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UNITED NATIONS DEVELOPMENT PROGRAMME

PROJECT OF THE GOVERNMENT OF VIET NAM

PROJECT DOCUMENT

Project number: VIE/01/010

Title: CAPACITY DEVELOPMENT FOR EFFECTIVE AND SUSTAINABLE EXTERNAL DEBT MANAGEMENT

Short Title: EXTERNAL DEBT MANAGEMENT

Starting Date: 01/09/2001

End Date: 31/12/2004

Executing Agent: NEX - National Execution Implementing Agents: UNCTAD - UN Conference on Trade and Development

NEX - National Execution

Project Site: Hanoi

Beneficiary Countries:

ACC Sector/Subsector: MONETARY AND FINANCIAL ISSUES AND POLICIES -

GENERAL DEVELOPMENT ISSUES

DCAS Sector/Subsector: Economic Management - Monetary policy and planning

Primary Areas of Focus/ Other UNDP Development Priorities/

Sub-Focus: Other UNDP Development Priorities

Primary Type of Intervention: Capacity-Building - Institution-building

Primary Target Beneficiaries: Target Organizations - Government - Governmental

organization

:

LPAC approval date: 14-Jun-01

Programme Officer: Trinh Tien Dung

Brief Description:

Approved by: Signature: Date: Name/Title:

Government of Viet Nam: Le Thi Bang Tam

Vice Minister of Finance

Government of Australia: Michael Mann

Ambassador Extraordinary and Plenipotentiary

Government of Switzerland: Thomas Feller

Ambassador Extraordinary and Plenipotentiary

UNDP: Edouard A. Wattez

Executing Agent: Resident Representative

Government:

This project, co-funded by the Governments of Australia and Switzerland and UNDP, aims at enhancing Governmentcapacity in critical areas of external debt management incl.: (1) monitoring and evaluation mechanism and system for

External debt Management (EDM); (2) the institutional and legal framework; (3) EDM Policy and Strategy; (4) EDM andfiscal links; (5) information collection, storing, processing and reporting, and (6) staff capacity development.

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PROJECT SUMMARY VIE/01/010

Financial sustainability is a necessary condition for sustainable development. Vietnam faces a criticalchallenge in finding a sustainable path for financing its development, and avoiding over indebtedness in thelonger term and financial instability. As the past 50 years of development experience from developingcountries shows, one of the greatest pitfalls is the external debt trap, indicating that there are clearly risksattached to increasing reliance on external debt. Therefore, one of the key measures in tackling the challengeof sustainable financing for development is to strengthen at an early stage the public economic governance inthe external debt management area, establishing a prudent and well co-ordinated public external debtmanagement system.

Key issues the country has to address in this area can be grouped according to five critical elements of asustainable debt management system:

- Institutional and regulatory environment

- Sustainable external debt policies- Servicing debt and fiscal links of contingent liabilities- External debt information flows- Human capacity for external debt management

Being aware of this the Government initiated its Action Plan for external debt management in 1997/1998 andsteady progress has been made in this area. More recently, the Government has recognised the need forintensified efforts to further strengthen economic governance in public finance management. AppreciatingUNDPs earlier experience in this area and its comparative advantages as a lead development partner in thisarea, the Government and UNDP have agreed to include external debt management under the programmearea Promotion of an improved framework for sustainable financing for development in the CCF for2001 2005.

The project VIE/01/010, funded by UNDP and the Australian Government and possibly other donor partnersto be identified, aims at supporting the Government of Vietnam in developing capacity to manage its externaldebt in order to support a financially sustainable development and minimise the risk of financial crises.

The project has six building blocks / immediate objectives, which are linked to the critical areas identified:

1) Inception and systems for monitoring of the project.2) Strengthening the institutional and legal framework for effective and sustainable external debt

management.3) Strengthening the capacity to formulate public external debt strategy including preparing portfolio

reviews, reviewing and updating the existing draft strategy documents and strengthening the capacity

for managing and monitoring non government external debt.4) Strengthening the capacity for external debt management in areas with strong fiscal links (such as

guarantees, on lending, non-Government public debt, and debt service) and in relation tointernational capital markets.

5) Strengthening the capacity to collect, store, process and report on external debt related information,including finalising and integrating existing DMFAS data bases and improve the external informationsituation regarding external financial data,

6) Strengthening of human resource capacity for effective and sustainable external debt management.

The project macro framework (see chart) provides an overview of the strategic areas of focus in theproject, the key results expected from the project, as well as of the medium term outcomes that the projectwould support. The outcomes are contingent on the Government policies and actions in the medium term.

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Based on this framework, the project will thus take a comprehensive approach spanning all categories ofexternal debt, and extend over key functional areas. In light of the institutional set up of external debtmanagement in Viet Nam and lessons learned from earlier support in this area the project will take a cross-institutional approach. It will involve and support the key institutions engaged in external debt

management, in particular the Ministries of Finance, Ministry of Planning and Investment, Ministry ofJustice, the State Bank of Vietnam and the Office of the Government.

The project is a medium-term capacity building program, which combines technical training (national,regional, international) with on-the-job preparation of analytical reports providing policy advice on key areasof external debt management. In four of the building blocks (2-5), technical training, disseminating moderntechniques and international experience, will be followed by on-the-job training where Government officialswill team up in cross-ministerial technical debt working groups, to prepare substantive reviews of criticaldebt management issues and provide concrete recommendations for improvement. The preparatory trainingand the working groups will be supported in various phases by the IRA, national and international experts. Inaddition, international experience will be brought to the project though various modalities (study tours,invited experts etc). In addition to the capacity building taking place throughout the project, a major project

component will be a special human capacity development programme (6). This programme will beimplemented in the latter part of the project and will be further developed and finalised during the course ofthe project.

The project will be supported by a small project staff capable of assisting the Government in achieving theobjectives of the project. It will require a diverse range of skills in key functional areas of debt managementinclusive of institutional and co-ordination arrangements, macroeconomic and debt sustainability analysis,debt information collection and recording, to conduct training activities and studies, and in follow-upimplementation activities. In light of its comprehensive and cross-ministerial approach it will also requiresignificant efforts in terms of policy dialogue, mobilisation of relevant expertise, process and projectmanagement and co-ordination efforts.

Taking into accounts the above approach and given the need for effective co-ordination between Governmentagencies in the project implementation, the project will be nationally executed. The Ministry of Financewill act as the Designated Lead Agency (DA) to undertake project co-ordination activities on behalf of theGovernment. As other key institutions will be the focal implementing agencies for relevant components ofthe project it is of crucial importance that these concerned agencies be adequately represented and involved inthe project management. A Project Steering Committee (PSC) consisting of representatives of all projectstakeholders will be established to guide the project implementation and review project recommendationsbefore submission to the Government for consideration. It will serve as a liaison forum for the concerneddepartments as well. To provide co-ordination support both to the day-to-day implementation managed by thevarious focal implementing agencies and to the monitoring performed by DA and PSC, a ProjectManagement Unit (PMU) will be set up at MOF. Throughout the project relevant departments within theministries will assume the role of either Focal Implementing Agency (FIA) or Participating Agency (PA).

When acting as FIA, the department will be accountable for achieving certain project objectives andimplementing specific components of the project, with the support from PMU and international expertise.When acting as PA, the department will assign well-qualified staff to relevant training and participate in thework of the Technical Debt Working Groups (TDWG). These TDWGs are inter-ministerial groups, whichundertake substantive reviews, related to some critical issues for strengthening of the external debtmanagement system in Vietnam and prepare analytical reports including recommendations for actions inthese areas. These reports will be reviewed by the PSC and then submitted to the Government forconsideration.

The project will have a tentative duration of 3.5 years. The total budget is estimated at approximately US$2,35 Million.

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StrategicAreas ofFocus

Medium-TermOutcomes

KeyOutputs

Enabling Legal andInstitutionalFramework

External Debt Policies,integrated into macroeconomic framework

Fiscal links of ExternalDebt Management

EffectiveInformation Flows

Human Resources

Comprehensive,and consistent legaland institutionalframework forexternal debtmanagement inplace, includingeffective co-ordination.

Reviewed strategyapproved, taking intoaccount projectmethodologies andrecommendations

Regular portfolio andstrategy reviews.

