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The Philippines: Staff Report for the 2014 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
August 2014
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Fund Relations

(As of May 31, 2014)

Membership Status: Joined December 27, 1945; Article VIII

General Resources Account

SDR MillionsPercent of Quota
Quota1,019.30100.00
Fund holdings of currency673.7066.09
Reserve position in Fund345.6033.91
Lending to the Fund
New Arrangements to Borrow44.80

SDR Department

SDR MillionsPercent of Allocation
Net cumulative allocation837.96100.00
Holdings846.17100.98

Outstanding Purchases and Loans: None

Latest Financial Arrangements:

TypeApproval DateExpiration DateAmount

Approved

(SDR millions)
Amount

Drawn

(SDR millions)
Stand-by04/01/9812/31/001,020.79783.23
EFF06/24/9403/31/98791.20791.20
Stand-by02/20/9103/31/93334.20334.20

Projected Payments to Fund: None

Exchange Arrangement

The de jure exchange rate arrangement is classified as free floating, while the de facto exchange arrangement is classified as floating. The value of the Philippine peso is determined in the interbank foreign exchange market; the Bangko Sentral intervenes in the spot and forward markets in order to smooth undue short-term volatility in the exchange rate and to strategically build forex reserves. The Philippines maintains an exchange system that is free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions except for exchange restrictions maintained for security reasons and notified to the Fund pursuant to Executive Board Decision 144-(52/51).

Article IV Consultation

Philippines is on the standard 12-month cycle. The 2013 Article IV consultation was held on March 29, 2013 (IMF Country Report No. 13/102).

Financial Sector Assessment Program (FSAP) and Report on Standards and Codes (ROSC) Participation:

MCM: A FSAP was conducted during the fourth quarter of 2001; FSAP missions visited Manila in October and November–December 2001. The final version of the report was discussed with the authorities in June 2002. The associated FSSA was discussed by the Executive Board together with the Article IV staff report in September 2002. The FSAP report was published in March 2004. The FSAP update mission took place in November 2009, and the report was published in April 2010.

FAD: Discussions on fiscal transparency were held in Manila in September 2001. The ROSC report was discussed by the Executive Board in September 2002 together with the Article IV staff report, and published in October 2002. The update to the ROSC report was published in June 2004. In addition, a pilot Fiscal Transparency Evaluation mission took place in February 2014.

STA: A ROSC Data Module mission was conducted in September 2003, and the report was published in August 2004.

Technical Assistance

The Philippines is an intensive user of IMF technical assistance (TA), particularly in fiscal and financial areas. Improvements have been made in all areas, but the translation of recommendations into law has lagged, except for the reform of excises on tobacco and alcohol and the revision to the BSP Charter for financial supervision, which is currently being discussed in parliament.

In the fiscal area, FAD has executed a TA project financed by the Millennium Challenge Corporation to improve the basic functions of tax administration by the Bureau of Internal Revenue, in line with recommendations made by FAD TA missions in 2005, 2008, and 2009. The project provided for a resident tax administration advisor and an extensive program of short-term expert visits. Seeking a pro-growth and equitable tax system, TA on tax policy in 2013 and early 2014 aimed to improve revenue yield, rationalize tax expenditures and reform natural resource-based taxation. FAD TA missions on tax policy provided advice that constituted the basis for the reform of excises on tobacco and alcoholic beverages implemented in early 2013. In the area of tax administration reform, progress has been made in the redesign of processes in the core functional areas of audit, arrears management and, large taxpayer service. A series of TA missions on tax administration, arrears collections, compliance strategy and VAT audit took place in 2013 and early 2014.

TA on public financial management (PFM) seeks to establish effective and efficient Budget and Treasury Management. In line with past PFM advice, the government introduced a Treasury Single Account and is reviewing its cash management and planning. It now produces a midyear report on the macroeconomic and fiscal outlook and midyear budget execution. In addition, the revenue and expenditure from off budget accounts are now presented in budget documents. TA on PFM has also expanded to cover the two main fiscal institutions.

On the legal area, LEG provided TA to the Philippines on Central Banking Legislation in 2012, and provided advice on the amendment to the Philippines’ Central Banking Law in November 2013. In April 2013, LEG also provided TA on Implementation of Targeted Financial Sanctions Obligations under UN Security Council Resolutions Relation to Terrorism Financing.

