At the close of the IMF’s two-week evaluation of the Philippine economy, IMF mission chief Joshua Felman lauded the government’s efforts to install reforms but added more difficult times lie ahead.
He said the government’s first order of business would be to balance its budget so that it will be stronger in coping with the harsh external environment in the coming year.
"A central challenge will be to restore fiscal balance, while ensuring adequate budgetary outlays for the government’s socio-economic reform program," Felman said.
He said this will require rebuilding of government revenues which he observed, has declined significantly, relative to the GDP (gross domestic product) in recent years.
The IMF recommended selective six increases, including reversing the real erosion in specific/excise duties on oil products and take advantage of the ongoing review of tax incentives to restore the tax base.
Over the medium term, the IMF said the government should implement an increase in the VAT rate, re-engineering the bureaucracy, reform procurement practices, and addressing imbalances in the SSS and GSIS.
However, the IMF measures are deemed "politically unpalatable" by the government.
"These are measures to be considered, but I told the mission up front that their recommendations are politically explosive, especially and runs counter to our objective of keeping inflation down," Camacho said.
Specifically, what the IMF wants is for the government to adjust the current excise taxes on both crude and refined oil products by indexing it to inflation. Indexation means taxes on such products will be adjusted annually based on the inflation rate.
Currently, excise taxes on oil products have remained flat since 1996, so even if oil prices are adjusted, the tax rate is constant which translates into a substantial revenue loss for government. As a result, the taxes collected as part of oil prices is also going down.
Raising taxes on oil products, however, is considered "political suicide" since these are socially-sensitive products that will affect both the middle class and the marginalized sectors. The oil companies normally pass on these added costs to consumers and in turn, this will trigger a rise in prices of other basic commodities and is, thus, inflationary.
The IMF also wants government to increase the VAT rate but Camacho said this may not be necessary. "The focus now is how to be more efficient in collecting VAT and eliminating the leakages or loopholes, that is our priority before considering increasing current tax rates," Camacho added.
The IMF said that given the current economic downturns both locally and globally, the Arroyo administration has to stick to its objectives and strategy of its medium-term development plan.
The budget deficit should be brought down to P130 billion in 2002 and eliminated by 2006, the IMF said. At the same time, monetary policy, should be anchored on the inflation target and the principles of a market-determined exchanged rate.
The IMF also expressed its deep concern over the increasing sour loans on non-performing loans (NPLs) of the banking industry which as of November was more than 17 percent.
The IMF is also pushing for the early passage of a bill that will facilitate the disposal of NPLs and a corporate recovery act that will modernize bankruptcy law and procedures. At the same time, the IMF also wants legislation that will beef up the regulatory powers of the Bangko Sentral ng Pilipinas and the Philippine Deposit Insurance Corp. since this will speed up the rehabilitation of ailing banks.
As an upside, the IMF maintained its growth forecast of 2.5 percent for the year. It added the local economy will have a higher growth rate of 3.5 percent next year but this is still lower than government’s forecast of 4.3 percent growth in GDP.