RP economy better than expected — IMF

The International Monetary Fund (IMF) said yesterday the country’s economic program was better-than-expected but the fund expressed concern over the worsening deficit problem, saying that the fiscal imbalance needed a more permanent solution beyond cutting public expenditures.

IMF director for external relations Thomas Dawson said the Philippines managed to emerge from the 1997 financial crisis strong enough without IMF funding.

"Contrary to what everyone thinks, the IMF’s goal is to not lend money," Dawson said adding that "because then it means that no one is in bad enough condition to need IMF money."

The Philippines has been out of the IMF program since late 2000 and is now under a so called post-program monitoring (PPM) stage which is expected to last 18 more months.

According to IMF senior resident representative Sean Nolan, the government’s deficit problem was not a narrow issue of achieving fiscal balance but of having the money to fund its expenditure program for sustainable development.

"The deficit problem is a revenue problem," Nolan pointed out. "The simple fact of the matter is that the government needs more money to finance a variety of things," he added.

According to Nolan, even the government recognized the need to achieve sustainable fiscal balance but the ultimate goal was to achieve a manageable level of public sector debt.

"The debt stock is the key in determining credit rating," Nolan explained. "A good credit rating would allow the country to get to cheaper money which would then make debt servicing less of a burden," Nolan said.

One banking sources said the less money spent on debt servicing, the more money could be spent on development programs and the less need for even more borrowing over the long term.

"The process, however, has to start somewhere, specifically in addressing the declining revenue which has prevented the government from achieving fiscal balance," they added.

The IMF has been urging the Arroyo Administration to restore selected excise taxes and increase value added tax rates to increase its revenues, warning that the continuing erosion of the tax base was undermining its fiscal position and overall growth.

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 think up new ones.

"Continued erosion of tax revenues has undermined the fiscal position, contributing to an upward drift in public debt," the IMF said its annual post-program monitoring report. "Vigorous action is therefore needed in botha reas," it added.

But to increase revenues, the IMF said the government would need to implement their planned tax administration reforms especially for strengthening revenues. In addition, the Fund said it has to follow through with plans to restore selected excise taxes and should consider other measures including raising the VAT rate.

The IMF noted that further spending pressure was likely to arise from contingent liabilities notably those of the Social Security System (SSS) and the National Power Corp. (Napocor).

"The authorities should free up funds 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 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 eyar with solid growth, low inflation and a comfortable level of reserves.

IMF attributed this achievements to the government’s strategy of market-oriented reform and macro-economic prudence, including a rigorous pursuit of their fiscal deficit target.