The 2006-2008 Philippines Country Assistance Strategy (CAS) was discussed by the Board of Executive Directors on May 17, 2005. At that time, large public sector deficits and debt were identified as the most important short-term obstacles for the Philippines to realize the obvious potential for much more rapid development and poverty reduction than had been obtained in the preceding years. The CAS emphasized a strategy of supporting “Islands of Good Governance” as an approach for the Bank to support institutions and reform experiences that demonstrate how progress can be made in the Philippines in an environment where public institutions are often not able to work effectively for the common good. During the last two years, the Philippines has entered a decisive turnaround of its public finances. Following a near-crisis situation in 2004, the consolidated public sector deficit was reduced to 1.9 percent of GDP in 2005 and turned into a 0.1 percent surplus in 2006, implying a primary surplus of about 6% (based on DOF medium term fiscal program) in 2006. Together with steady real growth and an appreciation of the peso in real terms, the non-financial public debt/GDP ratio fell from over 100% in 2003 to about 75% as of the third quarter of 2006. Different from previous years, the 2006 fiscal adjustment was based on a recovery of tax revenues rather than compression of already low public investment expenditures. As a result, market sentiment has rapidly improved and financing costs have declined, thus reinforcing a virtuous circle of fiscal consolidation. Supported by a favorable international environment, growth in a few dynamic sectors and high remittance inflows, real GDP grew by 5.4% in 2006, marking the first time that three consecutive years of growth of 5% or more was recorded since the 1970s. Fiscal reforms demonstrate that progress can be achieved even in the context of a complex and dynamic political environment. Fiscal reforms have created a new window of opportunity for broader policy reforms that could put the Philippines firmly on track toward rapid and sustainable development. The challenge for the next few years will be to build on recent fiscal reform progress and extend the reform commitment to areas where there has been no or less progress in recent years: - Deeper institutional reforms in the revenue collecting agencies would contribute to a continuing and sustainable fiscal recovery. Weak revenue collection in early 2007 serves as a reminder of the importance of such institutional reforms. The Government has initiated a comprehensive tax administration reform. Additional tax policy measures may become necessary if expected results of the revenue administration efforts fail to materialize.
- The policy debate is appropriately shifting to a proactive strategy aimed at raising the investment rate from the current low level of 15% of GDP. This is already bearing results and several multinationals have decided to invest in the Philippines over the last year. In parallel, the Government has prioritized regulatory reforms and policies to introduce more effective competition in key sectors to achieve higher, broader and sustainable growth. However, these measures are yet to demonstrate their impact on the economy as a whole.
- Stronger commitment to governance reforms and decisive actions for their effective implementation would translate into the scaling up of promising and in some cases successful initiatives to improve the quality of public spending and ultimately help improve the overall low ranking of the Philippines in global comparisons of governance and anticorruption. Such promising initiatives include procurement reform and the oversight of public service delivery through civil society monitoring as well as the focus on good governance in well-run local governments.Better governance is one of the keys for strengthening the investment climate in the Philippines.
- Further improvements in the quality and quantity of social spending, including the development of a coherent social protection strategy would help translate recent growth into more rapid poverty reduction and ensure that the benefits of economic reforms are widely shared among the population.
The central focus of the current CAS on support for fiscal reforms has helped policy makers persist in their fiscal adjustment efforts. At the same time, the improving fiscal situation has allowed the Bank to significantly scale up its financial support, as foreseen in the CAS for such a scenario. Likewise, IFC has been able to scale up investments as the overall economic situation has improved. Changes to the Bank Group support program have been implemented as laid out in the CAS and have led to increased relevance and demand for Bank support:  On the national platform, the National Program Support (NPS) loans have broadened an approach that supports the country’s own sectoral budget priorities through Bank investment lending. These operations enable the Bank to support the Government’s programs and have the added value of strengthening the respective agencies’ policy formulation and expenditure management systems. Cross-cutting policy and institutional reforms have been supported with the Development Policy Loan (DPL) as well as a series of technical assistance projects, including to support the comprehensive tax administration reform.- On the local platform, the Bank moved towards a stronger and more direct support to institutions working at the local level, especially local government units, civil society organizations and the local private sector, to deepen the impact of reforms, support better governance and strengthen accountability at local level. This approach has already led to tangible benefits with respect to better planning processes, improvements in service delivery, increased access to finance, and strengthened capacity.
