MANILA, October 5, 2004 (STAR) By Des Ferriols - The International Monetary Fund (IMF) has urged the Arroyo administration to take more aggressive steps in reducing its fiscal deficit, saying that its current program are not bold enough to make its 2009 goal achievable.

For the first time in history, the Philippine government allowed the IMF to release its staff report on monitoring discussions with Philippine authorities.

The IMF normally releases executive summaries of its discussions with its member countries, but the actual staff reports are released only with the acquiescence of the latter. The reports are contained in the 2005 Post Program Monitoring Discussions (PPM) with the Philippine government.

The report indicates that the IMF wants the Philippines to front-load its deficit reduction effort.

According to the Fund, the governmentís current program is "insufficiently ambitious."

IMF resident representative Vikram Haksar said it is critical for the government to jumpstart the virtuous cycle of raising investor confidence in order to attract investment.

"For one, markets will be looking for strong initial evidence of the authoritiesí ability to tackle the fiscal problem," Haksar said. "Second, fiscal measures are likely to be easiest in the opening period of the new administration."

Haksar said the IMF made several projections based on different scenarios: one based on strong reforms and one based on weak reforms, differentiated by how aggressive the deficit reduction would be and its impact on debt reduction.

The price of bold measures and aggressive deficit reduction, however, would be politically-unpalatable legislative measures that the Arroyo administration would have to babysit through Congress.

Haksar noted that there will be difficulties but he added that the IMF remains optimistic the Arroyo administration will be able to capitalize on its mandate to get these aggressive reforms passed on time.

In the staff report, the IMF argued for a reduction in the non-financial public sector deficit of 2.5 percentage points of GDP by 2005. The non-financial public sector deficit refers to total deficit of the National Government and all government corporations except government financial institutions.

"If achieved, such a reduction would make the 2009 target easier to achieve," the IMF report said. "In contrast, if the fiscal adjustment effort was to flag as under the weak reform scenario, debt would decline more slowly."

Under the strong scenario which features an aggressive deficit reduction program, the non-financial public sector deficit will be reduced from 5.5 percent of GDP in 2004 to 3.4 percent in 2005, three percent in 2006 and down to 1.2 percent in 2009.

At this pace, the IMF estimated that financing requirements would likewise go down from 29.5 percent of GDP in 2004 to 26.9 percent in 2005, further down to 24.4 percent in 2006 and on to 19.2 percent in 2009.

"It is much better to reduce deficit and therefore reduce debt rapidly," Haksar said. "We donít think itís enough to just achieve stabilization at a high level of debt because that means there will be a continued need to access the credit market."

Under this scenario, investments are projected to rise from 17.4 percent of GDP this year to 18.7 percent next year and finally to 21 percent by 2009. The IMF also projected savings to increase from 20.2 percent this year to 22.5 percent in 2009.

The existing program of the government falls under the weak scenario of the IMF where non financial public sector deficit is projected to decline gradually from 5.7 percent of GDP this year to 4.8 percent of GDP in 2005 and on to 4.4 percent of GDP in 2009.

If done this way, the IMF said investment growth would peak at 17.9 percent of GDP in 2005 and then start declining to 16.5 precent of GDP by the end of the Arroyo administration.

Reported by: Sol Jose Vanzi

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