The impact of the COVID-19 crisis on subnational public finance: the case of Da Nang City 1 VIETNAM FISCAL UPDATE THE IMPACT OF COVID 19 CRISIS ON SUBNATIONAL PUBLIC FINANCE: THE CASE OF DANANG CITY @2021 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations and conclusions expressed in this work do not necessarily reflect the views of the World Bank and its Board of Executive Directors. The World Bank do not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations and other information shown on any map in this work do not imply any judgement on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of the World Bank, all of which are specifically reserved. All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, the World Bank, 1818 H Street NW, Washington DC, 20433, USA, Fax: 202-522-2625; email: pubrights@worldbank.org. Cover picture: NgKhanhVuKhoa/Pixabay CONTENTS Abbreviations 7 Acknowledgements 9 Summary 10 Overview of growth and fiscal performance 12 Composition of revenues, expenditures, and impact of the COVID-19 shock 15 Recommendations 23 Annex 25 BOXES Box III.1. Da Nang support packages during the COVID-19 shock 20 HÌNH Figure III.1. National mobility trends, February 2020–February 2021 12 Figure III.2. Da Nang mobility trends, 2020 12 Figure III.3. Da Nang RGDP growth, 2016–20 (%) 13 Figure III.4. Economic growth in Vietnam and its major cities in 2020 13 Figure III.5. Key fiscal indicators, 2016–20 14 Figure III.6. Da Nang total revenue as share of RGDP (% of RGDP) 15 Figure III.7. Da Nang expenditure as share of RGDP (% of RGDP) 15 Figure III.8. Da Nang total revenue and its growtha 15 Figure III.9. Da Nang total expenditure and its growth 15 Figure III.10.Da Nang revenue composition, 2016–20 (% total revenue) 16 Figure III.11. Growth of major revenue sources (%) 16 Figure III.12. Revenue composition (% of RGDP) 16 Figure III.13. Tax composition (% of RGDP) 16 HÌNH Figure III.14. Contribution to revenue change by sources (percentage points) 17 Figure III.15. Contribution to revenue change by tax lines (percentage points) 17 Figure III.16. Da Nang total revenue, 2017–20 18 Figure III.17. Composition of total expenditure by function (% of RGDP) 19 Figure III.18. Composition of recurrent expenditure by function (% of RGDP) 19 Figure III.19. Da Nang public investment, 2016–20 (% RGDP) 19 Figure III.20. Da Nang public investment in 2016–20 by function (% RGDP) 19 Figure III.21. Recurrent expenditures by functions (%, y/y) 21 Figure III.22. Expenditure growth by economic classification (%, y/y) 22 Figure III.23. Da Nang total revenue, 2017–20 25 Figure III.24. Public investment in Da Nang, 2016–20 25 Figure III.25. Overall expenditure growths by function (%) 26 TABLES Table III.1. Disbursement of the COVID-19 income support package in Da Nang, 2020 20 ABBREVIATIONS COVID-19 coronavirus disease 2019 GDP gross domestic product IDA International Development Association ODA Official Development Assistance RGDP regional gross domestic product VND Vietnamese dong 8 Note III The impact of the COVID-19 crisis on subnational public finance: the case of Da Nang City 9 ACKNOWLEDGEMENTS This note on The Impact of Covid-19 Crisis on Subnational Public Finance – the Case of Danang City has been prepared as part of the Vietnam Fiscal Update 2021, a second report in a programmatic series. This report analyzes the impact of Covid-19 on Vietnam’s public finance. It consists of four notes that aim to provide timely and relevant information and policy recommendations to the development of the Ministry of Finance’s ten-year financial strategy (2021-30) and technical assistance to the Government to adopt good practices in fiscal policy and public finance management reforms. Key contributors to this note were Dorsati Madani and Nguyễn Thế Hoàng with inputs from Nguyễn Phương Anh. Quality review and assurance on earlier drafts have been provided by colleagues across the World Bank Group, including Arvind Nair (Senior Economist), Oleksii Balabushko (Senior Public Finance Specialist), Naira Melkumyan (Senior Country Officer), and Nguyễn Hồng Ngân (Senior External Affairs Officer). The report was also enriched by consultations with the government, development partners, and policy institutions. Comments were received from the Da Nang Department of Finance. We would like to acknowledge the strong support and contribution from Mr. Nguyễn Văn Phụng (Director, Department of Finance, Da Nang city. The team is grateful for the overall guidance of Carolyn Turk (Country Director for Vietnam); Hassan Zaman (Regional Director, Equitable Growth, Finance and Institutions Practice, East Asia and the Pacific); Stefanie Stallmeister (Operations and Portfolio Manager for Vietnam); Deepak Mishra (former Practice Manager, Macroeconomic Trade and Investment Global Practice); Sebastian Eckhardt (Practice Manager, Macroeconomic Trade and Investment Global Practice); Fily Sissoko (Practice Manager, Governance Global Practice); Jacques Morisset (Program Leader); and Matthew Wai-Poi (Lead Economist). The report benefited from the administrative assistance of Le Thi Khanh Linh, and communications support from Nguyen Hong Ngan and Le Thi Quynh Anh of the World Bank Vietnam Country Office. 