The ODA trap: Vietnam reassessing loans strategy

14:10 | 16/11/2018 Finance - Banking

(VEN) - After 25 years of reliance on official development assistance (ODA), Vietnam is rethinking its capital mobilization resources given that ODA has become increasingly expensive and some of the projects it has funded increasingly inefficient.

vietnam reassessing loans strategy

Limitations

With low interest rates, long terms (25-40 years) and a reasonable grace period (5-10 years), ODA loans have helped Vietnam access important technical and financial resources, and promote knowledge transfer, innovation and creativity. ODA has also created a catalyst helping Vietnam mobilize capital from other sources, especially domestic sources.

In a report submitted recently to the prime minister regarding the orientation for attracting, managing and using ODA and preferential loans in the 2018-2020 period, with a vision towards 2025, the Ministry of Planning and Investment warned of the growing ODA interest rates. If Vietnam does not tread carefully, it will possibly fall into an ODA and preferential loan trap when ODA interest rates and arrangement fees are higher than interest rates on commercial loans in the domestic capital market, the ministry said.

Even Japan, Vietnam’s largest ODA provider, has increased its interest rate and applied stringent conditions to its loans. The latest report by the Ministry of Finance regarding projects using Japanese ODA loans in the 2018 fiscal year shows that on October 1, 2017, Japan increased the annual interest rate of its normal loans for Vietnam from 1.2 percent to 1.5 percent, and the preferential interest rate applied to loans in specific fields from 0.3 percent to one percent. At the same time, Japanese experts working for ODA-funded projects claim for monthly wages of about US$30,000 per person, not including allowances. This is 20-25 percent higher than the average level of pay for foreign consulting experts in ODA-funded projects.

Preparing for withdrawal

In the report, Minister of Planning and Investment Nguyen Chi Dung asked the government for guidance on attracting and using foreign loans in the 2021-2025 period. The ministry proposed that ODA be used only for large-scale projects/programs expected to have widespread effects and meet development requirements.

The ministry also proposed that ODA and preferential loans account for 30-50 percent of total investment in a project. The report indicates that priority should be given to projects with direct contributions to promoting sustainable development, especially those capable of generating medium and long-term foreign currency revenue. “Vietnam needs to prepare for a withdrawal strategy. ODA should be considered a temporary channel for foreign currency capital mobilization. In the long term, we need to have a strategy to access other capital sources, concentrate on building the domestic capital market, access foreign capital markets and upgrade domestic human resources to international standards,” the ministry said.

Ministry of Planning and Investment data show that foreign loans for Vietnam in the 2016-2017 period totaled nearly US$9.2 billion, including more than US$6.78 billion of ODA, US$2.2 billion in preferential loans and US$216.8 million in non-refundable aid.

Vietnam has signed ODA agreements totaling US$84 billion. As of 2017, the Vietnamese government owed foreign

countries US$45.8 billion, equivalent to about 20.52 percent of Vietnam’s gross domestic product (GDP), while the

ratio of disbursed ODA to external debts was only 7.9 percent, pointing to the need for more effective use of these

capital resources.

Thu Phuong