Cablegate: Vietnam: Transparency of Budgets/Military Spending

This record is a partial extract of the original cable. The full text of the original cable is not available.






E.O. 12958: N/A

REF: STATE 239929

1. Summary: The transparency of Vietnam's budget and audit
process has improved since the last reporting on this issue.
The Law on State Budget effective January 2004 made
significant changes including giving the National Assembly
(NA) final approval over the budget and its allocation to all
GVN entities, requiring disclosure of budget data and
charging the Ministry of Finance's (MOF) inspectorate with
verifying compliance. Another mechanism of civilian
oversight of State budget settlements is the State Audit of
Vietnam (SAV) whose independence the NA just moved to enhance
by shifting SAV reporting to the NA from the government in a
new law that should be passed in the May legislative session.
Based on these procedures, civilian authorities review
receipts and expenditures funding military and security
activities. From this information, Embassy considers Section
576 (A) of the Foreign Operations Act of 1997 inapplicable in
the case of Vietnam. End Summary.

State budget development and approval process

2. Decree 60 issued in June 2003 governs the budget process
for all central government ministries and agencies, including
the Ministries of Defense (MOD) and Public Security (MPS).
This process, which post verified with MOF's Department of
the State Budget, is as follows: Each year, by May 31, the
Prime Minister (PM) issues a directive on budget estimates
based on the Government's socio-economic development
objectives. Before June 10, MOF and the Ministry of Planning
and Investment (MPI) issue circulars guiding the development
of budget estimates to include projected overall figures for
all Government agencies. Based on this directive and MOF and
MPI's circulars, each agency, including MOD and MPS, must
negotiate and prepare a budget estimate plan for MOF and MPI.
MOF and MPI compile the national budget and budget allocation
plan for submission to the Government. The PM then
authorizes MOF to report and justify the plan to seek NA
approval. Based on the NA's resolutions on the state budget
estimate and budget allocation plan, MOF submits the final
approved plan to the PM for assignment to each government
agency by November 20.

3. In the national and local budgets, productive development
objectives are prioritized over non-productive objectives.
The law on state budget lists development investment
(including construction of infrastructure, investment and
support for SOEs, addition to the State reserve fund) as the
first budget expenditure objective. Expenditures for defense
and security, described in Articles 31 and 33, are part of
regular expenditure and listed after expenditure for
education and training, health care, social affairs and
culture and information.

4. Regarding off-budget items, Deputy Director To Nguyen of
MOF's Department of the State Budget said that according to
law, all ministries must report every item for both revenues
and expenditures, including MOD and MPS. On unallocated or
discretionary spending in the budget, he stressed that every
ministry and agency must fully allocate its proposed budget.
Only the Office of the Government (OOG) and provincial
governments have an unallocated portion generally between two
and five percent.

5. According to the law, once the budget has been approved,
in case of major changes that require an overall budget
adjustment, the Government shall estimate the budget
adjustment and submit to the NA for a decision at its next
session. For urgent national defense or security needs, or if
an adjustment of a ministry or agency's budget that does not
cause changes to the overall budget is required, the
Government must seek a decision from the NA's Standing
Committee and report to the NA at its next session.

New Law on State Budget

6. A new State Budget Law was passed in December of 2002 and
took effect January 1, 2004, replacing Vietnam's first Law on
State Budget passed in 1996. According to Mr. Nguyen, the
major change that took effect in 2004 is a decentralization
of budget authority to the local level. One significant
aspect of the New Law on State Budget is a strengthening of
the public disclosure provisions in Article 13. Since 1996
the State Budget Law has required the publication of both the
National Budget and the audit result of the state budget.
The breakdown of MOD and MPS numbers in the approved budget
settlements for 2003 and in the budget estimate for 2005 will
be published for the first time under the new State Budget
Law. In the past, these numbers were published only as an
overall figure under National Defense and Security. The law
requires that budget settlements must be published within 18
months and budget estimates must be published within 60 days.
The budget settlement for 2003 is scheduled to be approved by
the NA in April or May of 2005. The budget estimate for 2005
has been passed by the National Assembly and will be put
online by mid January or February of 2005.

