Stimulus package of Vietnam 2008-2010

Macroecocomics assignment

Contents

I. INTRODUCTION 1
II. CONTENT 3
1. THEORETICAL BASE OF THE STIMULUS PACKAGE 3
1.1. Definition 3 1.2. The origin and basis of stimulus package 3 1.3. The basic principles to implement stimulus policies 5 1.4. How to increase the AD in the economy? 6
2. ANALYSIS THE FACT OF VIETNAM 7 2.1. The Effects of the Global Crisis 7 2.2. The first demand stimulus package of Vietnam 10 2.3. The explicitness of the fiscal policy…………………………………………………....19
III. CONCLUSION 23
IV. REFERENCES 24

I. INTRODUCTION
Since 2007, nations around the world experienced a series of major economic and financial problems. The events began with the financial crisis of 2007–2008, considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis.
Affected by the global economic recession, Vietnam's economy in 2008 faced many difficulties even in the next period of time. It was hit by a large fall in export demand and foreign direct investment. All entities in the economy from firms to consumers had to suffer from the condition of the economy. The government cannot stand apart from this situation, many policies, stimulus packages and other solutions have been brought out to respond promptly the fluctuation of the economy, to control effectively inflation and maintain the macro-economic stability. The question is what the stimulated impact is, if any, and whether a better outcome could have been achieved by a different mix of policies
Although this is not a topical problem anymore, we still want to analysis and learn about the fact that happened to the economy and the impacts of government’s policies. For the purpose of applying knowledge learnt from the macroeconomics and understanding deeply all this knowledge in reality and in concrete economic situation of Viet Nam, we presumed to do this assignment with the subject: “Stimulus packages of Vietnamese government and its effects during the period 2008-2010”. II. CONTENT
1. THEORETICAL BASE OF THE STIMULUS PACKAGE
1.1. Definition
A package of economic measures put together by the government to stimulate a floundering economy. The objective of a stimulus package is to reinvigorate the economy and prevent or reverse a recession by boosting employment and spending. The theory behind the usefulness of a stimulus package is rooted in Keynesian economics, which argues that the impact of a recession can be lessened with increased government spending.
1.2. The origin and basis of stimulus package
Stimulus policies derived from economic theory of John Maynard Keynes (1883-1946) who is one of the most famous economists of 20th century. In his theory, he appreciated very much the importance of aggregate demand. He supposes that in the short run, productive activity is influenced by aggregate demand - AD (total spending in the economy), and that aggregate demand does not necessarily equal aggregate supply - AS (the total productive capacity of the economy). Instead, it is influenced by a number of factors and sometimes behaves erratically, affecting production, employment, and inflation. Aggregate demand depends on consumption, investment, government expenditure and net export (AD = C+I+G+NX).
According to Keynes, during the movement of the economy, AD does not usually keep up with AS, which influences the production, decreases investment, causes a high rate of unemployment as well as the economic crisis. Increasing the AD is a solution. The AD is greater than the AS will increase investment. Thus, this increases employment and income. Finally national output (Y) also increases.
To increase AD, Keynes respects the role of the state in regulating the economy through government stimulus policies. He said that to get rid of the high rate of unemployment and crisis, State intervention in the economy is very important to increase AD, income and decrease unemployment. Government may apply several tools such as the State investment program; fiscal policy, monetary policy; expand employment by expanding investment, encourage consumption ... So stimulus policies derived from stimulus AD ideas drawn from two important theories of Keynes.
a. The 1st theory
The recession stems from the excess capacity of production of the economy. This situation is represented by inputs are not used effectively (not used at full capacity). This causes unemployment in the labor market, machines neglected and surplus goods.

P Figure 1
Because of this situation of surplus, producers decrease their price with the purpose of selling more goods. This make the price in the market tends to go down. At this time, consumers have no longer demand to consume more because they have satisfied their demand. Therefore, lower price cannot encourage them and as a result demand is far below the actual supply.
P

Figure 2
b. The 2nd theory
Government can spend a large expenditure, even more than the income. Meanwhile, the non-governmental areas: households and firms typically spend less than total income because they want to save (marginal propensity to save is greater than 0).In normal conditions, the savings are transferred to the firms for investment (which is a components of AD), but in a recession, businesses do not want to invest anymore because there is no ability to get more benefit.
Thus base on the 1st theory, Keynes said that the economy deteriorated temporary because the supply excess the demand (i.e the lack of effective demand).So to come out of recession, there must be a large enough demand.
Base on the 2nd theory, he believed that only government dares to spend much when the economy is in a recession.
From these 2 theories, Keynes proposed a stimulus idea according to the following principles: transfer purchasing power from the private area into the government to increase demand, take the economy out of the bad situation due to lack of purchasing ability.

