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IMF cautions gov’t on fiscal deficit

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IMF Article IV press briefing
‘Further reduction in nonpriority spending, especially those unrelated to flagship infrastructure projects and social protection, would be warranted if tightening of global financial conditions engenders a surge in borrowing costs, while expanding social protection spending as needed.’ -- IMF Article IV consultation staff report published on Friday. -- WWW.IMF.ORG

THE PHILIPPINES should aim for a more modest budget deficit by trimming “non-priority” expenses in order to reduce the risk of overheating, the International Monetary Fund (IMF) said.

IMF country representative Yongzheng Yang said that the Philippines should be “reprioritizing expenditures” primarily by doing away with some unitemized entries in the national budget.

“In the Philippine government budget, there is a portion allocated for special purpose funds. These funds are not allocated to specific projects and these funds, to my understanding, amount to one percent of GDP (gross domestic product),” Mr. Yang said during a media briefing on Friday.

Special purpose funds are lump-sum provisions in the national budget that are given to various agencies for projects or allocations which are not yet identified during national budget preparation. Some offices use it as a calamity fund, others for pension payments or as subsidy to state-owned corporations, to name a few.

“This could be achieved by intensifying efforts on the revenue side and containing non-priority spending, such as new hiring of public sector employees and non-urgent capital projects,” according to the 67-page IMF report released on Friday.

“Further reduction in nonpriority spending, especially those unrelated to flagship infrastructure projects and social protection, would be warranted if tightening of global financial conditions engenders a surge in borrowing costs, while expanding social protection spending as needed.”

The IMF completed its report following the Article IV Consultation with Philippine officials in July, which is an annual health check on member-economies.

The multilateral lender said the Philippines should keep the fiscal deficit at 2.4% of gross domestic product (GDP), steady from the 2017 level and lower than the government’s three percent ceiling.

The budget deficit stood at 2.3% of GDP last semester.

The Duterte government has been pushing for a wider budget gap to accommodate increased spending on infrastructure, particularly big-ticket items in its “Build, Build, Build” pipeline.

“We fully support infrastructure investments, but it is very desirable to keep the fiscal stance neutral… We think that tightening monetary policy and neutral fiscal stance would help reduce overheating risks,” Mr. Yang said, noting that the bank now sees “increased” risks of the economy overheating.

Mr. Yang announced last week that the bank has scaled down its growth forecast for the Philippines to 6.5% this year from an earlier 6.7% estimate in the wake of a slower-than-expected six-percent second-quarter growth that brought last semester’s pace to 6.3%, against the year-ago 6.6%.

The IMF official said he expects growth to accelerate this semester, with GDP growth seen to recover to 6.6% in the third quarter and 6.9% in 2018’s final three months. Still, it would mean that the 7-8% growth goal of the Duterte administration will be out of reach.

“We think the growth slowdown in the second quarter is temporary,” Mr. Yang said, even as he noted risks to growth amid quickening inflation fueled partly by rising global oil prices, rapid credit growth, increasingly tight global credit conditions and worsening world trade tensions.

The growth rebound is expected to be fueled by “very strong investments” and robust consumer spending, even if the latter softened in the previous quarter.

Sustained policy reforms to attract more foreign investments as well as the impending shift to a regular tariff scheme for rice imports that is expected to slash retail prices of the staple, however, could help lift growth prospects while easing inflation pressures.

The IMF said economic growth should remain “very respectable” and “strong” even as the Philippines faces new challenges. GDP expansion is seen to pick up to 6.7% in 2019, although inflation is expected to remain elevated at 4.9% this year and 3.9% next year versus a 2-4% government target.

The IMF is also calling for enactment of all planned tax reforms in order to raise more revenues to support state projects. — Melissa Luz T. Lopez