Supporting businesses key to further economic growth

The aftermath of the global health crisis has prompted Vietnam to consider adjusting its economic growth target. However, it is believed that providing practical support for the private sector will help the economy achieve higher growth and create more jobs.

Businesses are in critical need of more assistance so that they can contribute to higher economic growth
Businesses are in critical need of more assistance so that they can contribute to higher economic growth

This month, Nguyen Van Manh halted the operation of his garment factory in Quang Minh Industrial Park in Hanoi’s Dong Anh district. The factory was only inaugurated early last year, and is the second that Manhhas opened in Hanoi since 2018. The first factory suffered the same fate in April, with both factories managed by NTC Garment and Trading JSC, established in 2018, of which Manh is the director.

The temporary shutdown of the factories, which has cost Manh VND80 billion (US$3.48 million), followed no visits by customers since the COVID-19 pandemic hit Vietnam and the government-applied social distancing policy.

“Our company has halted operations, meaning a big debt to the banks and about 500 workers left unemployed,” he sighed.

According to the General Statistics Office, in April in Vietnam more than 4,100 firms faced such apredicament as NTC Garment and Trading, up 68%compared to March and 65% against the same period last year. In the first four months of the year, such businesses numbered 22,700, up 33.6% year-on-year. The key reason is said to be the grave effects of the pandemic which has been driving enterprises into dire situations.

Prime Minister Nguyen Xuan Phuc last week told the National Assembly (NA), “Difficulties are being seen in business and production across all sectors and enterprises in the economy. In the first four months the number of newly-established enterprises decreased 13.3% year-on-year, while the number of those halting operations increased sharply.” Notably, the demand for labour has seriously dropped, PM Phuc added.

“The pandemic has driven about five million people in Vietnam into unemployment since early this year, of which 98% are from the tourism, service, and aviation sectors. Some 78% of labourers in the transport, footwear, and garments and textiles have also faced layoffs,” the PM stressed.

The Korean Chamber of Business in Vietnam’s vice-chairman Hong Sun said that that the current time is “dangerous and extremely difficult” for all enterprises, including the 9,000 Korean businesses here employing over one million Vietnamese labourers.

“While enterprises are finding it hard to boost exports, it is also extremely difficult for them to expand domestic consumption as consumers are currently tightening their belts in fear of unemployment and reduced income caused by the pandemic,” Sun said. “Some of them have also had layoffs.”

Adjusting growth goals

During the ongoing ninth session of the 14th NA, the unemployment situation and enterprises’ difficulties are under discussion, with strong measures expected to be passed.

It will likely be the first time that the legislature must revise down the economy’s growth goal in the context of the existing pandemic raging worldwide, affecting all Vietnam’s trade and investment partners and the economy’s internal strength.

“With current numerous difficulties, the goal of 6.8%economic growth is quite a big challenge and will be hard to reach,” stated PM Phuc. “Based on the calculations of the economy’s major balances, and the fresh forecasts on the local and global economic situation, and taking the initiative in macro-monitoring, the government proposes that the legislature consider and adjust a number of goals for 2020, including the projected economic growth target and others regardingstate budget and public debt.”

In fact, the government has prepared two economic growth scenarios.

In the first, with Vietnam controlling COVID-19 in the second half of April and its key investment and trade partners doing this in the third quarter of 2020, GDP is projected to increase by 4.4-5.2% year-on-year in 2020, which is 1.6-2.4% lower than the initial target of 6.8%. Of which, the agro-forestry-fishery sector is expected to climb 2.5-2.8% year-on-year, the industrial and construction sector is projected to increase 6.7-7.9%year-on-year, and the service sector 2.8-3.6% year-on-year.

In the second scenario, with the country suppressing the pandemic in the second half of April and its major investment and trade partners doing this in the fourth quarter of this year, GDP is forecast to expand by 3.6-4.4% year-on-year in this year, which is 2.4-3.2% lower than the initial target of 6.8%. Of this, the agro-forestry-fishery sector will likely increase by 2.1-2.5% year-on-year, with the industrial and construction sectorincreasing by 5.8-6.7%, and the service sector by 1.8-2.8%, year-on-year.

