of the nation. Compulsory savings

by lynk2510 April 10th 2011, 8:17 pm

The budget deficit is continuing and the government is budgeting for 5% deficit again for this financial year. The trade deficit also shows no signs of abating quickly, with the February figure just below 1 billion. The government plans to restrict the 2011 trade deficit to 18% of export revenues or 14.2 billion. But this would still be a slight increase over 2010. Therefore, given the twin deficits are continuing, continued borrowing may be necessary, after taking into consideration disbursed FDI and remittances from overseas Vietnamese. However, remittances go straight into people’s pockets rather than the government’s purse. The Vietnamese people have several billions of dollars of wealth held in various instruments of savings, chiefly US dollars and gold. The main reason for this is of course a lack of confidence in the Vietnamese dong, and in the government’s fight against inflation.

In 2011, 4 billion is needed to pay interests on the foreign debt of the government. This is about 12% of the government budget. More and more, lenders to the Vietnamese government would have to take future earnings and the ability of the government to collect taxes as important considerations for future loans. Sovereign borrowers tend to have an edge over private sector borrowings in this regard, and one wonders whether this is a moral hazard in the international financial system? If the foreign reserves of the Vietnamese government falls below the 4 billion needed annually to pay interests, then what could happen? Government foreign reserves are on a downward trend since the financial crisis started in Vietnam in 2008, before the global financial crisis started. What would be the regional implications if Vietnam becomes Southeast Asia’s Iceland, or Greece?

There is now a drive to cut the budget deficit by cutting down on government spending. The reduction as planned is however a mere 0.5% reduction over 2010. More must be done and government and party leaders must set personal examples as well as let their offices take the lead. Vietnamese people were very impressed when a foreign head of government traveled via a budget airline out from Hanoi several years ago. In contrast, while on state visits, Vietnamese leaders often bring with them large delegations in a specially chartered plane of the national airlines. Travelling with less style would help. Other examples of wastage abounds.

What the government needs is to institutionalize macro controls and prevent over-spending. Overall there should be a cap on the deficit that no government is allowed to change or exceed without 80% approval by the National Assembly, and the State President should also be allowed to scrutinize the government’s budget more carefully and be given the authority to request the government to make compulsory changes mandated by law. The State President should also be allowed to veto budget deficits if he still felt that the 80% approval in the National Assembly was not in the interests of the nation. Compulsory savings from the annual government budget should become a regular practice.
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