News Brief No. 99/65

News Brief: Joint Statement by the Government of the Philippines and IMF Mission

October 1, 1999

The Philippine delegation to the Annual Meetings of the International Monetary Fund (IMF) and World Bank, led by Secretary of Finance Espiritu and Bangko Sentral Governor Buenaventura, yesterday successfully concluded the discussions with the IMF on the fifth review of the existing stand-by arrangement (SBA). The agreement, which still has to be ratified by President Estrada and IMF management, paves the way toward release of the next tranche of about US$290 million, subject to approval by the IMF's Executive Board (currently envisaged for early December).

The discussions were held against the background of largely favorable economic developments under the program. In particular, economic activity in the first half of 1999 was stronger than programmed, led by a rebound in agriculture, and inflation has come down faster than programmed. As a result, the outlook for real GDP growth in 1999 was raised to between 3-3½ percent, and inflation is now expected to end the year below the program target of 7.5 percent. These positive developments notwithstanding, it was also recognized that the recovery outside agriculture was still fragile, and that continued success in containing inflation required vigilance on the part of the monetary authorities. Although the peso has been under some pressure recently, the external fundamentals were judged to be sound, with the current account in sizable surplus and official reserves at a comfortable level.

Looking ahead, agreement was reached on the outlines of the macroeconomic framework for 2000 and the government's policy plans in support of those targets. Real GDP growth is targeted to broaden and accelerate to 4-5 percent next year, and inflation is to be contained at 6-7 percent. The external position is expected to remain strong, based on continued robust export performance and a steady improvement of investor confidence.

In support of these objectives, it was agreed that fiscal policy should remain accommodative in 1999, while ensuring that the deficit is kept under control; as the recovery gains momentum, a measured shift toward the necessary medium-term fiscal consolidation is envisaged for next year. Specifically, it was agreed that the underlying consolidated public sector deficit (CPSD) in 1999 would amount to about 3.6 percent of GNP, with the National Government (NG) budget deficit projected at around 85 billion pesos. For next year, following three years of expansionary fiscal policy in support of economic growth, there was agreement that the CPSD should be limited to 2.8 percent of GNP, implying a NG deficit of 62.5 billion pesos. While this is higher than originally budgeted, this target balances the need for making a significant start with fiscal consolidation, while at the same time avoiding too abrupt a withdrawal of fiscal stimulus. In light of unusual uncertainty over the outlook for revenue generation, budget expenditures will have to be managed carefully in order to safeguard the program targets.

Besides the discussions on macroeconomic policies, the review also encompassed the government's structural reform priorities. There was agreement on the specific steps to be taken in the various reform areas, including the banking, corporate and power sectors, as well as on tax administration and other public sector reforms. As emphasized, in particular, in the meeting of the delegation with the IMF Managing Director, Mr. Camdessus, full and timely implementation of these reforms is critical to the continued success of the Philippine economy in meeting the challenges of rapid growth and poverty reduction in the globalized world economy of the 21^st century.