MCM TA activities in the Philippines seek to develop and implement a risk-focused supervisory approach in keeping with the Basel Core Principles and other key international supervisory practices. In terms of outcomes, the authorities adopted Basel II in 2005, and began implementing Pillar 2 (Internal Capital Adequacy Assessment Process (ICAAP)/supervisory review of capital adequacy) in 2011. In 2010–11, a more concerted effort was made to enhance enforcement and clear a backlog of problematic institutions; the policy on cease & desist orders (CDO) was approved in August 2011, and this was followed by the issuance of internal procedural guidance in October 2011. Another key outcome has been the implementation of the supervisory core training initiative that began in late 2010. More than ten committees have developed content for new courses, with initial rollout of the courses in 2011. In 2013, the implementation of the overall program deepened in supervisory capacity building. The in-house training initiative is now self-sustaining and the quality of the supervisory reports has shown considerable improvement. A series of TA missions on banking supervision and training took place in 2013 and early 2014. In addition, a TA mission on liquidity management and forecasting took place in February 2013, and two missions on supervisory enforcement took place in August 2013 and February 2014.

A series of STA TA missions on Government Finance Statistics took place in 2012 and 2013 to assist the authorities in compiling and disseminating government finance statistics in accordance with Government Finance Statistics Manual 2001. Additionally, during 2012 STA provided TA to the Philippines in the areas of Balance of Payments Statistics, Data Dissemination Standards, National Accounts, and producer and consumer price indices.

Resident Representative

A Resident Representative has been stationed in Manila since January 1984. Mr. Shanaka Jayanath Peiris has been the Resident Representative for the Philippines since September 2012.

IMF-World Bank Collaboration

(As of April 23, 2014)

Background

The Bank and the Fund country teams for the Philippines exchanged views to coordinate the teams’ work during 2014 through the resident representative’s office and headquarters missions. The teams agreed on the Philippines’ main macroeconomic challenges to navigate the uncertain global environment to maintain macroeconomic stability, create policy space to meet future potential shocks, and build the foundations for faster and more inclusive growth. Based on this shared assessment, the teams identified three structural reform areas as macro-critical, in view of their central role in achieving sustained inclusive growth: (1) raising investment, including public sector capital spending; (2) strengthening public finance and social safety nets; and (3) the financial sector. Table 1 details the specific activities planned by the two country teams during January 2014-December 2014, along with their expected deliverables, and the division of labor.

Table 1.Philippines: Bank and Fund Planned and Ongoing Activities in Macro-Critical Structural Reform Areas, January 2014-December 2014
ProductsExpected Delivery Date
Bank Work Program
  • Philippines Development Report on “Creating More and Better Jobs”

  • Philippine Economic Update

  • Programmatic policy analysis and implementation support for inclusive growth, to include policy notes on rice, cabotage, ports and shipping, agrarian reform, and regional development and integration

  • Programmatic support on improving statistics, including support to the new Philippine Statistics Authority and the Securities and Exchange Commission

  • Implementation completion report on the NPSTAR project

  • Backstopping of GFMIS implementation (AusAID)

  • Development Policy Loan 2

  • Development Policy Loan 3

  • Report on migration and remittances

  • Grant (AusAID) on developing an enterprise survey

  • Grant (IDF) on program evaluation

  • Financial Modeling for Deposit Insurance (FIRST)

  • Microinsurance reporting system (FIRST)

  • Financial Education and Consumer Protection with BSP (SECO)

  • Programmatic AAA for Financial Sector Development

  • September 2013 (done)

  • Semi-annually

  • June 2013 to June 2016

  • June 2013 to June 2016

  • Project closing June 2013

  • ongoing

  • Board, March 2013

  • Concept Note, April 2014

  • March 2013

  • Closed in December 2013

  • Closing in December 2015

  • Completed in December 2013

  • Closed in November2013

  • October 2014

  • July 2014

Fund Work Program
  • Article IV consultation with a focus on adjusting to tighter external financing conditions while supporting sustained, more inclusive growth and containing stability risks.

