The International Monetary Fund (IMF) kept its growth projections for the Philippine economy this year and the next but raised its headline inflation estimates given the expected impact of El Nino phenomenon on food prices.
This was the IMF’s statement at the conclusion of the 2015 Article IV Consultation Mission to the Philippines held on May 14 to 26.
“The outlook for the Philippine economy remains favorable despite uneven and generally weaker global growth prospects,” Chikahasa Sumi, head of the IMF mission, said during a press briefing on Tuesday.
The multilateral still projects the Philippine gross doemstic product (GDP) to grow by 6.7 percent in 2015, as lower commodity proces life houshold consumption and imporved budget execution raises public spending.
Sumi clarified that that the IMF chose to retained its outlook for the Philippine GDP despite that the P33.51 billion budget gap in the first quarter of 2015 was 66 percent short of P98.1 billion target for the period.
“The budget gap is one important indictor, but it is still one of the many inputs to the GDP data so we do not intend to change the projection with just one set of data. We will wait for the other indicators to come in,” he said.
By 2016, growth is projected at 6.3 percent as the one-off fiscal impulse and oil price stimulus in 2015 are expected to wane, Sumi added.
The IMF said risks to the growth outlook for the Philippines stem from both external and dosmetic sources.
“An upside risk is a stronger lift to demand from lower commodity prices. On the downside, disruptive asset price shifts due to asynchoronous monetary polices in advanced economies are a risk, but the Philippines’ strong fundamentals should provide the necessary cushion,” Sumi said.
On the domestic front, any resurgence of strong credit and construction growth could give rise to financial stability risk, he said.
The multilateral also stressed that there is a downside risk associated with El Nino conditions leading to a poor harvest and a rapid run-up in food prices.
In this regard, the IMF raised its 2015 average headline inflation rate outlook to 2.4 percent from its previous estimates of 2.1 percent.
In 2016, inflation is seen to pick up as oil prices rise.
“The stance of monetary policy is currently appropriate following last year’s preemptive tightening,” Sumi said.
The IMF pointed out that any rapid food price increases due to El Nino-related drought should be addressed preemptively by promptly increasing food imports and should not justify monetary tightening unless second round effects were to appear.
On the other hand, the it said continued weak budget execution should also slow down improvements in infrastructure.
“Fiscal policy should focus on supporting infrastructure investment and inclusive growth,” Sumi said.
To achive this, the IMF calls for the implementation of the robust pipelines of public private partnership projects, the enactment of the proposed public financial management bill, and additional fiscal revenue.
“In this respect, the mission strongly encourages a comprehensive tax reform package that is net revenue loss, such as the recommended lowering of personal tax rates without the concomitant rationalization of exemptions/incentives and/or rise in fuel excise taxes,” Sumi points out.
Lastly, Sumi said the mission also supports the Department of Finance’s efforts to allow the tax authorities’ access to bank deposit information and make tax evasion a predicate crime to improve the efficiency and equity of revenue collection.