Renewing management and use of ODA

Tuesday, 2017-04-11 10:11:48
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Thanh Tri Bridge spanning the Red River is built from the Japan's ODA
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NDO - The World Bank (WB) is scheduled to work in July to remove some countries including Vietnam from the list of concessional loans from the WB's International Development Association (IDA). Vietnam will face the possibility of reduced official development assistance (ODA) from WB and reduced preferential treatment from development partners and sponsors, requiring the country to develop a new approach to the management and use of this important source of funding.

Shifting from grant to loan

For a long time, the management and use of ODA was mainly regulated by the Government Decree No. 38/2013/NĐ-CP, Prime Minister's Decisions; and guidance from ministries, sectors, localities and donors. These regulations are complicated and separated with low legal effect.

To remedy shortcomings in the management and use of ODA, the Government issued Decree No.16/2016/NĐ-CP on May 2, 2016 to replace the Decree No.38/2013/NĐ-CP with many new regulations including the reception, management, using, supervision and evaluation of ODA and preferential loans, helping reduce administrative procedures for management agencies.

The Ministry of Finance also issued the Circular No.111/2016 /TT-BTC to replace the Circular No. 218/2013/TT-BTC, which stipulated the financial management of projects funded by foreign loans with a noticeable change in the use of ODA loans, from the form of allocation to re-lending.

According to the Department of Debt Management and External Finance under the Ministry of Finance, Vietnam posted a total ODA and preferential loans of about US$45 billion over the past 10 years from 2005 to 2015.

One third of the total was allocated to the State budget to grant to projects managed by the State budget; one third was spent on projects at localities and the remaining one third was used for re-lending to key projects of the State.

Of the total funds spent on local projects, the proportion of allocated funds accounted for 92.2%, while the re-lending ratio was only 7.8%. Regarding the capital to re-lend to key projects of the State, the Government takes almost credit risks, while the re-lending agency only serves as a bank to collect service charge.

The use of capital relies on the allocations from the State budget and the State takes all risks pose many problems including over-diversified and ineffective investment, sluggish progress of projects, the dependence on the State, among others.
To overcome this, Vietnam will move from capital allocation to re-lending to local authorities and related agencies will be subject to credit risks.

Improving the efficiency of ODA use

There have been more than 50 bilateral and multilateral donors providing ODA and preferential loans to Vietnam in many socio-economic sectors. According to statistics, the total value of committed ODA for Vietnam reached nearly US$90 billion between 1993 and 2014 including nearly US$74 billion of signed capital and about US$54 billion disbursed, accounting for over 73.2% of the total signed ODA.

The Department of Debt Management and External Finance said that Vietnam was a low-income country before 2010 and enjoyed preferential loans with interest rates of 0.7-0.8% per year with an average term of 30 to 40 years. But, as a middle-income country, the average loan term was only 10 to 25 years in the 2011-2015 period and the cost of borrowing went up from 2% to 3.5% per annum.

Many donors have shifted from ODA to mixed financing, including both funding and commercial loans associated with other conditions. Due to the pressure of rapid repayment and doubled rate of principal repayment, the Ministry of Finance co-ordinated with WB experts to develop quick repayment scenarios and assess its impacts on the budget to put forth options for repayment and to avoid large impacts on the economy.

Vietnam aims at a GDP growth of 6.5 to 7% per year in the next five years, which will require about US$430 billion per year for development investment purposes. The Ministry of Planning and Investment calculated that the capital structure for this period will include 75% of domestic capital and 25% of foreign capital including foreign direct investment (FDI), ODA, and preferential loans. Of which, ODA and preferential loans are estimated at about US$40 billion.

As ODA has become a source of fund under market conditions, the need for improving the management and use of ODA becomes increasingly urgent.