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March 02, 2024

How the Philippines balances its fiscal accounts makes the IMF somewhat a worry wart

The International Monetary Fund (MF) is urging developing countries like the Philippines to carefully consider the impact of fiscal and monetary adjustments on the lives of the ordinary man on the street as authorities soon begin to rein in gaping budget shortfalls, a monstrous public sector debt and rising interest rates.

“There is reason to fear that the burden of policies aimed at reducing deficits and debt, such as spending cuts and tax increases, will fall predominantly on people already hit hardest by the pandemic—such as caregivers, low-wage earners, and less-qualified workers,” the economist Vitor Gaspar writes in a blog published regularly by the Washington-based multilateral financial institution.

This has reference to how fiscal and monetary authorities propose to manage down the line the pandemic-induced accumulation of public sector debt and the low-interest rate regime fostered by the Bangko Sentral ng Pilipinas (BSP) the past two years precisely to help manage the debilitating impact of the pandemic.

Such adjustments may include new taxes, or cutbacks in the delivery of key government services or possibly even a blunt instrument as an interest rate increase that would hit every Filipino like a 10-ton runaway dump truck.

Gaspar wrote that in some countries “there is also concern that premature austerity could jeopardize economic recovery.

He noted that the COVID-19 emergency triggered a massive increase in government spending that led to large budget deficits and unprecedented levels of government debt.

“It is remarkable that historically high levels of public debt have been accompanied by historically low interest rates and, for advanced economies, low interest cost of servicing public debt. But now, with inflation and interest rates on the rise, the issue is becoming how, and how fast, those deficits and debt levels will be reduced,” he wrote.

But thus far, the BSP has signaled that interest over the policy horizon stay the course and remain accommodative to sustain output growth going forward. It recently kept the rate at which it borrows from or lends to banks unchanged at the last rate-setting meeting of the Monetary Board.

It also reiterated that inflation should stay within the two percent to four percent band as inflation and inflation expectations remain well anchored.

On the fiscal side, Finance Secretary Carlos G Dominguez committed to keep the books of the national government as lean as the economic managers could make them although the level of public sector debt as percent of local output or the gross domestic product (GDP) has pushed slightly past the globally accepted norm of 60 percent of GDP as of latest.

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