MANILA, November 7, 2005
 (STAR) (AFP) The implementation of a long-delayed new value-added tax law will give a much-needed boost to the economy but it also brings fresh political problems for President Gloria Arroyo.

Arroyo's critics charge that the new expanded VAT, which took effect on November 1, will increase inflation and worsen the plight of the poor but economists say the country must bite this bullet and increase revenue so as to avoid a looming fiscal crisis and regain credibility with foreign creditors.

"Further down the road, we expect our credit ratings to improve as the world looks towards a new vibrance in our economy," Arroyo said.

The markets have responded positively, with stocks at three-month highs and the peso at five-month highs on investor relief that the new VAT law was finally being introduced after so many doubts and challenges

EVAT to have no impact yet this year By Ted P. Torres The Philippine Star 11/06/2005

The expanded value-added-tax (EVAT) will have practically no impact on the country’s economic performance this year but would be a significant contributor in 2006, a US-based investment bank and financial advisor said.

In a report, Morgan Stanley said EVAT "has had no role to play in this year’s fiscal performance" since the implementation started just a week ago.

Finance Secretary Margarito Teves said the National Government hopes to collect about P82 billion from the EVAT alone next year.

Morgan Stanley said the Philippines will realize additional revenues from the new tax law.

"The fiscal gains (from EVAT) will emanate from additional items including fuel, electricity, air transport, domestic shipping, and doctors and lawyers. And it will also increase the rate from 10 percent to 12 starting January 2006," it said in a report.

If the controversial tax does pump in the additional revenues of P82 billion, the gross domestic product (GDP) in 2006 may expand by between five to six percent or within the original targets prior to the new tax law’s implementation.

What is especially critical, however is that if the EVAT is implemented properly, the projected revenue generated is collected efficiently and not perceived as tainted with corruption colors, and that the proceeds will go to the targets areas especially in debt servicing, infrastructure and social services," Morgan Stanley.

However, the Morgan Stanley report somewhat frowned on the prospects of privatization, particularly the sale of the National Power Corp. (Napocor).

"Given regulatory issues that need to be ironed out before the company is made attractive for private participants, we do not share the authorities optimism on this front," the report said, citing the government’s aspirations of selling 70 percent of Napocor’s assets.

"Although we belong to the ranks of those who would like to see the power sector in private hands, we realize it may not happen over the near term—but we take heart from the fact that it is much smaller burden on the budget than in previous year," Morgan Stanley said.

This has been achieved largely on the back of an increase in tariff in 2004 to early 2005 as well as through the transfer of P200- billion of Napocor debts to the National Government’s book.

For the first six months of this year, Napocor’s deficit stood at around P9.5 billion – down significantly from last year when the deficit was in excess of P32 billion.

Chief News Editor: Sol Jose Vanzi

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