WB urges more fiscal reforms

More reforms and less scrimping is the best way forward for the Philippines, a World Bank (WB) official said Friday, urging the government to take further steps to boost its revenue base.

WB Philippine country director Joachim von Amsberg lauded the government’s fiscal management strategy over the last two years but said new revenue measures were needed to deliver more social services and the infrastructure required for higher economic growth.

President Arroyo stabilized the revenue base with the passage of key tax laws in 2004.

International credit rating agencies have been reluctant to raise the Philippines sovereign rating, saying revenues were growing only marginally faster than economic output, with nearly a third of the take going to debt service.

The government cut the budget deficit to P62.2 billion last year, half its target ceiling, mainly through reduced capital outlays.

"It is also critical that the fiscal consolidation be based on increasing revenues, since further expenditure compression is neither desirable nor sustainable," von Amsberg told a news conference.

The World Bank said that to raise revenue, the government should phase out redundant tax incentives and attack smuggling.

It reiterated its concern about governance and corruption, especially in large corporations owned and controlled by the government.

Von Amsberg urged the government to raise its rate of investment to at least 20 percent of gross domestic product (GDP), from 15 percent.

"The fiscal reforms and the favorable international environment provide a window of opportunity to increase the investment rate to rates more typical of comparable economies – that is, 20 percent of GDP or higher," he added.

He said fiscal reforms in the last two years had led to lower interest rates and improved borrowing spreads, stronger financial markets, slower inflation and surging foreign direct investment.

Von Amsberg said that without the fiscal reforms, the financial markets here would have been weakened considerably by the equities sell-off around the world the other week.

"There would have been far more cause for concern about damage to the Philippine economy from events such as those currently affecting global markets," he said.

Speaking at the same forum, President Arroyo expressed agreement, remarking that "Joachim is right in saying that there is much much more room for investments to grow to have a strong impact on alleviating poverty."

She said the government aimed to cut red tape and build infrastructure, and agreed that new laws must be passed rationalizing incentives.

"Our solid economic indicators give us a fighting chance to achieve at least seven percent (GDP) growth moving forward to 2010," she reiterated.

The government is aiming for GDP growth of 6.1-6.7 percent this year, driven by remittances from Filipinos working abroad, services, led by telecommunications and business process outsourcing industries, and by increased spending on infrastructure.

The economy grew by 5.4 percent last year.— AFP