PUBLIC INVESTMENT, PUBLIC DEBT AND STATE BUDGET

SUSTAINABILITY
I. Overview of public investment, public debt and State budget
sustainability
1. Public investment
Public investment generally refers to the use of state capital for investments
aimed at fulfilling targets of public programs and projects in service of socioeconomic development. Capital sources for public investment include: the state
budget, state credit, ODA, revenues from taxes, fees and charges
Subjects of public investment: national target programs and projects for physical,
technical, economic, social and environmental infrastructure, national defense and
security development; national target programs and projects in service of activities of
state bodies, non-business units, political organizations, socio-political organizations,
including procurement and repair of fixed assets through non-business expenditure;
investment projects of residential communities, political-social-professional
organizations financed by state capital as per regulations of law; national target
programs and other public investment projects as decided by the Government.
Role of public investment: public investment plays an important role in (i)
speeding up industrialization and modernization, fostering economic development and
ensuring social security; (ii) shaping and developing national socio-economic
infrastructure; (iii) increasing agrregate demand; (iv) increasing aggregate supply and
economic capacity; (v) kicking off investment, triggering and maintaining growth
momentum; and (vi) generating jobs for the society.
2. Public debt
Public debt, in a broad sense, imply debt obligations of the public sector,
including obligations of the central government, local authorities, central banks and
independent organizations (those with operating capital subject to state budget
decisions or having over 50% of state-owned capital and in case of default, the state
must repay debt). In a narrow sense, public debt includes debt obligations of the
central government, local authorities and debt of independent organizations with
government guarantee.
Presently, depending on the economic and political institutions, the concept of
public debt varies among countries. In accordance with the provisions of the law of

Vietnam, public debt is understood to include three groups as follows: government

debt, government-guaranteed debt and local government debt.
Public debt classification
There are many criteria for public debt classification; each has different a
meaning in management and utilization of public debt. General criteria for public debt
classification include the following:
By geographical origins of capital: Public debt consists of two categories:
domestic debt and foreign debt.
By capital mobilization modality: Public debt consists of two categories: public
debt from direct deals and public debt from debt instruments.
By preferential nature of loans incurring public debt: there are three types of
public debt: Public debt from ODA loans, public debt from concessional loans and
conventional commercial debt.
By liability for creditors: Public debt is classified as public debt in need of
payment and public debt with government guarantee.
By debt management levels: Public debt is classified as public debt of central
government and public debt of local authorities.
Public debt characteristics
There are various approaches to public debt. Basically, however, public debt has
the following main characteristics: (i) Public debt refers to the binding debt repayment
of the state; (ii) Public debt is managed in accordance with closely interconnected
procedures with the participation of competent state bodies; and (iii) The ultimate goal
of mobilization and use of public debt is to support economic development for the
benefit of the community.
Public debt nature
Naturally, public debt refers to loans to finance budget deficits. These loans will
require the repayment of principal and interest when due, and the state will have to
increase taxes for compensation. So, ultimately, public debt just gives one the option
to choose whether to tax today or tomorrow, whether to tax this generation or the
next. Debt borrowing essentially refers to gradual taxing, which is widely used by
governments to finance increased government spending. The ratio of public debt over
GDP reflects the safety or risk of public debt only partially. The level of safety or

