VINACHEM

From a poor country, Vietnam has become a middle-income country. But the achievement also presents challenges Vietnam for the near future as it gradually reduces its dependence on ODA funds and develops the nation by itself.

With their long maturity and low interest rates, ODA resources have brought a new look to the Vietnamese economy. In just more than a decade, ODA funds have focused on infrastructure, agriculture, education, and economic reforms.

But according to a recent release by the Finance Ministry, the preferential rate of loans from international partners has decreased since Vietnam became a middle-income country in 2010.

In addition the World Bank is going to terminate Vietnam's ODA incentives in 2017, switching to preferential loans and then loans under market conditions.

Following the WB, ADB said that from the beginning of 2019, it would stop offering part of its preferential ODA package to Vietnam.
ODA is considered one of the major resources for Vietnam’s economic development.

Truong Hung Long, head of the Finance Ministry’s Department of Debt Management and External Finance said as Vietnam has developed into a middle-income country, the ODA policies will evolve in the future from development aid to partnership relations.

Some key sectors in the national economy, including transport, energy, water supply and drainage, climate change and hunger elimination and poverty reduction, will obtain no more capital from the source.

Long said, “In the past, we were allowed to access loans that required repayment over 30 to 40 years. Now, the time has been reduced to 20 to 25 years, even to a decade for some donors. The interest rate on these loans has more than doubled from under one percent to over two percent, and pressure on repaying ODA loans is growing because of the shortening terms."

"In the long run, we should apply market mechanisms to the projects which can be socialized or directly refunded. We can borrow commercial capital for projects which are not under the allocation of the state budget,” he said.

Without ODA sources, Vietnam may lack capital for any urgent needs of the national economy, but as the shape of the economy improves, Vietnam is likely to be rated higher by credit rating agencies. It means it can access foreign loans at lower interest rates.

Nguyen Duc Do, Deputy Director of the Financial Economic Institute, said there are positive aspects as Vietnam grows less dependent on ODA sources.

When it uses commercial loans at higher interest rates with greater repayment pressure, debtors must take it into careful consideration so that the loans will be used more effectively.

“Basically in order to improve the effectiveness of the use of ODA funds, it’s necessary to combine the responsibility of capital use with a specific individual or agency. The government has planned to change the way ODA loans it borrows from global sponsors is turned into re-lending to local administrations instead of allotment of the funding in the past. The borrowing localities must think carefully before borrowing and spending the money,” according to Do.

To reduce the reliance on ODA capital, the government has put forward measures to adapt to the “post-ODA” period especially as annually Vietnam needs about US$90 billion for development from now until 2020.

The urgent solution now is to restructure the state budget, re-calculate the balance sheet to ensure an appropriate budget deficit, and to reduce public debt.

In the short-term, the government will restructure ODA flows and determine prioritized fields to use ODA or preferential loans to support the implementation of development projects and strategic breakthroughs.