IMF Concludes Article IV Consultation With The Philippines

by Ulrika Lomas, Tax-News.com, Brussels

19 February 2009

The International Monetary Fund (IMF) has concluded its Article IV consultation with the Philippines, and reported its findings, noting a broadly positive performance despite the difficulties posed by the global financial crisis.

The IMF noted that following solid economic performance in recent years, the economy faced headwinds initially from the commodity price shock and subsequently from the global economic and financial turmoil. After reaching 7.2 percent in 2007, GDP growth moderated to 4.6 percent during the first three quarters of 2008, led by weaker external demand and consumption as the oil and food price shock reduced real income. Headline inflation peaked in August at 12.4 percent, but fell to 8 percent in December as commodity prices receded. The external position has weakened due to high commodity prices, lower exports, and more recently, capital outflows. The exchange rate depreciated accordingly, compounded by a shift to long dollar position. Yet, international reserves remain at USD37bn, 240 percent of short-term debt.

The spill-over from the global financial turmoil to domestic financial and currency markets has intensified since September. Equity prices have declined by around 48 percent in 2008, with almost half of the decline taking place since the mid-September flare up in turmoil.

The 2008 budget will likely record a deficit of 1 percent of GDP, an improvement over the 2007 deficit of 1.7 percent of GDP. The tax effort is expected to remain broadly unchanged at around 14 percent of GDP. Expenditures are expected to be slightly lower, partly due to lower capital expenditure reflecting weak absorptive capacity. Non-financial public sector debt in percent of GDP is projected to decline modestly in 2008.

In its executive assessment the IMF noted that "the Philippine economy faces strong headwinds, but starts from a position of strength. Directors expected growth to moderate over the near term as external demand falls, and private consumption wanes with more modest remittance inflows. Weaker domestic demand, accompanied by receding commodity prices, should anchor expectations of lower inflation."

Noting that fiscal consolidation has reduced the public debt-to-GDP ratio significantly in recent years, the IMF agreed that fiscal policy could help to cushion the current slowdown. However, given the still-high level of public debt, there should be a measured fiscal stimulus to avoid compromising fiscal sustainability and policy credibility. To provide more scope for fiscal easing and outlays on well-targeted pro-poor cash transfers, the IMF suggested raising the tax collection effort, broadening the tax base, and rationalizing tax incentives. The IMF welcomed the authorities' intention to limit the fiscal deficit to no more than 2 percent of GDP by being prepared to scale back expenditures in the event of a shortfall in tax revenues. They encouraged the authorities to develop specific contingency plans to address unexpected pressures on the fiscal accounts.

The IMF considered that a formal medium-term fiscal framework would help strengthen fiscal policy planning. They supported the introduction of a fiscal rule, and a fiscal responsibility law providing for the full financing of new tax and expenditure measures.

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