P Figure 3
1.3. The basic principles to implement stimulus policies
According to Lawrence Summers - Director of the White House United States National Economic Council for President Barack Obama until November 2010, has said that to be effective, stimulus measures must meet three basic tests: they must be timely, targeted, and temporary.
• Timely measures are those that, once triggered, stimulate new spending quickly so that businesses do not have to cut back on production or lay off workers due to weak demand. Increased funding for government programs that spend-out slowly, or for tax cuts that will be saved in large part rather than spent quickly, are poor candidates for stimulus; they have little impact when the need is greatest and only kick in when the economy is reviving anyway.
• Targeted measures are those aimed at individuals and entities that will spend quickly the bulk of any new resources they receive. Tax cuts that mainly benefit high-income individuals are poorly targeted to provide stimulus, because those individuals are more likely to save a large share of any increase in disposable income they receive than are people of more modest means. Government-funded construction projects that take many months or even several years to get underway are poorly targeted as well. In contrast, tax cuts and increases in government spending aimed at low- and moderate-income consumers and unemployed workers — such as tax cuts that provide a flat refund to all tax filers, additional weeks of unemployment benefits to workers who have been unable to find a new job, and increases in food stamp benefits — are far more effective as stimulus.
• Temporary (i.e in short-run only) measures are those that expire once the economy improves. The country should not be stuck with permanent, deficit-increasing tax cuts or spending increases because of a temporary economic downturn; it is essential that all stimulus measures terminate when the economy strengthens. It also is desirable that short-term increases in the budget deficit caused by a stimulus package be offset by deficit-reduction measures that take effect in subsequent years. Otherwise, stimulus measures will cause some permanent increases in interest payments on the debt that will worsen long-term deficits, although the effects should be small if the stimulus measures are truly temporary.
1.4. How to increase the AD in the economy?
Nowadays, most countries implement the stimulus policy through these main measures:
a. Fiscal policy
To increase the AD, government can implement an expansionary fiscal policy. This is designed to stimulate the economy during or anticipation of a business-cycle contraction. By increasing government spending (both government purchases and transfer payments) or a decrease in taxes, AD will increase. Expansionary fiscal policy leads to a larger government budget deficit or a smaller budget surplus.
In general, expansionary fiscal policy works through the two sides of the government's fiscal budget: spending and taxes. However, it's often useful to separate these two sides into three specific tools: government purchases, taxes, and transfer payments.
b. Monetary policy
Another way to make AD go up is an application of an expansionary monetary policy. This is an increase in the quantity of money in circulation, with corresponding reductions in interest rates, for the expressed purpose of stimulating the economy to correct or prevent a business-cycle contraction and to address the problem of unemployment. In days gone by, monetary policy was undertaken by printing more paper currency of central bank. In modern economies, monetary policy is undertaken by controlling the money creation process performed through fractional-reserve banking.
State bank of Vietnam is the monetary authority - responsible for monetary policy. In theory, it can control the fractional-banking money creation process and the money supply through 3 tools: open market operations (buy government bond), decrease discount rate, and set a lower reserve requirements. An important side effect of expansionary monetary policy is control of interest rates. As the quantity of money increases, banks are willing to make loans at lower interest rates.
c. Increase export
Improve the trade balance by increasing exports and decreasing imports. Export growth help increase jobs, income, domestic consumption and economic growth. At the same time, it is necessary to adjust the exchange rate with the purpose of encouraging export and restricting import. Additionally, government has to encourage also domestic consumption.
2. ANALYSIS THE FACT OF VIETNAM
The global financial crisis affected almost all countries. Vietnam, a small open developing country, was hit by a fall in export demand and foreign direct investment in late 2008 and 2009. Many governments quickly prescribed stimulus packages and Vietnam was no exception. The question is what the stimulated impact is.
Demand stimulus is an effective measure to increase the aggregate demand whereby economic growth can be stimulated. In 2009, faced with the risk of economic recession, the Vietnamese Government launched the first demand stimulus package worth VND 160,000 billion, equivalent to US$ 9 billion. Studying and assessing the impact of this stimulus package are necessary requirements. In this paper, the implementation of the first stimulus package will be summarized, its impacts on economics evaluated and its ten problems identified. Then the lessons on the implementation of stimulus policy for Vietnam will be presented. Thus, it is necessary that the government should have a clear orientation and essential preparations for applying a demand stimulus package and that it should only maintain a short-term stimulus package and strictly monitor stimulus capital in launching a demand stimulus package.
2.1.The Effects of the Global Crisis
Up to the first half of 2008, Vietnam was relatively unaffected by the financial turmoil; but the financial and economic environment worsened in the final quarter of 2008 and first quarter of 2009 (Table 1). In the fourth quarter of 2008, Vietnam’s exports fell substantially because of the direct and immediate effects of the global crisis. According to official statistics from the General Statistics Office (GSO), the year 2009 witnesses a decline of exports by minus 8.9% due to decreased aggregate demand for its exports, and substantial fall in the prices of its export commodities, especially crude oil and other primary commodities . For a country with annual growth in export values of about 20 percent, this is a serious setback. As the year 2009 closed, exports showed some signs of recovery, due to a global demand revival, but export values amounted to just $56.6 billion - 10 percent lower than in 2008. In 2008, the flow of registered FDI capital into Vietnam totaled $64 billion (tripled the registered FDI capital in 2007), while flows of implementation capital reached $11.6 billion - versus $8 billion in 2007 . In 2009, however, FDI inflows slowed because of capital constraints and the tightening of the world credit market. For 2009, Vietnam managed to attract US $21.48 billion, accounting for only a third of the record level in 2008 (US $64 billion), but is higher than in 2007 (US $20.3 billion). Actual disbursements for investment projects were about US $10 billion, equivalent to 87% against 2008. The slowdown of FDI inflows in 2009, with the expectation of continued lower levels in the years to come, had serious consequences for Vietnam, especially in terms of its exports and investment-dependent growth strategy. According to official statistics, FDI has accounted for more than 50 percent of the country’s exports over the last six years.

