MANILA, December 18, 2003  (STAR) By Des Ferriols - The International Monetary Fund (IMF) upgraded its projected 2004 economic growth for the Philippines from 4 percent to 4.25 percent, saying that the country continued to demonstrate resilience this year that would likely sustain its momentum next year.

Despite its optimistic projections, however, the IMF said it has decided to keep the Philippines under its post-program monitoring (PPM) framework although fund officials ruled out the possibility that the Philippines would need further funding.

The IMF has just concluded its PPM review, saying that the economy showed resilience and it expected gross domestic product for 2003 to grow by 4 percent.

"To the extent that the Philippine economy benefits from the current upturn in the global economy, growth will pick up in 2004," said IMF mission head Masahiko Takeda.

IMF’s 2004 projection was an upgrade from its original 4 percent projection under its World Economic Report early this year.

However, Takeda said that based on the recommendations of the mission, the Philippines would continue to be under the IMF’s PPM framework where policy discussions and review would be conducted twice a year instead of just once a year.

"The PPM framework is not a program so it doesn’t have conditionalities other than those contained in the outstanding loans," Takeda explained. He added that the Philippines has crossed the threshold where its outstanding obligations were now less than its total membership quota but he said this did not exclude continued PPM review.

"One of the purposes of this mission is to look at the economic situation and to come to a judgment on whether or not we will recommend the termination or continuation PPM," Takeda said. "We have come to a decision in favor of continuation. We have come to an agreement that it is in the interest of both parties to continue the PPM."

However, Takeda said he did not think that the Philippines would soon need new IMF funding despite dire warnings of a fiscal crisis serious enough to push the country’s debt towards unsustainable levels.

In 2004, Takeda said there were upsides in the Philippine economy although he said much of the IMF’s macro-economic assumptions changed significantly. "But the 2003 performance was quite strong, so that helped," he said.

But the IMF said it continued to be concerned over the government’s strategy of cutting down on capital expenditures in order to contain its budget deficit.

The IMF said the government’s current policy that resisted radical tax measures to increase its revenues base made it necessary to cut back on public spending that would ultimately become unsustainable and impair growth prospects.

The IMF said this resilience was due largely to the timely monetary tightening and strengthening of the anti-money laundering legislation, encouraged further by the improvement in budgetary performance.

"Notwithstanding these favorable developments, the directors underscored the need to address vulnerabilities," said the IMF.

According to the IMF, it welcomed the authorities’ commitment to improve fiscal performance but there was 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.

"The [IMF is also concerned] that the current strategy relies heavily on expenditure compression involving undesirable reductions in capital expenditures," the IMF report said. "Such a strategy may seriously impair growth prospects over the medium term and become unsustainable."

The increase in the deficit target for 2003 and the postponement of the target year for balancing the budget from 2006 to 2009, according to the IMF, heightened the urgency of steps to safeguard the credibility of fiscal policies and ensure sustainability.

The IMF said it was also concerned about the continued worsening of the financial condition of the power sector, particularly the expanded borrowing requirement of the National Power Corporation (NPC).

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.

The IMF though said there was a need to implement fundamental tax policy measures to complement the ongoing 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.

Perhaps the biggest concern now, according to the IMF report, was the sharp deterioration of the financial condition of the NPC and the difficulties the authorities were facing in privatizing its transmission assets.

The IMF added that the government had to provide the Energy Regulatory Commission with "sufficient independence" to better balance the interests of producers and consumers "while acknowledging that power rates will need to be increased to restore the financial soundness of the sector."

Reported by: Sol Jose Vanzi

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