Public Fiscal Management (Economic planning and fiscal management in the Philippines)


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Public Fiscal Management (Economic planning and fiscal management in the Philippines)

  1. 1. The Philippines has traditionally had a private enterprise economy both in policy and in practice. The government intervened primarily through fiscal and monetary policy and in the exercise of its regulatory authority. Although expansion of public sectorenterprises occurred during the Marcos presidency,direct state participation in economic activity hasgenerally been limited. The Aquino government set amajor policy initiative of consolidating andprivatizing government-owned and government-controlled firms.
  2. 2. Economic planning waslimited largely to establishingtargets for economic growthand other macroeconomicgoals, engaging in projectplanning and implementation,and advising the governmentin the use of capital funds fordevelopment projects.
  3. 3. The responsibility for economic planning wasvested in the National Economic and DevelopmentAuthority. Created in January 1973, the authorityassumed the mandate both for macroeconomicplanning that had been undertaken by its predecessororganization, the National Economic Council, andproject planning and implementation, previouslyundertaken by the Presidential Economic Staff.
  4. 4. National Economic andDevelopment Authority plans callingfor the expansion of employment,maximization of growth, attainment offiscal responsibility and monetarystability, provision of social services,and equitable distribution of incomewere produced by the Marcosadministration for 1974-77, 1978-82,and 1983-88, and by the Aquinoadministration for 1987-92.
  5. 5. Growth was encouraged largely through theprovision of infrastructure and incentives for investmentby private capital. Equity, a derivative goal, was to beachieved as the result of a dynamic economic expansionwithin an appropriate policy environment that emphasizedlabor-intensive production. The National Economic and DevelopmentAuthority Medium-Term Development Plan, 1987-92reflected Aquinos campaign themes: Reduction of unemployment and privilege and Elimination of structures of mass poverty, Decentralization of power the economy making particularly in of and decision monopolization rural areas.
  6. 6. The private sector was describedas both the "initiator" and "primemover" of theGoals included alleviation of poverty, countrys development;hence, generation of more productive employment, the government was "toencourage and support private social justice, and promotion of equity andinitiative," and state participation in the growth. attainment of sustainable economiceconomy wasGoals minimized achieved through to be were to be anddecentralized. reforms; strengthening the collective agrarian bargaining process; undertaking rural, labor- intensive infrastructure projects; providing social services; and expanding education and skill training.
  7. 7. The plan also involved implementing moreappropriate, market-oriented fiscal and monetarypolices, achieving a more liberal trade policy basedon comparative advantage, and improving theefficiency and effectiveness of the civil service, aswell as better enforcement of government laws andregulations. Proper management of the countrysexternal debt to allow an acceptable rate of growthand the establishment of a "pragmatic,"development-oriented foreign policy wereextremely important.
  8. 8. Economic performance fell far short of plantargets. For example, the real GNP growth rate from1987 to 1990 averaged 25 percent less than the targetedrate, the growth rate of real exports was one-third less,and the growth rate of real imports was well overdouble. The targets, however, did provide a basis fordiscussion of consistency of official statements andwhether the plan growth rates were compatible with themaintenance of external debt-repayment obligations.
  9. 9. The plan also set priorities. Both Aquinos campaign pronouncements and the policies embodied in the planning document emphasized policies that would favorably affect the poor and the rural sector. But, because of dissension within the cabinet, conflicts with Congress, and presidential indecisiveness, policies such as land and tax reform either were not implemented or were implemented in an impaired fashion. In addition, the Philippines curtailed resources available fordevelopment projects and the provision of government services inorder to maintain good relations with international creditors.
  10. 10. An Investment Incentives Act,administered by a Board ofInvestments (BOI), waspassed to encourage and direct The Philippine governmentinvestment more has undertaken to provide 1967systematically. to firms, years incentives Three bothlater, an Exportand foreign,Act domestic Incentives towas invest in priority areasthe the passed, furthering ofeffort economy the economy to movebeyond imports substitutionmanufacturing.
