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ODA and the trap of preferential loans

Vietnam, which has been using ODA (official development assistance) capital for 25 years, has looked at the situation realistically and found the problems of ODA.

Vietnam has been using ODA for 25 years
Vietnam has been using ODA for 25 years

Economists began giving warnings about the ‘ODA trap’ many years ago. And most recently, the Ministry of Planning and Investment (MPI) released a report showing the problems of the capital source.

The ODA loans have become twice as much as the ‘quota’ granted by the National Assembly, reaching VND600 trillion, according to a report.

Vietnam’s public debt per capita has increased by VND4 million compared with 2017 to VND35 million, and the figure continues rising.

ODA is understood as a source of capital with preferential interest rates. However, economists have pointed out that in many cases, ODA capital is more expensive than the capital Vietnam can mobilize from domestic sources.

In order to receive ODA, Vietnam has to satisfy strict requirements from donors. In addition, the other problems, including the slow implementation and mismanagement also make the real costs of projects much higher than initially planned.

ADB estimated that if the project implementation lasts one year longer, the costs would increase by 17.6 percent. The figure would be 50 percent if the project implementation lasts an additional two years.

An economist affirmed that the real interest rates of ODA capital, if counting other expenses, such as commitment fee, management fee, capital adjustment fee and ‘relation fee’, would be as high as 10 percent, or even 13-14 percent.

In its report, MPI mentioned the ODA capital from China, pointing out that the interest rates offered by China are twice as much as other lenders, while the lending conditions are less preferential.

Chinese loans have an interest rate of 3 percent per annum on average, higher than the 0.4-1.2 percent offered by Japan, 0-2 percent by South Korea and 1.75 percent by India.

Analysts commented that Vietnam seems to have learned the lesson from the Cat Linh – Ha Dong elevated railway project, which had execution time extended by 10 years and the high real cost of $868 million instead of $552 million as initially estimated, and unprofitable projects managed by the Ministry of Industry and Trade.

MPI in April sent a dispatch to relevant ministries and branches, requesting to assess the effects of nearly 2,600 ODA using projects in 1993-2017. Many problems in using ODA have been recognized.

Dinh The Hien, an economist, has suggested a new approach way to ODA, saying that now is the right time for Vietnam to take initiative in attracting sources of capital.