“It is necessary to adjust the goals for 2020 which must be suitable to the objective reality. The goals needing to be altered would include GDP, which should increase by 4.5% on-year, which if the pandemic is controlled better in the world and the global market recovers stronger, is expected to climb by 5.4% on-year,” stated a government report on Vietnam’s socio-economic situation. “This would ensure that GDP grew by 6.5%on average in the 2016-2020 period.”

It is calculated that a reduction of 1% in economic growth would mean a loss of about 400,000 jobs, excluding the negative impacts of COVID-19 on theemployment opportunities of many millions of other labourers.

Unlocking private sector

According to the World Bank in Vietnam, existing obstructions for the private sectors must be removed so that Vietnam can achieve higher growth, and more jobs can be generated for Vietnamese people.

Ousmane Dione, the World Bank country director for Vietnam, said it is important that Vietnam boost its unfinished reform agenda and reinvigorate its growth potential, not only in terms of quantity but most importantly in terms of the quality and sustainability of growth. This is essential for the country to realise its aspiration of becoming a successful upper middle-income country.

“Reforms to promote domestic private sector development will need to be significantly stepped up, making it a primary driver for improved productivity and economic growth. This entails a continued effort to remove obstacles to private business and strengthen the regulatory environment,” Dione said. “Despite notable reforms, complicated procedures remain and prevent enterprises from growing more.”

In one specific case, over the past three years, Nguyen Hai Van, director of Vietnamese-Thai joint venture Sen Do Co., Ltd. in Hanoi’s Bac Tu Liem district, has found it more favourable for her company to do business thanks to the government’s annual Resolution 19 on improving the business environment and enhancing national competitiveness.

“The time it has taken us to conduct import procedures has been reduced by about 30%, but we still have to pay lots of money and spend much time to effectively conduct not only those procedures, but also many others,” Van told Nhandan Online.

“We have completed all e-customs procedures, but we are still required to submit many types of paper-based documents which need to be signed by the firm’s leader,” she said. “The problem is while enterprises are required to declare procedures online, they still have to submit such documents physically. Thus the online declaration has been rendered meaningless.”

Nguyen Minh Cuong, principal country economist from the Asian Development Bank, said that removing obstructions for the private sector will enable it to grow further and facilitate Vietnam in overcoming the aftermath of COVID-19 and in the generation of more jobs.

He said that despite the recent improvements inregulatory frameworks, the main problem is still policy enforcement, notably in taxes, market access, and access to land. High corporate tax income discourages small- and medium-sized enterprises to scale up their production, while procedures to file tax remain burdensome.

According to Cuong’s calculation, an enterprise has to file 14 payments a year, taking nearly 500 hours and amounting to 38.1% of total profits. Payment of VAT is onerous, taking around 220 hours, or 44% of the total time required to file tax.

The complicated administrative procedures have been highlighted at the NA, with many deputies criticising them as one of the key bottlenecks that have affected enterprise performance and the economy’s competitiveness, while private-owned enterprises (POEs) boast great potential for further development.

NA deputy Vu Tien Loc, representing the northern province of Thai Binh, said that the private sector is facing numerous difficulties caused by not only COVID-19, but also by cumbersome policies, affecting the country’s competitiveness.

“In Vietnam, though creating up to 40% of GDP, the private sector currently faces a paradox, in which over 700,000 POEs are creating only 10% of GDP, while the remaining 30% of GDP is created by five million business households, including two million with business registration,” said Loc, who is also chairman of the Vietnam Chamber of Commerce and Industry.

“There are no other economies like Vietnam which havesuch a big ratio of informal and formal economic sectors. The problem is whether the government’s policies have been good enough to help enterprises out of difficulties in order to grow more,” Loc stressed.

Back at the NTC Garment and Trading JSC, director Manh told Nhandan Online that he has heard about the government and the NA discussing strategies for enterprises amid difficulties.

“However, we are now facing a big debt to the banks. Will we be able to defer loan payments and secure more loans to revive the factories? We don’t want to see our 500 employees out of work” Manh said.

Last week he visited a bank to discuss such a deferral, but came away unhappy.

“The bank said it is now bogged down in difficulties and needs to recoup loans, so debtors like our companywill have to pay back loans and lending rates as soon as possible,” he said.