In 2004, the Vietnam’s economic operations took place in the context of fairly unfavorable conditions, both externally and domestically. The moderate growth of the world economy favored export performance of Vietnam, however unpredicted political unrest and uncertainties in fuel and raw material prices (steel and iron, petroleum, food and foodstuff and so forth) adversely effected domestic production and business operations. Domestically, bird flu occurred in almost all provinces and cities, droughts and prolonged and piercing cold elsewhere in the country caused the surge in food and foodstuff prices: rising trend of both domestic prices and prices of some major imported fuel and raw material namely steel and iron, fertilizer and plastic...brought about an increase of CPI by 9.5%, the highest level since 1995. Despite the poor operation of state owned enterprises (SOEs), slow progress of privatization, sluggish utilization of investment capital for development and prolonged deployment period occurred in many projects....the Vietnamese economy in 2004 still recorded GDP growth rate of 7.69%, higher than the rate of 7.34% in 2003, with GDP growth rate of proceeding quarter higher than that of previous one.

The transformation of economic structure: Accompanying with high growth rate, the quality of growth was also enhanced with positive shift in economic structure. The GDP share of agriculture-forestry-fishery sec-tor exhibited a fall while share of industry sector was expanding and service sector recorded a recovery after 3 consecutive years of narrowing. The ongoing dynamic development of private economic sector somewhat contributed to GDP growth. Industry-construction, service and agriculture-forestry-fishery represented 40.09%, 38.15% and 21.76% of GDP, respectively. The continuous adjustment and shift in investment structure in 2004 and the years before progressively changed economic structure, maintained and stabilized economic structure gradually toward the sustainable development in 2004 and years ahead. However, agriculture and service underwent a slow structural transformation process. The share of cultivation in total production value of agriculture sector was still high, representing 80.11%. Most of the major and potentially value added creating services still accounted for a modest part of GDP. This tendency will be harmful to economic growth, particularly in the context of pro-active international economic integration of Vietnam.

Agriculture, Forestry and Fishery¹: In 2004, GDP growth of this sector increased by 3.5%, lower than the rate of 3.62% in 2003, mainly attributed to adverse impacts of avian flu, widespread natural disasters and increase in input prices....This sector slightly slowed its contribution to GDP at current price to 21.76% in 2004 from 22.54% in 2003. In terms of production value, the agriculture, forestry and fishery sector grew by 5.4%, separately, agriculture increased by 4.2%, forestry by 0.9% and fishery by 11.2% ( in 2003, corresponding figures were 5.5%, 4.5%, 1.1%, 10.9%). The effectiveness of agriculture production was enhanced in 2004 thanks to changes in investment, crop and breed structures, restoration of cattle and poultry flocks lost by flu epidemics, technology application in agriculture production, and shift from low productivity rice plantation into aquatic production and cultivation of industrial, fruit crops and forest plantation...The GDP share of agriculture though reduced in relative terms but increased notably in absolute term.

Industry and Construction: In terms of its growth and contribution to GDP, the industry and construction sector in 2004 continuously obtained the higher rates compared with the same period of 2003. However, the annual growth rate of this sector in 2004 slightly reduced to 10.2% from 10.48% in 2003. High growth rates were observed in some industries, namely mining, garment, construction brick, motorbike and automobile assembling. Industry reached a growth rate of 10.53 %, the highest of all sectors in the economy, this was mainly attributed to the high growth of private and foreign invested sectors. The contribution of industry and construction to GDP at current price, continued to rise, accounting for 40.09%. In 2004, industrial production still maintained its high growth, thanks to an increasing domestic demand of industrial products, an enhanced product quality and a surge in export of industrial products, contributing about 80% to export growth. Many enterprises continued to increase their investment for production, aiming at renovation of technology, reduction in product prices and enhancement of product competitiveness in both domestic and export markets. In addition, the industrial development was also facilitated by measures taken by the government and ministries to constrain the rising rate of prices and well manage circulation of commodities.

