HANOI – Vietnam's economic growth will slow slightly to 5.1 percent this year, a government report said, but the central bank will maintain a prudent and flexible policy on interest rates next year as inflation remains a concern.

The estimate for GDP this year was previously 5.2 percent, and that target was lowered from 6.0-6.5 percent earlier in the year. The economy expanded 5.89 percent in 2011.

The country's annual inflation is forecast at 7.5 percent this year, while lending rates have eased and foreign currency reserves have risen to a level equivalent to 12 weeks of imports, the Planning and Investment Ministry said in a report.

Early this year the central bank tightened lending to help control inflation, making it difficult for domestic firms to access fresh funds. Lending only eased from the second half of the year when Hanoi projected a stabilising inflation rate.

Vietnam's consumer price inflation stood at 18.58 percent in 2011, the highest since 2008 when prices jumped 22.97 percent.

The International Monetary Fund said "persistently high core inflation with weak demand conditions may still indicate high inflation expectation", while reform of the banking system, now facing high bad debt and slow lending, was slower than expected.

"There is an urgent need to remedy major structural weaknesses that have become critical to the macro-economy," Sanjay Kalra, IMF Resident Representative in Vietnam, said in a report, a copy of which was released before a Vietnam donors' meeting in Hanoi.

"Given the weaker growth outlook and the need for banking sector reform and consolidation through 2015, NPLs are likely to increase further," the report said, referring to non-performing loans.

The State Bank of Vietnam is working on a plan to manage bad debts, Governor Nguyen Van Binh told donors and government officials at the meeting, without providing a timeframe.

The central bank will continue its prudent and flexible policy on regulating interest rates, keep control on lending growth for each bank in line with the inflation target, while fresh loans should go to agriculture, production of export goods and job creation, Binh said.

It will also continue to restructure banks and allow "domestic and foreign investors to participate in the process of banking reform," Binh said.

In November Prime Minister Nguyen Tan Dung said Vietnam would take firm measures aimed at cutting the banking system's non-performing loans to 3-4 percent of total lending by the end of 2015 from 8.82 percent at present.

The IMF urged the Vietnamese government to "force existing shareholders to take losses before receiving new capital injection, and dispose of bad debts," most of which were on the books of state-owned enterprises (SOEs).

The SOEs' true financial conditions must be disclosed and the government should take steps to improve their operation and governance structure, the IMF report said.

In October, Dung made a rare apology in parliament for problems gripping the economy and called for the Communist Party to work with the country at large to implement reforms more quickly and ensure order in its finances.

He had forecast annual economic growth of 5.2 percent and an inflation rate of 8 percent.

The World Bank has forecast Vietnam's economy to slow to 5.2 percent this year and pick up in 2013 to 5.5 percent, on par with a government target.

Later on Monday, donors are expected to announce their aid packages to enable Vietnam's reforms and development for 2013.

Their pledges for Vietnam in 2012 shrank to US$7.39 billion from $7.9 billion the previous year.