MANILA, Philippines – Despite dimming economic forecasts elsewhere around the region and an impending change in leadership, the Philippines is set to continue being a pacesetter in the world’s growth engine, the World Bank said.
The multilateral agency retained the country’s growth prospects for the medium term with GDP growth projected at 6.4% for this year, 6.2% in 2017 and 6.2% in 2018 in its latest Developing East Asia and the Pacific Economic Update released on Monday, April 11.
The World Bank pointed out that among the major economies in the region, the country is behind only Vietnam and China in terms of growth prospects.
“The projected faster growth in 2016 will be led by robust private consumption, aided by by low inflation and spillover from increased spending due to the upcoming general elections," said Karl Kendrick Chua, senior economist at the World Bank Philippines at the report’s launch.
Chua added that investments will also likely support growth as implementation of key private sector, budget and public private partnership (PPP) projects accelerates.
The slower growth of 2017 and 2018 reflects the normalization of the economy after the election cycle.
East Asia slowdown
In contrast, the World Bank lowered its overall growth outlook for the region.
Growth in developing East Asia is expected to drop from 6.5% in 2015 to 6.3% in 2016 and 6.2% in 2017-18.
The drop is predicated on China’s shift from an export oriented economy to a domestic oriented one. The World Bank forecasts the world’s second biggest economy to grow by 6.7% in 2016 and 6.5% in 2017, compared with 6.9% in 2015.
Excluding China, the region’s developing countries grew by 4.7% in 2015, and the pace of growth will pick up slightly – to 4.8% in 2016 and 4.9% in 2017-18 – driven by growth in the large Southeast Asian economies, the World Bank said.
The region, however, remains the key engine for the global economy despite the dimmer outlook.
“The region accounted for almost two-fifths of global growth in 2015, more than twice the combined contribution of all other developing regions,” said Victoria Kwakwa, incoming World Bank East Asia and Pacific Regional Vice President. “
Key time for reforms
The World Bank also pointed out that the Philippines’ steady growth is beginning to show at the bottom of the economic pyramid.
"Trends in recent years point to the beginnings of a more inclusive growth pattern, which needs to be sustained over a longer period before the poor can feel the impact of growth higher growth in their daily lives,” Chua said.
One essential area to inclusive growth that still needs to be addressed, however, is rice, said Roger van den Brink, the lead economist for poverty reduction and economic management in the Philippines.
Van den Brink said that the state has a monopoly on the importation of rice and that it has gotten exemption from the World Trade Organization (WTO) to continue this until July 2017.
The result of this policy is that rice prices in the Philippines are 2-3 times higher than in neighboring countries, he said, emphasizing that “the poor spend about 20% on their income on rice (a staple). If you can lower its price you can increase the poor’s real income enormously.”
The World Bank favors a policy of liberalizing rice trade in order to achieve these lower prices by replacing the import quota with an import tariff at around 30% and steadily bringing it down so as not to shock the system as well as allowing full importation by the private sector.
“The policy hasn’t worked and El Niño has exacerbated it. It would be better if the private sector could really prepare itself fully for importing because at the moment there is a lot of uncertainty,” he added.
The World Bank also pointed out the need for reforms to the tax system in order to increase government revenue as by its calculations, 6.8% of GDP or P900 billion is needed to sustain inclusive growth
To raise revenue through taxes, the government needs a more equitable and efficient tax system which it could implement in two phases.
The first phase would entail rationalizing tax incentive by making them more targeted, performance-based and temporary as well as indexing tax rates that have not kept up with inflation such as petroleum excise tax and property valuations.
“Only if new revenues are raised should reforms to reduce tax be considered including lowering the top tax rate to 25%, reducing the gap between regular and special income tax rates and simplifying taxes for small to medium enterprise," said Chua.
While World Bank lauded recent reforms to improve the economy’s competitiveness such as the Competition Act, it also noted that these measures should be improved upon by reducing the investment negative list, or areas of investment subject to foreign ownership limitation.
This, it said, would result in significant gains, particlarly in the telecommunications, shipping, construction and rice sectors.
“Reformers both inside and outside government should work together to help the government move quickly, as the first year of a new administration provides the best opportunity for reforms,” Chua said. – Rappler.com