MACROECONOMIC FRAMEWORK AND
DEVELOPMENT FINANCING
IV. Policies and Strategies
A. Monetary and Financial Policy
1. Monetary management and the external sector
The primary objective of monetary policy is the maintenance of price stability
conducive to sustainable growth. In light of the regional currency crisis, monetary policy shall aim
to ensure macroeconomic stability. The stance will continue to be cautious, focusing on
the maintenance of low and stable domestic inflation rate while supporting the growth targets.
The direction of interest rates will be influenced largely by monetary and fiscal
policies, consistent with the objective of promoting credit and investments, without sacrificing
the objective of price stability. This policy will also be supported by the phasing out of
government intervention in the credit market through government nonbank financial institutions
(GNFIs), and GOCCs.
A sound balance of payments will be promoted through a healthy trade in goods and
services. Exchange rate policy shall continue to be market determined. The BSP participation in the
foreign exchange market shall be limited to short-term smoothing operations. The current account
deficit will be kept at manageable levels. An open trading system, the development of a services
sector benchmarked to international quality standards, especially in finance, and a deregulated
foreign exchange market will be promoted to spur services transactions and foreign investment flows.
Foreign exchange reserves shall be increased to levels comparable to
internationally acceptable norms to cover for imports. In addition, the development of a derivatives
market will be fostered to allow market participants to hedge risks. Government will also ensure that
the supervisory and regulatory framework is adequate in addressing the challenges of a global
financial environment.
2. Financial and corporate sectors
The sustained development of the financial and banking sector hinges on a
strong regulatory and supervisory framework. Measures to improve the regulatory and
supervisory framework include: (a) increasing penalties for noncompliance with regulatory
norms; (b) improving surveillance mechanisms on the soundness of banks; (c) adoption
of internationally accepted banking standards and supervisory practices; (d) improvement
in transparency and disclosure requirements for banks; (e) promotion of capacity building
programs for bank professionals and regulators, particularly bank examiners and supervisors; and (f)
adoption of similar regimes of regulations for nonbank financial institutions, securities and derivatives market.
The passage of the Revised General Banking Act is expected to strengthen the ability of
the BSP to ensure a sound and stable banking system. Amendments to the General Banking Act
shall include, among others: (a) the expansion of the coverage of banks to be supervised by the BSP
to include Islamic banks and cooperative banks; (b) the granting of authority to the Monetary
Board to prescribe the duties and responsibilities of directors and officers of banks, quasi-banks and
trust entities, to disqualify, remove or suspend them, and to regulate their compensation and
other benefits; (c) the increase in allowable equity investment of a universal or commercial bank in
allied and nonallied enterprises and in another universal or commercial bank; (d) the increase in the
limit of the total amount of loans, credit accommodations and guarantees by a bank to any one
person or entity; (e) the expansion of limitations on loans granted to directors, officers, stockholders
and related interest (DOSRI) to expressly cover loans, credit accommodations and guarantees by
a bank to its DOSRI, as well as investments of such bank in enterprises owned and controlled
by said DOSRI; (f) the requirement on banks, quasi-banks and trust entities to publish their
financial statements; and (g) the setting of limits on investments of banks in real estate as well as
decreasing the loan value of real estate collateral.
Efforts to strengthen prudential regulations for the financial sector shall be complemented
by a set of measures to govern financial transactions in the corporate sector. The Securities
and Exchange Commission (SEC) shall adopt rules and procedures on suspension of debt payments
in accord with best international practices. Policy guidelines on rehabilitation of distressed
corporations shall also be issued. There will also be measures to strengthen the rights of creditors to
establish receiverships and empower them to take charge of all assets of a defaulting debtor. The SEC
shall also be strengthened to make it more effective and responsive to developments in
corporate sector performance. For this purpose, the executive branch shall work for the passage of
the Securities Act of 1999.
Efforts to create an attractive environment and liberal regime for investment shall continue.
The participation of foreign banks in the financial system will be further encouraged particularly
in troubled banks where foreign banks may be allowed to own up to 100 percent.
The government's credit policy shall operate within the framework of market-oriented
interest rates and full-cost recovery. Credit programs shall be rationalized by phasing out directed
credit programs by GNFIs and GOCCs by February 2002. In lieu of directed credit programs,
rural infrastructure spending will be increased as a more effective way of supporting agriculture.