10 Note III SUMMARY The national economy of Vietnam was affected by the April 2020 lockdown meant to contain the domestic spread of the COVID-19 virus and subsequent outbreaks in Da Nang and Ho Chi Minh City. Nevertheless, the economy showed exceptional resilience. Gross domestic product (GDP) grew by an estimated 2.9 percent in 2020, one of the few economies in the world that grew during the pandemic. At the sectoral level, the services sector, especially the tourism-related subsectors, have borne the brunt of the COVID-19 crisis, with accommodation and catering services dropping by about 15.0 percent in 2020 compared to 2019, while the number of foreign visitors in 2020 was only 21 percent of the number a year ago. In contrast, the COVID-19 crisis severely affected Da Nang. Da Nang is a city of about 1 million inhabitants, with an annual regional GDP (RGDP) of about US$4.7 billion (2019) and a per capita income of about US$4,000 (2019). It has been one of the main poles of growth in Vietnam’s successful development story, registering average RGDP growth of over 5 percent during 2016– 19. It hosts one of the major national ports and is a major national and international tourism hub. But Da Nang was one of the hardest-hit cities in Vietnam in terms of measures to control community spread of the virus. This note reviews the impact of the COVID-19 pandemic on Da Nang’s public finances. It is structured around the following questions: (i) What was the overall growth and fiscal performance of the city? (ii) What was the composition of revenues and expenditures, and how did COVID-19 impact the city’s finances? (iii) What was the fiscal response to the COVID-19 shock? (iv) What policies do we recommend the city consider going forward? We find: (i) Da Nang is highly reliant on tourism compared to other major Vietnamese cities. Its GDP contracted an estimated 9.8 percent as the result of the stringent international COVID-19 social distancing and travel restrictions, the July–August outbreak, and October storms. (ii) Da Nang’s finances have changed structurally in the past few years, with a focus on fiscal consolidation and paying off debt. This fiscal consolidation was achieved through reducing expenditures and despite a steady fall in total revenues as a share of RGDP. The COVID-19 shock reversed the fiscal consolidation efforts and the fiscal space deteriorated in 2020. (iii) Three main points of concern arise from the profile of revenue collection in Da Nang. First, the share of capital revenues remains high. In the past five years, every time tax revenues have fallen, the city has resorted to selling land-use rights to reach the targeted yearly values The impact of the COVID-19 crisis on subnational public finance: the case of Da Nang City 11 for revenue. Land is finite and an asset for the city. Such practices and short-term gains are reducing the city’s long-term ability to manage and optimize the use of its assets to ensure the most productive revenue earning capacities. Second, fees and charges, the revenue category that could provide a steady flow of local income to the city, is very small suggesting this is an area that city officials can explore to increase revenues. Finally, the revenue flows are relatively volatile across the years, suggesting potential instability of revenue sources year on year (iv) The city recorded its first primary fiscal deficit in five years, moving from a surplus of 4 percent in 2019 to a deficit of about 0.4 percent in 2020. The COVID-19 shock impacted tax revenues substantially, which the City attempted to mitigate through increased sale of land-use rights. Health and social protection expenditures surged in 2020 as resources were mobilized to contain the COVID-19 outbreak and provide support to households. Planned investment expenditures were also increased, though implementation lagged given the lockdowns and October storms. (v) Overall, on the fiscal front, the city was able to cope with the COVID-19 pandemic without having to increase its borrowing significantly in 2020, thanks to the prudent fiscal management it pursued before the pandemic. But it now faces a reduced fiscal space. Policy suggestions include: (i) On revenue policies, In the short term, given the continuing impact of the COVID shock on the city, attempting to increase sources or volumes of revenue would not be recommended as it could hamper economic recovery. This includes restraint in assignment of land user rights as a rush to assign these may address short term revenue needs but affect longer term fiscal sustainability of the city. In the medium term, there is need to increase non-tax revenue collection, with an eye to increasing the stability of revenue flows. More specifically, increase of local fees, and charges and user fees, either through better enforcement, raised rates