The French Development Agency (AFD) announced a $100 million concessional credit line to the Bank of Investment and Development in Vietnam (BDIV) and technical assistance to help establish green financing in Vietnam. As Vietnam continues its rapid development while disproportionately dealing with the adverse effects of environmental challenges, it is searching to develop green financing to underpin a sustainable, efficient renewable energy system. The BDIV plays a crucial role in that transition and the assistance from the AFD is a significant first step in the transition to green financing in Vietnam.
Development in Vietnam
In 1986, a set of economic reforms would fundamentally shift the role of markets in Vietnam. By encouraging private ownership, overturning its policy on forced collective farming and recognizing private land rights, the Doi Moi reforms provided a central role for markets as the primary resource allocation mechanism.
The results have been astounding for economic development and poverty reduction in Vietnam. In the last three decades, the poverty rate reduced from 70% to 6%, and the GDP per capita increased by 2.7 times. In total, more than 45 million people were able to leave poverty. Today, Vietnam is the fastest-growing economy in Southeast Asia.
A component of this development was a shift away from an agriculture-based economy to a more industrial economy. In 1988, agriculture constituted 46% of the GDP. Fast forward to 2014, and agriculture as a share of the GDP had contracted to only 17%, while the service sector and industrial sector accounted for 44% and 39%, respectively.
Nevertheless, similar to other nations with experienced industrialization and remarkable growth and in a truncated period, Vietnam struggles to manage the environmental consequences. It logically flows as the more dynamic an economy becomes, the more energy it requires to power it. Likewise, the quicker the development, the more demand for energy will outpace the supply. Vietnam is no exception; on average, its energy demands increase by 10% every year.
Naturally, when demand rapidly outpaces supply, countries search for cheap, quick options to increase supply. Therefore, fossil fuels, a historically abundant and cheap energy source, have primarily fueled Vietnamese development. As of 2019, 84.7% of Vietnam’s energy came from fossil fuels, primarily in the form of coal (50.25%) but also in oil (25.92%) and gas (8.61%).
This Faustian pact with the cheaper, more abundant resources – along with other trappings of middle-income status – comes with environmental consequences. In 1989, Vietnam contributed 0.26 tons of carbon emissions per capita to the globe. By 2017, this number jumped to 1.93 tons. As a result of the severe air pollution, 50,000 people a year die. Although significant inroads have occurred, access to clean water in Vietnam remains a problem as 9,000 people die a year from polluted water.
In addition to medical costs, environmental deterioration has a profound economic cost. Air pollution causes a financial cost of around 5% of GDP per year.
As with most unintended consequences, the most impoverished bear the brunt of it. The most poverty-stricken members of society are the most exposed, susceptible and resource-poor to adapt to the deteriorating environment. However, as the U.N. noted that it also creates a “…vicious cycle, whereby initial inequality makes disadvantaged groups suffer disproportionate loss of their income and assets, resulting in greater subsequent inequality” that threatens the economic development Vietnam has achieved over the last three decades.
On the flip side then, the poor benefit the most from green financing. For example, some researchers investigated this connection by studying 25 Chinese provinces over 13 years and found a high correlation between the two variables. The group argues that through a strong absorption capacity, long industrial chains and a high degree of relevance, green financing has a “pulling effect on economic development and can effectively alleviate poverty.”
Vietnam has recognized this dynamic and has set out to reverse the trend. The government has made significant inroads in providing cleaner development through creating cleaner transportation infrastructure, safer water and shifting to renewables. However, Vietnam achieved these inroads through government financing. According to the Asian Development Bank Institute, to supply energy demand with renewable energy, 50% of total investment in renewable energy development must come from private green financing. Yet, due to a lack of capacity and infrastructure, Vietnam banks cannot get near the 50% number.
Nevertheless, the AFD concessional loan is a significant first step in establishing green financing in Vietnam. As noted, the AFD provided a $100 million concessional loan to BDIV. BDIV is one of the leading financial institutions in Vietnam. It has over 1,100 banks worldwide and assets totaling VND1.56 quadrillion to promote green financing. The credit line will also mark the first green finance fund AFD has set up in Vietnam. Notably, AFD and BDIV earmarked $366,000 of the loan for technical assistance to support the transition.
AFD is valuable and experienced. It has more than 90 projects worldwide worth over 2.3 billion Euros. In addition, it has experience supporting green development in various sectors such as transport, infrastructure, agriculture and energy.
The CEO of BDIV, Le Ngoc Lam, hinted at three critical takeaways for Vietnam and BDIV in particular. First, it will assist BDIV in improving its operational efficiency in financing Vietnam’s green development. Second, it will establish a partnership between BDIV and AFD for future green development loans or projects. Finally, it signals to international partners Vietnam’s willingness to participate in green development projects or financial partnerships.
Put another way, the loan provides significant financing, technical assistance and establishes a partnership that can lead to other green financing opportunities. Therefore, it is essential to establish green financing in Vietnam and, accordingly, sustaining its development and further alleviating poverty.
– Vincenzo Caporale
Photo: Wikipedia Commons