EXECUTIVE SUMMARY

RATIONALE AND PURPOSE

The purpose of conducting the public expenditure and financial accountability (PEFA) report is to review the public financial management (PFM) reform progress since the last PEFA in 2013. The report will also provide findings and recommendations to inform the technical assistance program to implement the medium-term financial plan. This PEFA assessment covers the central government’s budgetary and extra-budgetary activities. Other PEFA assessments cover the subnational government. The period covered is 2017 to 2019. Even though the latest audited financial data for 2019 was used for assessment and scoring, the report offers other evidence of reform progress after 2019.

The PEFA assessment for Viet Nam applied the 2016 PEFA framework. The team assessed all 31 indicators (and their respective 94 dimensions) and followed the methodology without any deviation in coverage and application. As the Government carried out the previous PEFA assessment using the 2011 methodology, a supplemental annex presents the comparison between the two. The team prepared the report in compliance with the Guidance on reporting performance changes in PEFA 2016 from previous assessments that applied PEFA 2005 or PEFA 2011 at www.pefa.org.

The time gap between the scoping mission and the main mission was due to COVID-19. Interviews and data collection used virtual communication to minimize COVID-19 disruption.

BACKGROUND

Viet Nam is located in South-East Asia and borders Laos, Cambodia, and China, with a population of approximately 100 million. Viet Nam’s economy has grown impressively over the past three decades since “Doi Moi” in 1986. Real gross domestic product (GDP) growth averaged 6.2 percent1 annually from 2016 to 2020. Economic growth coupled with the Government of Viet Nam’s (GOV) intense focus on inclusive social development has enabled Viet Nam to reduce the incidence of extreme poverty drastically. The US$3.20-a-day poverty rate fell from 16.8 percent in 2010 to 5.7 percent in 2020. Viet Nam appears to be a unique country with a positive growth rate of 2.87 percent due to its success in combating the pandemic in 2020. However, since May 2021, Viet Nam has faced the largest COVID-19 outbreak, which requires the country to apply unprecedented strict control measures causing negative economic and social impact. As a result, GDP grew 2.56 percent in 2021. In 2022, thanks to the effective implementation of the Socio-Economic Recovery and Development Program, along with the determination to recover and develop the economy, Viet Nam has achieved an impressive growth rate of 8.02%, an increase highest in the past ten years, inflation is controlled, macroeconomic balances are contained, creating a premise for the following years. 

Viet Nam’s revenue collection was stable at around 20 percent during 2016-2020. In 2020, the COVID-19 pandemic negatively impacted tax collection. In addition, the economic slowdown led to lower revenue collection. Tax revenue fell from 14.7 percent of GDP to 13.3 percent from 2019 to 2020 mostly because of the reduction in taxes on oil and revenue from import-export taxes. On the expenditure side, the government exercises a fiscal consolidation policy during 2016 - 2019. Total expenditure remained at about 21 percent of GDP. As a result, the fiscal deficit has decreased from 3.2 percent2 of GDP in 2016 to 0.4 percent in 2019 then expanded to 3.4 percent of GDP in 2021 to contain the COVID-19 pandemic. Public and public guaranteed debt reduced from 47.6 percent of GDP to 41.7 percent from 2016 to 2020 and further decreased to about 38 percent of GDP in 2022. 

STRENGTHS AND WEAKNESSES OF THE PFM SYSTEM

Aggregate fiscal discipline

Overall, the fiscal discipline of the central government is reasonable, and most elements in the overall PFM system that contribute to achieving fiscal discipline appear to be sound. Revenue forecasting has improved. Payment arrears no longer distort expenditure patterns. There was a large stock of arrears before 2014, but spending units were requested to pay off the arrears by the end of 2020. This contributed to the result that estimates of budgeted spending and composition of expenditures by function vary less than five percent from budget outturns. The authorities set budget ceilings, and ministries follow them.

The team identified some practices which are not supportive of fiscal discipline. For example, detailed financial reports of extrabudgetary units (EBUs) are unavailable. In addition, the monitoring of fiscal risks from other public sector entities is weak, particularly concerning contingent liabilities and public-private partnerships.

The medium-term budget planning process is not yet valuable for supporting budget credibility and predictability. Although authorities recently introduced the three-year financial and budgetary plan (MTEF), the underlying forecasts are not sufficiently robust for credible medium-term ceilings and estimates. Moreover, the five-year investment planning process sets levels of the medium-term public investment expenditure (MTIP) without the forward annual capital cost nor consideration of recurrent cost implications, changes in resource availability, and implementation progress from one year to the next. Accordingly, authorities don’t correctly link the annual budget with the previous years estimates, nor can they adequately explain and reconcile the differences from one year to the next.