or introduction of new fees or charges. City authorities should also consider advocating for the adoption of property taxes to the National authorities, as such revenues would be retained by the city, providing a steady and increasing source of revenue for its budget over the longer term. Also, authorities should seek to optimize land value capture and improve return to public assets. A first step would be developing an integrated database of public assets to help the city authorities have a good overview of what they the city has and what its value is and adopt a more strategic approach in management of city assets. (ii) On expenditure policies, continued efficiency gains need to be explored. More specifically, allocative efficiency can be further enhanced by aligning budget planning more closely with the development goals of the City over the medium term. This includes development of the high tech and tourism sectors as main drivers of economic growth while ensuring a livable city that is based on the principles of green and resilient urban development. Potential strategic expenditure areas could be vocational training for services sector (hospitality) and 12 Note III high-tech industries (technical skills) to support economic growth and as well as investment in Infrastructure that improves resilience to global climate change. (iii) On fiscal and debt policy, given the short fall in revenues and increase in expenditures triggered by the COVID-crisis, the authorities may wish to consider a medium-term fiscal/debt strategy and management framework that would rely on a variety of financing options. While using accumulated cash reserves is helpful in the short term, acquiring domestic or ODA debt may be a more sustainable option for the city than resorting to land rights assignments. Additionally, development of a fiscal strategy will help City authorities incorporate a more active fiscal risks management (disaster risk management). OVERVIEW OF GROWTH AND FISCAL PERFORMANCE Da Nang’s GDP contracted sharply as the result of the stringent international COVID-19 social distancing and travel restrictions, the July–August outbreak, and October storms. Da Nang’s RGDP contracted an estimated 9.8 percent in 2020 compared to 5.3 percent growth in 2019 (figure III.3). Tourist arrivals in Da Nang are estimated to have hit 8.7 million in 2019, including 3.5 million foreigners and 5.2 million domestic visitors. 1 Restrictions introduced by the Vietnamese authorities on international flights starting in March 2020 severely affected the city’s economy. The late-July– August COVID-19 outbreak in Da Nang aborted the domestic tourist season, with the authorities taking swift action to lock down the city for about three weeks to quell community infections (figure III.1 and figure III.2). This effort was successful, but tourism and services did not recover for the year, especially as Vietnam’s central region was also deluged by five tropical storms in October 2020. Figure III.1 Mobility trends Figure III.2 Da Nang mobility trends compared to % change compared to baseline in the period Hanoi and Ho Chi Minh City Jan 3 - Feb 6, 2020 Source: Google community mobility data and COVID-19 Observatory data; https://share.streamlit.io/mahamfkhan/mobility-tracker/main/streamlit.py. The impact of the COVID-19 crisis on subnational public finance: the case of Da Nang City 13 Da Nang is highly reliant on tourism compared to other major Vietnamese cities. Figure III.4 shows how Da Nang fared compared to two other major cities and the national economy during 2020. Hanoi and Ho Chi Minh City both managed to grow, most likely given the different structure of their economy and sources of growth. Hanoi, like any capital, tends to be less vulnerable to shocks given that it hosts the national political and administrative activities and Ho Chi Minh City is the business heart of the country. 2 In Da Nang, the services sector, which accounted for about 65 percent of the city’s RGDP pre-pandemic, fell an estimated 8.2 percent, which contributed more than 5 percentage points to the contraction of its RGDP growth rate in 2020. Sales of accommodation and catering services fell by 50.7 percent and 28.0 percent, respectively. Sales of travelling services were only 26.7 percent of the 2019 level. GENERAL FISCAL TRENDS Da Nang’s finances have changed structurally in the past few years, with a focus on fiscal consolidation and paying off debt. The city ran primary fiscal surpluses of about 4 to 6 percent of RGDP between 2016 and 2019 and reduced total debt from 4 percent of RGDP to less than 1 percent in the same period (figure III.5). In effect, the only debt held by Da Nang is official development assistance debt, received through on-lending associated with development projects. While the city has in the past launched city bonds, city authorities do not plan to rely on such borrowing in the near future. Figure III.3. Da Nang RGDP growth, Figure III.4. Economic growth in Vietnam and 2016–20 (%) its major cities in 2020 