The IMF concluded yesterday the annual Article IV review, assessing the progress of the country’s economic reforms.
Sources privy to the consultations with the IMF mission disclosed that following the amendment in the value-added tax law, the IMF had started to focus on the completion of the economic reforms that have been laid down by the Arroyo administration.
According to the source, the IMF expressed particular concern over the rationalization of the fiscal incentives given to enterprises that have eroded government revenues over the years.
The source said the IMF supported the legislative proposal made by the Department
of Finance (DOF) to limit the fiscal incentives to critical export industries.
The source added that the IMF had also expressed its willingness to support the government’s efforts to tighten the administration of taxes to minimize leaks and optimize tax collection.
"It’s normal for developing countries to seek technical assistance from the IMF to improve fiscal administration," the source said. "The IMF seemed receptive since they have experts in the area with experience from other countries."
According to the source, the IMF had expressed satisfaction with the reforms already undertaken, particularly the increase in the value-added tax (VAT) by 2006.
The VAT rate increase is expected to alleviate the government’s fiscal crunch, generating over P100 billion in incremental taxes in 2006 onwards–enough to eliminate the fiscal deficit by 2008.
However, the source said the IMF wanted to see the amendments in the BSP charter, saying that changes were necessary to strengthen the regulatory powers over Philippine banks.
In his visit earlier this year, IMF deputy managing director Agustin Carstens said empowering the BSP was necessary to address the problems of the Philippine banking sector which remained vulnerable to shocks.
"I was encouraged to hear of current initiatives to advance financial sector reforms in the Philippines," Carstens said. "I particularly look forward to the passage of the amendments to the BSP charter that will strengthen the legal protection for bank supervisors."
Carstens said the IMF welcomed the progress made so far with the Arroyo administration’s economic reform agenda. However, he stressed that these reforms would have to be completed.
"The completion of these reforms will be crucial for reducing vulnerabilities and initiating a virtuous investment-growth cycle," Carstens said.
The IMF has been pressing the government to amend the BSP Charter, specifically where it was weak in the protection of bank supervisors dealing with problem banks.
The BSP is considered as one of the most vulnerable central banks in the world, unable to close down problematic banks unless they voluntarily declare a bank holiday.
Under current rules, the BSP is not even able to declare a bank insolvent unless management agreed to its evaluation and assessment.
The hurdle for insolvency itself is also deemed unusually difficult after the Supreme Court ruled that the assessment of a bank’s asset be based on the realizable value of its assets.
The IMF earlier said that if Congress was too nervous to allow the BSP to close down troubled banks, monetary authorities should at least have the power to write down the value of their equity.