MANILA, October 29, 2005
 (STAR) (AFP) Despite oil price fueled inflation, President Gloria Arroyo must insist on the full collection of a key consumption tax that aims to improve the Philippines' fiscal state, the World Bank said Friday.

The government is set to collect on a 10 percent expanded value-added tax (VAT) from Tuesday after a political battle between Arroyo and her opponents that reached the Supreme Court.

Manila maintains the extra tax revenue would help it avoid possible default on its mounting debts.

World Bank country manager Joachim von Amsberg urged Manila to resist pressure to delay the second stage of the VAT law to be implemented next year, when Arroyo has the option to raise the rate to 12 percent.

Arroyo, who survived an impeachment complaint in September for alleged election fraud, has been under pressure to ease the burden of higher pump prices and electricity rates arising from historically high oil prices.

Some allies have urged her to defer VAT collections on the two sectors for the time being.

"All of the measures that have been put in place, plus more, are quite desperately needed to bring financial health back to the Philippine state," von Amsberg told a news conference.

"A very large effort is needed. Every element that has been passed I think should be vigorously implemented to attain those targets," he said.

Von Amsberg and officials from major lender countries met with Arroyo's economic team on Friday to review Manila's efforts on the fiscal front after the government suffered a double downgrade of its sovereign credit ratings early this year.

The World Bank official acknowledged progress with increased revenue collections this year and the VAT law.

But he said it was "only one step in the sustained reform effort that is needed over several years" and which must be supported by other "credible measures to achieve the medium-term balanced budget target."

Finance Secretary Margarito Teves acknowledged that the government's tax effort was way below its historical peak of about 17-18 percent of the gross domestic product (GDP) in the late 1990s.

Even if the VAT is collected, it would improve to just 13.3 percent of GDP this year, he told the news conference.

Next year if the increased VAT rate is collected the tax collection rate should improve to 14.6 percent of GDP.

Von Amsberg said a 17-18 percent tax rate was "a good benchmark for the medium- to long-term recovery of revenue."

He said the Philippines rate of 12-13 percent in the last few years fairly low level and not enough to provide an attractive investment climate and to provide services to the poor.

Teves said the government's next priority is to improved tax collection as well as the sale of certain corporate assets before going back to parliament to seek the passage of the next round of fiscal reform measures.

Manila plans to sell state-held shares in brewer San Miguel Corp and utility Manila Electric Co.

Chief News Editor: Sol Jose Vanzi

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