Services: In 2004 GDP of the trade and service sector grew by 7.47%, of which railway transportation was up by 7.6%, road transportation by 8.6%, airlines by 35.5% etc. Total retailed sale value for social consumption of goods and services was up by 18.4% of which the public sector up by 14.5%, collective sector down by 10%, household sector by 25.88%, private sector by 13% and foreign invested sector by 7.4%. Like previous years, the service sector’s growth in 2004 remained slow with limited contribution to GDP. Therefore, more radical transformation for the trade and service sector is needed to facilitate economic growth.

1_{The 2003 were adjusted to the Reneral Statistics Office's official data.}

   Total foreign trade turnover in 2004 stood at USD 58.4 billion, up by 28.6% comparing to 2003, reflecting an increasingly expanded foreign trade of Vietnam.

Export: Total export turnover in 2004 accounted for USD 26.5 billion (by FOB terms), up by 31.5% comparing to 2003. Such a high peak in export is attributable to the economic growth and recovery of a number of Vietnam’s major export markets comparing to 2003 and it’s noteworthy to mention the active leadership by the Vietnamese Government over the relevant ministries and agencies to promote export and explore new markets.

Structure of exported products: Trade volume of most key exported products soared up, such as crude oil turnover of USD 5.67 billion, up by 48.4% comparing to 2003 thanks to a favorable price (up by 30.5%), and textile turnover of USD 4.38 billion, up by 19.0%, seafood turnover of USD 2.4 billion, up by 9.1%, footwear turnover of USD 2.69 billion, up by 19.0%. Four above-mentioned key exported products account for 57.1% of total export turnover. Besides, though quantity of such traditional goods as rubber, rice increased slightly, their price soared up, hence leading to a strong increase in their export volume. Wooden furniture is noted this year for its strong growth to USD 1.14 billion, up by 87.1% comparing to that of last year.

Structure of export market: Export turnover to EU, ASEAN, U.S., Japan and China all increased. However, the composition of export market this year experienced broad changes: Export growth rate to the U.S. market in 2003 was 60.6%, and down to 26.8% in 2004. Larger portion of most goods were exported to ASEAN (up by 31.2%) and China (up by 98.4%). Nevertheless, the U.S. continues being the largest export market for Vietnam, accounting for 18.8% of total export turnover, seconded by EU with 18.1% and followed by ASEAN 14.6%, Japan 13.2% and China 14.1%. That reflects a positive impact to export by the U.S. – Vietnam Bilateral Trade Agreement, AFTA Tariff Reduction Roadmap, various agreements between EU - Vietnam and other bilateral agreements.

   A significant contribution to export growth was exports by foreign-invested enterprises which accounted for USD 8.816 billion, up by 39.1% against 2003 and accounted for 33.2% of total export volume (31.4% in 2003).

Import: International political unrest and widespread terrorism led to an increasingly volatile prices. In 2004, price of some key imported products to Vietnam such as fuels, and inputs for production soared up comparing to those in 2003. As a result, to a total import volume reach USD 31.9 billion in 2004, up by 26.5% comparing to 2003, of which imported garment increased to USD 1.92 billion, up by 41.1%, input and auxiliary materials for leather products stood at USD 2.25 billion, up by 10.8%; plastic materials was USD 1.19 billion, up by 43.7%; petroleum products was USD 3.57 billion, up by 46.5%, fertilizer of all types were USD 823 million, up by 30.4%; and computers and spare parts were USD 912 million, up by 103%.

   Imports by the foreign-invested sector amounted to USD 11 billion, up by 25.8% comparing to that of the previous year and accounted for 34.6% of Vietnam’s total import turnover.

Structure of import market: Most imports originated from ASEAN, Japan, and especially this year, import from China grew by 42%. Import from EU increased by merely 4.2% while imports from the U.S. was down negligibly.

   In a nutshell, high volatile international prices exerted strong impacts on both export and import prices. Though export grew at a higher rate, a much larger imported turnover comparing to export volume had led to a USD 5.45 billion trade deficit in Vietnam (FOB-based export, CIF-based import) which is larger than the USD 5.1 billion trade deficit in 2003.

