Sound Policies and Reforms Help Philippines Manage Crisis and Seek Stronger Growth

• Author: Vivek Arora/Cheng Hoon Lim
• Position: IMF, Asia and Pacific Department
• Pages: 167-170

Page 167

Progress in the 1990s

The Philippine economy improved steadily in the 1990s, building on sound macroeconomic and structural policies and supported, since mid-1994, by an IMF arrangement under its Extended Fund Facility. Real GDP growth accelerated from zero in 1991 to around 6 percent in 1996; inflation fell from almost 20 percent to 5 percent, interrupted only by a supply shock (rice shortages) in late 1995; and the external position strengthened, with reserve coverage rising to over 2 Vi months of imports (see table).

In the early 1990s the fiscal deficit declined sharply, privatization accelerated, and a new statute helped recapitalize the central bank. The budget benefited from an expansion of the value-added tax, the deregulation of the oil industry and the end of oil price subsidies, and a successful reform of customs administration. Fiscal adjustment, in turn, greatly helped with the effective implementation of a tighter monetary policy.

The economy also opened up to greater domestic and foreign competition. Building on the private sector's success in resolving chronic power shortages, the Philippines liberalized the banking, telecommunications, and domestic shipping sectors, among others. Virtually all sectors were opened to foreign investment, with limits on foreign participation abolished or reduced in various sectors. The average tariff rate dropped to less than 15 percent or half the level of the mid-1980s, and nontariff barriers declined substantially.

Even so, by 1997 major obstacles remained to sustained rapid growth and low inflation. Tax, civil service, and local government finance reforms had been delayed; poverty and income inequality remained widespread; savings were much below the other major economies of Southeast Asia; and the external position had become increasingly vulnerable. In particular, a surge in private sector credit growth, fueled by rising capital inflows, added to the vulnerabilities-notably in the banking system. Resolving these problems is essential to continued economic progress, and has become more urgent with the onset of the Asian crisis.

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Crisis Management

With large external borrowing in 1996, especially by banks, the Philippines became increasingly vulnerable to shifts in market sentiment. In early 1997, a sharp fall in the stock market and a decline in capital inflows were...