10 15 10 5 5 0 -5 0 -10 -15 -5 -20 Vietnam Hai Phong Ha Noi Can Tho Da Nang Ho Chi Minh City -10 -15 2016 2017 2018 2019 2020 Sources: General Statistical Office; and Provincial Statistical Offices in Da Nang, Hai Phong, Ha Noi, Ho Chi Minh City, and Can Tho. 1. http://news.chinhphu.vn/Home/Da-Nang-strives-to-welcome-98-million-tourists-next-year/201912/38381.vgp. 2. Theo báo cáo tình hình kinh tế xã hội năm 2020 của Đà Nẵng, do Cục Thống kê Đà Nẵng ban hành, thành phố là một trong năm địa phương bị tăng trưởng âm năm 2020. Bốn địa phương trong đó - Khánh Hòa (-10,52%), Đà Nẵng (-9,77%), Quảng Nam (-6,98%) và Quảng Ngãi (-1,02%) - đều nằm ở duyên hải nam trung bộ và một địa phương - Bà Rịa-Vũng Tàu (-4,91%) - nằm tại miền đông nam bộ. 14 Note III This fiscal consolidation was achieved through reducing expenditures and despite a steady fall in total revenues as a share of RGDP. Total revenues (excluding targeted transfers from the central government) fell from 17.4 percent of RGDP in 2016 to 15.1 in 2019 (figure III.6). Interestingly, tax revenues increased from VND 9.1 billion in 2017 to VND 12.2 billion in 2019, signaling a strong economy, but capital revenues dipped in 2019, leading to a falling total revenue-to-RGDP ratio. The city reduced expenditures from about 14 percent of RGDP in 2016–17 to about 12 percent in 2018-19 (figure III.7). The COVID-19 shock reversed the fiscal consolidation efforts, as the fiscal space deteriorated in 2020 due to lower revenue collection and higher expenditure caused by the pandemic. The city registered a 0.4 percent fiscal deficit. Total revenue was 15.8 percent lower in 2020 than in 2019, as economic activities slowed because of measures to contain the spread of the coronavirus and the government temporarily granted tax incentives to support businesses and households (figure III.8). Expenditures rose by about 26 percent (from 12.2 of RGDP in 2019 to 17.0 in 2020) to contain the spread of the coronavirus, provide financial support to households, and stimulate the city’s economy (figure III.9). Figure III.5. Key fiscal indicators, 2016–20 Panel A Panel B Primary fiscal balance (% of RGDP) Budget balance (% of RGDP) 7 20 6 5 10 4 0 3 2 -10 1 0 -20 -1 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Total revenue Total expenditure Overall fiscal balance Panel C Panel D Total debt (end of period) (% RGDP) Total debt service payments (% of total revenue) 5 14 12 4 10 3 8 2 6 4 1 2 0 0 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Source: World Bank staff calculations based on Da Nang Department of Finance data. Note: total revenue includes inter-governmental transfers. The impact of the COVID-19 crisis on subnational public finance: the case of Da Nang City 15 Figure III.6. Da Nang total revenue as share of Figure III.7. Da Nang expenditure as share of RGDP (% RGDP) RGDP (% RGDP) 20 20 15 15 10 10 5 5 0 0 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Sources: World Bank staff calculations based on Da Nang Department of Finance data. Note: Revenue data are exclusive of central government transfers. Figure III.8. Da Nang total revenue and its growth Figure III.9. Da Nang total expenditure and its growth 20 20 30 60 10 10 20 40 0 0 10 20 -10 -10 0 0 -20 -20 -10 -20 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Trillion VND (LHS) % change (RHS) Trillion VND (LHS) % change (RHS) Source: World Bank staff calculations based on Da Nang Department of Finance data. Note: Revenue data are exclusive of central government transfers. COMPOSITION OF REVENUES, EXPENDITURES, AND IMPACT OF THE COVID-19 SHOCK While tax revenues are the main income source of the city, non-tax revenues contribute substantially to overall revenues. On average, tax revenues constituted about two-thirds of total revenues during 2016–19, while capital revenues (revenues collected from long-term land rental) constituted 22.2 percent, and fees, charges, and land rents brought in another 6.8 percent (figure III.10). Grant resources have diminished, reflecting the country’s graduation from International Development Association (IDA) assistance in 2016, while other subnational resources still contributed an average of about 4 percent, on average, of total revenues during 2016–19. The sharp fall in tax revenue collection between 2016 and 2017 was due to a change in the revenue sharing formula at the onset of the 2016–20 stability period (figure III.12). This revenue sharing 16 Note III formula allows Da Nang to retain a portion of collected federal taxes. Da Nang’s share of retained tax revenue fell from 85 percent to 68 percent of collected revenues. Tax revenues had started to increase again in 2019 but were affected by the April nationwide and July citywide lockdowns associated with COVID-19. Three main points of concern arise from the profile of revenue collection in Da Nang. First, the share of capital revenues remains high. In the past five years, every time tax revenues have fallen, the city has resorted to selling land-use rights to reach the targeted