By Jason Folkmanis and Nguyen Dieu Tu Uyen

Japan, the biggest country donor to Vietnam, suspended development aid to the Southeast Asian nation, saying stronger measures must be taken to fight corruption.

At an annual meeting concluding today of countries and agencies that give Vietnam so-called official development assistance, Japan did not pledge any low-interest loans, said Vietnam's Minister of Planning and Investment Vo Hong Phuc. Japan also suspended disbursement on previous commitments, Phuc said in an interview.

Annual statements by the so-called Consultative Group on Vietnam, whose list of members also includes the Asian Development Bank and the World Bank, have regularly cited corruption as a source of concern. Pledges of low-interest loans and grants have increased annually since 2002, amid Vietnamese economic growth in excess of 7 percent each year and rising foreign investment.

Effective measures against corruption are needed "to regain the support from the Japanese public for further assistance to Vietnam," Mitsuo Sakaba, Japan's ambassador to Vietnam, said yesterday at the meeting in Hanoi. "Japan would like to urge the Vietnamese government to make continuous efforts to prevent the recurrence of corruption."

Sakaba cited a "bribery case by a Japanese firm in relation to Japan's loan assistance project in Vietnam," without providing details.

The Ho Chi Minh City People's Committee last month suspended a city transportation official pending investigation into allegations of corruption involving a Japanese consulting company as part of a $581 million highway project, according to the Vietnamese government. The Japan Bank for International Cooperation was to fund two-thirds of the cost.

'Deeply Resented'

Corruption hinders Vietnam's attempts to attract foreign investment, Fitch Ratings said in February. Low-level corruption is widespread in Vietnam and "deeply resented" by the Vietnamese population, the World Bank said in a report last year.

"The fight against corruption should be based on zero- tolerance," Swedish Ambassador to Vietnam Rolf Bergman said in a statement today. "Further actions must now be taken."

Overall, low-interest loans and grants pledged to Vietnam by the consultative group fell to $5 billion from the $5.4 billion figure announced a year ago, the first decline since 2001. The group has met annually since 1993 to assess the state of and offer financial assistance for Vietnam's transition to a market- based economy.

Japan consistently led the table at past meetings, pledging $1.1 billion at last year's meeting, according to the Vietnamese government's web site. This year, France's $281 million led the list of countries offering assistance, followed by South Korea's $269 million and Germany's $186 million.

The World Bank pledged $1.66 billion while the ADB said it would provide $1.57 billion, according to a World Bank release sent today. Bloomberg, 05/12/08.