   2004 was a year of unexpected surge in CPI to 9.5%, well beyond projection aerlier in the year. This was the highest increase over the past 8 years, exceeding the 5% target set by the National Assembly. Out of 10 groups of commodities used as the bases for CPI computation, the group of food and foodstuff recorded highest price increase (by 15.6%), of which food increased by 14.3%, and foodstuff up by 17.1%; followed by pharmaceutical product group with an increase of 9.1%; housing and construction materials group up by 7.4%; all the remaining groups increased in the range of 2.2 – 5.9% (except the educational group decreased by 1.8%). A strong increase of food and foodstuff prices with its big weight in the consumption goods basket was a major factor to the much higher CPI in 2004. Nevertheless, CPI growth rate tended to diminish gradually from quarter to quarter during 2004. Monthly average increase of CPI in quarter I, II, III and IV were 1.63%, 0.73%, 0.47% and 0.27%, respectively. CPI’s strong increase was commonly attributable to the following:

         A strong economic growth worldwide augmented foreign demands for Vietnamese exported goods. 2004 experienced positive policies in expanding makets, promoting export, world economicgrowth, especially of big economies, that led to larger demand for quantity of imported goods which resulted in higher prices in favor of exporting countries, including Vietnam. In addition, international (espcially Chinese) booming demands for importgrains led to a higher international exportprice for rice, and so did domestic one – an important factor for CPI’s surge in 2004.

         A simultaneous impacts of the sea sonality by Year-end and Lunar New Year production, and consumptionto gether with bird flu in provinces, and municipal ities nation-wide had led to ashortage of food supplies, hence increasing prices of food and some other products. Besides, drought and prolonged cold weather in many areas also raised the costs of agricultural prduction.

        Increased international prices for such input materials as crude oil, steels, plastics, fertilizers elevated production cost and ultimately led to higher sale prices.

        Restrained regulatory capability, price forecast, and market surveillance enabled certain enterprises to monopo lise market and inappropriate reserves had led to incompatibly high domestic prices vs. international prices.

        Some other causes such as impacts of market's psychological reactions in the wake of policies on salary increase, railway and airway transportation charges adjustment, effects of Government's policy on demand stimulus in the previous years had exerted certain effects on prices in 2004.

In the face of such high CPI, the Government took timely measures and directed the relevant authorities to put high price surge in 2004 under control (see Box 1).

   All in all, a significantly improved urban employment market in 2004 created jobs for 1.55 million workers, equivalent to 103.3% of the annual plan. The unemployment rate for people of the working age in urban areas decreased slightly to 5.6% from 5.78% in 2003. In rural areas, the agricultural and rural structural transformation took place in linkage to urbanization created new jobs and increased employment time to 79.1% from 77.66% in 2003.

   Averaged per capita income was about VND 8.694 million/person/year, up by 14.67% comparing to that of 2003. High economic growth had been achieved in many sectors, of which industrial, trade and service sectors recorded a fair growth rate while agriculture and aquaculture increased both in value and output that helped increase per capita income.

   Budget deficit in 2004 accounted for 4.87% of GDP, lower than that of 2003 and equal to the one (5% of GDP) set by the National Assembly as the State Budget followed properly its projected plan, specifically: Budget revenue exceeded by 20.8% comparing to initial projection, constituting its 7th consecutive year of exceeded budget revenue (exceeded by 7.3%, 12.9%, 20.3%, 13.5%, 6.5% and 7.1% in 1998, 1999, 2000, 2001, 2002 and 2003, respectively).

   The fair increase of State Budget revenue could be attributed partially to a relatively high economic growth rate and an actual oil price which was 51.8% higher than predicted. Crude oil revenues exceeded projection by 81%. In addition, new improved taxation policies during 2003 and 2004 encouraged further business investment by economic sectors that raised revenues of all types. Revenues from foreign-invested enterprises (excluding crude oil), tax revenues from non-state industrial, trade and service sectors, income tax revenues from high-income groups, house- and land-related transactions, agricultural land use rents all increased by 20.5%, 11.1%, 8.2%, 163.7% and 113.8%, respectively. While revenues from SOEs decreased by 3.2%. A highly increased State Budget revenue further contributed State Budget investment on infrastructure, capital expenditures, export and economic growth for the years to come.

