic growth target of 6.7 percent this year.

The annual growth forecast has been lowered to between 6.2 and 6.5 percent from the 6.7 percent target set at the start of the year, Phuc told a recent cabinet meeting.

The economy would need to expand 7.1-7.3 percent in the final quarter to achieve its full-year goal, he said.

A key driver of the expected growth is stronger public spending, which has been delayed largely by slow disbursement of funds.

Although Vietnam has introduced both incentives and penalties to encourage ministries to reach their spending targets, capital disbursement still remains low, said Deputy Trade Minister Huynh Quang Hai at a parliament meeting.

Chief of the Government Office Mai Tien Dung said that over the first nine months of the year, ministries and local governments used only 58.6 percent of the projected amount from the state budget and 38.8 percent of funds raised from government bonds.

The government has taken measures to improve budget execution, which include efforts to simplify land acquisition procedures and advancing the tendering process for procurement of most public projects under the 2016 budget to expedite their implementation.

Other policy incentives include introducing simpler procedures for investment licenses and encouraging private investment in selected infrastructure projects through public-private partnerships.

The government can afford and wants to speed up the disbursement to clear some of the cash it has in hand.

“The prospect that we might miss the economic growth target will distort the National Assembly’s limit on the budget deficit-to GDP ratio, causing public debt and government debt to exceed the allowed limit,” said Dao Quang Thu, deputy investment minister.

In order to rein in government spending, parliament earlier this week denied a proposed increase to the government debt limit from 50 to 55 percent of GDP. They insisted that the current debt ceiling, which defines the amount of debt the government can legally owe, is intended to keep a lid on government spending.

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