RP can afford to incur a small deficit, says IMF

The International Monetary Fund (IMF) said the government could afford a small deficit this year, but additional spending should be targeted toward the low-income sector most affected by the dramatic increase in oil and food prices.

Because of improving debt ratios, the IMF said the government could afford to increase its borrowing to finance this deficit although IMF officials said tax collection efforts must continue to increase to sustain fiscal consolidation.

IMF resident representative Reza Baqir told reporters yesterday the debt burden of the national government had already declined from over100 percent of gross domestic product (GDP) in 2003 to an estimated 62 percent of GDP at the end of 2007.

“This gives some scope for fiscal policy to be used for reacting to external shocks,” Baqir said.

The Arroyo Administration had already decided it would postpone balancing the national budget by two years in 2010 as officials projected a budget deficit of P75 billion this year and P40 billion in 2009.

Economic planners said the government did not want to cut back on spending at a time when the US recession was slowing down the economy and public spending for pump-priming would be critical.

The Development Budget Coordinating Committee (DBCC) said the government decided it would, however, try to contain its budget deficit to no more than one percent of gross domestic product (GDP).

According to Baqir, the IMF still considered this deficit level “small” and affordable, considering the headroom that had been created by the fiscal consolidation process in the last three years.

Postponing the plan to balance the budget meant the Arroyo administration would have to increase its foreign and domestic borrowing to sustain both its public spending and debt servicing.

But Baqir said this was also acceptable, as long as the government maintained the trajectory of declining debt ratios in the medium term. This would entail enough increase in revenues so that additional borrowing would no longer be necessary looking forward, he said.

However, Baqir was quick to add that while incurring a small deficit, the government should sustain and even raise its tax collection effort to assure the country’s creditors and investors that the fiscal consolidation program was not being derailed.

“The investor community has to be assured that the increase in the deficit is temporary and that the government’s medium-term fiscal consolidation remains on track,” Baqir said.

But Baqir said the Arroyo Administration should ensure that the support programs that would create this deficit would be targeted on very specific income sectors that need to be protected from rising fuel and food prices.

“Our analysis suggests that well-designed cash transfer schemes and targeted education and health spending are amongst the more effective ways to provide social safety nets in response to fuel and price shocks,” he said.