  11. 11. Late 1960s and 1970s The incentive structure was criticized for favoringcapital-intensive investment as against investments inagriculture and export industries, as well as not beingsufficiently large. Export incentives were insufficient toovercome other biases against exports embodied in thestructure of tariff protection and the overvaluation of thepeso.
  12. 12. 1983 The investment incentive system wasrevised, and again in 1987, with the goal ofrewarding performance, particularly exportingand labor-intensive production.
  13. 13. Legislation under consideration of by the made by the United States As a results objectionsand other industrial nations to export-subsidy provisions Philippine Congress incontained in the 1983 Investment Code, much of the specific early 1991 would limitassistance to exporters was removed in the 1987 version. The this authority. Under the1987 Investment Code delegates considerable discretionarypower over proposal, foreignto the government Board of new foreign investmentInvestments when foreign participation in an enterprise participation exceedingexceeds 40 percent. would be 40 percent allowed in any area not covered by a specified "negative list."
  14. 14. The government has taken a ratherconservative stance on fiscal activities. Until the1970s, national government expenditures andtaxation generally were each less than 10 percentof GNP. (Total expenditures of provincial, city,and municipal governments were small, between5 and 10 percent of national governmentexpenditures in the 1980s.)
  15. 15. National government activity increased tobetween 15 and 17 percent of GNP, largely becausevicious Both approaches contributed to the ofincreased capital expenditures and, later, growing debt-circle of deficits generating the need for borrowing,service payments.and the debt service on those loans creating greaterdeficits and the need to borrow even more. At 5.2percent of GNP, the 1990 government deficit was amajor considerationgovernment expenditure to GNP rose The ratio of in the 1991 standby agreement above 20 percent. Tax revenue, however, remainedbetween Manila and the IMF. relatively stable, seldom rising above 12 percent of GNP. Chronic government budget deficits were covered by international borrowing during the Marcos era and mainly by domestic borrowing during the Aquino administration.
  16. 16. The largest portion of the national governmentbudget (43.9 percent) went for debt servicing. Mostof the rest covered economic services and socialservices, including education. Only 9.1 percent of thebudget was allocated for defense. The Philippinesdevoted a smaller proportion of GNP to defense thandid any other country in Southeast Asia. 1989
  17. 17. The Aquino government formulated a tax reform program in 1986 that contained some thirty new measures. Most export taxes were eliminated; income taxes were simplified and made more progressive; the investment incentives system was revised; luxury taxes were imposed. Beginning in 1988, a variety of sales taxes were replacedby a 10 percent value-added tax--the central feature of theadministrations tax reform effort. Some administrativeimprovements also were made.
  18. 18. 1984 and 1985 1989 1985 1980s LateThe latter with the The collections were Problems figure Assessments of a 70 P10.1 billion, thewas based tax system Philippine on the magnitude of tax over percent increasefact that only 38 to appear to have more evasion they remained 1988, by corporate do with collections thanpercent of incomebillion below P1.4 tax payers with the rates. Estimatesregistered firms varied from as low as expectations. Tax of individual income taxin the country P1.7 billion to as high evasion was compliance ranged ascompounded by P13 billion.actually filed a 27 between 13 and mismanagement and return corruption
  19. 19. Low collection rates also reinforced theregressive structure of the tax system. TheWorld Bank calculated that effective tax rates(taxes paid as a proportion of income) of low-income families were about 50 percent greaterthan those of high-income families in the mid-1980s. Middle-income families paid the largestpercentage. Individual income taxes accounted for only 8.9 percent oftax collections in 1989, and corporate income taxes were only18.5 percent. Taxes on goods and services and duties oninternational transactions made up 70 percent of tax revenue in1989, about the same as in 1960.
