, August 5
 (STAR) By Ted P. Torres - The Ateneo Center for Economic Research and Development (ACERD) is projecting a growth of 4.5 percent to 5.3 percent for the economy this year, while the inflation rate is seen to range from eight to nine percent.

"Inflationary pressure will come from oil prices and interest rates both of which show no signs to decelerating," ACERD director Cielito F. Habito said.

The implementation of the expanded value-added tax (EVAT) is expected to influence the full year inflation rate by 0.3 percentage points.

The ACERD growth forecast was originally placed at 4.8 to 5.6 percent early this year but the negative impact of the political instability in the second quarter of the year forced a review and the subsequent revisions.

The inflation rate has been moving upwards since 2002 from 3.1 percent to 5.5 percent last year. In June this year, it rose dramatically to 8.3 percent.

"The dominant cause of price increases is the continuing rise in world oil prices translating into substantial increases in domestic petroleum prices, resulting in permeating the economy through increased cost of power and transportation," ACERD said.

Last Tuesday, world oil prices jumped to an all-time high of $62.30 per barrel. The Philippines is a net importer of crude oil, mainly Dubai crude which closed at $54.82 per barrel yesterday.

Another area of concern is the increase in the underemployment.

Underemployment rose from 18.5 percent in April last year to 26.1 percent this year. In January this year it somewhat slipped to 16.1 percent.

"From less than one out of five employed, one out of four workers indicate that their current employment is not adequate. This suggests that the nature of jobs generated in the past year have been of low quality, much of it probably coming from the informal sector," the academic research group said.

Meanwhile, global trends show an upward creep in interest rates which will continue to dampen investments and consumer spending. The peso will remain volatile which is merely responding to the revaluation of the Chinese yuan, oil prices, and the domestic political turmoil.

To cushion the economy from the anticipated pressures, tax and other revenue collections must improve beyond its record performances in the past few years. The ongoing promotion of the small and medium enterprises (SMEs) and other development initiatives through financing, technology support and other support mechanisms must be increased.

"It is important that we avoid putting aside good programs and initiatives already set in place and throwing away gains already made, in the wake of political changes that may ensue," it added.

Local banks are warning that the country faces a flight of offshore capital if the government proceeds with its attempts to collect disputed taxes on foreign currency deposits, an industry official said yesterday.

"If the tax department goes ahead with the move it will virtually kill the offshore banking business in this country," Leonilo Coronel, executive director of the Bankers Association of the Philippines, told Agence France Presse.

Depositors with foreign currency accounts in the Philippines currently pay 7.5 percent tax on interest income and 10 percent on withholding tax on interest payments for loans financed by foreign currency deposit units (FCDU).

However, the tax department claims a revision of the Tax Reform Act seven years ago when the words "exempted from all taxes" were removed allows it to collect additional taxes such as stamp duty on foreign currency deposits.

The attempt to claim new taxes, estimated at P39 billion, has outraged bankers and the country’s new finance secretary, Margarito Teves, is said to be looking into the issue.

According to the central bank some $15 billion is tied up in foreign currency accounts in the Philippines as of Dec. 31, 2004.

Bankers association president Cesar Virata, who is also chairman of the Rizal Commercial Banking Corp., earlier this week warned the country could lose most of its foreign currency deposits if the disputed tax is collected.

And Kim Jacinto Henares, the deputy tax commissioner told a business newspaper this week that the dispute had come down to a "battle of wills" between the tax department and the banks.

In 1976 banks were permitted to establish FCDUs allowing local banks to lend in foreign currency, take foreign currency deposits and conduct foreign currency transactions with clients.

Coronel said when the FCDUs were established they were subject only to income tax and it was currently still the case. — AFP

Reported by: Sol Jose Vanzi

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