yearly values. Given that land is finite and an asset for the city, such practices and short-term gains are reducing the city’s long-term ability to manage and optimize the use of its assets to ensure the most productive revenue earning capacities. Second, fees and charges, the revenue category that could provide a steady flow of local income to the city, is very small (figure III.10), suggesting this is an area that city officials can explore to increase revenues. Finally, the revenue flows are relatively volatile across the years, suggesting potential instability of revenue sources year on year (figure III.11 and figures III.14 and III.15). Figure III.10.Da Nang revenue composition, Figure III.11. Growth of major revenue sources (%) 2016–20 (% total revenue) 120 100% 80 80% 40 60% 0 40% 20% -40 0% -80 2016 2017 2018 2019 2020 2017 2018 2019 2020 Source: World Bank calculations based on Da Nang Department of Finance data. Figure III.12. Revenue composition (% of RGDP) Figure III.13. Tax composition (% of RGDP) 14 15 12 10 10 8 6 5 4 2 0 2016 2017 2018 2019 2020 0 2016 2017 2018 2019 2020 Nguồn: Tính toán của cán bộ Ngân hàng Thế giới dựa trên số liệu của Sở Tài chính Đà Nẵng Ghi chú: TNCN = thu nhập cá nhân; TNDN = thu nhập doanh nghiệp; GTGT = giá trị gia tăng; TTĐB = tiêu thụ đặc biệt The impact of the COVID-19 crisis on subnational public finance: the case of Da Nang City 17 Figure III.14. Contribution to revenue change by Figure III.15. Contribution to revenue change by tax sources (percentage points) lines (percentage points) 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 2017 2018 2019 2020 2017 2018 2019 2020 Source: World Bank calculations based on Da Nang Department of Finance data. IMPACT OF COVID-19 SHOCK ON REVENUES The impact of COVID-19 on total revenues was substantial. Total revenues fell sharply in the first nine months, particularly in the third quarter, but rebounded in the last quarter of 2020 (figure III.16). With a complete lockdown to suppress the outbreak of coronavirus from the end of July to September, when Da Nang was the epicenter of a localized COVID-19 outbreak, third quarter total revenue dropped by about 35 percent compared to the second quarter, and by 29.4 percent compared to third quarter of 2019. Total revenue decreased 22.2 percent in the first three quarters of 2020 compared to the same period of 2019. A substantial decrease in taxes drove the total revenue fall, despite a sharp rise in revenue from the assignment of land-use rights. Total tax revenue, which accounts for about two-thirds of pre- pandemic total revenue, fell by 28.3 percent in 2020, thereby contributing 20.6 percentage points to the decline in total revenue (figure III.11 and figure III.14). The corporate income tax, value-added tax, personal income tax, and registration tax are among the most severely affected (figure III.13 and figure III.15). Lower taxes can be explained by the combination of tax incentives provided by the government to support households and businesses during the crisis, and the sharp slowdown of economic activity due to necessary measures to control the pandemic, particularly in the first three quarters of 2020. The city authorities managed to mitigate the fall in total revenues during the last quarter of 2020. Total revenue grew 45 percent relative to the third quarter, and 7.0 percent compared to the fourth quarter of 2019. This reversal was driven by three main factors. First, with the successful suppression of the outbreak by the end of September, economic activity resumed and the city economy started to recover, contributing to taxes. Second, many COVID-related tax and land rent deferrals to support businesses expired in December 2020, so tax revenue in the fourth quarter was 32.3 percent higher than in the third quarter, (though it was still 15.5 percent lower than in the same period in 2019). Finally, anticipating lower tax revenues in the wake of the COVID-19 pandemic, the city government 18 Note III focused on increasing non-tax revenues. This included resolving issues related to the assignment of land-use rights and accelerated the collection of capital revenues. Revenues from the assignment of land-use rights grew 60 percent compared to the third quarter of 2020 and quadrupled compared to the fourth quarter of 2019. Overall, revenues from the assignment of land-use rights 3 contributed 7.3 percentage points to total revenue in 2020, partly offsetting the 20.6 percentage point decline in tax revenues (figure III.14). Figure III.16. Da Nang total revenue, 2017–20 Source: World Bank calculations based on Da Nang Department of Finance data. Note: Excluding targeted transfers from the central government. On the expenditure side, in line with the fiscal consolidation objectives, total expenditures were curtailed sharply between 2017 and 2019. Total expenditures fell from 14.5 percent of RGDP to 12.2 percent in three years. These cuts were achieved through savings across most functions, with economic affairs and administration