Table 1. Basic Quarterly Macroeconomic Data during the Crisis
Content 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
GDP (year-on-year %) 6.5 5.7 3.1 4.5 5.8 7.7
Industrial production (year-on-year %) 15.8 14.1 2.9 6.8 10.7 14
CPI, end of quarter (year-on-year %) 27.9 19.9 11.3 3.9 2.4 6.9
Trade balance (% of GDP) -5.5 -5.9 8.5 -15.2 -19.7 -18.6
International reserves (US$ billions) 24.1 24.2 23.3 19 18 16
Policy rate, end of quarter (%) 14 8.5 7 7 7 8
5-year yield, end of quarter (%) 15.9 10 9.17 9.42 10.1 11.68
Dong/U.S. dollar, end of quarter 16.600 17.483 17.797 17.798 17.841 18.479

Dong/euro, end of quarter 23.572 24.301 23.492 24.517 26.048 26,425
Source: GSO. http://www.gso.gov.vn/
It is expected that Vietnam’s labor force to be highly vulnerable to the global financial crisis, given its heavy dependence on exports and relatively mobile international investment. Data on the impact of the crisis on the labor market and employment, however, are limited and not reliable, complicating the assessment of the social impact of the growth slowdown . According to a survey conducted by VASS , the effects have not been as bad as feared. Despite numerous job losses, frequent reductions in working hours and wages, reduced remittances, and increased reliance on informal sector jobs, major negative effects - such as rising poverty, food shortages, the need to pull children out of school or to sell land, or becoming homeless - have been relatively uncommon.
In addition to its impact on trade, FDI, industrial production, and the labor market, the global crisis has had implications for Vietnam’s capital inflows, exchange rate, and stock market. Like other Asian countries, Vietnam suffered capital flight starting in the second quarter of 2008. Banks and financial institutions in the United States and the West reduced their international businesses and focused on their home markets. As a result, funds flowing into Vietnam fell sharply. In response to the booming stock and housing markets during 2006 - 2007, short-term inflows had surged to high levels. The crisis then led to a reversal of these inflows, creating large outflows (Figure 4). The reversal of portfolio capital flows significantly affected the stock market, with the VN-Index falling to a record low of about 300 points in 2009 from its high of over 1,000 points in early 2007 . Although the Vietnamese dong has long been pegged to the U.S. dollar, capital flows have had a major impact on the dong, with several small adjustments of the trading bands and devaluation. Generally, capital outflows depress the dong’s value; indeed, since the beginning of 2009, the dong has lost up to a dozen percentage points in its value against the dollar . Declines in exports, as well as in remittance and foreign capital inflows, have reduced the supply of foreign exchange while expansionary monetary and fiscal policies have increased demand for it. Consequently, there has been a shortage of foreign exchange in the formal market, and the dong’s exchange rate against the U.S. dollar has been transacted at the upper bound of its trading band.

