IMF sees RP economy growing 5.8% this year

The International Monetary Fund (IMF) said it expects the country’s gross domestic product (GDP) to grow by 5.8 percent this year and could further expand by as much as seven percent if ongoing economic reforms are completed over the medium term.

The IMF concluded its 2006 annual consultation with the Philippines last month, taking particular mention of "impressive" fiscal reforms in an environment of sustained growth and declining inflation.

IMF country representative Reza Baqir told reporters yesterday that the renewed strength of the economy has strengthened market confidence in the Philippines and triggered strong investment inflows into both the stock and bond markets.

"The Philippines now has the welcome challenge of managing capital inflows," Baqir said.

He said the IMF was optimistic the domestic economy could easily grow by 5.8 percent and could even be n higher on the back of sustained reforms.

The domestic economy grew 5.4 percent in 2006, below the IMF’s forecast of 5.5 percent.

"The challenge now is to sustain reform momentum towards balancing the budget while raising public spending on infrastructure and social services," Baqir said.

Baqir noted that the country’s fiscal problems had stemmed not from overspending but from low revenue yields which had been addressed by the increase in the value-added tax rate and improvements in tax administration.

"The challenge now is to sustain the increase in revenues that has been recorded last year," he said.

He added that while the economy’s resilience has improved, there were vulnerabilities. He pointed out that public debt is still sensitive to rollover and exchange rate risks.

Although external commercial borrowing requirements were declining, Baqir said the volume was still significant.

"As recognized by the authorities, a sudden rise in global risk aversion could also affect the Philippines, unless confidence is sustained through further reforms," he said. "Continued reforms are also necessary to boost investment and growth and accelerate progress in reducing poverty."

Beyond balancing the budget by 2008, Baqir said the government should work towards increasing its revenue generation since continued expenditure compression was neither desirable nor sustainable given the country’s sizeable social and infrastructure needs.

"Looking ahead, the Fund considered that balancing the budget, while increasing priority spending, would require accelerating the implementation of tax administration reforms, as well as new tax measures, such as a rationalization of tax incentives," Baqir said.

Ultimately, Baqir said reforms need to be translated into higher growth and faster poverty reduction.

"At 5.8 percent, the GDP growth is at par with the region but growth can be higher particularly if investments can be raised," he said.