   State Budget’s expenditures exceeded by 23.4% comparing to projection (6.1% in 2003); State Budget’s expenditure structure was transformed positively which ensured investment for economic development, servicing foreign and domestic debts and supplementing financial reserves. Thanks to such increased revenue in 2004, the State Budget had more resources to invest in infrastructure, and support investment for economic development. State Budget’s deficit was financed by domestic and foreign borrowings. Domestic borrowings mainly came from Government bond issuance.

   In parallel with high economic growth in 2004, final consumption boomed (based on the comparative price of 1994, consumption increased by 6.33% of which Government’s consumption increased by 7.77%, private sector’s consumption up by 6.19%). Aggregate investment of the society increased also by 9.61% comparing to 2003 (based on the comparative price of 1994) to meet the demand of high economic growth. If current price was adopted, domestic savings would increase to 27.5% of GDP in 2004 against 26.6% of GDP in 2003. Aggregate investment increased to 36.2% of GDP in 2004 against 35.4% of GDP in 2003.

   Though domestic saving over GDP improved, aggregate investment over GDP increased. Vietnam maintained its gap between saving and investment, reflecting a continuing deficit of the current account. However the gap had been narrowed from USD 1.931 billion in 2003 to USD 925 million in 2004.

   The overall balance posted USD 883 million as surplus in 2004, a significant decrease as compared to USD 2.151 billion in 2003. Overall balance's surplus was attributable mainly to the current account's narrowed deficit and a preserved surplus of the capital account.

   Deficit of the current account was narrowed to USD 925 million (equivalent to 2.02% of GDP) in 2004 comparing to USD 1.931 billion (4.9% of GDP) in 2003 owing mostly to the decreased deficit of the trade balance and partly to increased private transfers. Trade balance’s deficit was USD 2.255 billion, lower than the USD 2.581 billion deficit in 2003 thanks to high export growth. Service account’s deficit was USD 872 million in 2004, slightly higher than USD 778 million deficit in 2003. Net investment income showed a deficit of USD 891 million, higher than the USD 811 million deficit of the previous year as profitability of foreign-invested enterprises improved. Notably, net transfers was USD 3.093 billion in 2004, as a significant increase against USD 2.239 billion in 2003 mostly contributed by money remittance of Vietnamese overseas residents and guest workers, hence decreasing current account’s deficit.

   Excluding net transfers, current account’s deficit in 2004 would be equal to 8.4%2 of GDP². High deficit should not be a big concern for a country in shortage of capital and technology like Vietnam as most of imported goods were equipment, facilities, and production inputs for domestic expansion. Nevertheless, such a development showed that the constantly increased international price of facilities, equipment, and input materials contributed among other things to import activities which show a significant independence of domestic production on the world economic development. Therefore, more emphasis should be placed on producing import substitutes to stabilize trade account.

Capital account's surplus well exceeded current account's deficit: Capital account posted a surplus of USD 2.753 billion in 2004, of which, disbursed FDI was USD 1.610 billion, higher than the USD 1.450 billion in 2003. Medium and long-term borrowings and repayments generated a surplus of USD 1.162 billion, as strong increase in comparison to USD 457 million in 2003 thanks to a significant increase in disbursed medium and longterm borrowings. Specifically, Vietnam Airlines obtained a foreign loan of USD 366 million however their medium and long-term debt repayment in 2003 was lower than that of 2003. On the other hand, the short-term net borrowings of USD 26 million surplus in 2003 had turned into a USD 54 million deficit in 2004 as a number of foreign bank branches in Vietnam took bridge loans from their holding companies for immediate repayment. 2004 also witnessed an aggregate USD 35 million overseas deposits by local commercial banks, a reversed trend comparing to the USD 1.372 billion overseas deposit withdrawal in 2003. It was mainly attributable to the higher USD-denominated interest rate in international market as Fed increased USD-denominated federal funds rate to 2.25% p.a from its previous 1% p.a.

   Developments of the balance of payment in 2004 indicates that though the current account’s deficit remained high, its funding structure of deficit remained quite robust (mostly funded by FDI, and medium and long-term borrowings) which are of long maturity, cost-effective, minimum risk of abrupt withdrawal, thus helping to stabilise the macroeconomic environment, and promote economic growth.

2_{Excluding net transfers, current account's deficit was 10.2% of GDP in 2003}