  20. 20. The consolidated public sector deficit--the combined deficitof national government, local government, and public-sectorenterprise budgets--which had been greatly reduced in the first twoyears of the Aquino administration, rose to 5.2 of GNP by the endof 1990 As a result of the 1990-91 Persian Gulf crisis, petroleumprices increased and the Oil Price Stabilization Fund put anadditionalThe government proposedsudden cessation of dollar strain on the budget. The a comprehensive new taxremittances from contract workers in Kuwait and Iraqsector reform package in an attempt to control the public andincreased interestthat time, domestic debt ofBank, and deficit. About rates on the IMF, World the government alsocontributed to the deficit. Japanese government froze loan disbursements because the Philippines was not complying with targets in the standby agreement with the IMF.
  21. 21. Negotiations between the Aquinoadministration and Congress on theadministrations tax proposals fell, with the twosides agreeing to focus on improved taxcollections, faster privatization of government-owned and government-controlled corporations,and the imposition of a temporary import levy. A new standby agreement between thegovernment and the IMF in early 1991 committedthe government to raise taxes and energy prices.Although the provisions of the agreement werenecessary in order to secure fresh loans, the actionincreased the administrations already fractiousrelations with Congress.
  22. 22. M onetary Policy In 1991 the policy-making body Philippines The Central Bank of the of the CentralBank was the MonetaryJune 1948 and began was established in Board, composed of thegovernor of the Central Bank as chairman, the secretary operation the following January. It wasof finance, the director general of the National charged with maintaining monetary stability;Economic and Development Authority, the chairman of preserving the value and covertibility of thethe Board of Investment, and three members from the peso; and fostering monetary, credit, andprivate sector. In carrying out its functions, the CentralBank supervised the commercial banking systemthe exchange conditions conducive to andmanaged the countrys of the country. system. economic growth foreign currency
  23. 23. Domestic saving (including capital consumption allowance) averaged 25 percent of GNP, about 5 percentage points less than annual gross domestic capital formation. This resource gap was filled with foreign capital. Between 1983 and 1989 Domestic saving as a proportion of GNP declined on theaverage by a third, initially because of the impact of the economiccrisis on personal savings and later more because of negativegovernment saving. Investment also declined, so that for three ofthese years, domestic savings actually exceeded gross investment.
  24. 24. The The Central Bankresorted, with the Central the banking system intervened extensively in Banksassistance, to foreign credit on terms that generally ignoredbank countrys financial life. It set interest rates on both foreign-exchange risk. The combination rates that factorswhen adjusted deposits and loans, often at of these were, mitigated againstthe development negative. Central Bank credit wasthe economy, for inflation, of financial intermediation in extendedparticularly the growth of long-term saving. The dependence of the to commercial banks through an extensive system ofbanking system on funds from the Central Bank at low interest rediscounting.rates, in conjunction with the discretionary authority of the bank,has been cited as a contributing factor to the financial chaos thatoccurred in the 1980s.
  25. 25. The proportion of Central Bank loansand advances to government-owned financialinstitutions increased from about 25 percent ofthe total in 1970 to 45 percent in 1981-82.Borrowings of the government-ownedDevelopment Bank of the Philippines from theCentral Bank increased almost 100-foldduring this period. Access to resources of thissort, in conjunction with subsidized interestrates, enabled Marcos cronies to obtain loansand the later bailouts that contributed to thefinancial chaos.
