Growth is projected to be solid, but there are substantial downside risks (Table 1). Domestic demand is projected to further recover as sanitary restrictions are removed. Real GDP is anticipated to grow by 6.5% in 2023 and maintain the speed at 6.6% in 2024. Supply chain disruptions may continue to weigh on global trade. Downside risks include unexpectedly high inflation and a rapid tightening of monetary policy in Viet Nam in response to inflationary pressures or downward pressure on the exchange rate. On the upside, foreign investors could increasingly appreciate the stable investment climate of Viet Nam amid heightened global uncertainty.

Inflation has picked up due to rising energy and commodity prices. Monetary policy normalisation in advanced economies has widened the gap in interest rates, further stoking inflation in Viet Nam by adding downward pressure to the exchange rate. This is eroding the purchasing power of households, providing a headwind to the nascent recovery of private consumption and increasing poverty risks for vulnerable households.

Monetary policy will need to be tightened earlier if inflation accelerates more rapidly than anticipated. Notwithstanding the highly uncertain inflation outlook, maintaining price stability should be the primary focus. Delaying unwinding highly accommodative policy would risk cementing higher inflation expectations.

Fiscal space could be used to provide additional support to mitigate the impact of rising costs of living on vulnerable groups. The value-added tax and the tax on fossil fuels have already been cut temporarily. Additional but more targeted support may be needed if downside risks materialise. Public investment included in the latest stimulus package of early 2022 should be implemented as planned. Simplifying public investment procedures and regulations would accelerate disbursement.

As Viet Nam’s society is rapidly ageing, strengthening social protection is increasingly crucial. By 2050, the old-age dependency rate will increase from the current 11% to 33%, to be one of the highest in Southeast Asia. Public support to the elderly should thus be further strengthened.

Social security should play a more important role. A comprehensive social security system has been evolving. Health insurance now covers almost 90% of the population. During the pandemic, unemployment insurance acted as an automatic stabiliser. Nevertheless, the public pension covers only one third of the labour force (Figure 2), with patterns of under-coverage strongly associated with employment status. Tackling informality is crucial to address weak compliance among small businesses in making social insurance contributions. In addition, the sustainability of the public pension needs to be strengthened. Hence, restricting early withdrawal is of the utmost importance. Old-age social safety nets for self-employed workers, who account for half of total employment but are not covered by the compulsory public pension, should also be enhanced by expanding the current tax-funded social pension.

Fiscal revenues need to be increased to fund growing spending. Besides population ageing, government expenditure will also continue to increase due to other spending needs, notably, investment in transport, digital and green infrastructure. This requires a concrete medium-term fiscal plan. Deductions and exemptions in the corporate and personal income tax should be reduced and the reduced VAT rate should be applied more narrowly. In addition, the tax on non-agricultural land should be replaced with a recurrent tax levied on both buildings and land.

Boosting labour productivity is crucial to achieve sustained high economic growth. Between 1990 and 2019, the economy maintained remarkably high average annual growth of 7%, supported by rapid capital accumulation and ample labour supply from rural areas. This growth pattern will become more difficult to sustain as the transition from an agrarian to an industrial economy is fully realised and as the labour force grows more slowly. Growth should thus be driven by advanced technologies and improved economic efficiency. To achieve this, it is crucial to restore market dynamism through further simplifying administrative procedures.

Ensuring a level playing field is key to creating a better business climate. Owing to extensive reform efforts over past decades, Viet Nam is one of the most open markets in Southeast Asia and has attracted a large amount of foreign investment. Restrictions on competition are lower than in other emerging market economies, but there is scope for improvement (Figure 3). In particular, state involvement is still strong in some sectors, where state-owned enterprises (SOEs) are dominant, notably in energy, transport and telecommunications. In addition to reducing entry barriers, renewed efforts to improve SOE governance is urgently needed. Moreover, the competition authority should be given more power to level the playing field for all market participants, including SOEs. Continued efforts to tackle corruption are also crucial to improve the overall business climate further.

Viet Nam is among the leaders of digitalisation in Southeast Asia. Uptake of digital tools has grown fast, and adoption of digital technologies, such as e-commerce, telemedicine and telework accelerated during the pandemic. Viet Nam is a hotbed of digital start-ups, home to three digital unicorn companies (private start-ups with value over USD 1 billion). Nonetheless, there is room for further improvement.

Digital infrastructure is more developed than in other Southeast Asian countries, but is still not sufficient. Investment in high quality infrastructure, such as fibre optics, will help boost uptake and the dissemination of advanced digital technologies. In particular, greater liberalisation in the telecommunications market is crucial to stimulate investment.

Viet Nam needs to enhance the enabling environment to accelerate digitalisation. Like in many other countries, the digital transformation has been changing all facets of the economy. The government was quick to deliver digital services, such as customs, and digital and cashless payments have become more common. To further promote digitalisation, more resources should be allocated to the technical and vocational education and training and on-the-job training to nurture digital skills and talents. Various regulations, including those for cross-border data flows should also be eased, while strengthening privacy protection and cybersecurity. These reforms are also crucial to deepen production sophistication which can enhance Viet Nam’s integration to the global economy.

The authorities have committed to net zero emissions by 2050. However, past high economic growth was underpinned by increasing energy consumption, mostly coming from fossil fuels. The share of hydroelectric power is now declining, making coal the major source of electricity. As a result, carbon emissions are increasing fast. Reducing the high emission intensity of production is crucial to simultaneously achieve both net zero emissions and high economic growth (Figure 4).

A comprehensive programme is required to transition to a low carbon economy. To guide all economic sectors to a low carbon path, a clear and predictable long-term climate strategy should be prepared. This strategy should include an energy sector reform which is crucial to upscale investment in renewable energy. All fossil fuels are now subject to the environmental protection tax, but it is difficult to reflect the social costs of carbon fully. This should be improved to influence consumption patterns of households and businesses more explicitly. A planned set up of a carbon market should be accelerated to encourage investment into renewable energy in the power sector. Adopting a green taxonomy could also help financial resources shift to low-carbon investment.