The agriculture sector will also be supported by lengthening the grace period for loans extended
to activities with long gestation periods, such as plantation agriculture. This means that the
initial amortization for such loans can be deferred until the fifth year of granting of the loan, compared
to the third year under the existing scheme. Cooperative banks, together with private and
government financial institutions, will be promoted to help spur growth in the countryside. Improved
regulatory and prudential standards will be enforced through the Cooperative Development Authority
(CDA) in the case of cooperatives and the BSP for private and government financial institutions.
3. Capital market development
Capital market development shall center on developing financial instruments responsive
to the needs of an increasingly globalized market. The secondary market and credit rating institutions
shall be strengthened and the development of pricing benchmarks for corporate bonds and
other instruments will be pursued. Taxes impinging on the development of capital market
instruments shall be rationalized. Advocacy programs will be enhanced with the Capital Market
Development Center, Inc. (CMDC) continuing the policy
initiatives to promote wider participation in the
capital and securities market. Efforts will be directed towards making available securities in
smaller denominations. Competition in the securities market shall
also be fostered through greater market transparency and increased availability of timely investment-related
information.
The mutual funds market shall be liberalized and the contractual savings schemes shall
be promoted to generate long-term savings. As proposed in the Revised Investment Company
Act (RICA), nationality requirements on owners of mutual funds will be relaxed to encourage entry
of new players. The role of investment houses in the capital formation process shall be enhanced.
The Small Investors Program (SIP) will be implemented nationwide to expand the base of investors
in government securities. This is also intended to provide additional buffer for the national
government's financing program.
The government will also increase competition in the pension fund market and promote
policies that will ensure the long-term viability of the presently publicly-managed pension fund system.
Privatization of the pension fund market will be undertaken through greater reliance on
private employer and individual schemes. The government, through a tripartite task force which
shall include labor groups, will formulate an action plan that will study the privatization of the
management of the publicly-managed pension fund system and other options. Reforms in the pension
funds system will include more direct representation of members in the Board of Trustees of
government-managed pension funds, greater competition from other private pension funds, and the shift in
the role of the government from manager of the Social Security System (SSS) and Government
Service Insurance System (GSIS) to regulator. Other reforms will include voluntary excess
contributions and wider membership coverage. The option of allowing government employees to enroll in
other pension funds such as the SSS and private funds will be studied and acted upon by government.
Participation of private institutions in housing finance and the development of
mortgaged securities will be encouraged. Establishing the long-term viability of housing finance would
require the following: (a) increasing the number of private financial institutions providing housing funds
at competitive rates; (b) creating a more active and liquid secondary mortgage market; and (c)
efficient targeting of government interventions in the housing sector. It is imperative that interest rates in
the mortgage markets for low cost housing shall be market-determined and with minimal price
distortions. This will induce greater private sector participation and lead to innovative financial products.
Furthermore, the implementation of reforms in the contractual savings market shall be
ensured, since mortgage markets need a stream of long-term funds which contractual savings provide.
B. Fiscal Policy
The country will continue to pursue fiscal
discipline and sustain the establishment of a
tax system that increasingly responds to the funding requirements of development expenditures,
is neutral and efficient with respect to resource allocation, and is simple to comply with and
implement. The fiscal stance shall support a stable macroeconomic framework and a declining ratio of debt
to national output.
1. Tax reform
The next phase of the tax reform shall look at rationalizing
fiscal incentives and subsidies, including tax exemptions granted to
cooperatives, tax rebates, and take-or-pay guarantee provisions in line
with the objective of leveling the playing field and eliminating distortions
in pricing and resource allocation.4
The fiscal incentives system shall be highly focused, time-bound, simple,
and transparent, as well as comparable with other fiscal incentives
system in the ASEAN. The taxation of motor vehicles will be rationalized
based on the concept of user charges and the benefit principle of taxation.
To minimize transaction costs in the capital market, a package of reforms
relating to the taxation of the financial sector shall be introduced.
An efficient taxation of electronic commerce and financial innovations
shall be formulated.
Revenue collection shall be improved by strengthening accountability and transparency
in collection. The performance of the collecting agencies shall be measured against the targets
based on macroeconomic variables such as growth of imports, consumption expenditures and income
of industries. Computerization efforts of the Bureau of Internal Revenue (BIR) will be focused on
the improvement of collection from major revenue districts. At the BOC, the reforms in systems
and procedures and their computerization will be sustained and further strengthened. The
efficient taxation of hard-to-tax groups will be pursued with greater vigor. An important
administrative measure will be the requirement to use the tax identification number (TIN) in transactions.