- On the private sector platform, the Bank Group spearheaded and stepped up support for a better investment climate and increased investments, in particular in infrastructure. As a result, IBRD and IFC infrastructure investments are growing, with substantial private sector participation. The platform has helped create the foundation for an active and growing future engagement in infrastructure and private sector development. Overall, IFC and IBRD collaboration in pursuit of this agenda has strengthened and deepened substantially.
- The Bank’s increased focus on good governance has been appropriate in an environment of high corruption risk. The aforementioned procurement reform and the participation of civil society in expenditure and project oversight are among the most promising approaches being pursued; while strong Bank supervision of procurement and financial management under harmonized country-based approaches have proven effective and necessary.
- The implementation of the above program changes under the CAS and the improved fiscal situation have substantially increased demand for Bank Group support. Lending has risen from a level around US$100-200 million p.a. under the previous CAS to US$410 million and $395 million respectively for FY06 & FY07, including the first policy-based lending in 8 years through a DPL. IFC’s transactions volume has likewise increased to US$130 million (FY07) and is expected to grow to US$200 million by FY08. IFC advisory services have increased substantially to add to a strong program of Bank AAA.
- A significant effort has been made over the last two years to strengthen partnerships on the basis of a common understanding of the country’s development challenges. The Philippine Development Forum includes international development partners, the private sector, and CSOs—has been a key instrument for government in this effort. The collaboration among international and national development partners has likewise strengthened, including the increased use of sector-wide approaches and larger trust funds administered by the Bank.
Two years into its implementation the objectives of the CAS continue to be relevant and the approaches outlined have good traction with Government and development partners. The CAS was designed in light of the earlier investment climate surveys, which emphasized obstacles in fiscal policy, governance and infrastructure/regulation. With significant progress on the first dimension but several remaining challenges, we judge that the CAS remains appropriate in the current policy environment. The Government continues to implement its own Medium Term Philippine Development Plan and has expressed its preference for us to extend the CAS rather than prepare a new one at this point. The Bank therefore proposes to continue implementation of the current strategy through a one-year extension of the CAS implementation period through FY09. To fully attain the CAS’s objectives, we propose to scale-up the lending envelope for the next two years from the highly constrained levels outlined in the CAS (based on DOF medium term fiscal program). This proposal is based on: (a) the increased fiscal space that has resulted from fiscal reforms, which have helped reduce concerns about creditworthiness; (b) the need for increased public investment, especially in infrastructure, to achieve higher growth and boost the country’s competitiveness; and (c) the strong demand from the Philippines for World Bank Group support. The overall CAS lending amount would continue to be determined by fiscal reform progress, while reform progress in different policy areas would determine the composition of lending. Strong governance filters at the operational level would imply that the lending envelope will only be used to the extent that operations are identified that would proactively support GOP’s governance reforms and/or include adequate corruption risk mitigation. Under a new high case of continuing, sustainable, and deepening fiscal reforms, lending in FY08-09 could reach up to US$2.2 billion. Under a new base case (which is considered to be attained under the current fiscal scenario), lending in FY08-09 could reach up to US$1.7 billion. These lending volumes are not meant as targets but as indications of how high lending levels could rise if the operations within current plans remain on track and on schedule. Even though most of the increased commitments are expected to come from investment lending, both cases could include policy-based lending, provided the specific reform objectives of such operations are met. Under a low-case scenario of significant slippage on fiscal reform, lending over FY08-09 would be limited to US$0.8 billion. The targets for program-level milestones would be adjusted to reflect the expanding engagement and deliveries to date. Related:
 Country Assistance Strategy for the Philippines, 2006-2009 (Progress Report)
Country Assistance Strategy for the Philippines, 2006-2008
More information:
Main World Bank CAS Website
|
RSS