IMF sees more moderate fiscal consolidation in Philippines

MANILA, Philippines — The International Monetary Fund (IMF) has projected that fiscal consolidation in the Philippines would proceed more moderately in 2024 than initially anticipated amid higher-than-expected interest payments and increased capital spending.

Elif Arbatli-Saxegaard, mission chief of the 2024 IMF Article IV consultation team, said the Philippines may incur a smaller budget deficit equivalent to 5.6 percent of gross domestic product this year  compared to  6.1 percent of GDP in 2023.

IMF’s latest projection matches the 5.6 percent of GDP ceiling set by the Philippine government. However, the IMF said this is slower than previously expected.

“Fiscal consolidation is proceeding in 2024, albeit more moderately than envisaged in earlier projections. Higher-than-anticipated interest payments and higher capital spending are being partly financed by a one-off increase in non-tax revenues,” Saxegaard said.

She said the IMF sees more spending on the public side this year, but higher revenues could finance this.

“For this year, there is a higher contribution from public consumption. Public investment has been pretty strong so far this year. So it is consistent with the fiscal consolidation being more moderate than we had envisioned and within that fiscal deficit target,” Saxegaard said.

Fiscal consolidation refers to government efforts to reduce fiscal deficits. The Philippines borrows heavily from both onshore and offshore creditors to finance its budget deficit as it continues to spend more than it earns.

The government seeks to reduce the budget deficit to just 3.7 percent of GDP by 2028, down from the record-high 8.6 percent in 2024.

For next year, the IMF said the Philippines’ fiscal stance would be neutral, meaning fiscal policy would neither be contractionary nor expansionary. This will help mitigate downside risks to growth.

“We do expect growth to be driven more by the private sector. The whole objective is to provide support to the economy as the private sector gradually picks up its momentum,” Saxegaard said.

The IMF also sees improvements in the Philippines’ financial conditions amid easing monetary policy until next year. The recent reduction in banks’ reserve requirement ratios will also lead to more favorable financial conditions, supporting higher investments and private consumption next year.

“Over the medium term, we do expect the same to happen. As the medium-term consolidation takes place, the private sector will pick up the slack. So this is the baseline expectation,” she said.

However, Saxegaard said the Philippines’ fiscal consolidation should be supported by a sustainable plan to raise tax revenues and implement expenditure reforms. Additional tax policy measures should be considered to create more space for spending in priority areas.

The government can prioritize excise taxation, enhancing the efficiency of value-added tax, improving tax administration and ensuring effective control of tax incentives. Introducing carbon taxation can ould also be explored moving forward.

Saxegaard said unlocking the medium-term growth potential would depend on comprehensive and well-sequenced structural reforms.

“These reforms, coupled with strengthened social protection programs, should aim to boost job creation, enhance productivity, increase resilience to climate change and reduce poverty and inequality,” Saxegaard said.