The study emphasized that the economic recovery policies must be for medium-term with non-traditional solutions, far different to any policies that have been applied in the past, due to dire current global circumstances.
Support packages have limited effect
The Covid-19 pandemic has created a gigantic economic tsunami, and disrupted the entire world economy. International supply chains have lost links with domestic supply chains, whereby causing serious difficulties in all business activities. Such disruption will most likely lead to a banking crisis. To cope with such a situation, countries must offer many policies, such as in the health sector and policies related to industry and trade, and also appropriately tackle fiscal and monetary policies.
Monetary and fiscal policies have also been introduced in Vietnam. However, the current stimulus packages offered have a limited impact on businesses that are in financial straits, because they only reduce cash flow, and do not support increase of cash flow for enterprises. There are businesses that had to temporarily suspend operations and now may even dissolve or go bankrupt, especially those that have a limited access to support packages. While interest rate decline was negligible in recent years, it is still a big burden for borrowers, which affects the recovery process for businesses and individuals. Some problems of a medium-term vision are also not clear.
In the current context of the Covid-19 pandemic, the scale of each support package must be timely and sufficiently large enough. It must not be for short term, but under a medium term vision, based on resources and needs, because the current negative impact on the economy is unprecedented, unlike any past crisis or recession.
Government role vital
The first tools to tackle the current economic crisis is to use both fiscal policy and monetary policy as the main tools. In fiscal policy, Vietnam has similar support packages as that of some emerging economies and some countries in the region. However, reduction and extension of taxes will only have the effect of reducing or preventing cash outflow for enterprises, but no immediate effect for businesses to increase their cash flow. These policies also have a considerable time lag before businesses can recover. Therefore, in the meantime, the Government needs to play a key role to stimulate consumption and investments.
A short-term fiscal policy will allow businesses, especially SMEs, to fully cover salary costs in 2020. This will help businesses to enjoy tax refund benefits. In order to enjoy this policy, the attached condition is that enterprises do not lay off workers and do not reduce wages in 2020 and 2021. There must also be measures to quickly disburse public investment of up to VND 700,000 bn. Disbursement of this capital means increasing the role of government spending and investment. This will create a very large buffer, which will have a stronger effect than tax reduction. If the target of promoting public investment spending in 2020 is realized, it will be a source for the Vietnamese economy to recover quickly.
In the medium term, fiscal policy may allow enterprises to carry forward losses of the previous years, which is tied to the proposed policy to allow businesses to account for salary-related issues. If allowing enterprises to carry forward losses of last two years, namely, 2018 and 2019, or future three years, namely, 2021, 2022 and 2023, it will have an effect on generating cash inflow through enterprise tax reimbursement and will stop the cash outflow, which means reducing corporate income tax for the next accounting years from 2021 to 2023.
Concerning monetary policy, although interest rates have decreased recently, they are still a big burden for borrowers. Based on macro factors, especially inflation, we believe that in the current context, the State Bank of Vietnam (SBV) still has room to lower interest rates to support businesses. It is even possible to consider increasing the inflation target of 4% by 2020, giving the SBV a bigger room for monetary easing and interest rate cut, not just interbank rates, to ensure a stronger impact on lending rates, including on existing loans.
As for credit support policy, the banking sector should not pursue a credit growth target, but it should set priority on supporting businesses based on two factors of a speedy recovery of enterprises, and the level of output of enterprises. Enterprises that recover quicker will become tools to support the national economy. Therefore, credit support policy should be appropriately designed to avoid excessive debt and have the ability to restructure debt in the future.
