An International Monetary Fund (IMF) team described the Philippine economy as “performing well,” forecasting continued 6.7 percent real GDP growth and below-4 percent inflation in 2019 while citing the country’s “prudent policies and critical reforms.”

The assessment comes after a team from the IMF visited Manila and Bohol from July 11 to July 25. Dr. Luis E. Breuer, the team leader, stated: “The Philippines has been one of the region’s strong economic performers over the past years, reaping the fruits of prudent policies and critical reforms. The team welcomes the authorities’ strategy of maintaining policy continuity, while adapting to emerging challenges, and taking advantage of the strong economy to implement reforms to improve inclusive growth and job creation. This strategy has served the Philippines well.”

While acknowledging “rising oil prices, external pressures on the peso, one-off effects of excise taxes, and domestic demand pressures” on the current inflation rate, the IMF team projected inflation to fall to under 4 percent in 2019 and toward 3 percent “over time.” This is consistent with the forecast of the Bangko Sentral ng Pilipinas.

“The IMF’s latest findings further underscore the urgency and importance of pursuing, with greater vigor, the administration’s economic agenda for sustained high growth and financial inclusion,” said Department of Finance Secretary Carlos Dominguez III. “There will be no letup in the government’s policy of aggressive spending on infrastructure and human capital development while maintaining fiscal prudence, in step with President Rodrigo Duterte’s vision of reducing poverty incidence to 14 percent and transforming the economy into an upper middle-income one by 2022,” he added.

“The fiscal policy of the Philippines will continue to be prudent, sustainable, and supportive of our investments in public infrastructure and human capital development,” said Department of Budget and Management Secretary Benjamin E. Diokno. “As President Duterte noted in his State of the Nation Address earlier this week, our economic growth agenda will ensure no Filipino is left behind.”

“The IMF’s assessment reaffirms the administration’s judicious approach to economic management and gives us great confidence that our strategy will continue to promote strong growth,” said Socioeconomic Planning Secretary Ernesto M. Pernia. “We are determined to stay the course on tax reform. We are also carefully monitoring our widening trade deficit that’s largely caused by substantial capital goods imports that should enhance growth potential, thereby sustaining poverty-reducing economic development. Further, we are vigorously implementing our Export Development Plan,” the NEDA Chief added.

Secretary Pernia likewise welcomed the IMF Staff’s view that trimming down the list of industries where foreign investments are restricted would be beneficial for the economy. “The draft 11th Regular Foreign Negative List, once approved, will be the shortest list to date. This will be out soon, and we expect this to help boost job-generating foreign investments to the Philippines,” he said.

Meantime, among the policy recommendations of the IMF Staff is to adjust the government’s budget deficit program to 2.4 percent of gross domestic product (GDP) in 2018 and 2019. At the moment, the deficit program is set at 3.0 percent of GDP for 2018, 3.2 percent for 2019, and 3.0 percent for 2020-2022.

The country’s economic managers noted the rationale behind the proposal, which is to help keep inflationary pressures in check in order to maintain stability of the economy even as robust growth is maintained. The IMF-proposed adjustment in the fiscal deficit program will ease the burden on monetary policy in managing inflation.

Nonetheless, they said that elevated inflation this year is due mainly to factors that are one-off and transitory, including the rise in global oil prices, the imposition of excise tax on sugar sweetened beverages and higher excise tax on tobacco, as well as supply-related problems for rice.

The proposed lifting of quantitative restrictions on rice imports, certified as urgent by President Rodrigo R. Duterte during his State of the Nation Address on Monday, is expected to reduce inflation by 0.4 percentage points, they added.

The DOF, DBM, and NEDA Secretaries also stressed that the existing medium-term budget deficit ceiling takes into account the bold infrastructure development program “Build Build Build.” The program is meant to address the country’s long standing and yawning infrastructure gap, which has dragged the country’s competitiveness for decades and which the IMF itself had pushed the Philippines to address.

Secretary Dominguez described the IMF’s proposal as “tough advice,” given that the government is already proceeding full steam ahead in its infrastructure development program. “Given deliberate improvements in our process, projects are in full steam to realize benefits envisioned in a timely manner. We do acknowledge that adjustments may be necessary to adequately respond to the changing macroeconomic landscape both internal and external,” Dominguez said. “The recommendation will be discussed in the DBCC since this requires the collective efforts of its members,” the Finance Chief added.

Budget Secretary Benjamin Diokno said there is merit to reviewing the proposal of the IMF Staff, but cautioned against the implication of abandoning certain infrastructure projects. “We will subject the IMF Staff proposal to a thorough review. Reducing the budget deficit program to 2.4 percent of GDP is feasible. However, the implication of abandoning some of our big-ticket infrastructure projects is something we are not comfortable with. We are already gaining significant progress in our aim to accelerate infrastructure development to boost the country’s competitiveness and improve the quality of life of Filipinos. We do not intend to slide back,” the Budget Chief said.

For his part, BSP Governor Nestor A. Espenilla, Jr. stressed his earlier pronouncement that the BSP is prepared to take follow-through actions to the policy rate hikes done by the BSP last May and June. The IMF Staff affirmed the appropriateness of these actions and supported the BSP’s intention to further tighten monetary policy.

The IMF Staff likewise supported the BSP’s move to reduce the reserve requirement ratio (RRR) for banks, which is part of an overall financial sector reform agenda. The IMF Staff suggested enhanced communication of the rationale behind the reform for better market understanding and for the BSP to calibrate timing of further cuts in the RRR to consider progress in lowering inflation.

“The BSP is firm in its commitment to price and financial stability. Elevated inflation this year was mainly on account of supply-side factors. However, to address potential second-round effects, the BSP saw it proper to hike policy rates last May and June. We are also prepared to take a strong follow-through action to anchor inflation expectations and address any brewing demand-side pressures,” Espenilla said.

The BSP Governor noted that based on the central bank’s latest estimates, inflation will move back to the target range of 2.0 to 4.0 percent by 2019.

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