Figure 4: Flows of Capitals Source: Vietnam Military Bank
In addition to the direct effects of decreased exports and FDI inflows, the global crisis has reduced aggregate demand sharply, through the employment and income channels. The drop in domestic demand was the result of falling employment and delayed consumption and investment by domestic consumers and investors. Remittances have long been seen as important sources of capital for Vietnam, and the crisis is expected to lower the inflow of this key source of capital. Other impacts include the decline in tourism and lower income for farmers, due to lower commodity prices. The effect of the global crisis on Vietnam’s economy is summarized in Table 2
Table 2: Summary of Effects of Global Economic Crisis on Vietnam’s Economy Period
1997-
2002 Period
2003-2007 Change from 1997-2002 to
2003-2007 Highest
2-year
average value before crisis Expected potential value just prior to the crisis 2008 2009 Total loss during 2008-2009 compared to potential
GDP growth (%) 6.58 8.05 1.48 8.45 7.62 6.18 5.32 -2.18
TFP growth (%) 1.66 2.99 1.33 3.21 2.72 0.2 -0.33 -3.08
Exports growth (%) 17.77 12.91 -4.86 27.74 0.25 5.05 -0.1 -0.26
Exports/GDP (%) 50.73 68.98 18.25 75.25 0.65 78.21 0.62 -0.03
Investment (% GDP) 29.83 37.29 7.45 39.97 37.00 41.13 42.8 5.8
Capital inflows (% GDP) 0.054 0.048 -0.006 0.078 0.007 0.014 0.098 0.028
Fiscal deficit (% GDP) - -0.051 - 0.055 0.05 00.041 0.07 0.02
Source:
2.2. The first demand stimulus package of Vietnam
a. About the first stimulus package
In 2009, the Vietnamese government has made policy stimulus measures by subsidizing 4% interest rate for businesses, duty free programs, and reduction of tax, loan guarantees for commercial bank. As follows:
4% interest rate subsidy package belongs to a group of measures to stimulate investment for businesses. There are three types of interest rate support: short-term, medium & long-term loans, and loans for agriculture and housing. Borrowers are not included in the list of 13 sectors:
1. Mining industry
2. Financial activities
3. State administration and national security, Party, Unions, compulsory social security
4. Education & training
5. Medical and social support activities
6. Cultural and sporting activities
7. Activities related to the property business and advisory services
8. Activities support for individuals and communities
9. Service activities in the household
10. Import of consumer goods
11. Business investment securities
12. Activities of international organizations
13. Real estate business in the form of sale of land use rights
Reduction tax program includes: reduction, extension of income tax and value added tax reduction for a number of goods and services. On 12/5/2009, the Ministry of Planning and Investment has officially announced stimulus package worth 143,000 billion Vietnam dong (about 8 billion USD), then increased to 160,000 billion (equivalent 9 billion USD). Accordingly, this $8 billion stimulus package is divided into 4 main sections with different values. (Table 1)
The government aggressively loosens its monetary policy stance by cutting the base rate from 14% per year to 7% per year within a few months. Ceiling lending interest rate (1.5 times base rate) was lowered accordingly, from 21% to 10.5% for productive activities. Lending interest rates for credit card and consumption are negotiable and fluctuating between 12% and 15%. In terms of fiscal policy, the stimulus package, was initially announced at $6 billion aiming at mitigating the impact of the global financial and economic crisis on the Vietnamese economy and the population, and preventing a general slowdown of economic activities. This figure was later revised to be almost USD 8 billion .
The government of Vietnam quickly and decisively responded to counter the negative effects of the global crisis. It reversed the course of the monetary tightening and fiscal austerity policy implemented in 2008.
Table 1: Vietnam’s Stimulus Measures
No Policy measures Amount
1. Interest subsidy VND 17000 billion
2. State Development investment VND 90800 billion

3. Tax holiday and exemption VND 28000 billion

4. Other spending for social security and economic downturn prevention VND 9800 billion

Total Total VND 145600 billion
( equivalent to USD 8 billion)