experiencing the largest cuts (figure III.17). Cuts in recurrent expenditures mirror the general cuts across the same main functional categories (figure III.18). This is associated with the civil service wage bill falling from 3.4 percent of RGDP in 2016 to 2.5 percent of RGDP in 2019. Surprisingly, expenditures on social protection, health, and education functions also fell over this period. The reduction in social sector expenditures is of interest as it happened during a period when the city’s economy was booming, and it was growing both in geographic size and population. One reason for the reduction may be the improved efficiency of expenditures. Public investment averaged 5.5 percent of RGDP during 2016–19 (figure III.19). This performance may be related to the difficulties in implementation associated with the stricter enforcement introduced by the 2014 national investment law. Further assessment of the investment expenditures is not possible due to a lack of detailed information on investment categorized under “economic affairs”, although a large share of it was likely spent on transport infrastructure (figure III.20). 3. Capital revenues include collection of revenues from the assignment of land-use rights and the sale of state-owned houses, though this second component is small. The impact of the COVID-19 crisis on subnational public finance: the case of Da Nang City 19 Figure III.17. Composition of total expenditure Figure III.18. Composition of recurrent expenditure by function (% of RGDP) by function (% of RGDP) 18 10 16 14 8 12 6 10 8 4 6 4 2 2 0 0 2017 2018 2019 2020 2016 2017 2018 2019 2020 Figure III.19. Da Nang public investment, Figure III.20. Da Nang public investment in 2016–20 (% RGDP) 2016–20 by function (% RGDP) 10 9 8 8 7 6 6 5 4 4 2 3 0 2 2016 2017 2018 2019 2020 1 0 2017 2018 2019 2020 Source: World Bank staff calculations based on Da Nang Department of Finance data. IMPACT OF THE COVID-19 SHOCK ON EXPENDITURES Health and social protection expenditures surged in 2020 as resources were mobilized to contain the COVID-19 outbreak and provide support to households. Health expenditures increased by 58.5 percent, accounting for 7.9 percent of total expenditure and 1.3 percent of RGDP in 2020. Higher spending was needed to undertake testing, quarantine people in designated places, and provide treatment to infected cases. In addition, the city provided two rounds of financial assistance to support households in response to the COVID-19 pandemic, with a total value of over VND 303 billion (about 0.3 percent of its RGDP in 2020) (box III.1 and table III.1). These two rounds coincided with the April national lockdown period and the August Da Nang COVID-19 outbreak and lockdown. Nearly half of the package value was directed to 20 Note III workers in informal sectors, who are vulnerable to the adverse effects of the crisis but are not covered by formal social security programs. Overall, total expenditure on social protection rose by 45.7 percent in 2020 (figure III.21), accounting for 0.8 percent of RGDP. Box III.1. Da Nang support packages during the COVID-19 shock In response to the COVID-19 pandemic, the city of Da Nang provided two rounds of income support with expanded coverage of beneficiaries. The size of the two packages was estimated at over VND 300 billion, about 84 percent of which was funded by the city’s own budget. • During the first national lockdown in April 2020, Da Nang followed the national policy and launched the first social protection package to financially support people affected by COVID-19 under Resolution 42/ NQ-CP. In addition to the target beneficiaries stipulated in the resolution, it also expanded the coverage of the package to include more workers in informal services sectors (including barbers, houseworkers, teachers, and employees in nonpublic schools without labor contracts or temporarily postponed contracts) and other vulnerable groups, and financed additional spending with its own budget. • During the second wave of the coronavirus, in August 2020, when the city was the epicenter, the city implemented its second round of income support by extending the first package by two months (August and September 2020) to assist its residents through the crisis. Table III.1. Disbursement of the COVID-19 income support package in Da Nang, 2020 Income Support Financing No. beneficiaries Payment Central budget Da Nang budget (thousand person) (Billion VND) (Billion VND) (Billion VND) Total ― 303.8 47.8 256.0 First round 163.1 168.5 47.8 120.7 National Resolution 42/NQ-CP 154.7 159.4 47.8 111.6 Expansion by the city 8.5 9.0 0.0 9.0 Second round 162.3 135.3 0.0 135.3 Source: World Bank staff calculations based on Da Nang Department of Finance data. Note: Beneficiaries across two rounds may be identical. Implemented under Resolution 42/NQ-CP dated 09/4/2020 (two rounds). Public investment was also increased to stimulate the economy during the crisis. Overall, public investment increased by 45 percent in 2020 compared to 2019 4 (figure III.22). This increase is mainly attributable to higher planned investment, rather than faster execution. The People’s Council approved 14.3 trillion VND 5 for the city’s 2020 total public investment plan. This amount was 87 percent higher than in 2019 and 87 percent higher than the initial allocation from the central 4. This is based on estimates of total public investments provided by Da Nang Department of Finance on 28 May 2021. According to the latest data published by MOF, Danang’s disbursed public investment in 2020 was 52.4 percent higher than in 2019. 