IMF sees RP growing 6.3%-7%

The economy could grow between 6.3 and seven percent this year if the Arroyo administration could raise sin taxes and increase infrastructure spending, the International Monetary Fund (IMF) said yesterday.

Even after slowing down from its 7.3-percent growth last year, the IMF said the country could bounce back faster under a “strong reform” scenario including the increase in taxes on tobacco and alcohol while raising infrastructure spending to four percent of gross domestic product (GDP).

The IMF released its full annual report on the Philippines where under a “strong reform” scenario, the growth in GDP could surge to as high as 6.5 percent by 2009 and an average of 6.8 percent by 2010 to 2013.

Without these reforms, the IMF said real GDP growth is projected to reach only six percent this year and in 2009, with the average growth rate at 6.1 percent by 2010 to 2013.

IMF resident representative Reza Baqir told reporters that even with the imminent recession in the US, the country’s projected growth is still near the top of comparable economies in the Asian region.

According to Baqir, generous tax incentives and the gradual erosion of sin tax revenues need to be corrected in order to generate the resources that would finance public spending.

Baqir said the economy is expected to enter 2008 with considerable momentum and the IMF forecasts GDP growth of six percent as fiscal impetus wanes.

According to the IMF, net exports would contribute less to growth, reflecting a projected mark-down of global growth for the first half of the year.

Baqir said reforms to date would allow the economy to operate at a modestly higher pace of growth than in the past but the scenario was markedly different if the government could move on with the reforms it had committed to undertake.

Under the IMF’s “reform scenario,” tax policies would be introduced that would strengthen the tax base, allowing higher capital and social spending.

“The expectation of better infrastructure in the medium term would catalyze private investment in the short run and throughout the period, leading to a rebound in domestic employment and a reduction in emigration,” the IMF said.

In addition, private capital inflows, led by foreign direct investment (FDI), would prompt a faster adjustment in the external balance toward its longer-term norm.

The IMF report said that with strong reforms in place, the IMF’s growth forecast corresponded with the government’s target of 6.3–seven percent for 2008.

However, Baqir stressed that such a performance would require an incremental increase in tax revenues equivalent to 1.5 percent of GDP—possible only if the government could finally raise the excise tax rate and then index it to inflation to protect the yield over the long term.

The government had tried but failed to do this in 2005, resorting instead to increasing the value-added tax rate from10 to 12 percent in order to raise the tax base.

According to Baqir, even the IMF found it difficult to identify a single cause for the decline in the tax receipts after the VAT rate was raised in 2005. He said the IMF found possible reasons including election-related tax evasion, and even discontent in the ranks of the revenue agencies.

The IMF said failure to meet tax collection targets could also have resulted from the decline in compliance from repeated amnesties (which aimed to improve taxpayer registration), lifting of the VAT input cap, peso appreciation, and higher smuggling despite better screening technology at the Bureau of Customs.

According to the IMF, revenue from fuel, cigarettes and alcohol alone have declined by about 1.5 percent of GDP since 1997 largely because excise taxes were not indexed to inflation.