Source: Report by the Government to the National Assembly (2009)
b. The implementation of the 1st stimulus package
How the government’s fiscal stimulus package is structured is presented in Table 2. The lack of transparency in Vietnam's fiscal accounting means that it is difficult to ascertain the exact size of the stimulus package. It is unclear how much of the stimulus package worth VND 145.6 trillion (USD 8 billion) is new money and how much has actually been spent. As usual we could expect that there is likely to have been some duplication of spending plans, and some of the announced measures involved spending that had been brought forward. At face value the VND 145.6 trillion represents a stimulus package equivalent to 8.5% of GDP, but this overstates the actual boost to the economy. Examining the Table 2 reveals that out of VND 145.6 trillion announced for fiscal stimulus package, VND 22.5 trillion is actually expenditure earmarked for 2008 carried forward, VND 37.2 trillion advanced from 2010 budget, and VND 3.4 trillion deferral of payment. It is suspected that the amount of VND 37.2 trillion advanced from 2010 budget is financed by “printing money”.
Table 2. Components and Size of Vietnam Stimulus Package
No VND trillion unless otherwise noted Proposed stimulus package

1 Revenue foregone 25.4
2 Corporate Income Tax (CIT) 10.4
3 Personal Income Tax (PIT) 6.5
4 Value Added Tax (VAT) 7.4
5 Licenses and fees 1.1
6 Additional expenditures 117.6
7 Interest rate subsidy 17
8 Budget advanced from 2010 37.2
9 Government bond carried over from 2008 7.7
10 Investments funded by additional bond issuance 20
11 Expenditures carried over from 2008 22.5
12 Deferral of repayment of budget allowance for 2009 3.4
13 Social spending 9.8
Overall fiscal stimulus 143.0

In percent of GDP 8.5%

Source: Ministry of Finance, Ministry of Planning and Investment, World Bank, IMF
c. The Impact of Stimulus Package
• Positive effects
The most obvious impact of the stimulus package implemented by the government helped keep the credit flowing into the economy and assisting enterprises to clean up their balance sheet, replacing the high interest bearing loans incurred during the turbulent year of 2008 when the interest rate each 21% with interest rate subsidized. This reduced the financial burden by easing capital costs during a period of economic pressure and enabled businesses to maintain production and jobs.
In September 2009 the Government reported that, the stimulus component worth VND 17,000 billion used for interest rate subsidy resulted in loans (for working capital) of VND 405,000 billion, of which 16% allocated to SOEs (small and medium-sized enterprises) and 84% to private sector. Spurred by the introduction of government interest rate subsidies, growth of credit and money supply accelerated in the first half of 2009. The growth of total liquidity (M2) increased to 35.8% in the second quarter 2009 from 20.3% in the fourth quarter of 2008 (Figure 4) . On the other hand, there is evidence that only a limited number of enterprises could access to the subsidy program. Remaining enterprises faced difficulty in accessing capital . In tandem with the fiscal stimulus package, the government also adopted an expansionary monetary stance to promote economic operations. Therefore separating and assessing the effects of monetary policy and fiscal policy on the credit growth would be superficial since the monetary and fiscal policies in Vietnam are no independent from each other. The government of Vietnam adopted an unorthodox policy during the crisis time, using the fiscal approach to obtain monetary policy objective (lower interest rates by interest rate subsidy). The interest rate subsidy under the stimulus package, together with the accommodating monetary policy, helped injecting credit to the economy during the bad time. Another effect of the package was to restore business confidence, as reflected in part by a rally in the stock market in mid-2009. Evidence of the impact of the 4% interest rate subsidized loan could be found in a recent study by Nguyen and Nguyen (2010), who use the annual survey of enterprises by the Vietnam Chamber of Commerce and Industry to investigate the impact of having access to the loan and job creation. They report positive and significant impact of such interest subsidy package on the performance and job creation by firms.
On monetary policy, since July 2008, Vietnam has gradually eased its monetary policy. From October 21, 2008 to January 23, 2009, SBV cut its benchmark interest rate six times from 14% to 7% per annum (Figure 5). The refinancing rate and discount rates were reduced to 8% and 6% per annum respectively. The reserve requirement level was also lowered by 1 percentage point for VND and 2 percentage points for foreign currencies. In addition, the exchange rate trading band of USD/VND has also been widened from ±2% to ±3% since November 7, 2008 to better reflect the changes in the supply and demand for foreign currencies.

