Public Information Notice: IMF Concludes Article IV Consultation with Philippines

August 10, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 22, 1999, the Executive Board concluded the Article IV consultation with the Philippines.1


In contrast to the countries most heavily affected by the Asian financial crisis, the Philippine economy was able to avoid a severe recession and the disruptions to economic activity experienced elsewhere. This can be attributed to better starting conditions as a result of a decade of reform policies implemented prior to the crisis, as well as sound crisis management including early floating of the peso, adaptation of monetary and fiscal policies, and a comprehensive program to strengthen the banking sector. These policies have been supported by a two-year stand-by arrangement from the IMF approved on April 1, 1998 (upon expiration of the 1994 extended arrangement which had been augmented and extended in mid-1997).

Following GDP growth of 5% in 1997, the economy contracted slightly (by ½%) in 1998. While non-agricultural output growth remained positive, the effects of the El Nino drought led to a record decline in agriculture of 7%. GDP growth in the first quarter of 1999, at 1.2%, was better than expected, reflecting a rebound in agriculture, continued growth in services, and signs of bottoming out in the industrial sector. For the year as a whole, GDP growth is projected in a range of 1-3%, with recent developments suggesting an outcome in the upper half of the range.

Reflecting the effect of drought on food prices, inflation reached 11½% in January 1999. Since then, it has declined sharply, to 5.8% as of June and well within the year-end program target of 7½%.

The external position has strengthened significantly over the past year, reflecting improvements in both the current and the capital accounts. In the first quarter of 1999, the current account recorded a surplus of $1.3 billion, following further improvement in the trade balance. Continued rapid export growth-in contrast to other crisis-affected countries-combined with declining imports led to a sharp turnaround in the trade balance, from a deficit of $11 billion in 1997 to a surplus of $0.5 billion in the first quarter of 1999. The trade surplus is expected to narrow in 1999, as imports pick up due to increased economic activity. Capital inflows are recovering with the restoration of access to foreign financial markets, which has allowed the government already to virtually complete its foreign borrowing program in support of the budget this year; private inflows have also returned in early 1999. As a result, gross adjusted reserves of the Bangko Sentral have risen to $11.6 billion as of the first quarter of 1999, over $3 billion higher than the end-March 1998 level. The turnaround in the external position has significantly reduced the Philippines' vulnerability to shocks.

After five years of consolidation, fiscal policy turned expansionary over the past two years. The underlying consolidated public sector deficit widened from 1½% of GNP in 1997 to around 3% in 1998-99, reflecting mainly weakening revenue collections, a fiscal stimulus package on the expenditure side, and a deterioration in the finances of government-owned and controlled corporations (GOCCs). The relaxation of fiscal policy reflected mainly the slowdown of economic activity and the government's efforts to support domestic demand, although delays in planned revenue measures and with reforms in the power sector have also contributed. The government's program envisages a return to fiscal consolidation as the economy recovers. For next year, a reduction in the fiscal deficit by 1% of GNP is envisaged, followed by continued consolidation toward balance by 2003-04. This is to be achieved in part through a sustained strengthening of National Government revenue collections and reversal of the recent deterioration in the finances of the GOCCs. Key elements in the government's reform agenda to this end are a major improvement in tax administration and comprehensive restructuring of the National Power Corporation, the largest among the GOCCs.

Monetary policy has been eased gradually since late 1998 as the peso stabilized and inflation was successfully contained. Interest rates are now below crisis levels, with liquidity conditions well supportive of the recovery. Even so, monetary and credit aggregates have remained substantially below program ceilings, reflecting weak demand conditions as well as banks' concerns over bad loans. For the period ahead, the BSP intends to continue with gradual interest rate reductions, conditional on peso stability and inflation remaining on track.

In the area of structural reforms, good progress has been made especially in the banking sector. While the banking system remains under stress, as evidenced by the still rising nonperforming loans ratio of commercial banks (13.1% in March 1999), the authorities are confident that the situation is under control given the system's strong capital base and the expected peaking of NPLs in the near future. Tighter prudential and supervisory standards have been put in place, and are encouraging the intended recapitalization of weaker banks through capital infusions or mergers with stronger banks. The rehabilitation and full privatization of the Philippine National Bank is proceeding, with a view to completion by mid-2000, at the latest.

Reforms in other areas (corporate sector, trade and investment liberalization, and improvements to economic statistics and their publication) are continuing, and the government is embarking on a comprehensive set of public sector reforms, with World Bank assistance. The Action Plan to improve tax administration, an important program element developed with IMF technical assistance, has proven more difficult to implement than envisaged. The government has recently re-vamped the Action Plan and remains fully committed to the strategic goals of strengthening the Bureau of Internal Revenue and improving taxpayer compliance. Likewise, the comprehensive reform of the power sector has been held up by delays in passing the Omnibus Electricity Bill, but the government is confident that reforms will soon move forward with the expected passage of the Bill in the near future.

Executive Board Assessment

Executive Directors commended the authorities for the sustained implementation of economic policies under the program that had allowed the Philippines to weather the regional crisis relatively well. The external position had improved markedly, economic growth has started to recover, and inflation had come down well within program targets.

