Public Information Notice: IMF Concludes 2002 Article IV Consultation with the Philippines

November 14, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On September 25, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Philippines.1


Over the past 15 years, successive governments have made significant progress in establishing a market-oriented economy in the Philippines. Despite these efforts, the legacy of the past has proved difficult to overcome, and the economy has remained troubled. For these reasons, the Arroyo administration has reinvigorated the reform effort. It plans to balance the budget by 2006, clean up the banking system, deregulate the power sector, and rely on commercial financing until the reforms take hold.

During its first year, the new administration made significant progress in implementing its agenda. It halted the fiscal deterioration, essentially keeping the deficit to the targeted 4¼ percent of GNP and pushed through with structural reforms, especially reviving the energy sector deregulation bill. These efforts have borne some initial fruit. Despite a very difficult international environment, marked by waves of financial pressure and a sharp fall in electronics exports, the Philippine economy grew by 3¼ percent in 2001. In the first half of 2002, growth quickened to around 4 percent, aided by recovering exports, while inflation decelerated to 3½ percent, helped by a relatively stable exchange rate. Such results have won the country increased respect in the international financial markets and early this year, the major credit rating agencies upgraded their outlook to stable from negative.

At the same time, however, underlying policy progress has begun to slip. Implementation of the power sector reform and passage of the Asset Management Corporations (AMC) bill have been delayed, raising questions about whether the authorities' aims can be achieved. At the same time, fiscal performance has veered away from the programmed path. Revenue collections were below target during January-August, and remained essentially unchanged compared to their year-ago level while spending raced well ahead of last year's pace, the result of a conscious decision to front-load expenditures. Consequently, by August the cumulative deficit had reached 144 billion pesos, exceeding the full-year target of 130 billion pesos.

So far, investor confidence in the Philippines has remained reasonably robust, partly attributed to the fact that the bulk of the country's external commercial borrowing for 2002 has already been completed, while international reserves are comfortably above short-term debt. Spreads on the country's international bonds have increased somewhat since mid-May, but levels remain well below their October 2001 peak.

Executive Board Assessment

Executive Directors recognized that the Philippines has made substantial efforts over the past 15 years to create a modern, competitive economy. The economic framework has been radically overhauled. Foreign investment and trade barriers have been dismantled and critical sectors deregulated; and, until the mid-1990s, the revenue base steadily expanded, shifting the fiscal position from a large deficit into a small surplus. As a result, economic growth has been fairly robust, inflation is well under control, the exchange rate is relatively stable, foreign exchange reserves are ample, and the Philippines has maintained its access to international capital markets.

Directors noted that, despite these efforts, some long-standing problems remain. This is true in particular for revenue collections, which in recent years have declined again, causing renewed deficits and seriously affecting the fundamental fiscal position. In addition, the economy has suffered from asset price volatility, which has saddled domestic banks with a large and growing nonperforming asset (NPA) problem.

Directors observed that these problems, if left unattended, could trigger a decline in investors' confidence and an adverse market reaction that would affect the country's growth prospects. They, therefore, strongly endorsed the authorities' strategy of eliminating the budget deficit by 2006, addressing the banking sector problems, and pursuing structural reforms to increase productivity and growth. Directors also emphasized the importance of reinforcing existing efforts to improve governance, noting that this is a basic precondition for strengthening the budgetary position and encouraging private sector-led growth.

Directors noted, however, that after encouraging progress in 2001, the implementation of some reform measures has proved difficult this year. The power sector reform has been delayed; the bill to encourage private Asset Management Corporations has encountered difficulties in Congress; and the budget has veered off track, mainly because revenue has fallen far short of target.

Directors, therefore, urged strong action at this point to bring the reforms back on track. The most critical task, they stressed, was to bring the budget back under control. To this end, they urged the authorities to continue developing a comprehensive and detailed fiscal adjustment plan, specifying revenue and expenditure measures to achieve a balanced budget in the medium term. They welcomed the steps that have already been taken to improve revenue collections and curtail expenditures, so as to curb this year's fiscal overrun. However, they stressed that further measures are still needed.

Directors agreed that the bulk of the fiscal effort would have to come from the revenue side, as there is little room for further expenditure cuts. They strongly supported the plans to restructure the Bureau of Internal Revenue, and suggested that this start with an overhaul of the agency's personnel. They urged that these steps be reinforced with sanctions, such as prosecutions and fines, against tax evaders and against tax collectors who divert funds from the Treasury. However, Directors called for other revenue enhancing measures as well, such as raising tax rates and expanding the tax base by reducing exemptions. On the expenditure side, Directors stressed the need to streamline the civil service and increase the flexibility of the expenditure budget, so that resources could be freed to balance the budget while still meeting the authorities' social and infrastructure objectives, and further their goal of reducing poverty and maintaining social safety nets.

