IMF upgrades economic growth projection for RP

The International Monetary Fund (IMF) has upgraded its economic growth projection for the Philippines this year but adopted a conservative economic projection for 2006.

The IMF said yesterday that it is expecting the economy to grow by five percent this year, which is slightly up from its original growth projection of 4.75 percent.

Its projected economic growth rate for 2006 is also five percent but this is lower than the 5.7 percent growth projected by the National Economic and Development Authority (NEDA).

The IMF praised the Philippines for its sweeping tax reform package but said a spike in world oil prices and a softening of demand for exports remain threats.

IMF senior advisor Masahiko Takeda said the growth in remittances helped offset the impact of surging oil prices and cushioned the effect of indirect taxes on consumption.

Takeda said the IMF also noted the improvements in the government’s fiscal position with the budget deficit staying below the target as a result of tight budget controls and a recent increase in revenue collections.

According to Takeda, the IMF believed that the Arroyo administration would be able to reduce its deficit to P150 billion this year, primarily with the increase in revenue from taxes on tobacco and alcohol or the so-called "sin taxes" as well as the lifting of value-added tax exemptions on oil and petroleum products.

However, the government would have to accelerate the pace of power sector privatization to restore the financial viability of the sector and facilitate investments to ensure adequate power supply.

The IMF wrapped up its performance review of the country’s economy yesterday, meeting with top Philippine officials to assess the progress of the Arroyo administration’s economic reform program.

The Philippines, an original member of the IMF since 1945, is under its so-called "post-program monitoring" until early next year. Under the program, the IMF reviews the performance of the economy twice a year and does not extend loans to the Philippines.

IMF division chief James Gordon said the IMF’s upgrade of its 2005 economic projection for the country was based on new data coming in towards the end of the year. "The likely outcome is something like 4.9 percent," he said.

The IMF is equally optimistic, he added, that the government would meet its 2006 budget deficit target of P125 million.

The deficit totaled P115.5 billion in the first 10 months of the year, or P40.5 billion less than the official estimate for the period. It also represents 64 percent of the government’s forecast for the year.

National Treasurer Omar Cruz also disclosed last week that government revenues climbed 15 percent to P577 billion from a year ago, outpacing a seven-percent gain in spending.

Gordon warned, though, that the IMF continues to worry about the impact of higher oil prices in 2006 as well as the changing dynamics of the export market that could press down on Philippine exports.

Gordon said a further spike in oil prices or even the Avian flu could take a toll on the real economy while adverse developments in international capital markets could raise external borrowing costs.

Nevertheless, Gordon said the country’s improving fundamentals should provide for a better shock absorber if such risks materialize.

"At the same time, additional reforms are necessary to decisively reduce vulnerabilities," he said. "If the expanded value-added tax (EVAT) is fully implemented in 2006, the fiscal targets look achievable."

Meanwhile, the inflation rate may average 7.7 percent this year and 7.8 percent next year, according to Gordon.

The forecast for 2005 is less than the Bangko Sentral ng Pilipinas estimate of 7.9 percent. Next year, the BSP expects inflation to average about 8.5 percent.

The IMF does not expect to raise its key overnight rate at the moment because inflation is being driven by higher oil prices and not by consumer demand. — With AFP