Audit of State Budget

7. The State Audit of Vietnam (SAV) was established in 1994
as a civilian authority attached to the Government. The Law
on State Budget states that SAV has authority to audit and
certify: the accuracy and lawfulness of the settlements of
State budget at various levels, the final settlement of the
state budget, the final settlement and financial reports of
agencies or organizations using State budget, and general
compliance with the law in managing and using the State
budget and public property. The law also confirms that when
performing its tasks SAV is independent and is held
responsible before the law for its auditing conclusions. The
auditing of budget settlements must be carried out each year
before the National Assembly and the local People's Councils
ratify the new budget. According to Mr. Nguyen of MOF, SAV
has been an effective instrument especially in inspections
and in identifying violations by ministries.

8. Among the SAV's tasks and powers are to promulgate,
guide and inspect the implementation of professional auditing
criteria and procedures. The SAV must also supply the
auditing results to State agencies and publicize the annual
audit report. SAV has the right to request any audited
agency or organization to provide their annual settlements or
financial reports including vouchers, accounting books and
relevant documents necessary for the audit. In addition to
its duties to inspect and settle complaints and
denunciations, combat corruption, negative acts and handle
violations in the auditing activities, SAV should also
propose appropriate amendments and supplements of mechanisms,
policies and regulations to the Government, the PM and the
Sate management agencies.

9. SAV has functional auditing departments including the
State Budget Audit, Investment - Project Audit, SOEs Audit,
Financial Institutions Audit, and Special Programs Audit. It
also has five regional offices located in Hanoi, Nghe An, Da
Nang, Ho Chi Minh City and Can Tho. The PM currently
appoints and dismisses the State Auditor General and State
Auditor Deputy Generals. However, the new draft law on state
audit further strengthens independent civilian oversight by
proposing that the State Auditor General and State Auditor
Deputy Generals should instead be appointed or dismissed by
the NA.

Draft Law on SAV

10. While there were no significant changes in the new State
Budget Law regarding SAV, a new draft law on the State Audit
is currently awaiting a decision. The key elements being
debated are whether SAV should be attached to the Government
or should report to the NA and, as mentioned above, who has
the authority to assign the position of Chief Auditor.
According to the local press, the NA has voted to make SAV an
agency attached to it, rather than to the Government, to
ensure its independence. The NA Information and Press
Department confirmed that a majority had voted to change the
draft law to have the SAV report to the NA rather than to the
OOG. As a result, the draft law will need to be revised by
SAV and resubmitted to the NA. A review of the revised draft
law on SAV is already proposed for the official agenda for
the NA's May 2005 session. In addition to the annual audit,
OOG currently has the authority to request ad hoc audits of
specific agencies or ministries. Under the new law on state
audit currently being revised, the NA would be able to call
for such audits.

MOF budget inspection - Financial Inspectorate
--------------------------------------------- -

11. The Law on State Budget stipulates that besides SAV,
MOF's Financial Inspectorate also is responsible for
verifying compliance with the state budget law and checking
the management of state properties by organizations and
individuals, including the MOD and MPS. When performing its
tasks, the Financial Inspectorate can request relevant
documents from organizations or agencies being inspected. If
a violation is found, the Finance Inspector has the right to
propose that competent agencies recover the amounts in
violation of the State budget. Depending on the nature and
the seriousness of the violation, the Financial Inspector can
either deal with or request that the relevant State agency or
ministry deal with the violation. Reflecting the importance
and magnitude of its duties, the Financial Inspectorate is
the largest department in MOF. Mr. Nguyen of the Department
of the State Budget confirmed that this internal verification
and inspection process has received increasing attention and
MOF has promulgated a decision that directs each ministry to
also set up an internal audit process.

12. The World Bank and International Monetary Fund
representatives both said that Vietnam had made great strides
in budget transparency in recent years. Once the new audit
law is in place, the system will be further improved.

13. Comment: Section 576 (A) of the Foreign Operations Act
of 1997 requires the U.S. executive directors of
international financing institutions to vote against lending
to countries not having in place functioning systems for
reporting to civilian authorities financial audits or defense
and security activities. The State budget estimate process
and public disclosure provisions in Vietnam's Law on State
Budget, the Financial Inspectorate receipts and expenditures
verification activities of MOF, and current State Audit of
Vietnam appear to indicate that receipts and expenditures
funding military and security activities are reviewed by and
reported to civilian authorities in Vietnam. The new State
Budget Law that took effect in January 2004 strengthens
public reporting requirements, particularly in the case of
defense and security spending. In addition, a new draft law
on state audit, currently under revision, further increases
civilian oversight over the state audit agency and its
practices. Based on this information, Embassy considers
Section 576 (A) of the Foreign Operations Act of 1997
inapplicable in the case of Vietnam. End Comment.


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