MANILA, August 15, 2003  (STAR) By Des Ferriols  - The International Monetary Fund (IMF) said yesterday the country’s economic growth is expected to remain around four percent this year despite the impact of the Middle East conflict to the economy.

With oil prices going down and pressure easing on the peso, inflation is expected to stay close to three percent this year compared with 3.1 percent last year, the IMF said in a review of the Philippine economy.

"The Philippines emerged from financial market pressures in early 2003 largely unscathed, with robust economic growth and low inflation," the IMF said.

Thanks to a quick resolution of the Iraqi conflict, fresh interest in emerging markets and easing financial market pressures, macro economic condition in the Philippines are expected to stay favorable in the near term, the IMF added.

But the bank said an increase in the country’s deficit for 2003 and the postponement of the target year to balance the budget to 2009 from 2006, had heightened the urgency to protect the credibility of fiscal policies and ensure a sustainable economy.

"Directors called on the Philippine authorities to move decisively to strengthen the medium-term fiscal vulnerabilities, contain the rapid increase in public indebtedness and increase the economy’s resilience to shocks," the IMF said.

It said it was concerned with the decline in the finances of the state-run National Power Corp. (Napocor) and difficulties with privatizing its transmission assets.

"They underscored the importance of a stable and transparent regulatory framework to attract much needed investment into the power sector," the IMF said.

The IMF praised the success of the country’s Bangko Sentral to stabilize the foreign exchange market, including several administrative measures to reduce demand for foreign exchange.

The IMF also said it welcomed the authorities’ commitment to improve fiscal performance but there is a need to build a consistent track record of fiscal prudence based on a viable and credible strategy to balance the budget over the medium term.

It also said there is still room for the BSP to buy foreign exchange from the market to avoid a decline in official foreign reserves.

But it warned that intervention in the foreign exchange market should be used sparingly and focus should be on inflation targeting.

According to the IMF, there had been a significant strengthening of revenue effort that was critical for bringing public finances and indebtedness to a more sustainable path.

But the IMF said there was a need to implement fundamental tax policy measures to complement the on-going effort to strengthen tax administration. The Fund made its usual pitch for increasing the actual tax rate on top of reforms that would improve the administration of the taxes that were already being collected.

Reported by: Sol Jose Vanzi

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