By Ted P. Torres (The Philippine Star)
The World Bank has revised downward its economic growth
projections for the Philippines this year and the next, warning that
growth would largely depend on public spending, disaster reconstruction,
and further structural reforms.
In a report, the World Bank said baseline growth projections were
revised downward from the original 6.6 percent to 6.4 percent for 2014,
and from the earlier 6.9 percent to 6.7 percent for 2015.
According to the World Bank, private consumption driven by strong
remittance inflows would drive the economy “but growth will depend
heavily on the ability of the government to ramp up spending.”
“An acceleration of reconstruction spending can support growth at above six percent,” the World Bank said.
A number of external and domestic factors could likewise pose risks to growth, it added.
External risks could come from disorderly policy normalization in
high-income countries, a disorderly adjustment in China’s property
market, political tensions in the Middle East and Eastern Europe, and
territorial disputes with China.
On the domestic side, the main sources of risk are low government
consumption, slow reconstruction spending, and domestic reform lags, in
particular reforms to raise tax revenues needed to raise infrastructure
and social services spending.
Inflation is projected to reach the ceiling of the Bangko Sentral ng Pilipinas’ three-to five-percent target.
It will also force monetary tightening and greater use of
macro-prudential measures, such as further increases in the RRR and
policy rates.
The World Bank report, entitled East Asia Pacific Economic Update,
warned that food supply could remain tight throughout 2014 because of
poor harvests due to weather-related disturbances, and could be
exacerbated by droughts due to El Niño.
In addition, because rice is a basic consumption necessity with
inelastic demand, any delay in the importation of rice, which is
controlled by the government, could result in sharp increases in rice
prices. Moreover, short-term depreciation of the peso and higher fuel
prices are sources of inflation.
The World Bank said growth can be sustained and made more inclusive
by pursuing structural reforms and investing more in human and physical
capital in the medium term. Key structural reforms include protecting
property rights, promoting more competition, and simplifying
regulations.
The report noted the government’s planned doubling of infrastructure
spending to five percent of gross domestic product (GDP), and
significant increases in health and education spending, which require
new sources of revenues.
“This can be achieved through a package of tax policy and administrative reforms,” the World Bank said.
There is scope to increase tax revenues, by, for example, broadening
the base and making the tax system simpler, more efficient, and more
equitable, while simultaneously lowering certain tax rates to increase
the political feasibility of such a package.
The government has successfully raised taxes by 1.2 percentage points
of GDP in the last three years through the sin tax reform, improved tax
administration, and higher growth.
Accelerating the current reform momentum would help the country yield
additional tax revenues to create the fiscal space needed to enhance
growth in the coming years.
Meanwhile, economic growth of developing East Asia is seen to slow
down to 6.9 percent this year, from 7.2 percent in 2013 due to various
external risks.
World Bank East Asia and Pacific regional vice-president Axel Vann
Trotsenburg said the region has the potential to continue to grow at a
higher rate and faster than other developing regions if policy makers
implement an ambitious domestic reform agenda.
The region remains vulnerable to a sharp slowdown in China, which
though unlikely to happen, could hurt commodity producers which include
metal exporters in Mongolia and coal exporters in Indonesia.