Other information linkages will also be established to effectively monitor passive incomes and the
self-employed. In order to tax the hard-to-tax groups, the government will also consider
taxing consumption rather than income. However, the proposed changes will have to be
revenue-neutral to the government.
In line with the long-term goal of reducing public sector role in the conduct of
business, privatization efforts will continue, focusing on the disposition of remaining big-ticket items.
However, the process will have to be thoroughly studied particularly with regard to areas such as
timing, mechanisms for disposal, as well as valuation and pricing schemes. While privatization is an
affirmed goal of government, government recognizes that it should not be treated as just a stopgap
measure to narrow down the budgetary deficiency. Paramount importance is given to its long-term effect
of catalyzing efficiency in operations.
The overriding principle for the remaining GOCCs is for these to improve their
efficiency. Their efficiency shall be boosted by adjusting fees and charges. Similarly, fees and charges
of national government offices shall also be adjusted based on cost recovery.
2. Expenditure reform
The expenditure program will be the primary tool of the government for its poverty
alleviation program. Fiscal spending shall be geared towards the social sector and agricultural modernization
to achieve food security and increase the productivity of the rural sector which accounts for
the bulk of the poor.
Social services will undergo improvement in quality along with the extension of more
effective and targeted safety nets. Meanwhile, the implementation of the Poverty Alleviation Fund shall be
contingent on improving the targeting mechanisms.
Local government units (LGUs) will be encouraged to develop infrastructure through
cost-sharing mechanisms. The share of LGUs to total infrastructure financing shall increase
commensurate to their financial capability.
Reforms in expenditure management will include improving the prioritization of
government resources and achieving better operating efficiency in budgeting. A medium-term
expenditure framework will be introduced initially by installing a three-year budgeting framework, integrating
a planning-budgeting framework, and further devolving financial and managerial authority to
agency heads. Performance management will be enhanced along with the accountability for results
in government. The allocation of resources shall
also be improved and made transparent by
introducing a regional breakdown of the national budget.
Government will increase its operational efficiency to reduce overhead costs and increase
the proportion of the budget available for program delivery and growth-enhancing projects. The
share of the budget earmarked for GOCCs will also be reduced as further privatization is
undertaken and as the operational efficiency of those that will be retained is improved.
More specifically, the growth of personal services will be controlled through the
reorganization of government, limiting the creation of new positions to population-related positions
(e.g., teachers and policemen but not medical personnel, since medical services have been devolved), and
the rationalization of government compensation.
A general salary increase will be undertaken upon the completion of the reorganization
program. An initial computation of the possible savings to be realized from streamlining of the
bureaucracy indicates that a program involving 10,000 personnel will not generate savings during the year
of implementation because of the separation benefits that will be extended. However, in the
following year, some P2.6 billion to P3.6 billion in savings can be realized from the reduction in
personnel and the associated maintenance costs.
The size of government will progressively decline consistent with the attainment of the
fiscal objectives. A "scrap and build" policy will be implemented wherein no new offices or new
programs will be created without the abolition or termination of existing ones.
The government will increasingly limit itself to the delivery of basic social services
and development of infrastructure facilities it is mandated to undertake. Private sector provision
of infrastructure in the NCR shall be encouraged by fostering an
appropriate policy framework for the collection of user fees while public funds are used to
finance essential rural infrastructure.
While keeping the present proportion of the total Internal Revenue Allotment (IRA) to
internal revenue collections at 40 percent, the allocation and utilization of budgetary transfers to LGUs
will be improved through: (a) improving the IRA allocation formula to encourage better
revenue mobilization by LGUs, favor poorer areas and those deprived of national
government-supported social services; (b) strengthening the monitoring of the utilization of LGU funds; (c)
encouraging cost-sharing schemes and capacity building programs for devolved activities and implementing
a time-bound removal of the NG funding for these
activities; (d) encouraging cofinancing based
on ability to pay by LGUs of projects, which shall be awarded on a competitive
basis; and (e) rationalizing the grant system for LGUs to improve its transparency and effectiveness.