5. According to the latest data from MOF, total investment plan for 2020 in Da Nang reached 15.2 trillion VND, including additional assignment from the central government during the year. The impact of the COVID-19 crisis on subnational public finance: the case of Da Nang City 21 government. This significantly higher planned investment was financed by excess revenues collected by the city in previous years. Most of this investment is listed in the catch-all ‘economic affairs’ category, which increased over two percentage points from 2.9 percent of RGDP in 2019 to 5.2 percent of RGDP in 2020. In addition, investment in health increased significantly (from 0.3 percent to 0.5 percent of RGDP), while investment in science and technology doubled as a percent of RGDP (from 0.3 to 0.6 percent of RGDP). As of 31 January 2021, according to MOF, the city managed to disburse only 60 percent of its total planned investments for 2020. This disbursement rate was lower than 75.1 percent in 2019 and the lowest among all provinces in the country in 2020. Slow progress in land clearance was one of the major bottlenecks. As of 30 October 2020, the city disbursed only 23 percent of funds allocated to land clearance. 6 Also, disbursement slowed in the second and third quarters due to the two lockdowns to suppress the coronavirus outbreak. It nevertheless gathered pace in the last quarter of 2020 even though the city was hit by a series of tropical storms and associated severe floods in October. Figure III.21. Recurrent expenditures by functions (%, y/y) 80 60 40 20 0 -20 -40 2017 2018 2019 2020 Source: World Bank staff calculations based on Da Nang Department of Finance data. 6. The report on the implementation of the public investment plan for 2020 and the public investment plan for 2021 (No. 329/BC-UBND) dated 20 November 2020. 22 Note III Figure III.22. Expenditure growth by economic classification (%, y/y) Source: World Bank staff calculations based on Da Nang Department of Finance data. Overall, on the fiscal front, the city was able to cope with the COVID-19 pandemic without having to increase its borrowing significantly in 2020, thanks to the prudent fiscal management it pursued before the pandemic. Following the fiscal consolidation of the national government, the city’s government pursued a contractionary fiscal policy, with four consecutive years of budget surpluses during 2016–19. These surpluses allowed it to pay back public debt, which steadily fell in the same period, and the city entered the crisis with only VND 680 billion of debt, or the equivalent of 0.6 percent of its RGDP at the end of 2019. As a result, in the wake of the COVID-19 pandemic, the city had the fiscal space to run a primary budget deficit of 0.4 percent of RGDP, with net borrowing of only VND 574 billion (0.57 percent of its RGDP) and marginal debt service payment in 2020 (0.3 percent of total revenue). Nevertheless, the pandemic has reduced the city’s fiscal space, which needs to be watched. With the services sector playing an important role, the city economy may not recover from the pandemic at the same pace as the rest of the country. In the short term, the city government may need to maintain high spending to support the economic recovery from the localized recession. At the same time, revenues from taxes may not recover to their pre-pandemic levels, while one-time sales of land-use rights will start to fall as available land for sale becomes limited. Consequently, depending on the pace of national and international vaccinations and the easing of COVID- 19-related restrictions on international flights that would help its service-oriented economy to recover, Da Nang could face a fiscal deficit in the next two to three years, along with rising public debt and higher debt services payments. The path to economic recovery is still uncertain, with attendant impact on fiscal outcomes and stance. Broadly, an upside scenario would see the city’s economy recovering in 2022 onward, with the opening of national borders and the return of some international tourists. This will help boost revenue inflows and reduce crisis-related expenditures, allowing the city to return the budget to a fiscally sustainable path once the city economy is back on its feet and growth The impact of the COVID-19 crisis on subnational public finance: the case of Da Nang City 23 is firmed up and broad-based. In a downside scenario, in which COVID-19 impacts affect the city into 