Authorities support fiscal discipline by relatively robust internal controls of payrolls and non-salary expenditures with good commitment control process in using data from TABMIS. The State Treasury registers expenditure commitments and verifies that all spending has been authorized and well-controlled by budgetary units before processing payments. In-year budget adjustments take place with clear rules and procedures, by which social benefits, employee remuneration, and operational expenses are well protected. 

Strategic allocation of resources

Strategic allocation of resources is not optimal because the variance in expenditure composition by administrative classification is still higher than 5%. In addition, the budget estimates are not classified by economic type, making it impossible to calculate the variance between budget estimates and outturn by this metric. Spending units can negotiate part of recurrent expenditures after the ceilings are set and before submission to the National Assembly (NA). Increasing amounts carried over from one year to the next reflect that the annual budget is not a credible mirror of policies and plans. Tax collections were slightly over-estimated on the revenue side, and nontax revenue collection was substantially under-estimated. 

Although authorities recently introduced the medium-term perspective, it is yet to help link policies, plans, and budgets, which ministries carry out independently. In particular, the investment plan and the recurrent budget follow separate processes in the dual-budget system. The selection of investment projects is not based on clear criteria and therefore did not provide value for money.

While the budget documentation meets all the basic requirements, authorities produce the underlying macroeconomic and fiscal assumptions once every five years in the medium-term financial plan (MTBP), which underlies the MTIP. The MTIP helped resolve the backlog of capital expenditure arrears that was accumulated in the past. However, the MTIP soon becomes unrealistic for annual budget allocation because of the unrealistic public investment project costing based on out-of-date cost norms and lack of consideration of recurrent cost implications. In reality, the projects that were included in the MTIP becomes unfeasible and cannot be implemented within the timeframe of the projects.

Legislative scrutiny benefits from transparent and comprehensive budget information but could improve with a greater results orientation. Public service delivery units (PSDUs) are encouraged to self-finance at least their recurrent expenditures by using service fees and other means, including partnering with the private sector, according to the socialization policy and the autonomy regime3. The central budget only covers the gaps to maintain public services as required.

Efficient use of resources for service delivery

There are efficiency gains in using resources for service delivery thanks to improvements in the procurement system and better control of payrolls and non-salary expenditures. The Treasury and Budget Management Information System (TABMIS) system produces more reliable fiscal data and reports on financial information with regular and orderly data reconciliation. The system also helps register expenditure commitments and automates budget balance control. In addition, the State Treasury verifies control of all payrolls and non-salary expenditures before it processes payments and ensures that cash is always available for any eligible expenses. Centralized procurement achieves cost savings in the health and education sectors. Public procurement has become more competitive and transparent with the new Procurement Law and the new government procurement platform (http://muasamcong.mpi.gov.vn/).

Expenditure outturn is classified at the level of detail by administrative heads, functions, and economic types, but the original budget does not present expenditure by detail economic classification. In-year budget reports are timely and accurate but only present information on spending at the payment stage. Authorities prepare the annual budget report on a cash basis. It does not contain information on assets, liabilities, contingent liabilities, and fiscal risks. Financial reports of extra-budgetary units are not detailed.

Authorities base the budget allocation and authorization to direct spending units on line items or tasks, which do not support comparing service performance with the actual resource received. Some performance targets are available but not systematically presented and linked with the budget, which prevents proper performance evaluation for service delivery. Lack of performance information and incomplete and untimely public access to information impede the central government and communities from monitoring service delivery efficiency.

The internal control feedback mechanism is based on compliance checks by the Inspectorate System, while the internal audit is operational for only a few central government entities. Therefore, external audit plays a crucial role in identifying inefficiency in the public sector. The external audit is independent and conducted regularly. Audit findings are discussed with the audited entities before the audit report is published. The NA uses audit reports for plenary hearings and its oversight missions, but neither scrutinizes audit reports nor issues scrutiny reports or recommendations. 