Figure 5: Changes in Vietnam’s benchmark interest rate (monthly, year – on – year)
The stimulus package has also helped mitigate the impact of the financial crisis on workers. In some papers, Manning (2009) suggested that the impact on labor has been milder than might have been expected for a country so heavily exposed internationally. This can be partly attributed to the government’s timely stimulus package and partly to other factors such as the tight labor market before the crisis, the competitive nature of Vietnam’s key exports, and the private sector’s capacity to compete globally, despite cutbacks in demand for key export commodities (Manning 2009).
The agricultural sector, which employs mo re than two-thirds of the country’s population and accounts for most of Vietnam’s exports, has also been hit hard by the global downturn, although the impact on rural areas has been limited. In April 2009, the government introduced a series of stimulus measures targeting the rural economy. The new policies include interest-free loans for purchasing farm equipment and subsidized loans for fertilizer and other agricultural inputs. However, in the first stimulus package, farmers, who account for 70 percent of the population, were able to access only $48 million of credit, a too small share of the total package of about $22 billion disbursed. In addition to the stimulus package, the resilience of the business sector appears to have been a major driver of the recent recovery. The stimulus has been seen as a “rescue remedy” to help enterprises access loans to get back on track, remain in production, and create jobs. It has been important in improving the liquidity of the banking system and maintaining debt payments. After all, it is the business sector that takes the risk in responding to the stimulus, and it is its investments that keep aggregate demand from falling too far. Another key factor in facilitating the recovery is the revival of world demand for Vietnam’s exports and inflows of foreign investment.
Positive signs of economy continue to be maintained. According to the result economic situation Vietnam of GSO, Vietnam has overcome the global economic crisis better than many other countries. Specifically: GDP increased up to 5.3% in 2009 and in the fourth quarter was up 6.9%. Inflation fell from 19.9% in 2008 to 6.5% in 2009. The first quarter of 2010 the Vietnamese economy continues to rebound in the last quarter of 2009 with gross domestic product growth rate of 5.83 percent, roughly 1.9 times the growth rate in the first quarter of 2009. Second quarter GDP increased from 6.2 to 6.4% to make up the economic growth approximately 6.1% compared with the same period last year.
Industry was considered bright array of economic picture first 6 months of 2010. The industry has strong rise with growth of production value of the industry six months at 13.8%. In short, cannot deny that the first stimulus package had a positive impact on the economy Viet Nam in 2009, contributed to Vietnam's early exit from the economic crisis.
• Negative effects
a. Inflation
During the early 2000s, Vietnamese inflation rates were relatively low with one digit. However, sustained debt-financed investment by the government combined with accommodative monetary policy, inflation accelerated in 2007 and peaked at over 23 percent in 2008. In switching from a high-growth strategy to one of stabilization, the government tightened monetary policy in 2008 (in combination with nontraditional and administrative methods) to curb the accelerating inflation rate. As a result, inflation in 2009 fell back to less than 10 percent. The government’s ability to control inflation in 2009 was made easier by the lower commodity pr ices (especially oil) associated with the crisis. To counter the effects of the global crisis, however, the government reversed the course of monetary tightening. Money supply and credit expansion, together with the large stimulus package, have put renewed pressure on inflation. The interest-rate subsidy, combined with relatively low official lending rates in 2009, also resulted in a surge in domestic credit expansion and undermined the progress in taming inflation achieved in 2008. As the economic recovery began toward the end of 2009, there were worrying signs of accelerating inflation. The government openly set the inflation target at about 8 percent for 2010, but as the year 2011 drew to close, inflation was higher than the target, reaching a double digit inflation rate at 11.7 percent. On the background of recent devaluation of the Dong (almost 10% in February 2010) and the huge trade and budget deficit, the risk of inflation is looming large.
b. The Chronic Current Account Deficit and the Dong’s Devaluation
The current account deficits have reached a level that is much higher than the commonly believed sustainable level of 5% of GDP. The continuing current account deficit was mainly driven by the growing domestic credit associated with the financing of the fiscal deficit, the increase in private consumption by households and an overvalued currency and a loss of competitiveness. Recently, with the stimulate package against the global financial crisis and a reducing foreign reserve due to increasing current account deficit and capital outflows, the domestic currency lost its favorite position and losses its value significantly. By late November 2009, the SBV announced that it would devalue the local currency by over 5% against the US dollar. Again, by early February 2010, the SBV devalued the Dong by another 10% against the USD. Prior to the devaluation, the dong had been under downward pressure. Demand for US dollars had risen strongly, driven by the widening merchandise trade deficit and rising domestic inflationary expectations. Figure 6 suggests that the foreign reserve is running quite low, meeting only 6 import months. In 2010, the situation is getting worse and fearing that the downward pressure on the Dong would increase further in the face of the dollarization, the government had to resort to administrative measures in early 2011.
