In its annual assessment of the Philippine economy, the Washington-based lender praised the government for undertaking market-oriented reforms, following prudent macroeconomic policies and rigorously pursuing fiscal targets. It also welcomed the adoption, in January, of formal inflation targeting.
But the IMF said more reforms were needed to protect the economy from future shocks, stressing vigorous action is needed to stop the erosion of tax revenues and to reduce the amount of bad loans in the banking sector.
The IMF also said that in order to meet the goal of balancing the budget by 2006, authorities should quickly implement their tax administration reforms.
However, the Department of Finance (DOF) promptly thumbed down even the mere suggestion of imposing more taxes, saying that the government was more inclined to improve the collection of existing taxes rather than come up with new ones.
The IMF said other improvements that would help include restoring selected excise taxes and including petroleum in such taxes. It also said other measures like raising value added taxes should also be considered.
Finance Secretary Jose Isidro Camacho said neither the proposed indexation of sin taxes nor the increase in VAT rates was high in the government’s priority.
"It’s a very bad time to even think about an increase now specially with the increase in oil prices," Camacho said, adding that "our position is to improve collection first before increasing taxes."
Despite its resistance, however, the government had already decided to lift the exemption of Asian utility vehicles (AUVs) from excise taxes and government is planning to impose between two and five percent excise taxes depending on the purchase value of the vehicle.
But this measure was only "slightly revenue positive" with initial estimates indicating that the government will be generating only P2 to P3 billion in additional revenue once the measure is implemented.
The initial proposal was to impose a two percent tax on AUVs purchased at P600,000; three percent for AUVs above P600,000 and below P2 million; and finally, five percent tax on AUV above P2 million.
IMF resident representative Sean Nolan said the Philippines could meet its 2002 gross domestic product (GDP) growth target of four to 4.5 percent.
"It looks achievable. This is not export driven growth. It looks achievable if budgetary targets are adhered to.. if lead sector perform as envisaged and if external sectors improve," Nolan said.
Nolan said the IMF supported the plan to limit spending but warned that any restraint might be difficult to reconcile with government’s plan to reduce poverty under its Medium Term Development Plan.
The IMF noted that further spending pressure was likely to arise from contingent liabilities notably those of the Social Security System and the National Power Corp.
"The authorities should free up for priority spending by implementing the long-planned government streamlining," the IMF said, adding that government should also protect the budget by restoring SSS to financial health before it goes bankrupt by 2015.
Despite fiscal problems and external shocks, however, the IMF said the Philippines turned in a robust performance, even when exports began falling at a double-digit rate as the global IT industry contracted.
IMF also observed that the Philippines had weathered the global storm reasonably well. Despite the sharp export contraction and volatile conditions in the external financial markets, the country ended the year with solid growth, low inflation and a comfortable level of reserves.