Fiscal links related tocontingent liabilitiesstrengthened

Revised guidelinesand regulations onoperational externaldebt managementapproved, taking intoaccount projectrecommendations

Operational,integrated externaldebt MIS in placeand sustainable

Accessibility andquality of aggregateexternal debt data towider publicimproved

Capacity andframework for basicexternal debtmanagement trainingat national level inplace

Institutional and Legalframework reviewedand recommendationssubmitted to GOV.

Procedures for regulardissemination ofregulatory changes inplace.

National external debtportfolio and ExternalDebt Strategy reviewedand recommendationssubmitted to GOV.

Recommendations oninstitutionalisation ofportfolio reviews andstrategy reviewssubmitted to GOV

External debt analysis andstrategy methodologies inplace.

Framework formonitoring Non-Government external debtreviewed andrecommendationssubmitted to GOV.

Reviews andrecommendationssubmitted to GOV on Guarantee system On-lending system Debt service

arrangements Non-government

public debtarrangements

Capacity in dealing withinternational capitalmarkets built.

Storage and collectionmechanism reviewed

Existing debt databasesintegrated to enablecomprehensive overviewof national external debt.

Operational customisedDMFAS

Database for short-termdebt developed

Database for on-lendingdeveloped

Capacity in use and basicmaintenance of databasesin place.

Comprehensive set ofanalytical external debtdocuments targeted atwider public developed.

Cadre of debtmanagement specialistscum trainers developedthrough fellowships

National trainingprogramme developed,including : Training materials

developed Training institution

identified Action plan for

training of GOVofficials developed

Support to GOVparticipation in UN High-Level event onsustainable financing fordevelopment

KEY ELEMENTS FORSUSTAINABLE EXTERNAL DEBT MANAGEMENT

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VIE/01/010

CAPACITY DEVELOPMENT FOR EFFECTIVE

AND SUSTAINABLE EXTERNAL DEBT

MANAGEMENT

(EXTERNAL DEBT MANAGEMENT)

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TABLE OF CONTENT

Project Cover page ....................................................................................................................

Project Summary.......................................................................................................................

Table of Content........................................................................................................................

Acronyms and Abbreviations....................................................................................................

A. CONTEXT......................................................................................................................... 1

1. Description of the Sub-sector....................................................................................... 12. The Host country Strategy ........................................................................................... 4

3. Prior and On-going Assistance ................................................................................... 6

4. Institutional Framework............................................................................................... 9

B. JUSTIFICATION OF THE PROJECT ......................................................................... 13

1. Issues to be addressed-the present situation ................................................................ 14

2. Key Expected Project Results...................................................................................... 243. Target Beneficiaries ..................................................................................................... 26

4. Project Strategy and Institutional Arrangements......................................................... 27

a) Project Strategy............................................................................................................27

b) Implementation Arrangements.................................................................................... 29

5. Reasons for Assistance from UNDP............................................................................ 32

6. Special Considerations................................................................................................. 33

7. Internal and External Co-ordination Arrangements .................................................... 34

8. Counterpart Support Capacity...................................................................................... 35

C. DEVELOPMENT OBJECTIVE..................................................................................... 37

D. IMMEDIATE OBJECTIVES, OUTPUTS AND ACTIVITIES.................................. 37

E. INPUTS .............................................................................................................................. 59

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1. Government Inputs....................................................................................................... 59

2. Donor Inputs................................................................................................................. 60

F. RISKS................................................................................................................................. 62

G. PRIOR OBLIGATIONS AND PREREQUISITES ...................................................... 63

H. PROJECT REVIEW, REPORTING AND EVALUATION ....................................... 64

I. LEGAL CONTEXT.......................................................................................................... 65

J. BUDGETS ......................................................................................................................... 66

Consolidated project budget...............................................................................................

The Budget for Government in Kind contributions ...........................................................

K. ANNEXES .........................................................................................................................

Annex I Project Detailed Activities for Section D

Annex II Input-Output Tables.Annex III Provisional Work Programme.

Annex IV Roles and Responsibilities for Project authorities and project functions.

Annex V Overview of project functions in the project implementation

Annex VI Job Descriptions and Terms of Reference for main consultants.

Annex VII Chart of Management and Implementation arrangements for project.

Annex VIII Overview of the Human Resource Development Programme.

Annex IX Chart: Government agencies involved in external debt management.

Annex X List of Equipment to be procured under the project

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ACRONYMS AND ABBREVIATIONS

Aidrecep Committee for Foreign Aid Management and Reception (MOF)CCF Country Cooperation Framework CIEM Central Research Institution for Economic Management (MPI)CTP Customized Training PlanDMFAS Debt Management and Financial Analysis ProgrammeDA Designated AgencyDRI Debt Relief International Ltd.DSI Development Strategy Institution (MPI)DSM+ Debt Sustainability Module PlusEDMD External Debt Management Division, (SBV)

EFD External Finance Department (MOF)FDI Foreign Direct InvestmentFDID Foreign Direct Investment Division (SBV)FED Foreign Exchange Department (SBV)FERD Department of Foreign Economic Relations (MPI)FIE Foreign Invested EnterprisesFMD Financial and Monetary Department (MPI)FOD Foreign Department ( SBV) , A.k. a International Cooperation Department.FPD Fiscal Policy Department (MOF)GDID General Department for Investment and DevelopmentGEID General Economic Issue Department (MPI)GEID General Economic Issue Department (OOG)

GNP Gross National ProductGSO General Statistical OfficeHIPC Heavily Indebted Poor CountriesIC International ConsultantID Investment Department (MOF)ILD International Law and Cooperation Department (MOJ)IMF International Monetary FundInformatics Information Technology Management and Application Committee (MOF)IR International AdviserIRA International Resident AdviserIRD International Relations Department (OOG)JBIC Japan Bank for International CooperationLC Lead CoordinatorMOF Ministry of FinanceMOJ Ministry of JusticeMPF Monetary Policy Department (SBV)MPI Ministry of Planning and InvestmentNE National ExpertNEX National ExecutionNDSF National Development Support FundNPC National Project CoordinatorNPD National Project DirectorODA Official Development AssistanceOOG Office of the Government

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PER Public Expenditure ReviewPSC Project Steering CommitteePMU Project Management Unit

RIF Research Institute for Finance (MOF)SBD State Budget Department (MOF)SBV State Bank of VietnamSOCB State Owned Commercial BankSOE State-Owned EnterprisesSPO Senior Project OfficerSTS Support for Technical Services at the Project LevelTDWG Technical Debt Working GroupTOR Terms of ReferenceTPR Tripartite Project ReviewUNCTAD United Nations Conference on Trade and DevelopmentUNDP United Nations Development Programme

UNITAR United Nations Institute for Training and ResearchWB World Bank

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1

A. CONTEXT

A.1. The external debt situation in Viet Nam key strengths and critical challenges1

Viet Nam faces a critical challenge in finding a sustainable path for financing its development,gaining financial strength and avoiding financial instability in the long term. Internationalexperience shows that the key to this challenge is to develop a solid domestic savings base whileat the same time managing external debt. As experience from many developing countries shows,one of the greatest pitfalls is the external debt trap, showing that there are clear risks attached toincreasing reliance on external debt. Therefore, one of the key measures in tackling the challengeof sustainable financing for development is to strengthen public economic governance in theexternal debt management area, establishing a prudent and well-coordinated public external debtmanagement system. As Viet Nam enters a new decade it does so with a relatively manageableposition in terms of its external debt and the risk of an external payment crisis or an Asian type ofcurrency-cum-capital-account crisis appears limited in the short term. However, a number of

challenges and shortcomings remain which could increase the risks over the medium and longterm. There are thus compelling reasons for addressing some of these issues in good time, wellbefore they may emerge as threats to the stability of the country.

Key strengths:

The external debt levels are still considered to be within sustainable limits (see Box 1). Whilethere has been a significant accumulation of foreign debt in the 1990s the growth in GDP andexports along with the significant share of concessional debt have implied that the externaldebt ratios have remained quite manageable.

Viet Nam has normalized its relations with external creditors through restructuring of itsexternal debt attracted before 1990 (see Box 2). As a result, Viet Nam is no longer to be

classified as a Severely Indebted Low Income Country and has most likely graduated fromeligibility for HIPC assistance.

Exposure to short-term liquid capital flows and reversals in capital flows has remainedlimited, partly as a result of strict capital controls and relatively underdeveloped domesticcapital markets.

Viet Nam has pursued a relatively prudent macroeconomic policy stance that seems set tocontinue, with relatively strong economic growth, modest official fiscal deficits andcontinued export growth.

