The International Monetary Fund (IMF) said the Philippines must focus on improving public infrastructure to attract investment if it seriously seeks to step up economic growth and cut poverty more significantly.
The Philippines has been lagging its Asian peers in investment due to poor infrastructure, which has been traced to government underspending on such projects.
Benchmarking the Philippines relative to its neighbors in terms of the size of public investment and capital stock; the quality of public infrastructure; and public investment efficiency, the IMF confirms in a country report that the level of public capital and the quality of public infrastructure in the country are low, and that there is room for improvement in public investment efficiency.
“At 21.8 percent of GDP [gross domestic product]in 2014, the investment rate in the Philippines is well below regional peers, as reflected in its low capital stock and infrastructure quality,” the IMF said in the report.
The report added that model simulations suggest that improving public infrastructure would result in a sustained output increase and leads to permanent gains in productivity, which crowds in private investment.
“With a low capital stock and a fast growing young population, addressing the large infrastructure gap is needed to raise potential growth and reduce poverty and external imbalances,” it said.
To date, those who comprise two-thirds of the total Philippine population are under 35 years old.
In the report, the IMF said it measured public investment and the stock of public capital for a large sample of countries, finding that the Philippines consistently had lower public investment than other members of the Association of Southeast Asian Nations (Asean) in the recent past, averaging 2.5 percent of GDP in 2000 to 2014.
As a result, the public capital stock is also one of the lowest among Asean countries, at about 35 percent of GDP in 2013, compared with the regional average of 72 percent of GDP.
The IMF directors, however, in a concluding statement on their recent consultation with the Philippines welcomed the government’s plan to step up infrastructure investment and social spending, and return to the medium-term fiscal deficit target of 2 percent of GDP.
Under the Philippine Development Plan 2011-2016, the country aims to increase public infrastructure spending to at least 5 percent of the country’s GDP by 2016 from around 3.5 percent of GDP in 2014.
The IMF directors noted that the planned increase in public expenditure in 2015 is appropriate from both cyclical and development perspectives, given the current low inflation, large infrastructure and social needs, and low and declining public debt.
Out of the total P2.6 trillion national budget for 2015, disbursement for capital outlay, which includes infrastructure expenditure, is programmed at P546 billion.
The Department of Budget and Management (DBM) reported late last month that government infrastructure spending and capital outlay in the second quarter of the year rose 37.3 percent to P81.8 billion from P59.6 billion a year earlier, due to the higher requirements of the Department of Public Works and Highways (DPWH) for its development programs.
The DBM chief said faster disbursements for public infrastructure and capital outlay from April to June this year helped raise total spending to P567.9 billion in the second quarter, reflecting a 12.4-percent year-on-year increase and bringing government spending to P1.07 trillion in the first half of 2015.
The IMF directors also called for further efforts to strengthen public financial management and budget execution, and to mobilize revenue to meet the large social and infrastructure needs.
“Raising investment, particularly in infrastructure, would allow the country to reap the dividends of its young and growing population,” the report said.
The IMF has said it would revise downward its growth outlook of 6.2 percent for the Philippines this year to reflect the government’s own downward adjustment in the first quarter.
Growth in Philippine GDP in the first quarter was revised by the government down to 5 percent from its previous estimate of 5.2 percent after a recent review of the numbers showed an overestimation of growth in three sectors namely, public administration and defense; mining and quarrying; and agriculture, hunting, forestry and fishing.