IMF cites underspending for huge forecast slash

Underspending under the Aquino administration is the major thorn for growth as the International Monetary Fund (IMF) cited the withholding of the state budget for its decision to reduce growth forecast for the Philippines by a full point to 3.7 percent for this year from an initial estimate of a 4.7 percent growth.

The IMF staff mission which visited the Philippines for the 2011 Article IV of the multilateral agency added the forecast was lowered due to the slowdown experienced by the economy.

The team explained that the country’s gross domestic product (GDP) growth slowed in the first three quarters of 2011 owing to the fall in public investments.

“The fall in public investments was due to authorities’ decision to adopt new practices that aim to improve the transparency and efficiency of government expenditure.

Earlier, growth for this year was pegged by authorities at seven percent and later to four percent due to what critics call ‘hoarding’ of public funds by the government.

In contrast, the previous government, although threatened by the same global economic instabilities, resorted to spending which resulted in higher growth figures.

Despite this, the group is not too worried about the country’s fate in the face of the fragile global economic environment affecting it because the local macro economic conditions remain generally stable.

In a press conference, Vivek Arora, country representative of the IMF, said policy management of the government is supporting confidence and has built up room for a strong response should further negative shocks from the global turmoil occur.

“The key challenge now is to navigate through the period of global uncertainty to maintain macroeconomic stability while building the foundation for faster and more inclusive growth,” Arora said.

Aside from underspending, Arora traced the weak local economy this year to a fall in semiconductor exports.

While the team expects growth to average 3.7 percent in 2011, it sees the country’s growth to reach 4.2 percent in 2012 as public spending recovers and private demand remains resilient.

It said the global environment remains a key risk to the outlook while inflation is seen to remain within the target range this year. The balance of payments will likewise stay in surplus, according to the group.

Arora said monetary policy of the government has responded well to chainging circumstances. “Policy tightening in early 2011 helped to forestall inflation pressures while the pause in tightening in recent months has been justified by extreme global uncertainity and low core inflation,” he said.

“Monetary conditions remain supportive of growth, suggesting that an easing of conditions is not needed at this time,” Arora said. He said that if global downside risks or further negative shocks were to materialize, monetary policy could be calibrated.

The IMF also pointed out that fiscal policy should provide welcome support for growth in 2012, as expenditures rise from their unexpectedly low level this year. Over the medium term, it said the planned fiscal consolidation should strengthen the ability of the budget to respond to future shocks.

“Expenditure is being appropriately reoriented toward social and infrastructure priorities for inclusive growth. Higher revenue will be needed in order to meet these objectives. The authorities’ emphasis on strengthening tax compliance is appropriate and the Fund continues to support these efforts with technical assistance,” it said.

Further, the IMF said it will be important to reform excises, rationalize fiscal incentives, and broaden the tax base.

Arora said the financial sector has been resilient to the global turbulence and that vulnerabilities from concentration and interest rate risks, real estate exposure, and potential spillovers from global financial disruptions need to be carefully monitored.

“It remains important that amendments to the BSP charter be quickly approved to give supervisors stronger legal protection as well as allow the BSP to issue its own debt securities for more effective conduct of monetary conduct policy and promotion of macroeconomic stability,” Arora added. –Mario F. Fetalino Jr., Daily Tribune