CHANGES SINCE THE PREVIOUS PEFA

The government conducted the previous PEFA assessment published in 2013 using the 2011 PEFA framework. The PEFA Secretariat upgraded the framework and methodology in 2016, significantly changing the structure and calibration of the indicators and dimensions. Therefore, direct comparison between the two reports indicators and scores is impossible. The coverage of the two reports are also different. While this report assesses performance of the central government, the first PEFA report assesses the performance of the national government. Any change in score could be performance-related but could also be attributable to the shift in the PEFA requirement for the indicator. Consequently, measuring the actual changes in progress over time since 2013 requires collecting additional data and assessing the performance indicators using the same 2011 framework. The report presents comparisons with the result in the PEFA 2013 that used the 2011 PEFA framework to illustrate the changes (supplement annex). This complies with the guidance on reporting performance changes in PEFA 2016 from previous assessments that applied PEFA 2011.

This PEFA assessment shows an improvement compared to the previous PEFA, even though the direct comparison isn’t possible due to different PEFA frameworks. Over the years, the authorities have demonstrated PFM reform progress on many fronts, including stronger fiscal discipline resulting in fewer expenditure arrears, improved cash management based on better commitments information, and increased budget transparency. The budget scope is determined comprehensively and fully according to international practices; Strengthen state budget management, improve budget use efficiency according to modern public financial management tools (preparing 3-year financial plan state budget on a rolling basis).

Aggregate fiscal discipline

Fiscal discipline is well maintained and has improved since the previous PEFA assessment. As a result, authorities can better predict cash commitments and requirements, and information on the availability of funds to budgetary units for service delivery is more reliable. The government consolidates all bank and daily cash balances in the Treasury single account established in 2017. This was not the case in the last PEFA assessment when there were different Treasury accounts with unconsolidated cash balances, leading to idle cash. As a result, cash is better forecasted now every month. In 2013, there were substantial capital arrears due to the government stimulus package. However, the authorities are paying off these arrears. They were estimated to be less than 1% of the total expenditure by 2019, thanks to the government’s strong commitment to pay off all arrears and tighten the policy to reduce the fragmentation of investment projects. Internal control is of non-salary expenditure has been well developed with strict commitment control system since the establishment of the Treasury and Accounting Budget management information system (TABMIS) in 2003.

Strategic allocation of resources

The government has developed the three-year medium-term expenditure framework (MTEF) according to the SBL 2015 since 2018 and five-year medium-term investment plan (MTIP) according to the PIL 2014 since 2016. This was not the case before. The previous PEFA assessment had no medium-term perspective on budget planning. However, authorities don’t use the medium-term expenditure plans as a tool to link policy with the budget. There is also a disconnection between the MTEF and MTIP, with different capital and recurrent budgeting processes. In addition, the issue with carry-over revenue and expenditure persists, which hampers budget credibility. The SBL 2015 stipulated that only certain expenditure assignments can be carried over to the next year. This helped to reduce the total carry-over amounts from one year to the next. Authorities have strengthened procurement with more competitive bidding.

Efficient use of resources for service delivery

The government has granted PSDUs more financial autonomy. Four categories separate PSDUs based on their capacity to raise revenue from service fees and charges to cover their expenditure. This, on the one hand, helped reduce the government’s budget allocation to deliver public service. On the other hand, it may create inequality and compromise the accountability of PSDUs. Even though the SBL 2015 mentioned budget allocation by service delivered and Decree 32/2019/ND-CP stipulated the recurrent budget allocation to PSDUs in the form of a bidding contract instead of inputs-based, all sectors have not applied this thoroughly. External audit plays a crucial role in identifying inefficiency in the public sector. However, the auditing function is limited to financial and compliance audits, with little attention to performance audits.

PFM reform program

The government has modernized the legal framework to strengthen the PFM system in the past decade. Since the previous PEFA, the government issued the State Budget Law (SBL 2015), the Accounting Law (2015), the Public Debt Management Law (PDML, 2017), the Public Assets Management Law (2017), the Auditing Law (2015), the Law on Management and Use of State Capital for Investment into Production and Business at Enterprises (2014), the Public Investment Law (PIL 2014, amended in 2019), the Enterprise Law (2020), and other bylaws and legal documents. The Prime Minister issued Decision 368/QD-Ttg dated 21/3/2022 on the financial development strategy for 2021-2030, which aims to achieve efficient revenue mobilization, effective resource allocation, and increased fiscal transparency and accountability. 

This legislation aims to adapt Viet Nam’s PFM system to good international practices such as the development of a medium-term debt strategy and expenditure framework, issuance of the Viet Nam accounting standards in line with international public accounting standards, and the development of the first-ever whole of government financial statement, and better disclosure of the budget documents. However, it requires better enforcement and capacity-strengthening to ensure authorities properly implement the legislation.