1 Please refer to the Technical Document for a more detailed account of the issues outlined in this section.

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Box 1: The level and structure of external debt in Viet NamIMF conducted an external debt sustainability analysis in 1998

2. The basic outcome was that

while Viet Nam remains very poor, the external debt levels are, in principle, sustainable. TheFund recommended the Government to stress continued prudence in borrowing and that allpublic debt should be on concessional terms. The World Bank projects that total external debthas risen to US$14 billion by the end of 2000, equivalent to about 45% of GDP. TheGovernments domestic debt is limited to around 3% of GDP, excluding public debt of SOEs toSOCBs. While there are concerns about the external debt data situation in Viet Nam, theavailable data for 1999 indicate that the total convertible external debt stock in 1999 amounted toUS$10.6 billion3. Total external debt to GDP stood at 37%, total debt to exports amounted to 74%and the debt service ratio was limited to 11%. Some 95% of the total external debt has medium orlong-term tenor

4. Of this long-term debt, about 60% is public or publicly guaranteed while the

remaining was mainly FDI-related debt. Around 74% of the public external debt has beenattracted on concessional terms, which translates to around 45% of the total long-term debt.Given the concessionality of most public external debt, the public debt service burden has

remained relatively low at around 12% of Government revenues (excluding grants). In terms ofcurrency composition US Dollar loans make up some 62% and Japanese Yen comprise 20% ofthe convertible long-term external debt

5. The average terms of new debt commitments appears to

have remained relatively stable and concessional over the 1990s.

Box 2: Viet Nam's external debt restructuringIn connection with the transition of the Eastern Block in the late 1980s, Viet Nam ran into externalpayment difficulties and Viet Nam had to seek restructuring of its official and commercial debt.Since then, Viet Nam has rescheduled significant parts of its external debt attracted before 1990.In 1993, Viet Nam cleared its overdue loans to IMF and rescheduled its external debt arrears withthe official bilateral creditors in the Paris Club with a comprehensive restructuring of arrears onmedium and long-term debt. In 1997, a debt rescheduling agreement with the commercial

creditors in the London Club was reached. The third step in this process, settling the debt in non-convertible currencies (mainly Soviet debt) has recently been finalized, as a reschedulingagreement was concluded in early 2001 with the Russian Federation, the largest creditor in thisdebt category. The Bretton Woods Institutions have previously classified Viet Nam as one of theSeverely Indebted Low Income Countries and as a HIPC. However, the debt reschedulingagreement with Russia implies that Viet Nam has moved out of the category of Severely IndebtedLow Income Countries and more importantly is likely to have graduated from eligibility for HIPCdebt relief.

Critical challenges:

There has been a rapid accumulation of external debt during the 1990sand this trend is setto continue. Given relatively low domestic savings, Viet Nam has relied significantly on

foreign capital to finance budget deficits and investments in the 1990s. Given thisperspective, it is worrying that the debt share of the external capital flows (ODA and FDI) hasbeen constantly rising to a level of sixty to seventy per cent in recent years. Viet Nam is thusclearly experiencing an increasingly rapid debt accumulation. Since 1992, the level ofexternal debt6 has more than tripled, from around US$3.9 billion to some US$14 billion in

2A new Debt sustainability analysis is expected to be undertaken by IMF during 2001. Country Report April 20013 A large share (US$1.7 billion) of the increase from 1999 to 2000 is a result of the rescheduling of the Russian non-convertible debt.4 That is with a maturity exceeding one year.5 World Bank, Global Development Finance 2000. Most recent available data are from 1998.6 Total external debt, (public and non public), medium and long-term debt, in convertible currencies.

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2000. It is noteworthy that this debt accumulation has taken place despite a period whenViet Nam has gone through significant debt rescheduling and experienced significant inflowsof non debt-generating FDI, as well as ODA grants. Looking ahead, the Government has

ambitious targets for the coming decade in terms of economic modernization, growth andpoverty reduction. Significant social and physical infrastructure investment needs areforeseen and external finance is envisaged to cover roughly 36 per cent of total investment inthe coming five years. The trend of external debt accumulation thus appears set to continue.This increase in foreign debt could very well bring external debt levels beyond levelsnormally considered as 'safe', depending on factors such as GDP and export growth andexchange rate developments. While debt service is low for the time, due to the significantelement of concessionality in the debt portfolio, it is expected to rise in the coming five to tenyear period. This is partly due to FDI-related debt but also due to the fact that grace periodsfor ODA loans from the 1990s will gradually be coming to an end, notably from 2005 andonwards.

There are some concerns about the extent to which the accumulated debt has actually beeneffectively utilizedand transformed into sustainable investments that contribute to the long-term economic growth and repayment capacity of the country. This is related to concerns thata weak investment and institutional environment hampers effective allocation of investments.

The external debt situation is gradually getting more complex with an increasingly diversifiedgroup of debtors within national boundaries. There are several trends contributing to this.Foreign enterprises have emerged as a significant part of the economy. Secondly, as theGovernment promotes the domestic private sector, this sector will increasingly contribute toeconomic growth. At the same time, the external financial requirements of this sector, ofwhich external borrowings will likely be a component, can be expected to increase over time.Finally, chances are that the Government will consider anew the scope for raising commercialdebt on international capital markets when or if conditions improve on international capital

markets and when emerging markets may gain renewed access to 'high risk money'. If theGovernment chooses to enter international capital markets, that might also lead to increasingpressures from SOEs and sub-national governments to be allowed to follow suite. Over time,the Government of Viet Nam will thus likely be the formal borrower of a declining share ofthe total national external debt. However, experience from many developing countries,indicate that quasi-public or even private external debt tends to be absorbed by the State inthe case of defaults, and thus ends up as a liability of the Government. Consequently, thedevelopments of the national external debt should be an ongoing concern for theGovernment.

Addressing the challenges external debt management is keyOne of the key measures in addressing these challenges is to ensure good public economic

governance in the external debt management area, including a prudent and well-coordinatedpublic external debt management system. The Government has made steady progress in this area.However, there are a number of strategic elements of a sustainable external debt managementsystem that need to be further strengthened (See further section B1).

Institutional set up and coordination. Many of the functions of external debt management areeach divided over a number of Ministries and departments. Formal coordination systems areweak and with a relatively high degree of compartmentalization within the Vietnameseadministration. The overall coordination and control of the external debt management systemneeds to be strengthened.

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Sustainable external debt policy processes need to be further developed and integrated intothe macroeconomic policy framework and better capture external and fiscal sustainabilityconcerns. Moreover, effective implementation arrangements for an external debt strategy

need to be developed.

There is a need to ensure stronger links between external debt management and the fiscalframework given the fiscal risks posed by contingent liabilities, including non-governmentpublic debt.

External debt information is an ongoing concern from a quality perspective, as well as interms of accessibility by policy makers in various Government functions in need of externaldebt data. In addition, the limited availability of adequate and reliable aggregate debt data toinvestors and a wider public is a concern. As illustrated by the Asian crisis, lack oftransparency and information is in itself a source of instability, especially given Viet Namsincreasing financial integration with the rest of the world.

This project seeks to support Viet Nam in meeting a critical part of the overriding challenge ofsustainable financing for development; namely to strengthen public economic governance in theexternal debt management area by addressing the above critical elements for a sustainableexternal debt management system.

A.2. Host Country Strategy

The main elements of the external debt policy of Viet Nam over the past decade have been thefollowing:

1. Normalizing the relations with external creditors. As described above, the Government has,through a series of efforts throughout the 1990s, rescheduled significant parts of the externaldebt attracted before 1990 and settled outstanding debt arrears. This also implies that theGovernment appears to have chosen not to pursue the option of seeking further external debtreduction under the HIPC initiative.

2. The Government has aimed at mobilizing significant amounts of ODA in support ofViet Nams development goals, while being a cautious user of foreign commercial debt.

3. The Government has taken careful note of some of the lessons from the Asian crisis, notablyin avoiding exposure to short-term debt and liquid capital. The Government has adopted agradual pace to further financial integration while gradually beginning to strengthen thedomestic financial institutional set-up.

4. The Government has made gradual but steady progress in strengthening its external debtmanagement capacity, moving away from the situation in the early 1990s with no specificregulations for external debt management, and with very weak external debt data.

