IMF warns RP on premature exit strategy

MANILA, Philippines – The International Monetary Fund (IMF) has stressed the importance for monetary authorities to maintain their accommodative policy stance and avoid premature exit to ensure sustained economic recovery.

In its public information notice, the IMF said monetary policy should remain accommodative until a sustained economic recovery is assured and, at the same time, ensure that inflation expectations would remain within target in view of the still negative output gap as well as the planned tightening of fiscal policy.

“A timely return toward a sustainable fiscal path while avoiding a premature exit from a supportive monetary policy will be important, along with continued reforms to ensure sustained growth in the medium-term,” IMF stated in the four-page notice.

In November 2008, the Bangko Sentral ng Pilipinas (BSP) took proactive steps to lessen the adverse impact of the global financial crisis.

These steps included the 200 basis-point cut in key policy rates since December 2008 to July 2009, as well as the implementation of several liquidity enhancing measures including the two percentage-point reduction in the reserve requirement on bank deposits and substitutes to 19 percent from 21 percent and the tripling of the rediscount window to P60 billion from P20 billion.

The IMF said the reduction of key policy rates to a record low overnight borrowing rate of four percent and an overnight lending rate of six percent had a significant impact on lending rates.

The international lender also encouraged fiscal authorities to introduce a credible medium-term fiscal consolidation plan after the country’s budget deficit swelled to a new record level of P298.5 billion or 3.8 percent of gross domestic product (GDP) last year from P68.1 billion or 0.9 percent of GDP in 2008.

The budget deficit last year exceeded the ceiling of P250 billion or 2.5 percent of GDP set by the Cabinet-level Development Budget Coordination Committee (DBCC). It also eclipsed the previous record level of P210.7 billion or 5.3 percent of GDP established in 2002.

The IMF said a medium-term consolidation plan would further strengthen public finances, bolster market confidence, and at the same time create fiscal space for pro-poor spending as well as growth-enhancing public investment.

“Directors concurred that the fiscal stimulus in 2009 proved to be an effective response to the weak economic environment. Given the limited fiscal space, they supported a measured fiscal withdrawal in 2010,” the notice added.

According to IMF, the country’s public debt remained relatively high while tax collections of both the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) weakened beyond cyclical factors.

The international lender said the country’s commitment to fiscal reduction this year would require new revenue measures and expenditure restraint focused on non-priority current spending.

The IMF also committed to provide technical assistance on revenue raising measurs as part of the establishment of a credible medium-term fiscal consolidation plan.

The lender sees the country’s domestic output as measured by the GDP expanding at a faster pace of 3.2 percent this year from 0.9 percent last year after the adverse impact from the global economic and financial crisis. The growth forecast was within the target set by the DBCC ranging between 2.6 percent and 3.6 percent this year.

The international lender likewise expects inflation to average 4.3 percent this year from last year’s 3.2 percent.

The inflation forecast of IMF was well within the BSP inflation target of between 3.5 percent and 5.5 percent this year.

The executive board of the IMF concluded the Article IV consultation with the Philippines last Jan. 29. Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with member-countries every year. –Lawrence Agcaoili (The Philippine Star)