Mechanisms to enhance transparency in government and the accountability of agency
heads for outputs and outcomes will be established through the installation of better external reporting
of the financial position and physical accomplishments of government, the institutionalization of
regular assessments and reporting of the performance of major programs, the conduct of client
surveys, and the granting of more managerial autonomy and responsibilities to government executives.
C. Debt Management
Considering the recent experience in a number of emerging economies, the Philippines
will strengthen its external debt management. This will include the continued monitoring of debt
flows and stocks, especially of short-term debt, using a computerized system. Reporting shall
be strengthened for a comprehensive coverage of debt statistics.
To ensure that the private sector bears the full risks of its borrowings, the government
will continue to refrain from providing any explicit or implicit guarantees on private external
loans.
The government shall adhere to an appropriate domestic and external financing mix within
its repayment capacity. Steps to reduce short-term debt and encourage a better maturity structure
of debt flows as well as higher nondebt creating flows have already been initiated. Approvals on
new external borrowings shall continue to be subject to an annual ceiling. To reduce the country's
dependence on external debt, the fiscal sector shall move towards a balanced budget by 2002.
Specific measures have been put in place to diminish the disincentive to peso
intermediation. Foreign currency deposits are now subject to a 7.5 percent withholding tax on interest income.
Prudential rules have also been adopted in response to the rapid growth of foreign
exchange intermediation by the banking system. The BSP now requires that 30 percent of the 100
percent cover for all foreign exchange liabilities of Foreign Currency Deposit Units (FCDUs) of
banks should be kept in liquid assets.
Central to debt management is the lengthening of the maturity profile of government
securities by issuing a two-year Fixed rate Treasury Bond (FXTB) every month and the 5-7-10 and
20-year FXTBs on a quarterly basis. Competitiveness in the auction process will be ensured by
continuous liberalization of the dealership of government securities.
D. Labor and Employment
Employment generation shall be a priority of the government in line with its thrusts to
reduce poverty, improve income and redistribute wealth. Thus, support strategies and programs shall
be harnessed to create an environment conducive to the generation of remunerative
employment, livelihood opportunities, and entrepreneurship growth. Through the Agriculture and
Fisheries Modernization Act (AFMA), the agriculture sector shall be bolstered by: (a) preparing
the agricultural workers for the modernization of their sector, (b) promoting other activities that
will enhance agricultural productivity, and (c) providing opportunities for small farmers to have
greater access to production inputs including credit. Meanwhile, the Magna Carta for Small and
Medium Enterprises will be fully implemented to enable small and medium enterprises to flourish in the
rural areas and to generate off-farm employment opportunities in the countryside.
The government will facilitate the delivery of employment training programs that are
responsive to the requirement of priority areas. It shall also improve the Labor Market Information
System, particularly through the computerization of job matching which will strengthen
employment facilitation. Strengthening labor-management cooperation, and promoting tripartism,
employment flexibility, and worker empowerment will further enhance industrial peace. Furthermore, the
Labor Code will be reviewed and updated as necessary to enable workers and employers to adjust
to the emerging labor market conditions. The government shall create the enabling environment
that will allow both workers and employers to negotiate productivity-based wages at the firm
level. Regulations governing occupational safety and hazard administration shall also be strengthened.
In industries experiencing adjustment problems, promoting the forging of social
accords between trade unions and employers associations will minimize job loss. Coping mechanisms
for workers and enterprises shall be enhanced while displaced workers will be provided safety
nets and adjustment assistance packages.
Overseas employment has evolved through the years as an alternative employment
option. The government shall manage this global reality, consistent with national development
objectives and with utmost regard for the welfare of the workers. The review of Republic Act (RA) 8402
or the Migrant Workers Act shall be prioritized to further strengthen the legal environment and
make it more conducive to promoting employment. The proposed review shall include separate rules
for sea-based and land-based sectors.
In the medium-term, GDP growth shall be driven by the higher growth of employment
vis-à-vis the labor force. The policy environment to increase the contribution of TFP to the
overall growth picture shall be laid down in the next six years. One such policy is the priority given
to social investments. The focus shall be on the provision of basic education, along with
the implementation of programs to match government training programs
with the needed skills as the economy develops. Further, restructuring the economy in order to channel human resources
to more growth-enhancing sectors such as industry and services will be pursued. Investments
in leading export-oriented technologies shall also be pursued.