5. Since the mid-1990s, a legal and regulatory framework has been developed in crucial areasand efforts have been made to further clarify the roles and responsibilities of variousGovernment agencies involved in debt management.

6. In 1997, the Government approved an Action Plan for Debt Managementwith the aim tostrengthen the human and institutional capacity in a comprehensive manner in this area. Themain elements of this Action Plan were:

To study and formulate a national external debt management strategy.

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Improve the legal framework for external debt management. Study and establish Inter-Ministerial Cooordinating Mechanisms for External Debt

Management.

Training external debt management officers.

For the coordination and implementation of the Action plan, the Government convened aninter-ministerial working group on external debt management under the chairmanship of theOffice of Government. In addition, this project (VIE/01/010) was also envisaged, to supportthe implementation of the action plan and Decree 90. While the inter-ministerial workinggroup was soon dissolved and the project delayed, each ministry has pursued implementationit its respective areas.

The efforts to build a computerized, DMFAS-based, information and monitoring systemfor external debt has progressed with a gradual build-up of loan databases forGovernment and non-Government external debt.

The legal framework has been further modified and developed, further institutionalizingimportant aspects of external debt management such as the guarantee operations, theaccumulation fund for external debt repayments and the emerging use of external debtceilings or targets.

Further human capacity has been built in some areas of external debt management. While an official external debt strategy, regularly reviewed and updated, remains to be

fully developed, the first draft of a medium-term external debt strategy has been preparedby MPI and presented to the Government for consideration.

The outline above shows the steady progress that the Government has made in the external debtmanagement area. Indications of the Governments future policy direction signal recognition ofthe need for further intensified efforts to strengthen public economic governance in external debtmanagement.

The Ten-Year Socio-Economic Strategy emphasizes the need to strictly manage foreign debt,to maintain foreign debt within a safe range, and ensure the effective use of these funds.

The directions and tasks for the Five Year Socio Economic Development Plan (2001-2005)also highlights the need to enhance external debt management and outlines that a monetaryand financial supervision mechanism will need to be implemented in order to safeguardnational financial security; and, to control capital flows, debts and repayments, and toincrease financial transparency7.

In the area of Public Administration reform (PAR) the recent PAR review recommendspublic financial management reform become an integral part of PAR. The improvement offinancial management in administrative agencies is considered an urgent task, since efficientand effective management of the States financial resources will play a decisive role inachieving desired socio-economic development goals. In the ongoing preparations for astrategy for PAR, the drafts include reform of the management of foreign debt, includingrevising the regimes for managing and utilizing foreign borrowings and establishing a focalpoint arrangement for debt management. Similar signals have recently come from theNational Assemblys Economic and Budgetary Commission8.

7 C.f. The directions and tasks for the Five-Year Socio Economic Development plan (2001-2005) (in officialtranslation). In chapter V.Essential policy directions and major measures for the five year plan 2001-2005, under issue3-To enhance the effectiveness of macro policies and management instruments and to continue building and perfectingthe legal system.8C.f. Viet Nam News, 25 December 2000. p.1 In an interview, the Chairman of the National Assemblys Economicand Budgetary Commission, Mr Tao Huu Phung calls for efforts to be made to set up a new coordinating regime and/oragency for ODA borrowing and repayments.

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The Government intends to mobilize significant external resources to achieve its long-termdevelopment targets. While FDI and ODA are crucial components, considerations are alsogiven to other means of mobilizing external finance, such as the use of Government

guarantees and accessing international capital markets in the medium term.

A.3. Prior and Ongoing Assistance

Since the early 1990s, several projects dealing with external debt management issues have beenimplemented in Viet Nam9 In addition, there have been a number of free-standing seminars andworkshops. Most of the project assistance took place between 1995 and 1998. Currently, there aretwo ongoing external debt management projects (VIE/ADM/0249 and VIE/ADM/0250 seebelow). There are also a significant number of projects supporting the Government at the centraland provincial level in related areas such as ODA coordination and utilization, as well as inpublic finance. These are not accounted for here, with the exception of AusAIDs ODAMonitoring and Evaluation project and UNDPs ongoing PER project. This section also reviews

some lessons learned from these projects. Coordination recommendations are provided in SectionB7. Table 1 (below) provides an overview of prior and ongoing projects with external debtmanagement activities. (Please refer to the Technical Paper for a more detailed outline of thecontent of these projects, the links with VIE/01/010 and an account of the free-standingseminars).

Some lessons learnedExperience from earlier projects indicates that technical assistance, policy advice and capacitybuilding in the external debt policy and management area are complex tasks. There are at leasttwo main reasons for this:

The highly decentralized institutional set-up for external debt management (see section A4)

implies a complex institutional environment for project execution. Too narrow an institutionalfocus risks entailing that the project has too limited a scope to have a significant impact onstrengthening the external debt management set-up as an integrated whole, including externaldebt policy and analysis functions. On the other hand, there are elements of sectoral interestsand institutional compartmentalization in the Government administration that complicate asystemic approach involving several Government agencies, sharing information and workingtogether toward a common goal. Finally, this institutional environment implies a risk ofduplicating efforts, with various donors providing similar support to different agencies due toweak coordination at the donor and counterpart levels.

The data and information situation in the external debt management area is difficult. In theVietnamese context there is a long tradition of non-disclosure of external debt data, as the

finances of the State has been subject to a high degree of confidentiality. This is furthercompounded by an ingrained resistance in the administration to share data betweenministries, or even within ministries. Thus, a project may be hampered by lack of adequateaccess to data and information and hence, unable to contribute to an improved understandingof the outstanding issues that would support strategic decision making in this area. Takentogether, this implies that the external debt management is one of the more sensitive areas forusing Vietnamese data and information for policy advice and capacity building. On the otherhand, there are reasons for some optimism on this issue, given the signs of growingaccessibility and availability of public finance data. For example, evidenced by the

9 Based on available project information, it is estimated that roughly US$700,000 to 850,000 of ODA has beenallocated in support of external debt management activities until now.

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publication of broad budgetary data for the first time in 1999 and the subsequent PERexercise. Moreover, the external debt information situation gradually improved over the pastcouple of years, and Viet Nam regularly provides aggregate external debt data to the Debt

Reporting System (DRS) of the World Bank.

In several prior projects, external debt management has only been one of several components,resulting in valuable but often piecemeal improvements. Moreover, past projects in the externaldebt management area have focused, by and large, on human capacity building, implementinginformation and monitoring systems, and developing the legal framework. By doing so,significant preparatory groundwork has been made for the debt management set-up in Viet Nam.However, while beneficial for the Government and the improvement of the debt managementsystem of Viet Nam, most projects have tended to have a rather narrow institutional focus andsuffered from the problems outlined above. Moreover, relatively limited attention has been givento the most crucial, but also perhaps the more delicate areas, such as the institutional and policydimensions of external debt management. In an attempt to fill this gap, this project intends to be

fully focused on the external debt management area and have a policy and institutionalorientation.

Experiences from past projects confirm the complexities and the risks associated with technicalassistance to the external debt management area.Judging from these experiences, the strategy ofapplying a cross-ministerial and comprehensive capacity-building approach is perhaps the

appropriate way in order to achieve an overall strengthening of the external debt management

system in Viet Nam. Such a comprehensive approach would combine human resourcedevelopment with assistance to the Government agencies in carrying out a number of diagnosticstudies, and the provision of expertise to on-the-job tasks. For example, in reviewing the nationalexternal debt strategy. This support aims to enable the Government to further strengthen theinstitutional frameworks, the debt policy-making capacity, procedural arrangements and

information flow mechanisms. By necessity, it would involve all the key agencies in external debtmanagement, mobilizing the special skills from each agency that are needed in a systemicapproach to external debt management.

A more comprehensive project approach will also entail significant risks (see Section F) and willplace high requirements on management and coordination efforts within the project (see sectionB4 and B7), and on the preparedness and ability of the involved agencies to work effectivelytogether. Experience from earlier projects and from the preparation phase of this project points tosome critical pre-conditions for achieving the intended results of this project, notably:

the strong commitmentfrom the highest level of Vietnamese counterparts ensuring that theinvolved ministries see the full benefits of the project and are prepared to work together andensure adequate access to information to the project;

a well functioning high-level coordination mechanism for the project;

support to the project implementation process through an ongoing policy dialogue involvingGovernment agencies and key donors active in related areas, coordinated by UNDP;

a good measure offlexibility regarding the project activities, in order to enable the technicalassistance to adapt to the changing circumstances in terms of policies and institutionaldevelopments that can be expected over the three-year period of the project.

