IMF endorses admin’s initial fiscal policy actions

The International Monetary Fund (IMF) has endorsed the initial fiscal policy actions of the Duterte administration, primarily the proposed increase in government spending that would raise the closely watched shortfall in the budget.

In a report, IMF representatives who recently visited the country said that, “given the large infrastructure and social needs and ample fiscal space, we support raising the national government budget deficit to 3 percent of gross domestic product (GDP) over the medium term, consistent with the broadly stable debt-to-GDP ratio.”

Earlier, the Asian Development Bank (ADB), also in a show of approval of Mr. Duterte’s socioeconomic and poverty reduction priorities, pledged an unprecedented P47 billion ($1 billion) in sovereign loans for the country. ADB President Takehiko Nakao made the pledge during a recent meeting with Finance Secretary Carlos Dominguez III and Socioeconomic Planning Secretary Ernesto Pernia.

The IMF, however, said it would encourage a “comprehensive and equitable tax-reform package that raises substantial additional revenue to finance higher productive spending that would crowd in private investment.”

The IMF said the raised public spending and higher revenue “would raise the IMF staff’s baseline growth outlook of about 6-percent to 7-percent to a 7-percent to 8-percent range over the medium term.”

The IMF said this “additional effort scenario” would make the Philippines one of the fastest-growing, if not the fastest, economies in the world and help reduce poverty toward the government’s ambitious target.

It credited Mr. Duterte’s 10-point reform agenda, which makes up its economic program, as anchoring policy formulation and structural transformation over the medium-term.

The IMF said its mission, led by Chikahisa Sumi, visited Davao and Manila from June 28 to July 12.

The mission met with the governor of the Bangko Sentral ng Pilipinas (BSP), the secretaries of the economic cluster, senior national and local government officials, private-sector representatives, and the financial community.

The IMF said a comprehensive tax-reform package that simplifies the personal income-tax (PIT) rate structure, indexes tax brackets for inflation, and eliminates the exemptions could be progressive while raising the relatively low revenue ratio through offsetting higher excises on fuel, rationalization of value-added tax (VAT) exemptions, and excises on sweetened beverages.

“The package could also include simplifying and reducing the corporate-income tax (CIT) rate structure while at the same time rationalizing tax incentives,” it added.

Among the tax measures that the Duterte administration plans to implement is the reduction of income-tax payments. But it also plans to also raise the VAT to 15 percent from the current 12 percent to recoup revenues to be lost from the income-tax cuts.

The IMF added that enhanced infrastructure investment, including in areas that have not benefited from such investment in the past, should help create jobs and make growth more inclusive.

“Structural reforms, like liberalizing foreign investment and land use, will help catalyze the effects of higher government spending; and enhanced competition in the crucial transport, logistics, and telecoms sectors should be achieved through steadfast implementation of the competition law and avoiding regulation that unduly discourages new entrants,” it said.

The IMF also welcomed the BSP’s “initiatives to strengthen systemic risk monitoring in the financial sector.”

The central bank’s micro and macro prudential policies, as well as enhanced monitoring of credit and real-estate conditions, including the introduction of the residential real-estate price index (RREPI), have helped maintain financial stability in a challenging global financial environment, it said.

“We also welcome the regulatory agencies’ concerted efforts to maintain financial stability through the Financial Stability Coordination Council (FSCC), including addressing data and regulatory gaps related to real-estate developers and concentration risks posed by conglomerate structures and rising corporate leverage,” the IMF added.

It said capital-market development is crucial for growth and infrastructure investment, including PPPs (private-public partnerships) while mitigating concentration risks in the banking system.

It noted that the recent incident involving the unauthorized transfer of $81 million from Bangladesh’s international reserves to entities in the Philippines highlights the need to tighten anti-money laundering legislation and procedures, as well as easing bank secrecy in line with international practice, including making tax evasion a predicate crime.

It said that, while the Philippines economy has performed well, there is scope to do even better.

Real GDP regained strength from a slowdown in mid-2015 to record a robust 6.9 percent in the first quarter of 2016, “in line with our 6-percent year-on-year growth forecast for 2016 as a whole.”

It noted that consumption and investment have grown rapidly, but net exports have been held back by weak external demand.

“Amid strong economic activity, inflation fell below the government’s target band (of from 2 percent to 4 percent) in 2015 and the first half of 2016, due to lower food and fuel prices, but is expected to return to within the target range later this year and in 2017 as commodity prices stabilize,” it added.

The IMF said the country’s external current account remains in surplus, driven by robust remittances and business-process outsourcing receipts, while international reserves are stable and comfortable.

“Notwithstanding strong economic growth and improved governance, there is a need to ensure that the benefits reach the broader population. Infrastructure quality and social indicators are still below those of peers. The unemployment rate has fallen to a decade’s low of 5.3 percent, but significant under-employment and poverty remain,” it said.

Budget execution has improved since mid-2015, reflecting enhanced public finance and procurement management, making the 2-percent deficit target attainable in 2016, it said.

“The risks to the short-term 2016 outlook are balanced, with upside risks related to a better-than-anticipated execution of the 2016 budget and downside risks emanating from the external environment including Brexit,” it said.

The IMF warned, however, that the Philippines’s favorable medium-term outlook is subject to downside risks mainly emanating from the global environment.

“On the downside, lower growth in China and the region, tighter global financial conditions, and a surge in global financial volatility could lead to capital outflows and tightening of domestic financial conditions,” it said.

Should risks materialize, the authorities are well equipped to respond, particularly given the Philippines’s strong fundamentals and ample policy space, it noted.