Government bane: Weak spending

WEAK spending, despite improvements in tax takes, continues to hobble the country’s growth, the World Bank said.

In a report released on Monday and titled “From Stability to Prosperity for All,” the world’s largest lender said that while the “Philippine economy grew by 3.7 percent in 2011, broadly in line with its neighbors,” the growth was “slower than expected.”

Citing data from the government’s National Statistical Coordination Board, the World Bank’s Poverty Reduction and Economic Management (PREM) Unit traced the slow growth to “weaker public spending and external demand” and described the growth in investment touted by the Aquino administration as “artificial.”

“Only consumption was strong”; “exports performance deteriorated further,” it said.

The World Bank said the Philippines needed to accelerate reforms to allow for sustained growth of “above 5 percent” annually to improve the lives of the poor.

“A stronger structural underpinning would allow the country to deal with shocks more effectively, achieve more inclusive growth, and reduce poverty at a faster rate.”

The World Bank added that strengthening public finances and competitiveness was needed for rapid growth of the same level achieved by neighboring countries that led to greater poverty reduction.

The report said the country’s balance of payments was buoyed by portfolio investment inflows and remittances from overseas Filipinos.

According to the Bangko Sentral ng Pilipinas, cumulative foreign direct investment (FDI) for the whole of 2011 “yielded net inflows of $1.3 billion, sustaining the level in 2010.” The BSP also said in a statement that “remittances from overseas Filipinos coursed through banks remained resilient, rising by an annual rate of 5.4 percent to $1.6 billion in January 2012.”

But while the government tried to accelerate spending in the last quarter of 2011, the World Bank said such “was lower than programmed.”

The report forecast growth in gross domestic product (GDP) would hit the World Bank’s targeted 4.2-percent rate for this year if actual government spending would be 85 percent of appropriations, or about an 11.3-percent increase in spending.

The GDP growth rate could even hit 6 percent if the spending increased to 27.6 percent or if the government actually spent all the money it has appropriated. The report forecasts economic growth of 4.2 percent in 2012 and 5 percent in 2013, up from 3.7 percent last year.

The report says inflation is low and stable and government finances are manageable.

It also says the central bank is awash with dollars, and the government is committed to improving government and reducing poverty.

But it said this remained a “tough call” considering that the average per-capita growth has been very low at 1.4 percent in the last 50 years, the report said. “Real income drastically fell after the 1983 crisis and narrowly averted in 2005,” the report said. It also said constraints to the country’s growth remained “largely structural,” resulting in “slower poverty reduction and weaker labor market outcomes.”

The report noted that while employment figures in the succeeding quarters showed improvements, majority of Filipino workers were employed in micro and small companies and many have no social insurance.

The precarious state of the country’s economy that would impact hard the Filipino poor is aggravated by what the World Bank said are “significant downside risks” stemming from the inability of the international financial structure to heal itself.

The report noted that a “slow growth in large middle-income countries and financial turmoil and recession in Europe are generating headwinds.” “Developing countries need to prepare…since [a] sharp deterioration in conditions could imply a cycle as large as the 2008/09 crisis—potentially longer lasting because of reduced policy space.”

The report noted that economic activities in developing countries like the Philippines “will be vulnerable to varying degrees to a further decline in international capital flows, reduced exports, falling commodity prices or remittance levels, and a reduction in international aid.” –Dennis D. Estopace / Reporter, Businessmirror