Philippines and the IMF
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The following statement was released in Manila on July 8, 2004 by an International Monetary Fund (IMF) staff mission:
A post-program monitoring mission took place during June 25-July 8, 2004. The discussions focused on macroeconomic and structural policy issues facing the Philippines. The mission's findings will be reported to the Executive Board in August 2004, and the team's initial assessment of macroeconomic developments and policy priorities is as follows:
The Philippine economy is at a crucial juncture. A renewed political mandate provides the administration with a clear opportunity to press ahead with much needed reforms to ensure macroeconomic stability while creating new opportunities to reduce unemployment and poverty. Indeed, the current relatively good economic growth performance provides a solid foundation for implementing bold measures.
Growth has strengthened since late 2003, although inflation has begun to rise on the back of adverse supply shocks. Meanwhile, economic risks associated with the pre- election period have been successfully managed. The budget deficit target for 2003 has been met and performance remains on track this year, sovereign bond prices and the exchange rate have rebounded from earlier lows, and reserves have been maintained. Nevertheless, the turn in the global interest rate cycle along with continued large financing requirements highlight the need to proceed decisively with early implementation of measures to reduce existing vulnerabilities.
The mission welcomes the authorities' focus on lowering the high level of public debt while taking steps to address the major concerns in the power sector and to strengthen the financial sector. Three policy priorities stand out:
• Strengthening fiscal performance. It will be critical to raise the revenue effort to begin the process of bringing the public sector fiscal deficit and debt down to more sustainable levels while creating room for needed development expenditures. Front-loading fiscal consolidation will boost confidence and facilitate an early reduction of borrowing costs. Significant tax policy measures should form the bed-rock of this effort. Consideration ought to be given to raising and indexing excise taxes on alcohol, tobacco and petroleum products, in addition to other possible steps. These measures will need to be complemented by further deepening of the successful efforts underway to strengthen tax administration. It will also be important to resist proposals for new tax amnesties, given the harmful impact that repeated amnesties have on incentives for taxpayer compliance.
• Restoring financial soundness in the power sector and creating the basis for newinvestment. Greater private sector participation in the sector is essential to encourage needed investment and to ensure adequate generation capacity over the medium term. The outlook for the sector has been clouded by large losses at NPC which have contributed to high levels of overall public sector debt and increased external commercial borrowing. These losses need to be tackled and NPCs debt burden reduced to support the ongoing efforts to privatize its transmission and generation assets. Passage of the Transco franchise bill remains a key measure to facilitate the privatization of the overall power transmission network and so advance the comprehensive power sector reform strategy under EPIRA.
• Reinvigorating the financial sector. Banks continue to be weighed down by a high level of distressed assets which constrains their ability to expand lending and support new investment. The existing SPV framework for addressing distressed assets needs to be further supported by ensuring full implementation of international accounting standards so that the underlying valuation of assets can be clarified and thus facilitate the resolution process. Further, it continues to remain critical to strengthen the legal powers of the BSP and PDIC in line with best international practice.
The IMF will continue a close policy dialogue with the Philippine authorities, in the context of post-program monitoring and the annual Article IV consultation.
IMF EXTERNAL RELATIONS DEPARTMENT