IMF tells RP to limit fiscal deficit in 2009

Although an economic stimulus package is necessary to cushion the impact of the global slowdown, the International Monetary Fund (IMF) said the country’s fiscal deficit should not be more than P140 billion in 2009.

Concluding its annual macroeconomic review, the IMF said it expects the deficit this year to be around P75 billion, roughly equivalent to 0.9 percent of the country’s gross domestic product (GDP).

Next year, however, IMF officials said the government should resist the temptation to widen the budget gap when it begins to undertake its economic stimulus plan intended to make up for the slack in the country’s major trading partners.

The Philippines has prepared well for the oncoming economic crunch but the IMF said it is still not immune to the turmoil, as it prescribed preemptive measures to face the challenges that lie ahead.

“Trade and financial linkages, including through workers’ remittances, between the Philippines and advanced economies have grown over time,” said IMF mission chief Il Houng Lee.

Because of these linkages, the IMF projected the country’s economy to grow 4.4 percent this year and 3.5 percent next year. The previous projection was 4.4 percent for 2008 and 3.8 percent for 2009.

But Lee said the IMF was concerned with weak revenue collections, mainly in the value added tax (VAT) and this posed the risk of renewing investor worries that the fiscal balance could slip again.

“For 2009, the key challenge for fiscal policy is to balance the need for cushioning the impact on the real sector against the benefits of maintaining fiscal discipline,” Lee said.

On the one hand, Lee said increased spending and the resulting expansion of the deficit would help soften the impact of the global shock on the domestic economy.

But on the other hand, Lee said the tax effort might fall back to the levels recorded before the adjustment of the VAT because of recent changes to the income tax law and the planned reduction in the corporate income tax.

“This could re-kindle investor concerns, especially in the context of expected tight external financing conditions for emerging markets next year,” Lee said.

In the IMF’s assessment, Lee said a measured expansion of the national government deficit would help soften the reduction in growth without causing the effort to backfire.