Philippines: The Deficit And Hopes For Reform

2003

Filomeno Aguilar

With business confidence sinking in November to its lowest level in two years, the economy has outflanked security as the most pressing issue in 2003. Amid a ballooning fiscal deficit, the government’s toughest challenge is prudent fiscal management. Given that expenditures have been held relatively constant in the last five years, the worsening deficit owes mainly to weak collection by the Bureau of Internal Revenue (BIR), which accounts for about four-fifths of total government revenue.

Originally, the government aimed at a full-year deficit of 130 billion pesos, or 4 per cent of GDP (gross domestic product), but in July this ceiling was breached. The deficit target was raised to 180 billion pesos, or 4.5 per cent of GDP. By October the deficit stood at 187.6 billion pesos, compelling the further revision of the deficit target upward to 223 billion pesos, or 5.6 per cent of GDP. Standard and Poor and Fitch Ratings downgraded the Philippines’ credit rating from ‘stable’ to ‘negative’, and the IMF has exerted pressure to improve revenue collection, institute needed reforms, and broaden the tax base.

For 2003, the deficit target was raised from the original 142 to 202 billion pesos, or 4.7 per cent of GDP. The financing requirement increased 45.3 per cent from 136.6 to 198.5 billion pesos.

Key cabinet changes were also announced. Although praised for his ‘macro-economic achievements’, economic planning secretary Dante Canlas was sacked in early December. The new secretary, Romulo Neri, stresses micro-economic reforms, supply-side productivity and efficiency, and internal sources of growth. He is to address ‘specific business issues’, including reducing corruption and spurring investments.

By mid-December, however, reports indicated that tax collection for November had reached nearly 41 billion pesos, exceeding the monthly target by some 3.2 billion pesos. As a result, the deficit by end-November was calculated at 200.6 billion pesos, well below the revised full year target.

The finance secretary hailed measures to address the deficit as showing ‘concrete results’. It should be recalled, however, that current BIR Commissioner, Guillermo Parayno, was appointed in late August when then BIR Commissioner, Rene Bañez, resigned amid abysmal tax collection. Nineteen months earlier, Bañez had assumed office with reformist zeal. Senior officials were reshuffled. In July 2002 he had caused a bill to be introduced in Congress meant to transform the BIR into a performance-based quasi-corporation. Threatened by reform, BIR employees openly expressed their opposition to Bañez, who was maligned in the media and accused as a fraud. But many perceived the conflict as an attempt by corrupt BIR officials to protect their lairs. In his resignation statement, Bañez blamed saboteurs who derailed reforms by systematically cutting back on revenue collection, thereby aggravating the deficit.

Under the current bureau chief, a détente has been achieved. By September tax collection showed a big upturn. Presumably the lining of pocketbooks has also been on the mend. The tax officials’ dangerous play with collection ended in triumph for institutionalised corruption. Even the new bill filed in November to create a new tax office, but with guarantees for tenured BIR staff, signalled that corruption cannot be eliminated with one bold stroke. The World Bank estimated official corruption to have cost the economy some US$48 billion in the last twenty years, but the IMF did not support Bañez’s reforms.

The appropriations committee of the House of Representatives had earlier estimated corruption as eating one-fifth, or 21 billion pesos, of the 104 billion pesos in the 2001 procurement budget due to collusion, lack of competition and transparency, and delays in project implementation. In December, Congress ratified a procurement reform bill meant to check corruption by instituting a transparent bidding process.

Still, expressions of confidence are not wanting. Moody’s Investor Service has not resorted to a ratings downgrade as it sees no problem with the country’s debt repayment ability. Despite lingering structural problems, economic liberalisation, monetary policy and other measures have improved the country’s ranking in terms of economic freedom, climbing eight points up from its 70th position in 2001 to 62nd place in a field of 161 countries. In mid-December the US ambassador spoke reassuringly stating that his government ‘remains upbeat about doing business’ in the Philippines, citing important reform bills passed by the Philippines Congress.

WATCHPOINT: To what extent will the reform of government procurement procedures check corruption? Will the BIR reform bill eventually pass?

 

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