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Table 1: Prior and Ongoing Projects

Title/Code10 Time frame Donor support Executing AgencyGovt Agencies11

Debt components

External Debt ManagementProject

Finalized 1995-97 ADB UNCTAD

MOF-EFD Main focus on external debt Installation and training of DMFAS12. Support to build up of database Govt debt

Viet Nam Canada FinancialManagement Project

Ongoing, butrefocused.Debt component1996-97.

CIDA Free-standing

consultancy

MOF-FPD MOF-EFD.

MOF-GDID,MPI, SBV

External debt a componentBasic training concepts of external debtmanagement and related policy analysis

Strengthening of FinancialPolicies and Institutions(VIE/93/007)

Finalized 1995-2000Debt componentfinalized in mid 1999

UNDP,Switzerland,Sweden

IMF, UNCTAD

MOF MPI, SBV,

OOG, MOJ

External debt a component Continued support to database Govt debt Support to build up of DMFAS database

on Enterprise debt initialized Institutional & regulatory area supported

(Decree 90 and coordination mechanisms)Eurotap project: Support tothe Information System forEconomic Planning

Ongoing, but debtcomponent finalized1996-97.

EU Free-standing

consultancy

MPI-FMD External debt a componentBasic training in external debt strategyformulation.

Implementation of DMFAS atthe State Bank of Viet Nam(Int/95/A11)

Ongoing.Commenced 1999Extension planned.

Switzerland(SECO)

UNCTAD

SBV-FED Main focus on external debt Installation and training of DMFAS. Support to build up of database Govt debt

Legal Aspects of DebtManagement

Ongoing.Commenced 1999Extension discussed.

Switzerland(SECO)

UNITAR

MPI, MOJ, MOF,SBV

Main focus on external debt Capacity building in legal aspects of debt

management and debt negotiations

Public Expenditure Phase II(VIE/96/028)

Ongoing 1999-2002. UNDP MOF-PEMD13

MOF-SBDMain focus Public FinancePotential links in fiscal areas to VIE/01/010

Viet Nam AustralianMonitoring and EvaluationProject (VAMESP)

Ongoing 2000-2001.Pilot Phase

AusAID MPI-FERD MOF-EFD,

Line Ministries

Main focus ODA Monitoring and EvaluationPotential links in data areas to VIE/01/010

10 Where available, the donor project identification code is stated. Please refer to Technical Document for the UNDP DCAS project identification number.11 Refers to external debt component only12 DMFAS = Debt Management and Financial Analysis Programme13 PEMD = Public Expenditure Management Department

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A.4. Institutional Framework

The development of the legal and institutional framework for external debt management has inmany ways been significant over the past few years. This section outlines the main features of thecurrent institutional set-up for external debt management, including an overview of theorganizational set-up (A.4.1), as well as the regulatory framework (A.4.2). For a more detailed

review of these issues, please refer to the Technical Document14. Institutional issues are alsofurther discussed in section B.

A.4.1 Organizational set-up and coordination issues

The main institutions involved in external debt management are the Ministry of Planning, theMinistry of Finance, the State Bank of Viet Nam and the Office of the Government. Within theseGovernment agencies there are a number of departments with either direct external debtmanagement responsibilities or with tasks forming important links to external debt management.The present understanding of the institutional arrangements for external debt management isoutlined in broad terms below15.

Ministry of Planning and Investment (MPI) is responsible for long-term macroeconomicforecasting and planning, as well as planning the mobilization and investment of foreign capitalfor the Government. In this capacity, MPI is assigned with the lead responsibility andcoordination role for developing the Five Year Plan, the national long-term foreign debt strategy,and for the related tasks of developing the five year public investment programme (PIP); as wellas ODA mobilization and investment strategies. In relation to this, MPI also takes the lead inestimating capital expenditures and to determine the structure of investment capital allocationfrom the State budget. MPI is also the focal point both for FDI and ODA management. Inaddition, MPI is in charge of monitoring and regulating FDI and is therefore charged withcollecting data on FDI16 and is the focal point for the management of ODA mobilization andutilization. The above responsibilities are divided between several departments within MPI.

Ministry of Finance (MOF). The functions and responsibilities of MOF essentially cover allfinancial issues related to the State Budget. While MPI has the lead role in planning the capitalexpenditure, MOF has the lead role in the Budget formulation, in making short-term budgetaryprojections and an implementing role for both recurrent and capital expenditure. MOF'sresponsibilities include the administrative and financial management of the Governmentsexternal debt and grants, as well as domestic Government debt. This includes:

Servicing of the Governments external debt, with responsibility for ensuring resourceallocation to the State budget to settle repayment obligations.

Collection, recording and reporting of Government debt.

Administrating Government guarantees for enterprises.

Preparing and chairing negotiations on Government borrowing with ODA agencies andother creditors, except the IMF, World Bank and the ADB.

Mapping out policies and mechanisms for the State, in cooperation with SBV, in thefield of managing foreign loans in line with the national foreign debt strategy (preparedby MPI) and the national financial strategy (prepared by MOF).

Financial management of ODA, including planning and monitoring of on-lending.

14 The Technical document outlines departmental responsibilities and provides a more in-depth account and discussionon coordination issues, as well as on the legal framework.15 This outline is based on a review of the legal framework and discussions with officials from the relative Ministries.16 This is mainly done through a quarterly survey of FDI enterprises covering actual FDI commitments anddisbursements, as well as revenue, exports, employees etc. However, it does not cover detailed loan data. C.f. IMF

Selected issues (1999).

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Producing an annual report on Government and Government-guaranteed debt, as well asthe total national debt.

These tasks are shared between several departments within MOF.

The State Bank of Viet Nam(SBV)has several areas of responsibilities related to external debt

policy and management including:

Monitoring the external debt of enterprises belonging to all economic sectors17. This includesregistration of enterprise borrowing, preparation of and monitoring an annual commercialloan plan, which sets an aggregate borrowing ceiling on enterprise debt. SBV also collects,records and reports enterprise external debt data, including FDI loans and prepares an annualreport on enterprise external debt.

Administrating Government guarantees for credit institutions.

Preparing and chairing negotiations on Governments multilateral borrowing from IMF,World Bank and ADB.

Management and monitoring of official international reserves; monitoring, analyzing and

forecasting the balance of payments situation; and preparing policies related to exchange ratepolicy, capital controls and external transfers and payments.

The Ministry of Justice (MOJ) is mandated to provide legal input with respect to the formulationof the Governments legal framework for external debt management and on loan contracts. It alsoprovides legal input to the loan negotiation process and gives legal input to negotiated borrowingdocuments before submission to the National Assembly for ratification.

National Development Support Fund (NDSF) was formed in early 2000 with the status of aseparate Government financial organization, to carry out part of the policy lending and on-lendingoperations of the Government.

The Prime Minister and the Office of Government (OOG). The OOG has the role of collectingand vetting external debt-related policy proposals that other Ministries have submitted for theapproval of the Prime Minister, which has the highest approval authority the key areas of externaldebt policy and management including the following areas.

- The annual list of projects to be allocated capital from foreign loans.- The annual plan for borrowing and settling foreign loans of the Government.- The total annual commercial loan value limit plan of enterprises- On-lending of ODA loans and conditions for on-lending to banks.- Final decision on the issuance of Government Guarantees.- Final decision on the use of balance of payment support loans.- Final decision on the use of capital from international bond issues.

- The national medium and long-term foreign debt strategy.

In addition, other institutions have certain influence over the external debt policy andmanagement. Agencies such as the Ministry of Foreign Affairs, the line ministries andimplementing agencies are involved, for example, in debt negotiations. While not explicitlymentioned in the legal framework, the National Financial Monetary Policy Advisory Council is aMinister-level advisory body to the Prime Minister on financial and monetary matters 18.

17 i.e. all non-Government external debt including SOEs, FIEs, credit institutions and other enterprises.18 The council was installed in 1999. The Chairman is currently Deputy Prime Minister Nguyen Tan Dung and deputychairpersons are the Minister of Finance, the Governor of the State Bank and a deputy head of the Central PartyEconomic Department. High-level representatives from the Ministry of Trade and MPI are also among the council

members.