danger of public debt not only depends on the ratio of public debt over GDP but, more
importantly, on the level of development of the economy.
3. State Budget sustainability
Budget sustainability refers to the status of the state budget always being capable
of providing the state with efficient financial tools; revenues, expenditures and debt of
the state budget are all controlled proactively by the state in any circumstances; and
the state is never pushed into bankruptcy, instability, and/or threatened in its financial
security either in the short term, medium term or long term.
Criteria for evaluating budget sustainability cover important aspects which are
closely interrelated, including: solvency, liquidity, vulnerability, ensuring sustainable
growth, stability and fairness.
II. Status of public investment, public debt and state budget sustainability in
Vietnam
1. Status of public investment
Public investment in Vietnam is generally referred to investment from capital
sources of the state, including development investment funded through the state
budget, government bonds, state credit, ODA, development investments of stateowned enterprises (SOEs) and other state capital sources. In line with the strong
development of the country in recent years, total social investment capital has steadily
increased. Public investment has accounted for a relatively large proportion of total
investment and has proven to play a very important role in socio-economic
development.This is particularly reflected in the following facts: public investment
has had an important contribution to maintaining and promoting economic growth;
public investment has contributed to infrastructure development; public investment
has proactively ensured social security; and public investment has made a significant
contribution to macroeconomic stability.
However, actual performance of public investment in Vietnam is still subject to
many constraints, leading to low efficiency, waste and loss of state capital. These
constraints can summarized as follows: investment mechanisms have not been
reasonable and effective; investment has soared for many years, causing substantial
budget deficit; low investment efficiency has been due to a lack of rationality in the
structure of investments, the protfolio spread of investments, low construction quality,
slow and delayed construction progress, lack of transparency regarding information
about investments and weak accountability, together with chronic corruption and high
waste of investment resources.

The above-mentioned limitations stems from several causes, notably including

the following reasons: investment decisions go beyond the capacity of the economy,
leading to scattered investment, repeated delays; an asymmetric investment structure
results in a lack of synergies; lack of close and effective monitoring and supervision
of investments; operation and maintenance with regard to infrastructure funded by the
state budget lack behind the level of investment; lack of proactive execution of major
macro balances in the economy; planning, particularly investment planning, fails to
accommodate regional strengths and advantages; decentralization of investment
management is exposed to various problems, including a lack of corresponding
capabilies at the management level.
2. Status of public debt
In recent years, Vietnam's public debt has increased rapidly both in absolute
terms as well as in terms of the ratio of public debt over GDP. According to data from
the Ministry of Finance, if in 2006, public debt accounted for 44.5% of GDP, then in
2012, the debt increased to 55.7% of GDP. At the same time, foreign and domestic
debt have tended to increase; the successful issuance of government bonds together
with attracting ODA from external sources has led to an average increase of 43% in
total government debt in the last 3 years.
Although in Vietnam the rate of public debt remains under control, it is still too
high compared to the average level in developing economies. Besides, the use of
public debt in Vietnam is not efficient; delays in the disbursement of investment
capital from the state budget and government bond funds take place quite often. There
remains a lack of effort and determination to overcome the status of slow and delayed
construction progress. These constraints, together with a lack of financial discipline in
public investment and in the operation of SOEs and large business corporations results
in scattered investment, waste , loss of investment capital at all stages of the
management of investment projects. All of the aforementioned limitations have
exposed Vietnam to numerous risks in the management of public debt, notably
including the following:
- The percentage of Vietnam's public debt has tended to increase, both
domestic debt and foreign debt, at 5-7% of GDP per annum. With the current growth
rate of public debt, it is estimated that after 5 years, Vietnam's public debt will exceed
100% of GDP and at that time, a debt crisis may occur;
- The volatility of interest rates and exchange rates toward a depreciation of the
Vietnamese Donghas created pressure on interest rates for domestic debt and pressure
on exchange rate for foreign debt;

- The international monitoring capability on the safety of debt through the

monitoring indicators of Vietnam has remained low given the fact that state budget
accounting has not been standardized and publicized;
- Lack of transparency in public debt information;
- Vietnam has just only paid attention to mandatory debt management, but not
hidden debt management
3. Relationship between public investment, public debt, and state budget
sustainability
According to the current regulations of Vietnam, public investment and public debt
are closely related. Specifically:
- The State budget shall be balanced on the principle that the total revenue from
taxes, charges and fees must be larger than the total regular expenditures and should
accumulate more and more funds for spending on development investment; eventually
the balance between budget revenue and expenditures shall be achieved.
- The state's budget deficit shall be funded from domestic and foreign sources.
Borrowing to make up for the state's budget deficit must comply with the principle
that they must not be used for consumption, but only for development purposes and it
must be ensured that the budget arrangement include an initiative to repay all debt
when due.
- In principle, the local budgets shall be balanced with the total expenditures not
exceeding the total revenue. Where provinces or centrally-run cities need to invest in
infrastructure projects which run under the scope of the provincial-level budgets and
are on the list of investment projects in the five-year plans already decided by the
provincial-level Peoples Councils, but are beyond the balance capability of the
provincial-level budgets in the estimation year, they shall be allowed to mobilize
domestic capital but must balance the annual provincial-level budgets so as to take
initiative to repay all debt when it is due. The debit balance from the mobilized capital
source must not exceed 30% of the provincial-level budgets annual investment
capital for construction. .
III. Recommended solutions for efficient use of public investment, public
debt and improved budget sustainability
There are various ways to improve the efficiency of public investment, ensure
public debt safety and enhance state budget sustainability. However, comprehensive
solutions must include the following elements:

