Structural Adjustment
Report No: ; Type: Report/Evaluation Memorandum ; Country: Vietnam; Region: East Asia And Pacific; Sector: Macro/Non-Trade; Major Sector:
                                                 Economic Policy; ProjectID: P004829


       The Socialist Republic of Vietnam Structural Adjustment Credit (Credit 2657-VN) for US$150 million was
approved in FY95. The credit was closed in FY97, following two extensions of the closing date totaling nine
months. The Implementation Completion Report (ICR) was prepared by the East Asia and Pacific Regional office.
Borrower comments are included in an appendix.

         The Vietnamese leadership initiated an ambitious program of renovation in 1986 aimed at stabilizing the
economy and transforming a centrally-planned economy to one guided by market forces. Initial reforms removed
price distortions and improved production incentives. Collective farms were dismantled and replaced by family
farms. Virtually all price controls were lifted, the exchange rate was unified and devalued, the budget constraint for
state enterprises was hardened, and the fiscal deficit was reduced. The economy responded positively, with GDP
growth averaging 7 percent in 1989-93.

        The Bank has been an important partner of the Government since the late 1980s, providing advice in the
formulation of its strategy and contributing to shaping measures and policies before lending began. Bank economic
and sector studies contributed to the understanding of the issues facing Vietnam and subsequently served as the
basis for the lending program. Since lending began in 1993, the Bank has worked closely with the Government to
ensure successful implementation of policies. As Chairman of the Consultative Group for Vietnam, the Bank also
helps coordinate the activities of bilateral donors, multilateral institutions and UN agencies.

        The Structural Adjustment Credit (SAC) was designed to focus on the critical elements of the reform
agenda, assist Vietnam to sustain a high growth rate and make a smooth transition to a market economy by
providing balance of payments assistance. The program, which addressed key fiscal management, state enterprise,
financial sector, and foreign trade policy issues was successfully implemented.

        Improved fiscal management was facilitated by enactment of a Budget Law, the adoption of a
Public Investment Program (PIP) for 1996-98, and the completion of a Public Expenditure Review (PER).

        The number of state-owned firms had been reduced from 12,000 to 7,000 and the SAC encouraged
continuation of this process. Under the SAC, the Government adopted measures necessary for further reform. This
included establishing criteria for identifying firms providing critical public services, strengthening the management
of these firms, and transforming non-strategic enterprises into companies competing openly with private firms. The
Government plans to privatize (equitize) about 150-200 firms on an experimental basis.

        The SAC required completion of audits of at least two state banks. However, due to delays in securing
technical assistance, only one bank had been audited by the SAC closing date, with a second audit underway and
expected to be completed in 1997. The SAC also supported the Government's trade liberalization program,
including a reduction in the maximum import tax rate to 60 percent, effective January 1996. Relaxation of a large
number of trade restraints contributed to export diversification and the development of new markets. Exports have
been growing by close to 30 percent per year.

         Most macroeconomic performance benchmarks were met or exceeded. Stabilization has been largely
achieved, underpinned by consistently prudent fiscal practices. Monetary policy was tightened, helping reduce
inflation to 4.5 percent in 1996. Growth and diversification of the economy has proceeded at a high rate. GDP
grew by 8.8 percent in 1994, 9.5 percent in 1995, and 9.3 percent in 1996. Investment exceeded 27 percent of GDP
in 1995 and 1996, while savings rose from 12 percent of GDP in 1993 to 17 percent in 1995.
        The ICR rates the project outcome as highly satisfactory, institutional development impact as substantial,
sustainability as likely, and Bank performance as satisfactory. OED concurs with these ratings.

        The lessons that emerge from this operation are: (i) close cooperation between the Bank and the
Government, continuity of Bank staff, intensive economic and sector work and high-quality technical assistance
contribute to the success of a government’s programs and policies; (ii) adjustment and the transition to a ma rket
economy is a complex task, requiring sustained attention to institution building; and (iii) it is feasible to construct
and use macroeconomic performance criteria for monitoring the success of adjustment operations.

                                        The ICR is of satisfactory quality. An audit of this project is being processed.