, April 1, 2004
By Des Ferriols - The Philippines must urgently implement a wide array of economic reforms, the International Monetary Fund (IMF) warned yesterday, expressing growing concern over the government’s budget and indebtedness.

In a regular report, the IMF expressed "serious concerns" about the country’s high deficit and debt, a change in tone from its previous report last August in which it said there was a need to "address vulnerabilities."

"Key areas of weakness and vulnerabilities remain," the IMF said.

An unstable political environment, heavy debt and fiscal deficit dampened the economic outlook for the year ahead, it said, predicting a flat growth of 4.5 percent in 2004.

"The economic outlook for the Philippines is likely to remain subject to considerable uncertainty in the period ahead. In particular, the uncertain political environment ahead of the elections brings downside risks to the outlook," the IMF said, referring to the May 10 presidential elections.

Inflation is likely to edge up, but should remain within the official target range of four percent to five percent, the IMF said.

The business community has been concerned over the May 10 elections as a lead contender for the presidency, opposition candidate Fernando Poe is a high school drop-out with no experience in government but enjoys a high following as the country’s biggest movie star.

The IMF credited government officials with having undertaken "important economic reforms in recent years," adding that "the macro-economic performance has been favorable with sustained growth and declining inflation."

The world body said the government’s plan to cut its deficit to 4.5 percent of gross domestic product (GDP) this year from 4.9 percent in 2003 was not ambitious enough, urging the government to raise taxes on cigarettes, alcohol and petroleum.

Widespread tax evasion and the government’s failure to pass bills to raise so-called sin taxes have hampered progress towards its goal of achieving a balanced budget by 2009.

Analysts have voiced concern in recent weeks that rising interest rates, falls in foreign reserves and the steady weakening of the peso ahead of May 10 elections had raised the risk the government will face funding difficulties this year.

The Philippines, Asia’s most active debt issuer outside Japan, faced a "considerable risk of a financing crisis this year," CLSA said in a recent research note.

President Arroyo’s government kept the fiscal deficit in check last year. But at nearly $300 million a month, it helped push the government’s debt stock above 90 percent of annual gross domestic product, up sharply from 70 percent in 1998.

In light of the upcoming presidential and local elections, the government should not loosen its economic policies, the IMF said.

The directors also recommended the country move its heavily indebted power sector toward privatization and allow higher rates to halt the "sharp deterioration" in the financial condition of National Power Corp., the main power plant operator.

The privatization of heavily indebted Napocor, now under way after several delays, would save the government the P38 billion it says it spends financing the company each year.

The IMF recommended that the Philippines improve its appeal to investors by loosening excessive regulation. The country also needs to improve transparency and the rule of law to quell corruption, it said.

It said the threat of international sanctions as a result of an inefficient anti-money laundering law contributed to market turbulence in 2003. Other contributions it cited were the war against Iraq and worsening public finances.

Reported by: Sol Jose Vanzi

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