  26. 26. The government introduced a number of monetarymeasures built on 1972 reforms to enhance the banking industrysability to provide adequate amounts of long-term finance. Effortswere made to broaden the capital base of banks throughencouraging mergers and consolidations. A new class of banks,referred to as "expanded commercial banks" or "unibanks," wascreated to enhance competition and the efficiency of the bankingindustry and to increase the flow of long-term saving. Thefunctional division among other categories of banks was reduced,and that between rural banks and thrift banks eliminated. 1980’s
  27. 27. Early 1980s Monetary and fiscal policies that were set The thereserve requirement to large by government, contributed was intermediation margins, the difference revised upwardand borrowing rates. between lending twice, going from 21 percent to 25 percent. In addition, the government levied both a 5 percent gross tax on bankExample, loan rates averaged 16.8 percent, whereas tax on receipts and a 20 percentrates on savings deposits were earnings, and borrowed deposit only slightly morethan 4 percent. The Central Bank traditionally extensively to cover budget deficitsmaintained relatively high reserve requirements (theproportion of deposits thatto absorb excess growth in the and must remain in reserve), money excess of 20 percent. 1988
  28. 28. In addition to large intermediation margins, Philippinebanks offered significantly different rates for deposits of differentamounts. For instance, in 1988 interest rates on six-month timedeposits of large depositors averaged almost 13 percent, whereassmall savers earned only 4 percent on their savings. Rates offeredon six-month and twelve-month time deposits differed by only 1percentage point, and the rate differential for foreign currencydeposits of all available maturities was within a single percentagepoint range..
  29. 29. Because savings deposits accounted forapproximately 60 percent of total bank deposits andalternatives for small savers were few, the probability ofinterest rate discrimination by the commercial bankingindustry between small, less-informed depositors and moreaffluent savers, was quite high. Interest rates of time depositsalso were bid up to reduce capital flight. This discriminationcoupled with the large intermediation margins, gave rise tocharges by Philippine economists and the World Bank thatthe Philippine commercial banking industry was highlyoligopolistic
  30. 30. Money supply growth has been highly variable,expanding during economic and political turmoil and thencontracting when the Philippines tried to meet IMFrequirements. Before the 1969, 1984, and 1986 elections,the money supply grew rapidly. The flooding of theeconomy with money prior to the 1986 elections was onereason why the newly installed Aquino administration choseto scrap the existing standby arrangement with the IMF inearly 1986 and negotiate a new agreement. The CentralBank released funds to stabilize the financial situationfollowing a financial scandal in early 1981, after the onsetof an economic crisis in late 1983, and after a coup attemptin 1989.
  31. 31. The money was then repurchased by the Treasury andthe Central Bank--the so-called Jobo bills, named after thenCentral Bank Governor Jose Fernandez--at high interest rates,rates that peaked in October 1984 at 43 percent and wereapproaching 35 percent in late The interest paid on this debt necessitated even 1984 greater borrowing. By contrast, in 1984 and 1985 in , order to regain access to external capital, the growth rate of the money supply was very tight. IMF dictates were met, very high inflation abated, andthe current account was in surplus. Success, however, wasobtained at the expense of a steep fall in output and highunemployment.
  32. 32. It is the process of transferringownership of a business, enterprise,agency, public service or publicproperty from the public sector (agovernment) to the private sector,either to a business that operate fora profit or to a non-profitorganization.
  33. 33. When Aquino assumed the presidency in 1986,P31 billion, slightly more than 25 percent of thegovernments budget, was allocated to public sectorenterprises--government-owned or government-controlled corporations--in the form of equityinfusions, subsidies, and loans.
  34. 34. Aquino also found it necessary to write off P130billion in bad loans granted by the governments two majorfinancial institutions, the Philippine National Bank and theDevelopment Bank of the Philippines, "to those who heldpositions of power and conflicting interest under Marcos."The proliferation of inefficient and unprofitable publicsector enterprises and bad loans held by the PhilippineNational Bank, the Development Bank of the Philippines,and other government entities, was a heavy legacy of theMarcos years.
  35. 35. The Asset Privatization Trust had sold 230 assets with netproceeds of P14.3 billion. Another seventy-four public sectorenterprises that were created with direct governmentinvestment were put up for sale; fifty-seven enterprises weresold wholly or in part for a total of about P6 billion. There was widespread controversy over the fairness of the divestment procedure and its potential to contribute to an even greater concentration of economic power in the hands of a few wealthy families.
  36. 36.
  37. 37. Jepnie Jan Gadong-Barrido ReporterDr. Rosario Clarabel C. Contreras Course Facilitator