MANILA, JUNE 23, 2008
(STAR) By Des Ferriols - The International Monetary Fund (IMF) has scaled down its growth projection yet again from 5.8 percent to 5.2 percent this year, citing the impact of slowing global economy and escalating prices.

The IMF had just concluded its mission to the country last week, headed by mission leader Il Houng Lee who met with local authorities and other key stake holders to discuss economic developments and their emerging outlook.

The IMF mission said in a statement released yesterday that the Philippines, together with its peers in the region, faced the twin challenges of a slowing global economy and escalating food and fuel prices.

Late last year, the IMF upgraded its 2008 growth projection from 5.8 percent to six percent but the Fund brought this projection back down to 5.8 percent last April after assessing the impact of the global slowdown in the region as a whole.

The latest revision resulted from the latest assessment of the impact of emerging global developments on the country’s economy and fund officials said even with the downscaling, the impact was actually still contained.

According to the IMF, the situation would have been worse if not for the cushioning effects of fiscal and other reforms that have so far cushioned the full impact of deteriorating conditions outside the country.

“Nevertheless, continued prudent macroeconomic policy management is needed to navigate through the challenging times ahead,” the IMF said, especially since efforts to mitigate the impact of higher food prices on the poor would add to the fiscal burden.

According to the IMF, growth was expected to slow and inflation would likely remain elevated.

“On the back of slowing external demand and softening consumption indicators, the economy is likely to grow 5.2 percent in 2008, down from 5.8 percent projected earlier,” the IMF said.

Meanwhile the fund said inflation is expected to remain close to double digit levels in the coming months as the recent increases in food and fuel prices filter through to the consumer price index.

However, the IMF said that to its credit, the Philippines has maintained a largely deregulated oil sector which has allowed it to avoid the fiscal problems being faced by some other countries from fuel subsidies.

The IMF said it was in full support of the targeted increase in pro-poor spending that might result in a modest fiscal deficit in 2008. However, the mission said it was important for the Arroyo administration to protect the 2009 fiscal program.

The IMF said the recent reduction in public debt, from about 100 percent of the gross domestic product (GDP) in 2003 to 62 percent in 2007, has provided some scope for increased social spending.

But the IMF said social spending should be limited to well-targeted schemes for protecting the poor, such as through well-designed conditional cash transfer schemes.

“Limiting the deficit and increasing the tax effort to secure revenue will assure investors that the Philippines remains committed to medium term fiscal consolidation,” the IMF said.

In this context, the IMF said recent reforms to personal income taxation and the planned reduction in the corporate income tax would make it harder to achieve the target to reduce the fiscal deficit to only half a percent of GDP in 2009.

To make up for the fiscal cost of these tax exemptions, the IMF said the Arroyo administration would have to adopt legislative measures as early as possible to reform fiscal incentives and excises as well as to find other resources, such as from accelerating tax administration reform.

The IMF said the strength in the fiscal position of developed economies in Asia would cushion the impact of the global slowdown but for countries like the Philippines, fiscal consolidation would be critical.

However, the IMF said the strength of domestic demand in the region, combined with rising food and energy prices, has contributed to a buildup of inflation pressures in a number of countries.

The IMF said inflation pressures have begun to emerge in the Philippines as well as Indonesia and Thailand.

“Growth prospects remain dependent on how resilient the region’s financial systems,” the IMF said earlier.

Chief News Editor: Sol Jose Vanzi

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