Press Release: IMF Approves Extension and Augmentation of EFF for the Philippines
July 18, 1997
The International Monetary Fund (IMF) today approved a request by the government of the Philippines to extend until December 31, 1997 the current SDR 474.5 million (about US$652 million) Extended Fund Facility (EFF) credit for the Philippines, and to augment it by SDR 316.7 million (about US$435 million) to support the government's 1997 economic policies. A total of SDR 508.75 million (about US$699 million) is immediately available to the Philippines. The remaining SDR 245.95 million (about US$338 million) will be made available following a review of performance under the program and based on end-September performance criteria. The IMF approved the current three-year EFF on June 24, 1994 in support of the Philippines’ medium-term economic and financial program (see 94/43). The EFF was due to expire on July 23, 1997.
In approving the request of the Philippines for an extension and augmentation of the EFF, the IMF made use, for the first time, of the accelerated procedures established under the Emergency Financing Mechanism (EFM). The EFM was adopted in September 1995 to strengthen the IMF’s ability to respond swiftly in support of a member country facing an external financial crisis and seeking assistance from the IMF in support of a strong macroeconomic adjustment program.
The performance of the Philippine economy under the EFF-supported economic program has been satisfactory. Real GDP growth accelerated to 5.7 percent in 1996, inflationary pressures were kept under control, and net international reserves increased to the equivalent of 2.8 months of imports. This performance allowed the Philippine authorities to opt, after making an initial drawing of SDR 36.5 million (US$50 million), to treat the EFF approved in 1994 as precautionary and to anticipate not making any further drawings before the EFF expires in mid-1997.
While the macroeconomic program remained broadly on track in the first quarter of 1997, the authorities faced a number of important challenges in the second quarter, including increasing turbulence in the foreign exchange market, slippages in fiscal performance, and a delay in the passage of proposed tax reforms. The combination of a relatively rigid exchange rate and high domestic interest rates encouraged a large inflow of external resources into the Philippine economy, some of it in the form of unstable short-term capital. The peso came under pressure as a result of recent turbulence in regional capital markets. These pressures intensified following the float of the Thai baht on July 2, causing a significant depletion of the Philippines’ international reserves.
The authorities responded decisively to pressures on the peso by floating the currency on July 11 and supporting this action by strong fiscal and monetary policies. They requested an extension and augmentation of the EFF until end-December 1997 to allow passage of tax reforms and completion of the final review of the EFF, and, importantly, to support their action to float the peso in order to discourage speculative capital flows.
The 1997 Program
The objectives of the government’s economic program for 1997, which is supported by the EFF, are to achieve economic growth of 6.3 percent after 5.7 percent in 1996; to reduce the average rate of inflation to 6.5 percent from 8.4 percent in 1996; to contain the external current account deficit to about 4½ percent of GNP after a deficit of 4.3 percent of GNP in 1996; and to hold net international reserves equivalent to 2.1 months of imports of goods and services by the end of the year.
To these ends, the new exchange rate policy will be supported by strong monetary and fiscal policies. Interest rates will be kept high for some time until the foreign exchange market stabilizes, and base money growth is to be reduced to keep annual broad money growth at 23 percent, a rate consistent with the inflation and growth targets. Fiscal policy will be tightened in the second half of 1997 to offset slippages in the first half and achieve a public sector surplus of 0.3 percent of GNP for 1997, after a surplus of 0.1 percent of GNP in 1996. The fiscal tightening will include revenue-enhancing measures as well as expenditure cuts.
Under the program, the government will seek passage of the remaining elements of the Comprehensive Tax Reform Package, a vital element of its policies to strengthen savings performance. The financial system will be further strengthened by recently adopted measures to tighten the limits on the exposure of banks to the real estate market and to discourage the growth of foreign currency liabilities through new liquidity requirements; and by removing tax disincentives to peso deposits.
The Philippines joined the IMF on December 27, 1945, and its quota1 is SDR 633.4 million (about US$871 million). Its outstanding use of IMF financing currently totals SDR 188 million (about US$258 million).