Economic restructuring
Restructuring the economy is directed towards in-depth development, providing
moreadded value for the economy through ensuring sustainable development of
infrastructure, human resources and finance. Promoting internal resources of the
economy and increasing domestic savings aims at gradually reducing excessive
dependence on foreign capital inflows. This solution is the basis for increasing budget
revenue, meeting expenditure needs for development investment and reducing the
risks associated with decreased foreign investment inflows and global volatility of
interest rates and exchange rates, etc.,. It is also necessary to restructure SOEs that fail
to operate efficiently. Gradually reduce the economy's dependence on bank loans and
foreign investment capital. Onlyrestructuring the economy and improving growth
quality can help Vietnam to sustain high growth in the future.
Public investment restructuring
Restructuring of public investment and diversification of investment capital
sources aim to improve the investment efficiency for society. The public investment
policy must primarily serve to promote and support sustainable development and
enhance the quality of life and welfare for everyone. Restructuring of public
investment should not only target high growth rates based on reduced public
investment but also aims at the harmonious combination of economic development
and better assurance of justice and social progress, including the rational use of land
and water resources, protection of the environment, and ensuring sustainable
development.
In the restructuring of public investment, it is necessary to increase investment in
the development of services for agricultural production, consumption of agricultural
products, science and technology, education and health; to reduce the provision of the
state budget for state corporations and business groups; to refocus public investment
to invest in infrastructure and social development. At the same time, there should be a
strong determination not to carry out investment projects that fail to meet criteria of
socio-economic efficiency and to focus budget resources on projects that demonstrate
the ability to be completed within deadlines and that exert a high level of efficiency.
Furthermore, the number of public investment projects funded through the state
budget that are big in scope and require long-time investment but are not urgent
should be reduced. It is important to stress that strict control of public investment is
important to help reduce budget deficits.
Development and implementation of a debt management strategy

The development and implementation of a debt management strategy should

clearly state purpose and scope of tools and activities as well as a long-term
perspective in debt management. At the same time, it is necessary to inspect and
monitor closely the implementation of the strategy and the execution of debt
management policies, including the development of a debt limit and the monitoring
compliance with the set limits. The strategy must focus on the risk management of
debt portfolios, including currency risk on loans, interest rates, exchange rates,
liquidity and operations. It should also include an analysis of debt sustainability to
propose appropriate responses. Debt management tools should be divesified through
continued development of the secondary market in order to enhance the ability to
manage risks through derivative transactions. Debt management organizations need
to be restructured to gradually strengthen and promote the role of debt management
so that they are capable of uniformly managing domestic and foreign debt.
Improving transparency, publicity and enhancing public accountability in the
use of public resources
Improvement of transparency, publicity and public accountability with regard to
the use of public resources would require the following: (i) Expand forms and
contents of publicity; enhance accountability and overcome the current situation of
formalistic publicity; (ii) Enable people to have access to information on principles,
objectives and orientations of fiscal policy as well as data relating to the state budget.
This should expand and enhance public policy consultation and discussion by
communities and society; (iii) Enhance oversight responsibilities of the National
Assembly for national key projects, of the People's Council with regard to investment
projects in the locality; and (iv) Strengthen community supervision, improving
mechanisms for people to check and monitor activities relating to budget, land and
property of the state.