Agriculture Reference
In-Depth Information
government provides to these organizations. Providing preferential access to
credit to SOEs is such a policy, which can cause financial instability and have
dramatic macroeconomic consequences in many countries, as outstanding loans
to food agencies can be substantial, accounting for as much as 20-30 percent
of total outstanding loans from the formal banking sector (Timmer 1989). This
possibility turns out to be particularly relevant for Vietnam, as credit access is
highly biased toward food SOEs, which generally borrow from the Agricultural
Bank or export promotion funds at highly subsidized interest rates. Borrowing
by SOEs at zero interest is also common. For example, in 2000, the government
ordered SOEs to buy 1 million tons of rice at market price and facilitated this
operation by providing zero-interest loans from the Export Promotion Fund. A
simple calculation should reveal the implications of such a credit policy. Sup-
pose that the market price of rice is US$140 per ton and that stock is held for 3
months. Assuming a market interest rate of 7 percent per year, it implies that
the government subsidy to SOEs in this particular transaction is about US$2.4
million.
This preferential treatment in credit allocation for SOEs has clear impli-
cations for private-sector participation and credit availability to other sectors.
For example, the provision of export credit differs markedly among private
traders and SOEs. While SOEs with export contracts are allowed to borrow
100 percent of the value of the contract, private millers can only borrow up to
70 percent of their collateral that is provided in the form of buildings and equip-
ment.
2
Clearly, such policies put private millers at a great disadvantage com-
pared to SOEs, hindering their participation in the export market.
In addition to preferential credit, SOEs in Vietnam benefit from tax exemp-
tion and purchase facilitation. For example, in 1999 food SOEs were exempted
from value-added and enterprise taxes, giving them a clear competitive advan-
tage over the private sector. In mid-2000, SOEs were also exempted from buy-
ing rice from the remote areas, which used to serve as a mechanism for ensur-
ing floor prices. To further facilitate the operation of SOEs, the government
invested in building wholesale markets in 2003 so that food SOEs can organize
to buy paddy and rice from other stakeholders.
Management of Rice Export
Although broad indicators overwhelmingly support Vietnam as a success story
of market liberalization, the country has had its share of problems in managing
exports and providing adequate incentives to the private sector (Box 8.1). Three
examples are worth noting. First, government-to-government contracts con-
tinue to be allocated to VINAFOODs, which prevents other companies from
competing and often relegates them to a subcontracting role. Furthermore, since
2. Note that land is excluded from the valuation.