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Similarly, the Economic and Budgetary Commission of the National Assembly may exert certaininfluence on economic and fiscal policies. The Economic Committee of the Communist Party hasa role advising the Party on the overall parameters for the resource mobilization, as well as fiscaland monetary policies, which in turn has an important bearing on external debt policies.

A.4.2 Overview of the regulatory framework

Since the mid-1990s, significant efforts have been made to revise and strengthen the fundamentallegal framework for external debt and ODA management. In this period, the basic legalframework was established and the administrative roles and responsibilities of the maininstitutions involved in debt management were further clarified. Together with the Law on StateBudget (1996)19, and the Law on the State Bank of Viet Nam and Credit Institutions (1997), thetwo key Government decrees the ODA decree 17/CP (2001) 20 and the External Debt decree90/CP (1998), establish the core legal framework and administrative roles and responsibilities ofthe main institutions involved. Namely, OOG, MOF, MPI, SBV and MOJ. These decrees alsoprovide the framework for the conduct of external debt management activities by otherinstitutions, including enterprises, credit institutions, other ministries and provincial authorities.

Decree 17/CP on the Management and Utilization of ODA deals mainly with themobilization of ODA and provides a broad framework for ODA management as well asfurther specifications of the division of responsibilities between various Government agenciesinvolved in ODA mobilization, utilization and management.

Decree 90/CP on the Management of External Loans and Debt Repayments21 furtherclarifies the institutional division of labour between the involved agencies in debtmanagement and addresses the management of the borrowing of enterprises, Governmentguarantees, on-lending operations and servicing of Government debt.

MPI, MOF and SBV have subsequently issued several implementation regulations supportingDecree 90. In addition, related regulations were issued. There are more than fifteen legal

documents with a bearing on the external debt management system. The main elements in thisregulatory development are outlined in Table 2. A more detailed account and discussion on thecontents of these documents is presented in the Technical Document.

19 The Government plans to revise the State Budget Law in a number of areas, including changes in the authorities ofState agencies in the management and execution of the State Budget. The proposal for revision is scheduled to besubmitted to the National Assembly in late 2001.20 Decree 17/2001/ND-CP superseded Decree 87/CP, which was issued in 1997, which in turn superseded the precedingDecree 20/CP issued in 1994.21 Decree 90/CP superseded the preceding Decree 58/CP issued in 1993.

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Table 2: External Debt Management Legislation

1. Type ofRegulation

2. Code 3. IssuingInstitution

4. Date ofIssue

5. Title

Decree Decree 17/ 2001/ND-CP

Government 04/05/2001 On the Issuance of the Regulation on Management and Utilization of OfficialDevelopment Assistance

Decree 90/1998/ND-CP Government 07/11/1998 On promulgating the regulation on management of foreign Loans and paymentof foreign debts

Decree 43/1999/ND-CP Government 29/06/1999 On the States development credits

Decree 50/1999/ND-CP Government 08/07/1999 On the organization and operation of the development support fundDecision 802/1997/QD-TTg Government 24/09/1997 On the opening of L/CsDecision 200/1999/QD-TTg Government 06/10/1999 On the formation of the National Financial, Monetary Policy Advisory Council

Decree 164/1999/ND-CP Government 16/11/1999 Concerning the management of Viet Nams international settlement balance

Decision 233/1999/QD-TTg Government 20/12/1999 Promulgating the regulation on the Governments guarantee for foreign loansof enterprises and credit institutions

Circular 81/1998/TTLT-BTC-NHNN

MOF 17/06/1999 Guiding the process, procedures and management of capital withdrawalregarding official development aid

Decision 72/1999/QD-BTC MOF 09/07/1999 Promulgating the regulation on the setting up, use and management for theaccumulation fund for foreign investment

Decision 207/QD-NH7 SBV 01/07/1997 Issuing regulations on the opening of deferred L/Cs

Circular 07/1997/TT-NHNN7

SBV 04/12/1997 Guiding the implementation of Decision 802/1997/QD-TTg to resolveremaining problems concerning the opening of L/Cs

Circular 03/1999/TT-

NHNN7

SBV 12/08/1999 Providing enterprises with guidance on foreign borrowings and debt payments

Decision 308/1999/QD-NHNN7

SBV 01/09/199922

Regulating the Conditions to Borrow Foreign Loans

Circular 05/2000/TT-NHNN1

SBV 28/03/2000 Guiding implementation of some points on formulation of international balanceof payments of Viet Nam in accordance with the Government Decree164/1999/ND-CP, of November 16, 1999

Decision 418/2000/QD-NHNN7

SBV 21/09/2000 Eligibility for foreign currency borrowings from credit organizations

22 Decision 308 is under revision.

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B. JUSTIFICATION OF THE PROJECT

Viet Nam faces a critical challenge in finding a sustainable path of financing its development, avoiding financialinstability and the external debt trap in the longer term. In the light of Viet Nams ongoing transition to amarket-oriented economy, its increasing economic and financial integration in the world economy and theincreased accumulation of external debt since the early 1990s, it is clear that Viet Nams financial relationswith the rest of the world are becoming increasingly diverse and complex, and that the challenge of sustainablefinancing is increasingly compelling. The past fifty years of development experience reveals the difficulty ofthat challenge. Few developing countries have succeeded in developing from low, to middle or high-incomecountries, through heavy reliance on foreign debt. In fact, among the many failed attempts there seems to be asignificant correlation with heavy reliance on foreign debt and significant misallocation of foreign and domesticfinance. The lessons learned from the past financial crises in developing countries, both in the 1980s and therecent emerging markets crises are indeed compelling.

The social costs of financial crises are often very high. The World Bank23 estimates that the average cost of

an emerging market currency crisis amounts to eight per cent of cumulative foregone GDP. Moreover, theaverage costs tend to rise considerably in the case where a 'twin crisis' of currency and financial sector crisesoccur simultaneously. The social impact is even more severe with significant increases in poverty ratesoccurring in the wake of financial crises. It has been estimated that each percentage point of decline ineconomic growth from an adverse economic shock raises the poverty rate by two percentage points 24.Hence, financial crises have long-term consequences for the country as a whole and the impact on the pooris particularly severe.

Excessive reliance on foreign debtover a longer term is associated with considerable risks as it tends tocreate imbalances that can ultimately become a threat to stability, poverty reduction achievements andnational sovereignty. Reliance on short-term liquid capital carries the highest destabilizing potential.However, as experienced in many developing countries, for example in Africa, the "mirage ofconcessionality" can be deceptive and caution is advisable also when regarding the use of long-term

concessional loans. While concessional loans keep debt service down for an extended period through lowinterest rates and long grace periods, these loans eventually also becomes 'short-term' when they fall due.

The need to increase reliance on non-debt generating development finance. While Viet Nams external debtlevels are still considered to be within sustainable limits, there is a need to move toward greater reliance ondomestic savings, foreign equity financing and other form of non debt-generating financing. To make thisshift, the institutional and investment environment needs to be improved to further release the dynamic andentrepreneurial forces of the Vietnamese people and to increase the attractiveness of Viet Nam to FDI.Moreover, the banking system and capital markets need to be further developed and deepened to increasethe availability of medium-term domestic finance and increase the efficiency in investment allocation.

The need to address external debt management issues in good time. In addition to the system-wide changesmentioned above, a critical part of addressing the overriding challenge of sustainable financing for

development lies in improving public economic governance, which is a key to minimizing the countryssusceptibility to financial crises and their potentially destabilizing economic and social effects. Viet Nam isin the fortunate position to be able to address outstanding external debt issues in a systemic andcomprehensive manner at an early stage before serious imbalances threaten to emerge.

As outlined in section A, the Government has recognized these issues and initiated its Action Plan for externaldebt management in 1997/98, and has more recently highlighted the need for intensified efforts to strengtheneconomic governance in public finance management. This project seeks to support Viet Nam in meeting acritical part of the overriding challenge of sustainable financing for development; namely, to strengthen some ofthe most critical elements of a sustainable external debt management system. The project will build on the

23

World Bank, Global Development Finance 200024 World Bank, Global Development Finance 2000

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achievements already made by the Government and further consolidate them. It will contribute to theGovernments efforts to establish a prudent and well-coordinated public external debt management system,including the effective monitoring of private external debt flows. It will undertake a comprehensive capacity-

building programme, which will address the key institutions involved in external debt management as well asthe different departments/units within these institutions. The critical issues and the way the project wouldcontribute to address them are outlined in section B1. The expected results are then outlined in Section B2.

