MANILA, Philippines – Fiscal reforms have improved the Philippines’ capability to face the global economic meltdown, but more reforms are needed, the International Monetary Fund (IMF) said yesterday.
“The Philippines is in a better position to face this crisis because of fiscal reforms undertaken by the government in 2005-2006,” IMF Resident Representative Reza Baqir told The STAR last night.
“The impact on domestic financial markets of ongoing global financial stress would have been greater if these reforms had not been in place,” Baqir said. “These reforms also provided resources to the government to undertake measures to protect the poor from high food and fuel prices.”
As the local economy braced for the impact of the meltdown in the US market, the IMF official said the government would need more funds and that now is the best time for the government to push for more tax reforms.
Chief among these reforms, according to the IMF, was indexing tobacco and alcohol taxes to inflation in order to generate the revenues needed to finance poverty alleviation programs.
With elections approaching in 2010, the IMF said the window for legislative action would close soon.
Without the economic reforms, the IMF said the damage from the US market meltdown would have been bigger.
The IMF is the biggest supporter of the Arroyo administration’s strategy to undertake targeted and conditional cash transfer program to cushion the impact of the market turmoil and the surge in oil prices.
A reduction or scrapping of the VAT on oil and petroleum products –as pushed by some quarters –would have caused a dramatic erosion in government revenues at a time when public spending is needed more to stimulate the economy.
“The tax effort —tax collections in percent of GDP —remains a key barometer of Philippines’ fiscal health,” Baqir said.
Aside from further reducing Philippine vulnerability, Baqir said reforms would provide sustainable resources for needed spending on infrastructure and social sectors.
“Provision of such public goods is necessary for reducing poverty and raising growth prospects,” Baqir said.
Baqir said the tobacco tax level should be raised then indexed to inflation which, he said, would strengthen the tax effort and bring tobacco taxation in line with other countries.
Baqir said the IMF was also supporting the rationalization of fiscal incentives since it was shown that income tax holidays benefit mostly very profitable firms.
Baqir said measures being supported by the finance department that would replace tax holidays with reduced corporate income tax rate or a low tax on gross receipts, would provide stronger incentives to invest while increasing government revenues.
The IMF said the government should also improve the collection efficiency of Bureau of Internal Revenue and the Bureau of Customs. At the BIR, reforms should cover taxpayer registration, arrears collection, and audits. The BOC also needs to craft and implement a comprehensive reform agenda.
Banks stable
Malacañang assured the public yesterday that there’s no reason to worry about bank closures despite the troubles being experienced by a number of large financial institutions in the US.
Executive Secretary Eduardo Ermita emphasized at a briefing that the banking system is very stable and is capable of fending off external shocks.
Ermita said that insolvency should not be an issue among the local banks which have exposure in the troubled Lehman Brothers.
Bangko Sentral ng Pilipinas deputy governor Nestor Espenilla Jr. noted that the country’s banks, particularly the commercial banks are well capitalized and are well protected from developments in the US.
Espenilla said that a survey of around 60 commercial and thrift banks conducted by the BSP showed that only a handful had accounts with Lehman Brothers.
Espenilla noted that it is the country’s biggest banks that had exposures in Lehman Brothers, three of which already made their disclosures to the Philippine Stock Exchange.
Ermita said that six banks were affected but this would not be confirmed by Espenilla.
Espenilla pointed out that the exposure of the affected banks is far less than their capital bases so that even in a worst-case scenario, they would not be forced to shut down.
He said that the worst that could happen to the affected banks would be a failure to realize their projected incomes.
“It won’t result in negative incomes and we’re not expecting the solvency of the banks to be an issue,” Espenilla said.
“We believe that the banks will be able to hurdle this because of their huge capital base,” he added.
According to Espenilla, the lessons learned during the Asian Financial Crisis in 1997 have buttressed the banking system from problems similar to what is happening in the US.
Since the 1997 crisis, the BSP has required higher capitalization for banks in order to protect the interests of their clients and the entire financial system as a whole.
Espenilla said that the affected banks could even recover part or whole of what they invested in Lehman Brothers now that financial institutions such as British bank Barclays Plc. have decided to buy parts of what used to be a formidable US firm. - With Marvin Sy