IMF warns Philippine economy could overheat

Economic overheating happens when increase in demand due to growing economic wealth outpaces that of supply. Stock photo by Reimund Bertrams

IMF warns Philippine economy could overheat

Julian Ocampo (Philstar.com) - August 8, 2017 - 9:45am

MANILA, Philippines —  The International Monetary Fund has flagged overheating risks for the Philippine economy, which is nonetheless, forecast to grow slower this year, albeit still within target.

"The combination of rapid credit growth, buoyant private investment and fiscal expansion could lead to overheating," the multilateral agency said in a statement concluding its annual review of the economy.

Overheating happens when increase in demand due to growing economic wealth outpaces that of supply. This, in turn, results in higher inflation that eats up consumer purchasing power.

The result usually is growth excessively slowing. For 2017, the IMF trimmed its growth forecast for the Philippines to 6.6 percent from 6.8 percent previously.

IMF's outlook remains within the government's growth target of 6.5 to 7.5 percent this year. For 2018, growth could pick up to 6.8 percent, below the 7-8 percent goal.

"The medium-term macroeconomic outlook remains favorable," the Washington-based lender said.

Risks against growth also exist externally from a slowdown in China, tightening credit conditions in the US to rising protectionism that could derail trade.

Inflation, meanwhile, could end up at "the center of the target band" of 2 to 4 percent, making current monetary policy stance "appropriate." As of July, inflation hit 3.1 percent.

On the supply side, the IMF calls for the passage of the first tax reform bill currently pending at the Senate "to expand the productive capacity of the economy."

This, it said, will help ensure resources are available to finance the Duterte administration's ambitious P8-trillion infrastructure agenda, while keeping the budget deficit in check, and thus avoiding large debts.

As of the first semester, the deficit amounted to P154.47 billion, 32 percent of the revised P482.1-billion cap this year.

"Passing the first package of the comprehensive tax reform proposal is critical to sustain the rise in expenditures, while maintaining the strong investor confidence and low borrowing costs," IMF said.

The lender also called Congress to pass the budget reform and rightsizing bills to "help achieve the inclusive growth agenda."

The three are among the priority measures of the Duterte administration. Budget reform aims to fast track procurement processes, while rightsizing bill cuts redundancies in government work.

IMF also called on the government to end rice import limits "to help reduce consumer prices and poverty," while supporting farmers  that will be affected.

President Rodrigo Duterte has extended for three years the cap on rice shipments, in place for more than a decade now, meant to protect local farmer produce against cheaper imports. This, in turn, has led to high rice prices.

"Structural reforms will be essential to sustaining rapid inclusive growth to significantly lower poverty and maximize the demographic dividend," IMF said.

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