Press Release No. 05/148

Press Release: Statement by IMF Staff at the Conclusion of the Post-Program Monitoring Mission to the Philippines

June 22, 2005

The following statement was issued today in Manila by an International Monetary Fund (IMF) mission:

"A Post-Program Monitoring mission visited Manila during June 9-22, 2005. The discussions focused on the macroeconomic and structural policy issues facing the Philippines. The mission's findings will be reported to the IMF Executive Board in September 2005, but the preliminary assessment is as follows:

"Considerable progress has been made with economic reforms in the last year. The passage of the expanded VAT law marks a major breakthrough in the reform process. Other significant achievements include long-overdue increases in alcohol and cigarette excises and power tariff hikes that will substantially stem the National Power Corporation's (NPC's) losses. With steadfast implementation, this package of measures should permit a major stride towards balancing the budget, reassure markets about the authorities' commitment to tackling the fiscal problem, and create room for needed development expenditures.

"The economy has also performed well, with GDP growth boosted by surging remittances and new-found vigor in tourism and business process outsourcing. Although high oil prices weigh on activity, GDP growth of about 4¾ percent is expected in 2005. The fiscal deficit has been placed on a downward path through resolute control over expenditures, while revenue collection is being assisted by the current crack-down on tax evaders. Foreign portfolio investment has responded favorably to the better fiscal news, while a pivotal ruling by the Supreme Court on foreign ownership of mining projects has improved prospects for FDI.

"Nonetheless, there are a number of risks in the outlook, including the potential for further increases in oil prices and a softening of foreign demand for Philippine exports, as well as the continued potential for adverse developments in international capital markets. Moreover, recent events have demonstrated the sensitivity of the economy to political uncertainty.

"Inflation remains above target, reflecting in large part the impact of supply shocks, and will likely remain elevated in the near future as the impact of transport fare hikes and VAT reform filters through to prices. The mission welcomes the Bangko Sentral ng Pilipinas' (BSP's) stance, as indicated when the policy rate was last raised in April, that monetary policy will be used to manage inflationary expectations and contain the impact of any second-round effects on prices. Given that inflationary pressures are expected to remain, the BSP should monitor price developments carefully and take action as appropriate.

"Looking ahead, successfully implementing the fiscal reform agenda will be important for reducing vulnerabilities and initiating a virtuous investment-growth cycle. While a significant reduction in the fiscal deficit is in prospect for 2005 and 2006, additional fiscal measures, such as the rationalization of tax incentives, will be needed to ensure achievement of the medium-term plans to balance the budget. It will also be important to increase the VAT rate as envisaged in January 2006 and to sustain the courageous campaign being waged against tax evaders. Moreover, other parts of the public sector, such as the government-owned and controlled enterprises (GOCCs), should be monitored closely to avoid shifting the burden of fiscal adjustment disproportionately onto the national government.

"Another priority is to press ahead with privatization of generation and transmission assets in the power sector and to continue to strengthen the regulatory framework to attract needed new investments into the sector.

"The mission welcomes the encouraging developments in the financial sector with the ongoing implementation of the Special Purpose Vehicle (SPV) framework, and particularly looks forward to early passage of the amendments to the BSP Charter that will strengthen legal protection for bank supervisors.

"The mission also welcomes the recent improvements that have been made to the statistical data, including the progress in consolidating the non-financial public sector debt data. Efforts to extend these data to earlier years as well as to complete the reconciliation of debt flows and stocks will be useful.

"The IMF will continue a close policy dialogue with the Philippine authorities in the period ahead in the context of Post-Program Monitoring."