  • Article IV staff report

  • Banking supervision technical assistance (TA)

  • Tax administration TA

  • Public financial management (cash management and budget execution) TA

  • Tax policy TA

  • Liquidity management and forecasting

  • March 2014

  • June 2014

  • Ongoing

  • Ongoing

  • Ongoing

  • Ongoing

  • Ongoing

Joint Work Program
  • Close coordination in Support to Tax Administration Reforms in the BIR (IMF under an MCC supported work program and WB through its post-NPSTAR operation), support for reinforcing reforms tax policy: fiscal incentives rationalization

  • Management of Fiscal Risk and GOCC/PPPs

  • DoF-BTr Debt Management Strategy

  • Support for Fiscal Intelligence Unit in DOF (focused on assessing and strengthening customs and BIR performance)

  • support for the Bureau of Treasury’s lead role in implementation of a Single Treasury Account (TSA)

  • Collaboration and review of Philippines Development Policy Loans Program

  • DPL 2 Board

  • DPL 3 Concept Note

  • Review of Philippines Development Report on “Creating More and Better Jobs”

  • Review of Concept Note programmatic policy analysis and implementation support for inclusive growth

  • Ongoing

  • Ongoing

  • Ongoing

  • Ongoing

  • Ongoing

  • March 2013

  • April 2014

  • September 2013 (done)

  • April 2013

The Key Areas with Joint Programs

Strengthening Public Finance

The continued focus on mobilizing fiscal revenue help fund spending in support of sustained and inclusive growth, while strengthening the resilience to shocks. The Fund and the Bank have a long standing program of support for strengthening public finance and involve close coordination in support of tax administration reforms in the Bureau of Internal Revenue and Bureau of Customs; tax policy reform including fiscal incentives rationalization and monitoring of the sin tax implementation; management of fiscal risks; debt management strategy; strengthening the fiscal unit in the Department of Finance (focused on assessing and strengthening customs and BIR performance); and support for the Bureau of Treasury’s lead role in implementation of a Single Treasury Account (TSA).

Financial Sector

A joint Bank/Fund Financial System Stability Assessment took place in 2009, following up on the initial joint FSAP in 2002. Following the FSAP recommendations, the Fund has focused on technical assistance in bank supervision. The Bank has taken the lead in the nonbank financial sector. Joint areas of interest are banking sector soundness, and capital market development.

Broad agreement among the two teams emerged on the key issues and challenges, and on the division of tasks to tackle these. It was agreed that further details on collaboration, as necessary, would be agreed at the technical level as work progresses. The teams have the following requests for information and collaboration from their counterparts:

  • The Fund team requests to be kept informed of progress in World Bank’s discussions with the government on financing of infrastructure, PPPs, and implementation of the development policy loan. Review and sharing of analytical work, in particular the Philippine Development Report (PDR) series, would be welcome, in addition to follow up from the 2010 FSAP, and on work related to the reform of social safety nets, public expenditure reviews, and public financial management.

  • The Bank team requests to be kept informed of the Fund’s assessments of macroeconomic policies and prospects and to coordinate closely the technical assistance work, especially in areas such as tax policy and administration, where the Bank has an existing program in place, as well as in public expenditure analysis and management, where extensive Bank work is ongoing.

IMF-World Bank Collaboration Matrix: Macro-Critical Structural Issues
Short-Term ReformsMedium- and Long-Term Reforms of Direct Relevance to IMF 1/Other Structural Reforms 2/
Raising potential growthInvestment incentives



Energy sector taxation



Oil deregulation law
Corporate sector

Corporate sector performance and vulnerabilities (IMF/WB)

Investment environment

Regulatory framework (WB)

Corruption /rule of law (WB)

Investment incentives (IMF)

Energy Sector

Power supply and expected shortage (WB)

Energy sector taxation (IMF)

Rice market

NFA operation and efficiency (WB)

Pricing and subsidy of rice (WB/IMF)

Labor market (WB in relation to education)

Regulatory framework (WB)

Wages/union structure (WB)

Structural reforms in key sectors (e.g., ports and shipping,

water, tourism, agriculture, and IT-enabled services) (WB)
Corporate governance



Concentration/oligopoly/ monopoly (WB-2005 CEM)
Public financeBIR reform



Cash management



Expenditure efficiency (capital spending)
Revenue administration

BIR reform (IMF/WB)

BOC (IMF in relation to customs)/WB in relation to trade facilitation)

Revenue forecasting (WB/IMF)

Public financial management Cash management (IMF)

IFMIS/fiscal reporting (IMF)

