The International Monetary Fund (IMF) has projected the country’s gross domestic product (GDP) growth at 6.5 percent in 2014 and year-end inflation to moderate to 4 percent.
The domestic economy posted a 7.2 percent growth in 2013 on account of the robust domestic demand coupled with higher public spending and private investments.
“With potential growth estimated at 6.25 percent, the positive output gap is expected to widen slightly in 2014 as the fiscal stimulus from reconstruction activities related to super typhoon Yolanda further supports growth, the IMF said its latest report on the Philippine economy.
The IMF sees higher imports to meet reconstruction needs expected to narrow the current account surplus to 3.2555 percent of GDP.
“Considering the reforms undertaken, GDP growth is projected to converge to 6 percent, with inflation remaining within the new lower 3±1 percent target band.”
While this envisaged growth path is faster than what was achieved during previous decades, realizing the Philippines’ full potential for rapid, sustained and inclusive growth calls for further reducing bottlenecks to investment and formal sector employment that may be discouraging broader-based business activities, the IMF said.
The report noted that a diversified production structure is more conducive to delivering more durable, employment-intensive growth.
“This would help achieve significant progress in lowering unemployment and poverty rates, thereby reducing the number of people who may be vulnerable to natural disasters and other shocks. The challenge is to continue implementing policies that deliver high quality, sustainable growth.”
The IMF said that the Philippines’ growth remained resilient, the external sector was strong, inflation was subdued, and the banking sector performed well, aided by prudent BSP oversight and regulatory standards.
The IMF supports the BSP-proposed amendments to the BSP charter authorizing, among others, higher capitalization, exemption from income tax, the issuance of its own bills and enhancing its supervisory powers.
“In the fiscal area, we support the government’s dual objectives of narrowing infrastructure gaps and mobilizing additional revenue.”
“Increasing the national government deficit to 2 percent of GDP in 2014, together with continued modest revenue gains from stronger tax administration, would accommodate sizable reconstruction spending needs under ‘build back better” standards arising from the recent earthquake and typhoon,” the report noted.
On the structural policy front, the IMF recommended further reforms to create a more enabling business environment and to generate additional employment.
“Successfully executing PPPs and public capital spending projects would relieve infrastructure bottlenecks and help catalyze private investment.”
The IMF said that identifying PPPs of national importance through amendments to the Build-Operate-Transfer law could mitigate regulatory uncertainty for investors, and further opening energy generation and distribution to competition would have downstream benefits for other sectors through lower input costs.
Narrowing the negative list for foreign investment and scaling back generous perpetual income tax holidays that favor incumbents would support greater market contestability, the report said.
“Reducing internal transport costs including by opening domestic shipping to foreign competition under the Cabotage law amendment would support agri-business and lower food prices.”
“Resolving uncertainties with land titles and use, expanding access to formal-sector credit by SMEs and micro-firms, reducing skill mismatches through better targeted education and apprenticeships would support job creation,” the report added.