B.1. Issues to be addressed the Present Situation

Based on consultations with involved counterpart agencies, interested donors and ongoing projects, a number ofareas have been identified in which further improvement is needed. They can be grouped into five criticalelements of a sustainable external debt management system:

i. institutional and regulatory environmentii. sustainable external debt policies

iii. servicing debt and fiscal links of contingent liabilitiesiv. external debt information flowsv. human capacity for external debt management

(i) Institutional and regulatory environmentFor external debt management to be effective, both good policies and strong institutions to regulate andcoordinate borrowing are required. The institutional arrangements should facilitate a sufficient flow ofinformation and enhance the degree of coordination among agencies. As outlined in section A, there has beensteady progress in the Governments efforts to strengthen the institutional set-up for external debt management.An important step forward was the enactment of Decree 90 in 1998, which further clarifies roles, and stipulatesclose collaboration, information sharing and cooperation between key agencies. Decree 90 also makesprovisions for coordination between Government agencies, stipulating that the Prime Minister can set up "inter-

branch mechanisms to deal with foreign loans mechanisms". However, to a certain degree these ambitions haveso far proven difficult to effectively implement in practice. This is recognized by all involved Governmentagencies as being one of the main outstanding issues in the debt management area, and there is wide recognitionthat the institutional set-up needs to be further consolidated and strengthened. By way of illustration, Table 3 isan attempt to map the institutional arrangements according to functional categories at a departmental level. Thefunctional mapping is based on the current understanding of the institutional set-up, which builds on the existingregulatory framework and consultations with Government officials25.

This functional mapping clearly illustrates that the external debt management system in Viet Nam is a complexand highly decentralized system. Several different Government agencies, and several departments within them,are involved in performing the different external debt management functions and in several cases, two or threeagencies have a role in a particular function. For example, data recording, negotiation and mobilization,

extending Government guarantees, or policy making. Furthermore, for the system to work effectively, thedecentralized and complex nature of the system and the sometimes-shared responsibility for functional areas,pose high requirements for coordination, cooperation and information flows between the entities involved.

25This mapping is a common way of analysing the institutional set up. It divides the system in to a number of functions at differentlevels: the executive level of debt management (e.g. policy, control and regulatory functions), and the operational level (e.g. recording,analytical, controlling and operating functions). C.f. UNCTAD "Effective Debt Management" www.unctad.org/en/subsited/dfmasFor the fiscal issues, the paper the Budgetary Process in Viet Nam produced by UNDP/Government project PER Phase II, has also beenconsulted.

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Table 3: External debt management related functions by institutions26

MOF MPI SBV OOG, MOJ, OthersExecutive Level

ControllingCoordination

The formal decision-making authority in a number of crucial issues rests with the Prime Minister, while the National FinancialMonetary Policy Advisory Council has a potential advisory role in this area. However, at present there is no central body, focalpoint or mechanism with an effective mandate to coordinate the nations external debt management and policy making.

MacroeconomicPolicy

SBD (Annual budget)SBD/EFD (FinancialStrategy)

GEID (Five Year Plan, PIP,investment planning includingBudget plan for Capitalexpenditures, with MOF)FMD (external debt strategy)FERD (ODA mobilizationstrategy)

FED (Exchange ratepolicies, Annualborrowing ceiling for nonGovernment debt)

Economic Commission of theCommunist PartyEconomic and Budget Commission ofNational Assembly.OOG-IRD & OOG-GEID(Review and advisory function)

Regulatory While main decrees are issues by the Prime Minister, the Ministries all issue implementing circulars in their fields of operation.

Resourcing All agencies have their own resourcing functions to ensure adequate staffing and material resources.

MOF MPI SBV OOG, MOJ, OthersOperational Level

Analytical SBD (Fiscal monitoring,Short-term Budget andexpenditure forecasting)EFD (Reporting on Govtandtotal external debt)

FMD (Fiscal and Bankingsector monitoring)GEID, DSI, CIEM(Macroeconomic andinvestment planning)

MPD (Balance ofPayments, exchange rate)FED (Reporting onenterprise debt)

OOG-IRD & OOG-GEID(Review and advisory function)

26Please refer to the list of acronyms and abbreviations for the titles of the various departments. Please refer to the Technical Document for a more detailed review of the debt managementfunctions of various ministries and their departments.

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Recording EFD (Government debt,and Govt guarantees toSOEs, grants).Aidrecep (grants)

FERD (monitoring of FDI andODA flows)FDID (monitoring of FDIflows)

FED (Non-Governmentdebt, including publicenterprise debt and FDIdebt, Guarantees tobanks)

Mobilization andNegotiation

EFD (non-mutilaterals) FERD (ODA frameworkagreements)

FOD (mutilaterals) MoJ/ILD Legal input. Line ministriesand MOF participate in negotiations

Utilization EFD (Guarantees forSOEs, on-lendingpolicy, on-lendingbanks, grants)ID (project selection andassessment)SBD (disbursementoperations)Treasury (disbursementoperations)NDSF (on-lendingexecution to SOEs etc)Aidrecep (grants)

FERD (ODA coordinationincluding loans and grants,Evaluation of ODA use, withMOF-EFD and Aidrecept)

SBV (Guarantees forSOCBs, on-lending forSCOBs)

OOG-IRD & OOG-GEIDReview and advisory fucntion

Debt service EFD & Treasury SBV externalizes the debtpayment

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Based on the discussion with Government officials and the above analysis, some of the identifiedinstitutional impediments to effective external debt management are:

There seem to be many institutions and departments directly involved in external debt managementfunctions. Moreover, the involved agencies all have many other functions they need to fulfil. Hence,attention to external debt management, which is arguably one of the most critical portfolios of theGovernment in the area of macroeconomic policy and financial management, may risk being divertedto other pressing issues. Related to this, the technical expertise on external debt management is thinlyspread across the involved ministries.

There are still overlapping or blurred responsibilities and duplication between Ministries anddepartments. Aclear division of roles and responsibilities between agencies and departments withinagencies is needed.

The administration is compartmentalized with everybody more or less 'working in their own field'with limited cooperation. This implies that:

The information flows do not appear to run effectively, sometimes not even within ministries.Obviously, efficient information flows are required between Government agencies that needexternal debt and other financial data at various detail levels for their functions. Weakinformation flows could hamper the effectiveness of control functions as well as making itdifficult for an analyst to provide policy makers with a consistent and accurate assessment of theoverall debt situation. This is a difficulty often cited by officials.

Coordination is limited between the key agencies. The formal decision making power of thePrime Minister stipulated by Decree 90 in many critical areas, gives OOG a de jure coordinatingrole, which does not entirely materialize in practice, partly due to lack of resources and capacity.In reality, the formal coordination mechanisms have remained weak. There have been earlierdiscussions and attempts to improve the coordination. However, at present, there is no centralbody, or mechanism, with an effective mandate to regulate and coordinate the nations external

debt management and policy making, and which can ensure a comprehensive approach to debtmanagement and mobilize the expertise and information required from the various agencies.

Mechanisms need to be in place to ensure that the executive level of debt management is consistentlytranslated into the operational level to ensure that day to day operations of debt management is in linewith an overall policy. Related to this it is recommended to review the links between the national debtstrategy document and other related policy and implementation tools such as the PIP, and themedium-term fiscal framework, once fully developed [see also area (ii) below].

The regulatory framework must go hand-in-hand with the organizational set-up. Therefore, it would alsoneed to be further improved and consolidated. While the Government has made significant progress inrecent years in further developing the legal framework, there are, as indicated above, still concerns thatinstitutional roles and responsibilities need to be further modified and clarified. The challenge ahead isnot so much in the quantity of regulations, as in ensuring the quality of regulations and consistency of thelegal framework. Again, this will require a coordinated process of formulating the regulations. There isalso scope for further raising awareness about the regulatory framework, within the central and provincialadministrations, as well as in banks and enterprises. Related to this, there also seems to be scope forfurther improvement of the process for regular dissemination of regulatory changes to key sectorsinvolved in debt management. Finally, it is also recommended to bring the English translation of theregulations closer to the legal English used internationally, to minimize the risk of possiblemisunderstandings between borrowers and lenders.

