A new decree by the Vietnam Government prohibits local governments from directly borrowing from international lenders, or to guarantee the borrowing of organizations and individuals, along with the issuance of bonds.
Under Decree 93/2018/ND-CP on management of debts of local governments, local governments can receive loans to finance their overspending with projects in medium-term public investment plans to pay off original debts, if approved by municipal or provincial People’s Councils. Lan Nhi, from the SaigonTimes reported.
Local governments’ borrowing must follow regulations as set by the laws on State budget and public debt management. Also, governments needs to ensure a five-year borrowing plan, a three-year debt management program and an annual borrowing plan within the upper cap, as informed by the competent authority, and the outstanding loan cap as stipulated by the law on State budget and the Government’s decrees, concerning special financial and budgetary mechanisms of certain localities.
Prevailing special mechanisms for localities, such as Hanoi and HCMC, allow for capital mobilization of over 30% of capital for annual investments to meet local capital needs and accelerate investments.
Government data reported that outstanding loans by local governments, as of early last year, were VND66.105 trillion, with advances on the State budget making up VND7.48 trillion, municipal bonds VND25.234 trillion and loans from commercial banks reaching VND1.356 trillion.
Regarding local government loans from the Vietnam Development Bank, which were primarily from bonds guaranteed by the Government and from the Government’s foreign loans, they were not included in the calculation of outstanding loans of localities, as they were already in Government-guaranteed debts and foreign loans by the Government, to avoid overlaps.
This year’s planned borrowing by localities has reached over VND21.513 trillion, with VND8.769 trillion in domestic loans and VND12.744 trillion from the Government’s on-lending loans, which is still within the permissible level.
On-lending of ODA, concessional capital specified
The Government has issued Decree 97/2018/ND-CP on on-lending of official development assistance (ODA) loans and foreign concessional loans provided by international donors.
On-lending requirements applied to local governments, enterprises and public non-business units are stipulated in Article 36 of the law on public debt management.
Regarding on-lending ratios assigned to local governments, localities with central budget allocations making up 70% or more of total local budget spending, the ratio is 30% of ODA and concessional loans. However, with localities which have central budget allocations accounting for 50-70% and below 50%, the ratio is kept at 40% and 50%, respectively.
Localities which send off a proportion of their incomes to the central budget fund, except for Hanoi and HCMC, receive an on-lending ratio of 70%. Such a ratio for Hanoi and HCMC is 100%.
The Ministry of Finance provides on-lending ratios of localities for every budgeting period by January 1 of the first year in such periods.
As for public non-business units, those which can cover all regular expenditures and investment costs, the on-lending ratio is 100% of ODA and concessional capital used for investment projects. Meanwhile, the ratio is only 50% for units which can cover all regular expenditures and part of investment costs.
Businesses are eligible to borrow ODA and concessional capital used for investment projects, but the loans cannot exceed 70% of the investment amounts approved by competent authorities.
According to the decree, on-lending rates are as prescribed in Clause 5, Article 34 of the law on public debt management, including the law on public debt management and rates of the Government’s foreign loans, related fees in foreign lending agreements and fees of on-lending management and risk provisions.
Lenders must make sure on-lending loans are used for the correct purposes and are applied effectively, according to decisions on investment approval, project documents and signed on-lending contracts.
Also, borrowers have to pay off loans in full amounts and on time, according to on-lending contracts to the Ministry of Finance or authorized on-lending agencies.