Figure 6: Foreign Reserves i. Investment and Capital Inflows
In the face of the government’s growing need to secure additional funding, ODA takes on greater importance. This is especially true when FDI inflows and export earnings are falling. On this front, the Japanese government has resumed its ODA for Vietnam; the Asia Development Bank granted Vietnam budge t support of $500 million; and, most recently, the government has secured an unprecedented level of ODA—$8 billion—from international donors. While we expect that such cheap ODA funding will still be available in the medium term, ODA funds will become more expensive over the long term, and Vietnam may have more difficulty competing for them as its economy develops. There is also the issue of destabilizing capital inflows. As previous experienced in 2007, the sudden inflows capital (both long-term FDI and hot money) had not been accommodated with appropriate policy led to high inflation, overheating and bubbles. With the possibility of resurgent capital inflows once the crisis is over it is also essential to manage inflows effectively. Responses should address currency flexibility, clear and stable monetary and fiscal policies, an appropriate regulatory and supervisory framework, and even carefully crafted temporary capital controls. ii. Fiscal Risks Faced by the Government
Up to 31/12/2009, the public debt accounted for 52.6% of GDP, of which government debt was 41.9% while the limit provision of the Prime Ministry is 50%, the guaranteed debt at 9.8%, the external debt level at 38.8% of GDP and the local government debt at 0.8% of GDP. This level which is projected to reach 56.7% of GDP by 2011, including government debt at 44.5% and external debt at 42.2%, shows that the national financial sustainability is running the risk of surpassing the threshold. In the medium term, this rate is anticipated to continue to increase as the government keeps pursuing the investment-based development strategy and therefore incurring more debt . iii. Fiscal Transparency
According to the Article IV Consultations report published by the IMF in 2007, the Ministry of Finance’s (MoF) State Budget Department “produces provisional monthly, quarterly, and annual data on government operations shortly after the end of the reference period; final data for the fiscal (calendar) year are published after a delay of about eighteen months” (p.15). The data represent the consolidated operations of the state budget, which covers all four levels of the government: central, provincial, district, and commune. They exclude off-budget data on nor investment expenditure or quasi-fiscal activities of SOEs and extra-budgetary funds, among which are the social Security Fund, Enterprise Restructuring Fund, Development Assistance Fund, Export Support Fund, local development funds, and the Sinking Fund (for repayment of on lent funds), for which data are not complied on a regular basis. Starting in late 2001, the MoF began posting annual budget outturns and plans on its external website, including by major revenue and expenditure items.
However, the statistics has not yet meet international standards of functional classification, an d this, in turn, might hamper formulation, execution, and monitoring of fiscal policy" (p. 16). Therefore, further considerable actions must remain to be taken so as to improve the coverage of fiscal data as recommended in the 1998 Bank-Fund report on fiscal transparency, the STA multi sector statistics mission of 2001, and the 2005 P¬¬¬-ublic Expenditure Review . Vietnam does not yet subscribe to the IMF's Special Data Dissemination Standard (SDDS), but has participated in the less rigorous General Data Dissemination System (GDDS) since 2003.
2.3. The explicitness of the fiscal policy
a. The orientation of Vietnamese fiscal policy
The orientation of Vietnamese fiscal policy is unclear and don’t have the differentiation among demand or supply stimulus package or saving package etc. All of them are called “stimulus package” even though their purposes are not to raise the aggregate demand. For example, the firms could use the stimulus package to liquidate their debt borrowed from the banks instead of investing other projects. This issue is still uncontrollable for the government.
b. The median agent
Vietnamese stimulus package is the saving package (case by case). Unlike those of the US and Europe, the government doesn’t invest the money through commercial banks. In the case of our government, fiscal policies are complemented with the commercial institutes as the median agents. As a result, the stimulus package doesn’t support directly banks’ benefits, which leads to the dubiousness and tortuousness.
c. The consequence
The stimulus package, particularly between 2008 and 2009, should have given us better credit growth, about 30% instead of 17% in reality This is just one of those evidence to prove that the fiscal policies may not reach to the right objects and support the right purposes. The main reason is the lack of information during the complementing process between the central banks and the commercial ones as well as between the commercial banks and firms.

