Vietnam should raise debt limit to provide resources for recovery

Given Vietnam’s current fiscal standing and credit room, experts say that government should raise the spending deficit and borrow more to have resources for fighting the pandemic and supporting economic recovery.

The government should raise the spending deficit and borrow more to have resources for economic recovery.
The government should raise the spending deficit and borrow more to have resources for economic recovery.

Such a policy should be implemented in a short term until 2023 before returning the previous orbit.

As Vietnam is looking to revive the economy, which has been battered by the fourth outbreak of coronavirus, research organisations and economists have recommended that Vietnam should take a stronger fiscal policy corresponding to the difficulty facing the country.

According to the Minister of Planning and Investment Nguyen Chi Dung, the total size of Vietnam’s support packages in 2021 is estimated at US$10.45 billion, equivalent to 2.84% of the country’s GDP.

Compared with the other countries, Vietnam’s support package is relatively small, with 197 countries in the world having pledged to spend US$17,910 billion, equivalent to 15.9% of global GDP to rescue economies from a COVID-19-induced crisis.

The size of fiscal support packages vary depending on the country’s budget capacity and the damage incurred by the pandemic. The US announced a package equivalent to 28% of GDP and Australia 18.4% of GDP. The packages of Asian countries such as India, Thailand and Singapore are equivalent to 10-14% of their economies. The lower levels belong to Vietnam, Indonesia and the Philippines with the support packages within the range of 2-6% of GDP.

Chairman of the Vietnam Chamber of Commerce and Industry Pham Tan Cong said that the Vietnamese government’s fiscal package is not big enough and needs to be increased as there is still room for issuing government bonds and borrowing from foreign countries.

The view is also shared by Associate Professor Vu Sy Cuong at the Academy of Finance, who said that Vietnam should accept a greater spending deficit and higher borrowings so as to create a better fiscal space for both fighting the pandemic and reviving the economy.

He noted that the extraordinary situation requires quick measures, even if they go beyond the usual limits, suggesting that the government should consider raising the spending deficit for 2022 and take advantage of low interest rates to borrow and restructure public debt.

Like other economies, the question for Vietnam is to what extent the country can increase its debt limit so as to not affect macroeconomic stability. Furthermore, under the law on public debt, national borrowings are only allowed to be spent on development investment.

Dr Truong Van Phuoc, former Chairman of the National Financial Supervisory Commission said that in the years prior to the pandemic, the room for fiscal policy had been improved, the government budget balance was ensured and the ratio of public debt to GDP currently stands at 44% while the limit allowed by the National Assembly is 60%. To cope with the pandemic, countries around the world have raised their public debt limits, and it has been calculated that for each percentage point in GDP growth it is necessary to increase public debt by 2.5 times.

With its current state, Vietnam needs to raise the public debt ratio by 5-7 percentage points, equivalent to US$18-20 billion. After 2-3 years, the ratio should be reduced gradually to the previous level. What needs thorough discussion is how to use such money the most effectively.

Dr Nguyen Dinh Cung, former Director of the Central Institute of Economic Management, said that there remains much room for economic recovery in the coming years, namely low inflation, stable foreign reserves and a stable financial system, especially a low spending deficit rate. Therefore, the government should boldly accept a budget deficit increase of 3-4 percentage points.