Budget preparation (IMF/WB)

Budget execution (IMF/WB)

Tax Policy (IMF/WB)

Expenditure efficiency/policy

Social safety net (WB)

Level of spending (IMF/WB)

Efficiency (WB)

Medium-term Expenditure Framework (WB/IMF)

GOCC reform (WB)

Fiscal Responsibility Law (IMF/WB)










PPPs (WB/IMF)

Debt Management

(World Bank/IMF)
Financial sectorBank supervision (IMF)

Banking sector soundness (IMF/WB)

PDIC

Contingency Framework (IMF)

Capital market development (IMF/WB)

International coordination to limit regulatory arbitrage

(IMF)

Financial Inclusion (WB)

Issues directly relevant for IMF work; (IMF) means work done in-house, (IMF/WB) implies in-house work in parallel or collaboration with the WB; and no specific reference means input required from other institutions.

Noncritical, but useful input to IMF analysis.

Issues directly relevant for IMF work; (IMF) means work done in-house, (IMF/WB) implies in-house work in parallel or collaboration with the WB; and no specific reference means input required from other institutions.

Noncritical, but useful input to IMF analysis.

Relations with the Asian Development Bank

(As of December 2013)

Since joining the Asian Development Bank (ADB) in 1966, Philippines has received 222 sovereign loans and grants financed by ADB Special Funds for a total of $14,423.4 million including nonsovereign financing amounting to $792.2 million. The energy, public sector management, and agriculture and natural resources account for the largest proportion of ADB lending (combined 59.8 percent of the total) (Table 2). As of December 31, 2013, cumulative direct value-added cofinancing for Philippines since 1970 amounted to $2.75 billion for 51 investment projects and $81.9 million for 65 TA projects.

Table 2.Cumulative ADB Lending to Philippines(As of December 2013)
SectorNo. of

Loans
Amount of

Loans

(US$ millions)
Percent

(by amount)
Energy323,384.723.5
Public sector management113,228.022.4
Agriculture and natural resources612,010.414.0
Transport and ICT301,463.910.2
Finance221,366.09.5
Multi-sector121,082.37.5
Water and other municipal infrastructure271,042.97.2
and services
Health and social protection7367.42.6
Education8252.11.8
Industry and trade12225.81.6
Total22214,423.4100.0

ADB’s private sector operations in Philippines began in 1986. As of December 2013, cumulative approvals in 27 projects amounted to $792.2 million. ADB’s private sector operations in Philippines included financing for power plants and investments in banks and private equity funds. In 2008, a $200 million loan was approved and disbursed for the acquisition, rehabilitation, and operation of the existing 600-megawatt Masinloc coal-fired thermal power plant in Zambales province by Masinloc Power Partners Co. Ltd. In 2009, a $120 million loan was approved for KEPCO SPC Power Corporation for the construction, operation and maintenance of a new coal fired power plant in the Visayas region using circulating fluidized bed technology. In 2012, an equity investment of $25 million was approved for Philippine Investment Alliance for Infrastructure Fund.

The Country Partnership Strategy (CPS) 2011–2016 was endorsed by the ADB Board of Directors on October 26, 2011. The CPS is aligned with the government’s Philippine Development Plan 2011–2016 and ADB’s Strategy 2020. The key objective of ADB support will be to help Philippines achieve, high, inclusive, and sustainable growth. The intended outcomes of the CPS are: (i) improved investment climate and private sector development; (ii) more efficient, effective, and equitable social service delivery; (iii) reduced environmental degradation and vulnerability to climate change disasters; and (iv) strengthened governance and reduced corruption. The Country Operations Business Plan (COBP) 2014–2016, the third under the CPS 2011–2016, was approved on October 1, 2013.

