RP not yet on sustainable growth path — World Bank
path, the vicious cycle of rising interest rates that lead to increasing fiscal deficits and to rising government borrowing requirements must be broken.
The main agenda for Government is thus to control its rising domestic debt, termed “a major source of macroeconomic stress.”
“Under the circumstances, further fiscal adjustment merits top priority” to be accomplished through new tax- generating vehicles, an acceleration of the privatization program, and further expenditure cuts.
The World Bank’s analysis showed that the reason the National Government’s deficit has persisted despite substantial improvements in the performance of the Bureau of Internal Revenue and reduction in expenditures is the increase in interest payments occasioned by rising domestic and international interest rates.
It explained that the problem of rising domestic debt and interest rates is that it engenders two types of “crowding out” effects.
First, it crowds out vital expenditures in the national budget.
“For example, the prospects for higher growth are adversely effected when higher interest payments reduce the budgetary resources available for necessary Infrastructure investments,” the memorandum said.
The second crowding out occurs when the private sector is starved of investment funds.
“Similarly, high interest rates discourage private investment, again entailing a loss of growth potential.”
An interesting aspect of the report was its glowing praise for the country’s economic performance since the mid-1980s, especially when compared to other developing countries.
In a completely contrary viewpoint to domestic doomsayers who harp on the economy’s poor record, the report noted. “Among highly indebted countries, the adjustment performance of the Philippines ranks near the top. Its growth has been relatively high and stable compared to that of such countries as Argentina, Brazil and Mexico, which have experienced multiple episodes of negative growth in the ten years and at least one in the last three. Its fiscal adjustment has been deeper and more consistent, its inflation lower and less volatile, and its external debt reduction faster.
Fiscal discipline in the form of high revenue growth and low expenditure growth, a tight and conservative monetary policy, and responsible external debt management were cited and the policies that helped the country achieve the impressive growth rates.
The report recommended further trade reforms such as the removal of import quotas and reduction of tariffs in order to improve resource allocation and the country’s competitiveness against its Asian neighbors.
It called Government initiatives such as the elimination of import restrictions and reformation of the tariff schedule through Executive Order 413 as “steps in the right direction.”
“Such measures would reduce the bias that still exists against exportables and agriculture and result in improvements in efficiency as well as equity since these sectors are labor- intensive.”
It also batted for the liberalization of foreign investment rules; export promotion through incentives and improved export financing facilities; increased bank competition and reduced financial taxes; and speedier privatization.