Figures released by the General Statistics Office in Hanoi showed that a pick-up in domestic demand - driven by a wave of new investment by state enterprises - helped the communist-ruled country to withstand an expected slowdown in previously strong export growth last year.

The economy also received a boost last year from a17 per cent rise in the number of foreign visitors.

Il Houng Lee, the International Monetary Fund's resident representative in Hanoi, said yesterday that the pace of growth was likely to continue in the coming year. "Given the momentum, I don't think the growth will be substantially slower this year than last year," he said.

But he warned that the government, which has been encouraging investment by state-owned enterprises, had little room to provide extra stimulus, while accelerating inflation also posed a risk to the business climate.

Inflation has been averaging about 8-9 per cent and was more than 8 per cent in December, well above the government's target forlast year of less than 6.5 per cent.

"Inflation has been picking up," he said. "If the government does not slow down, there may be overheating that could add uncertainty to the business environment."

Economic growth in Vietnam, which averaged about 7 per cent between 2000 and 2004, has been driven in recent years largely by surging exports, after the signing of a long-anticipated bilateral trade agreement with the US in 2001.

But the pace of Vietnam's export growth slowed this year, as rival China - which has joined the World Trade Organisation - was initially freed from quotas on its garment industry. This was damaging to Vietnam's garment exports.

However, aggressive inv-estment by state-owned enterprises helped to pick up the slack.

"The growth impetus that used to come from the export side was replaced by domestic demand, particularly investment," Mr Lee said.

Vietnam's export-oriented garment industry also rec-eived a boost later in the year when Europe and the US imposed safeguard measures on Chinese garment exports.

Vietnam had hoped to join the WTO in December but is still struggling to reach agreement with key trad-ing partners, including the US, on the terms of itsaccession.

By Amy Kazmin in Bangkok