Statement at Donor Meeting

Development Partners’ Briefing on Reconstruction Assistance on Typhoon Yolanda

December 18, 2013

Let me begin by expressing our deep sympathy for the human loss and devastation the Philippines has suffered in the wake of Typhoon Yolanda. The disaster in Tacloban and neighboring areas has deeply touched all of us in the international community, as can be seen in the enormous outpouring of support from governments, aid organizations, large corporates, and ordinary citizens. The government and the people of the Philippines have responded in unison, working day and night to meet the overwhelming challenges brought by the calamity. We at the IMF continue to stand ready to assist where we can.

Although relief operations and humanitarian assistance remain in high gear, it is time to look ahead to the next phase of the response. Philippine economic managers have prepared the Reconstruction Assistance on Yolanda (RAY) Plan that seeks to improve wellbeing in affected regions by restoring communities and livelihoods. The price tag for rehabilitation and reconstruction will be substantial. The Philippines’ strong macroeconomic fundamentals provide sufficient space for an appropriately-scaled fiscal response, while adequate international reserves imply no the need for balance of payments support from the IMF. Nonetheless, to preserve resilience to macroeconomic shocks, it is important that government debt, which has halved during the past decade, continue to remain on a declining path. Therefore, meeting the large fiscal obligations for rebuilding will require additional government revenue and donor grants. At the same time, the Aquino Administration’s continued commitment to implementing broad economic reforms to foster more inclusive, job-intensive growth remains essential.

With this in mind, I will present a brief overview of how we at the IMF view the Philippines’ economic outlook and policy priorities, as well as the role the IMF can play. The Typhoon’s macroeconomic effects will be felt mainly through three channels:

Loss of income in affected areas: Temporary disruption to electricity, communications and transport infrastructure, as well as damage to private property and population displacement, is expected to severely hamper production in the next few quarters, with more lingering effects in the hardest hit locations and in agriculture. The regions most affected by the typhoon contribute 12½ percent to national GDP in real terms, but encompass 20 percent of the population, who are among the poorest and most vulnerable. Thus, there is likely to be a disproportionately greater impact on poverty and health outcomes.

Relief effort: Much of the relief effort is expected to comprise import intensive donor‐supplied goods and services in kind and remittances. As such, the direct effect on GDP growth and the current account is likely to be modest.

Reconstruction spending: Repairing the storm damage to infrastructure, housing and the capital stock could contribute significantly to GDP and employment growth on a temporary basis depending inter alia on the scale, phasing, and import content of related spending. While reconstruction tends to boost growth on a temporary basis, it merely seeks to restore destroyed wealth and does not compensate for lost incomes. Thus, the welfare of affected people will tend to be lower, despite faster growth in the short term.

More than six weeks after the storm, considerable uncertainty surrounds the scale of damage and reconstruction needs. Nonetheless, based on the preliminary RAY damage estimate of about 5 percent of GDP and envisaged public reconstruction spending of about 2½−3 of GDP growth is foreseen to slow temporarily, but then recover, keeping GDP growth around 6½−7 percent during 2013−16. Inflation is forecast to remain well anchored despite temporary price pressures from demand and supply factors. The external sector is projected to remain resilient, with the current account relatively unaffected as increased private remittance inflows and donor grants are expected to broadly offset higher public and private reconstruction-related imports. In addition, reconstruction can be expected to support job creation in storm affected areas, raising the employment intensity of GDP growth. The construction sector is likely to see continued strong expansion and some price pressures, requiring close monitoring of real estate and related financing to prevent overheating or asset price bubbles.

In recent years, the IMF has assisted through various channels several countries that have been hit by natural disasters, and drawn lessons from those countries’ experiences. While natural disasters cannot be prevented, much can be done to reduce their human and economic toll. Based on economic research by others and the sample of case studies, the Fund draws the following lessons for the Philippines on ways to strengthen disaster risk mitigation and its post-disaster response:

Early warning: Identify the probability of disasters and integrate these risks explicitly into economic planning frameworks. This would provide guidance on how much countries should “self insure,” that is, accumulate funds in advance of a disaster to be spent after a disaster has occurred, as well as the appropriate amount of investment to strengthen defenses against climate change and for disaster proofing to be included in the Philippines’ Medium Term Expenditure Program and annual budget. The Philippines has a system of disaster risk financing institutions, including the National Calamity Fund, Local Calamity Funds, People’s Survival Fund, and Quick Response Fund that can be utilized, but their adequacy and flexibility should be re-assessed ahead of future events.

Flexibility: Ensure sufficient room and flexibility within fiscal frameworks to permit rapid redeployment of fiscal spending and mesh existing investments into an overall recovery plan. The approval of the 2014 budget with specific line items for relief and reconstruction, as well as the potential to use budgeted appropriations classified under “unprogrammed” funds in the event that foreign financing or additional revenue becomes available indicates the flexibility present in the Philippine’s fiscal framework.

Coordination: Improve coordination between the authorities, multilateral institutions, donors, and civil society. This is critical in countries where administrative capacities are limited. There is also scope for improved international coordination to consider ways to spend donor assistance for risk reduction purposes, such as through the UN Green Climate Fund, which is likely to yield larger benefits than emergency assistance after the event. In the case of a fiscally-decentralized country like the Philippines, coordination between the national government and LGUs is also critical.

Transparency: Ensure transparency in the allocation of disaster spending to bring about the most effective use of revenue and donor assistance, while limiting imbalances and contingent liabilities to the state. The Government’s FAiTH website for tracking foreign aid and pledges is exemplary in this regard. Implementation of the Treasury Single Account from 2014 and the Government Integrated Financial Management Information System (GIFMIS) over the medium term would help track RAY spending as well as disaster risk mitigation expenditures down the road.

Growth and structural reforms: As part of reconstruction and recovery, take the opportunity to accelerate broader growth-enhancing structural reforms. For example, affected regions are largely agricultural with limited access to financial services and in need of rebuilding houses in less vulnerable locations. Therefore, a focus on land administration reform and provision of secure property titles could facilitate productivity-enhancing agri-business investments, more appropriate zoning, and increase access to housing finance. Existing supply-based incentives to real estate developers could also be redesigned to directly benefit needy home-buyers and avoid potential transfers to developers.

Looking ahead, the Fund will continue to work with the Philippine authorities and other multilateral agencies in the context of our surveillance and technical assistance functions. We will continue to assist in the assessment of the macroeconomic impacts of the disaster and

advise on revenue mobilization. In the areas of disaster preparedness and transparency, we can advise on fiscal frameworks for post-disaster financing mechanisms, integration of disaster risk considerations into the medium term expenditure program, as well as institute systems to track public spending on climate-proofing infrastructure. And finally, we can offer guidance on how best the financial sector could reduce vulnerable groups’ susceptibility to disasters/climate change and support rebuilding while still preserving financial stability.