The interest rates offered by China are twice as much as other lenders

The Ministry of Planning and Investment (MPI) has submitted to PM a report on ODA (official development assistance) attraction, management and use in the 2018-2020 period, expressing its concern about preferential loans from China.

The ministry pointed out that Chinese preferential loans, just like export credits, are conditional loans (Chinese corporations are the contractors for projects) with conditions less favorable than loans from other donors.

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.

When borrowing money from China, Vietnam has to pay a commitment fee of 0.5 percent and management fee 0.5 percent, while the lending terms and grace periods are shorter by 15 and five years, respectively, than that offered by other lenders.

Chinese preferential loans are provided via China Eximbank.

Regarding the investment efficiency of projects using Chinese loans, contractors and equipment, the report says most projects proceed slowly, quality is low, and real investment capital is always higher than the estimates.

The Cat Linh-Ha Dong elevated railway project is an example. The execution time lasted 10 years, while the Chinese contractor four times asked for deadline extension and the real capital was $868 million instead of $552 million as initially planned.

One third of the 12 multi-trillion dong unprofitable projects under the management of the Ministry of Industry and Trade are using Chinese capital. 

These include the Ninh Binh Fertilizer Plant, the second phase of the Ha Bac Fertilizer and the second phase of the Thai Nguyen steel mill.

MPI recommends keeping cautious about ODA, saying that as the interest rate tends to increase gradually, Vietnam may fall into the ‘ODA and preferential loan trap’ when the lending interest rate plus capital arrangement fee are higher than the interest rates of commercial loans in the domestic market.

In many cases, the loans are conditional, i.e. Vietnam has to accept the requirements set by lenders on the technologies and contractors used for the projects. 

MPI has also warned that the appreciation of the currencies of the countries that provide ODA will increase the debt burden on Vietnam.

Nevertheless, MPI emphasized that accessing ODA and foreign preferential loans remains essential for Vietnam which needs 35-40 percent more investment to obtain the GDP growth rate of 6-8 percent in the upcoming period.

To date, Vietnam has borrowed $84 billion worth of ODA capital. The government’s foreign debts had reached $45.8 billion by 2018, or 20.5 percent of GDP.

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