It’s difficult for the commercial banks in controlling using money for right purpose. Additionally, the cost of auditing the activities of central banks is very high. For the fact that, in only 1 week, 5 commercial banks owned by the government lent 32.000billion for supporting interest rate. So the government cannot control the high speed of growth of credit like that.

There is a lack of information between the commercial banks and customers. Therefore, the commercial banks are incapable of controlling customers’ purposes in using their loans, particularly who have complex business. Without close supervision, borrowed bonds may be used for other objectives such as speculative hoarding of gold, buying coupons, strong foreign currency or investing on immovable properties… instead of using for business. In a report of the central bank in 2010, when using our first stimulus package in 2009, there are about 3923 loans which are against the law, approximately equal 8334 billion VND. The banks which had the most numerous illegal bonds were the commercial bank with 5916 billion VND.

Besides, there’s also a fact that the firms’ ability to reach to the government’s support is limited due to the disorganized information system and paper procedure. It happened to mostly medium and small business organization. It was reported that until the end of 2009, only 20% of all the firms in our country, which would be 78000 among 390000, received the government’s support.
d. An example from the US government
Barack Obama, right after his celebration of winning the election in January 2009, had faced the challenge to recover the US’s economy which is under the finance recession. He had resolved the biggest problem of the Americans by the Recovery Act (2009) along with a webpage called www.recovery.gov

This web is all about the fiscal policy of the US’s government. It makes all the spending and consumption which are relevant to the fiscal policy become public. They are clearly showed to all citizens who access to this webpage. Where, how, and who spend the money are no longer secrets. The information is carefully and appropriately organized so that people can learn about the whole process of spending from the Whitehouse to each state in the country.
An interesting point about this “recovery” page is the part of “chatting” between the people and the government. When creating this website, the leaders of this big country also wanted to know about the opinions of the citizens : What effects has the fiscal policy made on them? And how do they react?
Recovery.gov has proved not only the effort of the US government in exploiting modern technology but also the clear-sightedness of the first African American president of the US. He had gained something from the quote of the 4th president James Madison : “A popular government without popular information or the means of acquiring it, is but a prologue to a farce, or a tragedy, or perhaps both” .

III. CONCLUSION
Unlike other countries, Vietnam does not have modern social insurance mechanisms yet thus lacking an important automatic stabilizer in the economic turbulent time. Instead Vietnam had to rely on other mechanism such as cash transfers which is fraught problems.
While striking the right balance between stimulus and stability becomes more pressing, the macroeconomic debate should not relegate other key policy reform agendas to the backburner. There is a need to support economic activity and to preserve stability, and the government should strike the right balance between them. However, there are also key structural reforms which are required to sustain long-term growth. The crisis highlights the necessity and offers the opportunity to execute these reforms as well as tackle structural problems. From our point of view, the most important issues are boosting competitiveness and improving the environment for investment. Despite all these short-term challenges, though, Vietnam's positive medium-term growth outlook still rests on a sound footing. This includes its young and relatively well-trained population which promises to yield a positive demographic dividend. Although there are some concerns about budget deficit and the debt sustainability, overall the fiscal sustainability of Vietnam is still within the manageable range if the government exercises restraints in its fiscal expenditure (budget advancement).
This is the first time that I have carried out an assignment of macroeconomics in English so it is sure that I make many mistakes. I have tried my best to finish this assignment and I realize that by doing this task I have obtained so much knowledge not only on theory but also on reality. Although it took me so much time to find the references, the data, to translate from Vietnamese into and to do this paper, I felt extremely happy when I finished it. I hope that you may forgive me all my mistakes and thank you so much for reading my paper.

IV. REFERENCES
1. Reinhart Carmen and Vincent Reinhart (2009), ‘Is there scope for fiscal stimulus for debt intolerant countries?’ available at: http://www.voxeu.org/article/fiscal-stimulus-debt-intolerant-countries
2. Government (2008), ‘Report on imperative measures to prevent economic downturn, sustain economic growth and maintain socio-economic security’, Report No. 191/BC-CP submitted to Standing Committee of the National Assembly dated 18 December 2008 (in Vietnamese) http://www.viet-studies.inf o/kinhte/GiaiPhapKichCau.pdf
3. http://www.viet-studies.info/kinhte/FA_FutureOfHistory_Fukuyama.htm
4. World Bank (2009a), ‘Taking stock: An update on Vietnam’s recent economic development’, prepared for the Annual Consultative Group Meeting for Vietnam, December 2009.
5. World Bank (2009b), ‘Taking stock: An update on Vietnam’s recent economic development’, prepared for the Annual Consultative Group Meeting for Vietnam, June 2009.
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7. International Monetary Fund (2007), ‘Vietnam: Ar ticle IV Consultations - Staff Report; Staff Supplement and Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Vietnam’, Country Report No. 07/387, Annex IV, Washington, D.C.: IMF, 2007.
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