Statistical Issues

(As of June 2, 2014)

I. Assessment of Data Adequacy for Surveillance
General: Data provision to the Fund has some shortcomings, but is broadly adequate for surveillance.
National accounts: As part of a World Bank-funded project, Improving the Quality and Usefulness of the Philippine System of National Accounts, the National Statistical Coordination Board (NSCB) rebased the national accounts from 1985 to 2000. Continuing improvements include ongoing efforts to fully implement the System of National Accounts, 2008. Despite the authorities’ efforts to improve quality, weaknesses remain in the national accounts. These include the coverage of the GDP and the statistical discrepancies in the GDP estimates between the expenditure and production sides. The authorities are working on improving (i) the accuracy of the GDP volume measures; (ii) the coverage of the public corporations sector; (iii) the accuracy of the quarterly GDP data; and (iv) the adoption of benchmark techniques to reconcile quarterly and annual national accounts estimates. The NSCB is currently participating in the IMF Statistics Department’s Project on the Implementation of the System of National Accounts and the International Comparison Program, funded by the Government of Japan. This three-year technical assistance project provides assistance to improve the quality of the national accounts and price statistics.
Price statistics: In July 2011, the National Statistics Office introduced a rebased consumer price index (CPI). The updated CPI is compiled using weights based on the 2006 Family Income and Expenditure Survey. Data from the 2008 Commodity and Outlet Survey were used to augment the provincial market baskets. One important methodological change implemented in the updated CPI is the adoption of the internationally recommended Classification of Individual Consumption by Purpose (COICOP) for the classification of all items. As noted in the above section, assistance will be provided to improve the quality of price statistics in Philippines.
External sector statistics: Steps have been taken to improve the quality of balance of payment statistics. In 2005, the Central Bank of Philippines (BSP) created a Department of Economic Statistics, with one of its units to concentrate on compiling, analyzing, and publishing the balance of payments and the international investment position. Since deregulation in the early 1990s, international transactions have increasingly flowed through nontraditional channels that are not adequately covered by the statistical reporting system. The authorities have introduced new data sources, including the Cross Border Transactions Survey and administrative-based reporting systems to address coverage issues, but challenges remain. The Foreign Currency Deposit Units (FCDUs), which account for about 70-75 percent of foreign exchange settlements, are exempt from reporting requirements because of strict banking secrecy rules.
Monetary and financial statistics: Compilation of monetary and financial statistics (MFS) largely conforms to the Fund’s methodology.
Government finance statistics: Provision of fiscal data is broadly adequate for surveillance. Major areas for improvement include detailed data for levels of the public sector beyond the national government as well as transition of fiscal data reporting to the GFSM 2001 format. Fiscal Transparency ROSCs were conducted in 2002 and 2004.
II. Data Standards and Quality
Philippines subscribed to the Special Data Dissemination Standards (SDDS) in August 1996.A data ROSC was published in August 2004.
Philippines: Table of Common Indicators Required for Surveillance(As of May 31, 2014)
Date of

Latest

Observation
Date

Received
Frequency

of

Data7
Frequency

of

Reporting7
Frequency

of

Publication7
Memo Items:
Data Quality—

Methodological

Soundness8
Data Quality—

Accuracy and

Reliability9
Exchange rates5/31/20145/31/2014DDDOO
International reserve assets and reserve liabilities of the monetary authorities14/20145/2014DDMLOLO
Reserve/base money4/20145/2014DWWO, LO, LO, LNOLO, O, O, O, LO
Broad money3/20145/2014MMM
Central bank balance sheet12/20135/2014MMM
Consolidated balance sheet of the banking system3/20145/2014MMM
Interest rates25/31/20145/31/2014DDDOO
Consumer price index4/20145/2014MMMO, O, O, OO, LO, O, LO, LO
Revenue, expenditure, balance and composition of financing3—general government420135/2014QQQLO, LO, O, OLO, LO, LO, LO, LO
Revenue, expenditure, balance and composition of financing3—central government3/20145/2014MMM
Stocks of central government and central government-guaranteed debt53/20145/2014MMMLNOLNO
External current account balance12/20135/2014MMMO, LO, LO, LOLNO, LO, O, LO, LO
Exports and imports of goods and services12/20135/2014MMM
GDP/GNPQ1:20145/2014QQQLO, LO, O, LOLNO, LNO, O, LO, O
Gross external debtQ4:20135/2014QQQOO
International investment position620121/2014AAAOO

Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Reflects the assessment provided in the data ROSC or the Substantive Update (published on August 25, 2004, and based on the findings of the mission that took place during September 1–16, 2003) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scop classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 8, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment and validation intermediate data and statistical outputs, and revision studies.

Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Reflects the assessment provided in the data ROSC or the Substantive Update (published on August 25, 2004, and based on the findings of the mission that took place during September 1–16, 2003) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scop classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 8, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment and validation intermediate data and statistical outputs, and revision studies.

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