For the period ahead, Directors noted the twin challenge of preserving the stabilization gains while bolstering the prospects for a strong and sustained recovery. With the stance of fiscal and monetary policies now well supportive of the recovery, Directors urged the authorities to implement forcefully their ambitious structural reform agenda to underpin the economy's prospects for sustained medium-term growth and poverty alleviation.

Directors endorsed the fiscal targets under the program, although they expressed concern about the continued shortfall in budget revenues. A stronger revenue effort was seen as critical to medium-term fiscal sustainability and rapid high-quality growth. Directors welcomed the authorities' renewed commitment to strengthening tax administration, and hoped that implementation of the agreed reforms would not again fall short of expectations. They supported the planned financial sector tax reform and rationalization of fiscal incentives, and urged early Congressional passage of these initiatives as well as of all the revenue measures submitted in late 1998.

Directors emphasized the need to reverse the recent deterioration in the finances of several important government-owned corporations. In particular, they urged a speedy restructuring and privatization of the National Power Corporation, and advised the authorities to avoid recourse to extrabudgetary spending.

Directors emphasized the need for medium-term fiscal consolidation. In this connection, they strongly encouraged early implementation of the planned public sector reforms, with World Bank assistance. Directors welcomed, in particular, the plans to strengthen the budget framework, improve expenditure control and monitoring, and reform the civil service.

Directors commended the Bangko Sentral (BSP) for the judicious conduct of monetary policy through the turbulence of the past two years. They recommended that any consideration of further easing of monetary policy should be approached cautiously, and should be conditional on continued stability of the peso. Directors encouraged the BSP to review and clarify its monetary framework once the crisis subsides, taking into account changed circumstances experienced in recent years. Directors also referred to the need to maintain sufficient exchange rate flexibility to help deal with volatile capital flows. Directors noted that external adjustment had helped rebuild reserves and reduce the Philippines's vulnerability to external shocks. However, they encouraged the authorities in their steps to further strengthen the reserve position.

Directors welcomed the successful implementation of banking reforms under the program, which had helped contain the problems in the sector. Directors stressed the importance of adherence to the international best practice and regulatory standards in banking supervision and risk management. In this context, they considered that the appropriateness of the recently granted exemption for general provisioning requirements could merit early review. Directors also reiterated the need to bring bank supervisors within the perimeter of the bank secrecy law. Directors encouraged the authorities to proceed with the necessary restructuring and privatization of the Philippine National Bank on a timely basis.

Directors urged the authorities to proceed forcefully with the structural reforms in a number of other critical areas. They encouraged the authorities to reconsider the draft revised framework for corporate debt resolution recently approved for public hearing by the Securities and Exchange Commission, with a view to ensuring that the final version be consistent with the best international practice. They strongly endorsed the plans for continued trade and investment liberalization, and welcomed the authorities' commitment to resisting pressures for increased protection. In particular, Directors looked forward to the lapsing at the end of 1999 of the temporary tariff increases introduced in January, and to passage of draft laws to liberalize foreign investment in the retail sector and in distressed banks.

Directors noted that the social impact of the recent economic downturn was most severely felt in the-traditionally poorer-rural areas, although government intervention had helped mitigate the impact. Directors strongly supported the plans to improve the targeting and efficiency of social programs, and to strengthen the performance of agriculture as a priority in the fight against poverty. A number of Directors underlined the need for higher expenditure on social services and for a comprehensive social safety net.

Directors considered data provision to the Fund timely and adequate for effective surveillance. They welcomed the progress made by the Philippines in meeting SDDS requirements and encouraged the authorities' continued efforts to improve the quality and comprehensiveness of economic statistics, including on balance of payments transactions through foreign currency accounts.

Philippines: Selected Economic Indicators

  1996 1997 1998 1999

Growth and prices (in percent change)        
GNP growth 7.2 5.2 0.1 1.5-3.5
GDP growth 5.8 5.2 -0.5 1-3
CPI inflation (end period; 1994=100) 7.1 7.3 10.3 7.5
Public finances (in percent of GNP)        
National government balance1 0.3 0.1 -1.8 -2.2
Total revenues 18.2 18.7 16.6 15.9
Total expenditures and net lending 17.9 18.6 18.3 18.1
Underlying consolidated public sector balance2 -0.1 -1.5 -3.0 -3.2
Money and credit (in percent change)        
Broad money 15.8 20.9 7.4 15.0
Bank credit to private sector 51.0 28.7 -3.1 4.7
Interest rate (91-day T-bill, in percent)3 11.7 18.0 13.5 8.84
Balance of payments (in percent of GNP)        
Trade balance -13.1 -13.0 0.0 0.9
Current account balance -4.6 -5.1 1.9 2.1
Gross official reserves (adjusted, in months of imports)5 6 2.8 1.7 2.7 3.4

Sources: The Philippine authorities; IMF staff estimates and projections.

1Authorities' definition. Includes privatization receipts of the national government, and excludes the Central Bank Board of Liquidators (CB-BOL).
2IMF definition. Excludes privatization receipts, and includes net deficit of the CB-BOL.
3Last auction of each year.
4June 28, 1999.
5Adjusted for gold and securities pledged as collateral against short-term liabilities.
6In months of imports of goods and services.

1Under 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. In this PIN, the main features of the Board's discussion are described.


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