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Project support to strategic area (i):institutional and regulatory environment

To support the Government in addressing these issues the project would contribute by organizing a

review of the institutional set up as well as the legal framework. A joint Government team mobilizingrelevant expertise from the involved key agencies would perform the review with the support ofinternational experts. The review will be drawing on international experience in institutionalarrangements for external debt management and coordination. It will undertake an analysis of the currentVietnamese institutional set up and the body of legal documents. Some key issues would be evaluate theimplementation of Decree 90, identify existing gaps and inconsistencies, to look at options for improvingoverall coordination of the external debt management system, how to strengthen intra-agency cooperationin the area of external debt management and ensure internal consistency within the legal framework. Thereview is to provide options for improvements and recommendations to the Government regarding how tostrengthen the institutional set up and coordination mechanisms so as to strengthen an effective, rationaland coordinated debt management institutional set up.

(ii) Sustainable external debt policiesExternal debt management should not be seen in isolation from the general macroeconomic management.The growth of external debt needs to be carefully planned in consistency with the overall macroeconomicframework and based on a forward-looking analysis of the countrys sustainable external debt servicingcapacity, with prudent assumptions regarding domestic and external conditions. Moreover, guidelinesregarding prudent, sustainable new borrowing levels should be established and the terms on which it maybe contracted should be clearly established and disseminated.

The preparation of a first draft debt strategy, as well as the internal policy debate on related fiscal policyissues preceding the drafting of the new ten-year strategy and five-year plan, are indications of theprogress in the area of public external debt policy that the Government is making in Viet Nam. There hasalso been progress regarding non Government-sector external debt and the SBV has been introducingvarious reporting and controlling mechanisms in recent years. There is however, recognition among theinvolved agencies that the policy level of debt management needs to be strengthened and to be givenfurther attention. This issue has three key dimensions:

First, there is a need to better integrate issues related to debt policy into the overall macroeconomicpolicy framework. Related to this, there is a need to give more attention to sustainability concerns,given the potential threat to national sovereignty and stability that comes with reliance on foreignfinancing and increasing indebtedness. While there are strong interdependencies between fiscal,monetary, exchange rate and external debt policies, external debt policy appears to be conducted inrelative isolation from these other issues. As a result, external debt policy making seems inclined togive prominence to mobilization of foreign finance, and the strategy formulation is largely based on atarget approach, which emphasize the importance of mobilizing the required amount of foreign debt

to achieve a target level of annual growth. It is arguably critical to an external debt strategy that asustainable level of borrowing is determined, taking into account the medium to long-term fiscal andbalance-of-payments outlook. However, critical inputs such as external debt portfolio review anddebt-sustainability analysis (fiscal and external) with macro-modelling of debt scenarios, appear to belimited in the policy formulation process27. Partly the division between planning and the financialmanagement of the budget, and between capital expenditure budget and recurrent expenditure budget,as well as the institutional set-up, appears to contribute to this outcome. Coordination among theinvolved key Ministries (MPI-MOF-SBV) in the policy-formulation process seems to be ratherlimited on the sustainability and macro issues. Moreover, the departments and research institutes with

27 In fact, the most recent external debt sustainability analyses in Viet Nam have been prepared by external experts IMF in 1998and JBIC in 1999.

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some specialization in macroeconomic policy analysis within MPI, MOF and SBV appear to havevery limited involvement in debt policy28. Another related issue is that from a risk management andsustainability perspective, it is important that mechanisms are in place to ensure that the external debt

portfolio is regularly reviewed. Portfolio reviews analyse the existing debt portfolio with respect tocurrency composition, interest rate structure and maturity profile review, subject the portfolio to stresstests to analyse its risk profile and identify any bunching of payments in the maturity structure. Theportfolio reviews are also a critical input to formulating the debt strategy and in determiningguidelines for the appropriate levels and terms of new borrowing. Currently, regular portfolio reviewsare not undertaken and the Government officials have identified this as an area where further humanresources and institutional capacity needs to be built. Finally, to be effective, the external debtstrategy will need to be prepared on a rolling basis, with regular revisions in order to reflect changingmacroeconomic conditions and priorities. To shift external debt management towards a moresystemic approach with greater focus on sustainability and macroeconomic concerns will likelyrequire the following improvements:

Improved coordination between the key agencies on policy formulation and possibly theinvolvement of the Government entities mostly concerned with macroeconomic policy analysisand forecasting.

Improved information flows among the involved agencies in the debt policy formulation process,not only on external debt data but also on other critical inputs such as medium-term fiscaloutlooks, the outlook for external balances and projections of public investments.

To further build the technical capacity for policy analysis and debt analysis. While parts of theGovernment have been briefly introduced to some external debt analysis modelling and analysistools, there has been limited training on debt sustainability analysis and in general there seems tobe significant scope for further capacity building in this area. Currently, there seems to be fewpersons specialized in external debt management issues on a policy level and these forces arethinly spread, and the responsible units tend to be understaffed.

Secondly, the implementation and monitoring of a public external debt strategy needs to be clarifiedand strengthened. It is, for example, not clear what status the external debt strategy (now in draft) willhave vis--vis other planning and monitoring tools of the Government (e.g. Public Investment Plan(PIP), ODA mobilization and utilization plan, medium-term fiscal framework29). It is critical that thePIP and ODA strategy is consistent with the Governments debt strategy in aspects such as prioritysectors, terms of borrowing, and sustainable borrowing levels. Mechanisms will also need to be inplace to ensure its implementation and enforcement on the operational level. Related to this, prudentrisk management of public external debt would imply that before approving individual loans, ananalysis is undertaken not only of the economic returns of the project relative to the interest payable,but also of their impact on the external debt service and other recurrent expenditures, the budget andon the overall external debt portfolio.

Finally, there is a need to, in good time, review and strengthen the Governments existing institutionaland regulatory system for monitoring non-state sector debt. The debt management framework goesbeyond central Government debt and central Government Guaranteed debt. Other types of debt suchas unguaranteed public enterprise and/or local government debt, as well as private sector borrowings,are important to debt management, as they may contribute to making a country vulnerable to financialcrises. They may also have important fiscal implications [see area (iii) below]. As Viet Nam graduallyintegrates economically and financially with the global economy, its external financial relations will

28 Examples of such departments are GEID at MPI, MPD at SBV or SBD and Financial Policy Department at MOF, and researchinstitutes such as DSI at MPI or the Institute of Financial Research at MOF.29 While beyond the scope of this project, this issue is also related to the need highlighted in the latest PER exercise to develop arolling medium-term fiscal framework. Such a framework would enable forward looking analysis of the fiscal situation and offiscal risks, taking into account external debt related issues [see also issue (iii) on fiscal links below].

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inevitably grow increasingly complex and diverse. As a result, the composition of the nationalexternal debt is gradually getting more complex, with an increasingly diversified group of debtorsbeyond the national Government. FDI-related debt currently amounts to roughly one-third of the

national external debt. The Governments intention to increase its efforts to promote the developmentof a dynamic private corporate sector will, in the medium term, imply growing financing needs fromthis sector. Here, there are important strategic choices to be made in the coming years. For example,regarding the degree of control and by which mechanisms the Government should exercise controlover private sector borrowing, and also how information can be best collected. Regarding the SOEsector, through recent legislation, SBV has relaxed the formal control mechanisms over enterprises'foreign borrowing. In principle, the previous requirements for SBV approval for SOE borrowing havebeen replaced by reporting requirements and a broad framework for allowed terms and conditions 30.A reporting system has been established, and the recording system is near completion [see area (iv)below]. While efforts are continuing to ensure its implementation, there are some difficulties withenterprises not fully reporting borrowings or not applying the conditions stipulated in the framework.

Project support to strategic area (ii): sustainable external debt policies

To support the Government in addressing these issues, the project would contribute to strengtheningprocesses for formulating a national debt strategy based on the Governments development objectives, aswell as fiscal and other macroeconomic constraints, and strengthening the capacity to determinesustainable levels of external debt. The projects objective is to build on the Governments existing policyformulation efforts and to build effectively on the job capacity of debt officials. Therefore, the mainvehicle for addressing the above-mentioned issues would be to organize and perform a review of theexisting medium-term debt strategy proposal for Viet Nam. A joint Government team mobilizing relevantexpertise from the involved key agencies would perform the review with the support of internationalexperts. As a baseline and input for the strategy review, an external debt portfolio review of theoutstanding external debt stock will be performed by a Government team, with the support ofinternational experts. The strategy review would assess the feasibility, effectiveness and sustainability ofthe existing debt strategy. Building on t