Philippines to keep growing — IMF

THE PHILIPPINES’ growth potential has increased but policy and fiscal reforms are needed, the International Monetary Fund (IMF) said in reports released yesterday.

It said “high confidence” could boost investment and growth, but also warned that the external environment was “complicated” and would have to be managed.

Among others, the IMF said the central bank’s accommodative stance “needs to start being tightened in the near term” given inflation risks.

The comments were contained in two country reports that were the product of annual Article IV consultations. Discussions for the 2010 report were held from Dec. 1-10 last year and the process was formally concluded on Feb. 18, 2011.

“The economic outlook is generally favorable, with sustained growth and a strong external position,” the IMF’s Executive Board said.

“A key policy challenge is to preserve macroeconomic stability while enhancing medium-term growth. Meeting this challenge will require a careful exit from stimulus policies in a complicated external environment, and further reforms to promote investment.”

The IMF, which has a 5% Philippine growth forecast for 2011, said “raising growth towards the government’s 7-8% objective will require a continuation of efforts to rebalance the economy towards investment, particularly private investment, as well as to address impediments to job creation and productivity”.

It said discussions had focused on five key areas: monetary policy, managing external inflows, fiscal policy, the financial sector, and reforms to enhance growth.

With respect to monetary policy, it said the central bank’s accommodative stance had helped support a recovery but a tightening was needed in the near term to forestall inflation risks.

“Should a tall risk materialize, such as renewed global turmoil, the timing of monetary normalization could be recalibrated,” the report said of IMF staff views made during the consultations.

With reserves at adequate levels, the peso “broadly in equilibrium” and last year’s capital inflows likely to persist, meanwhile, the IMF said “there is scope to rely more on greater exchange rate flexibility going forward”.

The government’s plan to cut the deficit to 2% of gross domestic product (GDP) by 2013 was welcomed and the Fund said “a greater consolidation could be considered”, which would necessitate an increase in the tax effort,

The financial sector was described as sound and asset bubbles not a concern “so far”. Prices, however, need to be watched and further financial market development was recommended to channel external inflows to infrastructure.

To enhance growth, the IMF stressed the need to increase investments.

In a “special issues” report, meanwhile, IMF staff said the country’s potential growth had increased to around 5% from 3-4% in the 1990s. Measures to raise this towards the government’s 7-8% target in the medium term were offered.

In particular, the IMF staff said an increase in secondary schooling years, improved governance, and a further shift to industry and services from agriculture could raise the contribution of total factor productivity — a measure of an economy’s technological dynamism — to 3% by 2015 from a historical 2%.

The growth contribution of capital, meanwhile, could also be raised via fiscal reforms and business climate improvements that increase the investment rate to 19.5% of GDP by 2015 from a historical average of 15%.

The contribution of labor, lastly, could be increased by increased training and search assistance, among others, and continued growth in the industrial and services sectors would be needed to address the need to create jobs.

Asked to comment on the IMF country reports, Budget Secretary Florencio B. Abad said the Aquino administration’s priorities involved instituting transparent, accountable and participatory governance; reducing widespread poverty via substantial investments in social protection, basic education and public health; and achieving economic growth through the public-private partnership initiative. –Businessworld