Directors also underlined the importance of strengthening the banking system along the lines recommended in the Financial System Stability Assessment. They noted that the high levels of NPAs had seriously affected the health of the banking sector, reduced capital adequacy, and constrained credit to the private sector. They agreed that these problems could only be solved if bank supervisors could compel bank owners to inject new capital. Directors realized, however, that this would require strengthening the supervisory framework. In particular, the prompt corrective action regime should be reinforced and laws amended to ensure that supervisory decisions are final and supervisors are immune from lawsuits for actions performed in the normal course of duty. Directors also stressed the need for action to address the existing distortions in the financial sector, the remaining weaknesses in corporate governance, and the potential systemic risks posed by non-bank financial institutions.

Directors welcomed the draft bill promoting the sale of nonperforming assets to private AMCs. They noted, however, that the final law would need to ensure that debtors cannot block such sales or buy back their NPAs at a discount from banks. They also stressed that supervisory authorities would need to remain vigilant to ensure that the transfer of nonperforming assets to AMCs are arms-length transactions that directly address the banks' problems.

Directors welcomed the authorities' continued efforts to strengthen their anti-money laundering and anti-terrorism financing framework. They urged quick action on the amendment of the anti-money laundering law to eliminate the deficiencies identified by the Financial Action Task Force, and on the anti-terrorism financing legislation now before Congress that would permit the freezing of terrorist assets.

Directors agreed that further structural reforms are needed to bolster growth. In this respect, they welcomed plans to privatize and deregulate the power sector, which hold out the promise of solving long-standing problems, while spurring large amounts of foreign direct investment. They noted, however, that the reform would only succeed if the authorities are able to find a way to balance the needs of investors to recoup their investment with the desire of the public for lower prices, without placing additional burdens on the budget. Accordingly, they urged the authorities to depoliticize the regulation of electricity prices, by allowing the new Energy Regulatory Commission to base regulatory and pricing decisions strictly on economic considerations.

Directors urged the authorities to limit the risks from external commercial borrowing. They noted that over the past several years, public external commercial borrowing has grown rapidly, increasing the country's vulnerability to external shocks. To minimize the risk this entails, Directors suggested that greater reliance be placed on concessional borrowing and on the domestic capital market. They also encouraged the monetary authorities to continue building international reserves by higher purchases of foreign exchange in the market. Directors welcomed the authorities' commitment to trade liberalization.

Directors commended the authorities for steering a careful monetary policy course, allowing interest rates to fall to stimulate the economy, while keeping inflation firmly under control through the new inflation targeting regime. They noted, however, that the key to preserving this fine balance would be to bring the fiscal deficit under control, to continue the focus on the inflation target, and to maintain a flexible exchange rate that can respond to any fundamental changes in the country's competitiveness.

Directors welcomed the authorities' efforts to remedy the statistical problems that currently hamper economic analysis, such as those in the national income accounts, balance of payments, and the fiscal sector. They looked forward in particular to the final results of the work of the interagency balance of payments task force, and hoped that this major statistical problem could be addressed by the end of the year.

Directors looked forward to a continued close policy dialogue with the Philippines under post-program monitoring.

Philippines: Selected Economic Indicators, 1997-2002







IMF Staff Proj.

Growth and prices (in percent change)


GNP growth







GDP growth







CPI inflation (average)








Public finances (in percent of GNP)


National government balance 1/







Total revenues







Total expenditures and net lending







Underlying consolidated public sector balance 1/








Money and credit (in percent change)


Broad money 2/ 3/







Bank credit to private sector 3/







Interest rate (91-day Treasury bill, end period, in percent) 4/








Balance of payments (in percent of GNP)


Trade balance







Current account balance








Gross official reserves 5/


Unadjusted, US$ billions







Adjusted, US$ billions 6/







Adjusted, in percent of short-term liabilities 7/







Sources: The Philippine authorities; IMF staff estimates.

1/ IMF definition. Excludes privatization receipts of the National Government, and includes net deficit from the 1993 restructuring of the central bank.

2/ For 1999 and 2000, adjusted for the estimated effects of Y2K.


3/ July 2002.


4/ Auction on October 14, 2002.


5/ As of end-September 2002.


6/ Adjusted for gold and securities pledged as collateral against short-term liabilities.


7/ Short-term liabilities include medium- and long-term debt due in the following year, and exclude loans backed by gold and securities pledged as collateral.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100