The loan is a second of a three-part Development Policy Support Program aimed at helping the Philippines achieve its medium-term development goals. The first DPSP loan was approved in February 2007.
Since then, the Philippine government has implemented a series of measures to address the fiscal imbalance, resulting in improvement in the fiscal situation and macroeconomic stability. These measures provided much needed funds for increased spending on the social sector and infrastructure in 2007. The measures also contributed to the Philippines’ best macroeconomic performance in over 30 years.
However, the surge in commodity prices in early 2008, volatility in US financial markets, and the economic slowdown in developed economies have negatively affected the Philippine economy, with a sharper-than-expected slowdown in GDP growth and a spike in inflation to a 17-year high level in August.
“Despite the negative impact, the Philippine economy has weathered the external shocks well compared to some of our other member economies, and also compared to previous external shocks to the Philippines economy,” said Kelly Bird, an Economist in ADB’s Southeast Asia Department. “This resiliency is due to the government’s commitment to fiscal discipline and key reforms including tax reforms, especially on VAT, the absence of fuel subsidies in the national budget, previous trade reforms and synchronized fiscal and monetary policies.”
The external shocks will challenge the government’s resolve to maintain fiscal and macroeconomic stability and performance. At the same time, it is important to protect spending in the social sectors to help poor and vulnerable families, and achieve the country’s longer term development objectives.
“Responding to the recent developments in the global economy, the second loan addresses these issues through greater flexibility in fiscal policy in 2008 and 2009, further enhancement in tax revenue collection, and support for the government’s conditional and targeted cash transfer program currently piloted as a way to mitigate the worst effects of these shocks to the poor,” Mr. Bird added.
The conditional cash transfer program and broader social protection reforms are important as ADB preliminary research shows only about one third of the poor have access to social assistance.
The DPSP also includes a set of measures to strengthen the investment climate with focus on reducing red tape, support for infrastructure policy and rural development.
A policy and advisory technical assistance grant of $800,000 is included in the loan, to support public expenditure reform initiatives at the Department of Budget and Management. This will be a multi-year exercise over a three-year period.
The third DPSP loan is expected to be processed in 2009 and submitted for ADB Board consideration upon the completion of the second loan.