The International Monetary Fund (IMF) at the conclusion of its 2016 Article IV Consultation Mission to the Philippines said it still sees the economy growing by 6 percent this year, but needs a new medium-term strategy to boost growth even further.
“The Philippine economy has performed well, but there is scope to do even better. Real GDP [gross domestic product]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,” Chikahisa Sumi, IMF mission chief, said in a press conference on Tuesday.
Sumi stressed that the continued solid growth in 2016, despite the external headwinds, is due in part to fiscal stimulus and supportive monetary conditions.
The IMF, however, said that even with strong economic growth and improved governance, there is still a need to ensure that the benefits reach the broader population.
Sumi noted that infrastructure quality and social indicators in the country are still below those of the Philippines’ peers.
“The unemployment rate has fallen to a decade’s low of 5.3 percent, but significant underemployment and poverty remains,” he said.
The IMF said President Rodrigo Duterte’s 10-point reform agenda would anchor policy formulation and structural transformation over the medium-term.
Sumi said given the large infrastructure and social needs and ample fiscal space, the multilateral supported raising the national government budget deficit to 3 percent of GDP over the medium term, consistent with a broadly stable debt-to-GDP ratio.
“We would moreover encourage a comprehensive and equitable tax reform package that raises substantial additional revenue to finance higher productive spending that would crowd in private investment,” he said.
Over the medium term, IMF noted that a higher revenue and productive spending scenario of about 3 percent of GDP, with the expeditious implementation of the 10-point reform agenda, raised the IMF’s baseline growth outlook of about 6 percent to 7 percent to a 7 percent to 8 percent range.
“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,” Sumi said.
IMF said key elements of this medium term strategy could include:
• 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 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;
• 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 such as 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.
However, the IMF said Philippines’ favorable medium-term outlook is subject to downside risks mainly emanating from the global environment.
On the downside, it said, 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.
“Should risks materialize, the authorities are well equipped to respond, particularly given the Philippines’ strong fundamentals and ample policy space,” Sumi said.
In connection to this, the multilateral institution said monetary policy remains supportive of growth and the introduction of the interest rate corridor (IRC) system will help improve monetary policy transmission.
The current monetary stance is appropriate and should remain vigilant to the impact of additional fiscal stimulus on inflation, it added.
The IMF added that amid strong economic activity, inflation fell below the government’s target band in 2015 and the first half of 2016 due to lower food and fuel price.
For 2016, it sees average inflation close at the lower end of the 2 percent to 4 percent target range, before hitting the midpoint of the range in 2017 as commodity prices stabilize.
It also said the flexible exchange rate regime and strong external position should help cushion the economy from external shocks.
“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 in Brexit,” Sumi said.
IMF also said authorities’ initiatives to strengthen systemic risk monitoring in the financial sector are welcome.
Sumi said the Bangko Sentral ng Pilipinas’ micro and macro prudential policies as well as enhanced monitoring of real estate and credit conditions including the introduction of the residential real estate price index (RREPI) have helped maintain financial stability in a challenging global financial environment.
“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,” he added.
Capital market development is crucial for growth and infrastructure investment including public-private partnerships while mitigating concentration risks in the banking system, he said.
Lastly, the IMF stressed 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.
MAYVELIN U. CARABALLO