2022, economic recovery may be slower and only firm up in 2023. The city will need to continue supporting affected businesses and households in the meantime, which will affect its budget. The city may wish to resume fiscal consolidation only once economic recovery is well established to ensure that any contractionary fiscal policy (such as fee increases or expenditure cuts) would not affect growth dynamics or the welfare of its citizens. RECOMMENDATIONS ON REVENUE POLICIES: In the short term, given the continuing impact of the COVID shock on the city, attempting to increase sources or volumes of revenue in an inefficient manner would not be recommended as it could hamper economic recovery. This includes resorting to sale of land user rights as a rush to assign these may address short term revenue needs but affect longer term fiscal sustainability of the city. Improving collections through efficient administration or collecting what is due need not be inconsistent with supporting economic activity. In the medium term, there is need to secure new sources of revenue collection, with an eye to increasing the stability of revenue flows. Focus should be placed on identifying non-tax revenues as part of a more strategic approach to revenue and budget management. This can be achieved through development and adoption of a fiscal strategy for the new stability period 2021-2025. More specifically: l Focus should be placed on increasing non-tax revenues such as local fees, and charges and user fees, either through better implementation, raised rates or introduction of new fees or charges. The City authorities should also consider advocating for the adoption of property taxes to the National authorities. The adoption of a property tax needs to be done at the national level, but the revenues will be fully retained at the subnational level, providing a steady and increasing source of revenue for the City budget over the longer term. The successful implementation of any future property tax would entail building revenue administration capacity. l Seek to optimize land value capture and improve return to public assets. This would first entail developing an integrated database of public assets, which would help the City authorities have a good overview of what they the city has and what its value is. This would then permit the authorities to decide on the use of such assets, including the assignment of land user rights, with a more strategic approach. The World Bank-SECO Subnational PFM TA can support elaboration on revenue policies as part of its pillar on fiscal strategy. ON EXPENDITURE POLICIES: Continued efficiency gains need to be explored. More specifically, allocative efficiency can be further enhanced by aligning budget planning more closely with the development goals 24 Note III of the City over the medium term. This includes development of the high tech and tourism sectors as main drivers of economic growth while ensuring a livable city that is based on the principles of green and resilient urban development. This strategic view would suggest more funding to: l Vocational training for services sector (hospitality) and high-tech industries (technical skills). l Infrastructure that city development that ensures resilience to global climate change. Operational efficiency can be further improved through ensuring better public service delivery. Improvements in allocative and operational efficiency of public expenditures are to be supported by the World Bank – SECO Subnational PFM TA. ON FISCAL AND DEBT POLICY: Given the shortfall in revenues and increase in expenditures triggered by the COVID- crisis, the authorities may wish to consider a medium-term fiscal/debt strategy and management framework that would rely on a variety of financing options. While using accumulated cash reserves is helpful in the short term, acquiring domestic or ODA debt may be a more sustainable option for the city than resorting to land rights assignments. Additionally, development of a fiscal strategy will help City authorities incorporate a more active fiscal risks management (disaster risk management). The impact of the COVID-19 crisis on subnational public finance: the case of Da Nang City 25 ANNEX Figure III.23. Da Nang total revenue, 2017–20 6 40 30 5 20 4 10 3 0 -10 2 -20 1 -30 0 -40 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2017 2018 2019 2020 % change (y/y) (RHS) Trillion VND (LHS) Source: World Bank staff calculations based on Da Nang Department of Finance data. Note: Excluding targeted transfers from the central government. Figure III.24. Public investment in Da Nang, 2016–20 Source: World Bank staff calculations based on Da Nang Department of Finance data. Note: LHS = left-hand scale; m/m = month-on-month; RHS = right-hand scale; y/y = year over year. 26 Note III Figure III.25. Overall expenditure growths by function (%) 150 100 50 0 -50 2018 2019 2020 28 Note III 63 Ly Thai To, Ha Noi Tel: (84-24) 3934 6600 Fax: (84-24) 39350752 Email: vietnam@worldbank.org Website: www.worldbank.org.vn