ADB may suspend lending to RP due to slow reforms

The Asian Development Bank (ADB) said yesterday it may cut off lending to the Philippines over the next three years unless the government speeds up reforms designed to shore up its fiscal position.

ADB vice president Joseph Eichenberger said economic growth in the country has been insufficient to lift the country out of poverty over the past 20 years.

"There needs to be deep and sustained change in how things are done in the Philippines," Eichenberger said. "ADB cannot pursue a business-as-usual approach."

The bank, which lent about $200 million to Manila last year, said in a statement that its board had approved a new three-year program to 2007 under which "new lending could range from zero to as much as $1.5 billion, depending on the pace of fiscal consolidation and key sector reforms."

The Manila-based ADB said it would strictly seek concrete results in the implementation of sector reforms before releasing new funds.

It was the first time that the lending agency had placed its three-year development or strategic program on the line, or outlined conditions of fiscal growth.

The warning was the third blow to the Arroyo administration this week after three major credit rating agencies downgraded the country’s outlook amid a political crisis sparked by vote-rigging allegations against her.

Eichenberger said loan processing for Manila "will not be allowed to run ahead of the political, macroeconomic and sector supports" necessary to ensure the success of ADB-backed projects.

ADB spokeswoman Shamshad Akhtar told AFP the new country program takes into consideration the reality that some projects for which ADB funding had been pledged could not be implemented due to the "non-availability of counterpart funding given the tight fiscal situation" of the Arroyo administration.

Specifically, the ADB wants concrete results in the implementation of sector reforms that focus on the privatization of power sector assets, strengthening the banking and financial sector, intensified support to the decentralization process, and the vigorous pursuit of judicial and legal reforms.

The ADB specifically called for "accelerated progress" in the sale of the assets of state utility National Power Corp., saddled with nearly P600 billion ($10.7 billion) of loans guaranteed by the national government, and the resolution of the non-performing asset overhang of banks.

It also called for government decentralization and "vigorous pursuit of judicial and legal reforms to provide effective recourse to both public and businesses."

A recent ADB study on the effectiveness of its past assistance program in the Philippines shows that its development impact has not been commensurate with the level of financial support.

The Country Strategy and Program (CSP) for 2005-2007 is an innovative and flexible approach designed to build on the lessons of the past, better accommodate policy and economic uncertainties, and produce more demonstrable impact in reducing poverty.

Eichenberger said loan processing will have to go hand-in-hand with the political, macro-economic, and sector supports necessary to ensure high development impact of projects.

"In particular, the level of ADB financial support will be contingent on significant front-loading of the fiscal consolidation process, backed by an enhanced tax effort to ensure the sustainability of economic reforms," he added. Nonetheless, the ADB statement said it would still support "some modest investment projects" designed to support commitments to the Millennium Development Goals (MDG), including projects related to health, water supply and sanitation, microfinance, and small and medium enterprises.

The bank’s non-lending activities for the Philippines will also continue.

The ADB said it had approved more than $8 billion since 1966 in support of the Philippines, which was among its founding shareholders. It is also ranked ninth overall in terms of the amount of contracts awarded. — With AFP