THE International Monetary Fund (IMF) has warned Vietnam that its inflation and financial risks may be increasing although its economy is recovering.
Mission Chief to Vietnam and Division Chief in the IMF's Asia and Pacific Department, Era Dabla-Norris said during recent talks with top Vietnamese officials that the conflict in Ukraine was likely to have a moderate impact on the pace of recovery and inflation in Vietnam.
She said that despite the rise in the prices of goods and raw materials, IMF believed inflation was still under control in the country for now, demonstrating that economic activity was still moderate.
According to a Vn Express report, the IMF expects Vietnam's inflation to reach 3.9 per cent by the end of the year, which is close to Vietnam's control target. Vietnam's GDP is expected to grow by 6 per cent this year and 7.2 per cent next year.
Immediate risks include an increase in geopolitical tensions and a slowing of China's growth, global financial conditions and developments in the real estate and corporate bond markets.
The State Bank of Vietnam targets inflation of not more than 4 per cent this year, with Vietnam's economy growing by 2.6 per cent last year, well below its pre-pandemic trend of 7 per cent.
Dabla-Norris said that in order to have Vietnam's economy grow and control inflation at the same time, policy formulation and support packages should be quick and flexible, so that it can be adjusted according to the pace of economic recovery.
She said timely and effective implementation of the Socio-Economic Development and Recovery Program will be critical in fostering growth.
The programme prioritises the health and recovery sectors, and focuses on medium-term growth prospects.
She added that future fiscal policies need to strike a balance between providing temporary assistance on one hand while promoting economic transition on the other.
On monetary policies, the IMF also advised Vietnam to be wary of rising inflationary pressures and that the State Bank of Vietnam should tighten its monetary policies and clearly communicate the factors that led to this inflation control decision.
She said the IMF believed that in the future, credit growth policies should strike a reasonable balance between promoting economic recovery and ensuring financial stability.
"The delegation appreciates recent steps to increase exchange rate flexibility and modernise the monetary policy framework," Dabla-Norris said.
She also pointed out that it was critical to strengthen the banking sector's resilience in order to sustainably support growth in the medium term.
As its recovery strengthens, Vietnam should stop relaxing regulations on debt classification and provisioning, she added.
The IMF said regulations allowing debt restructuring while keeping the debt group unchanged should not be extended beyond the June 2022 deadline, as this would delay and possibly aggravate the recognition of bad assets.
According to the IMF, financial sector regulation and supervision needed to be strengthened in order to address emerging risks and build a more resilient banking system.
Dabla-Norris said Vietnam also required more drastic structural reforms as well as improvements to the business environment and labour quality.