The International Monetary Fund expects economic recovery in the Philippines to gain momentum in the second half of 2021 and in 2022.
“Real GDP is projected to expand by 5.4 percent in 2021 and 7.0 percent in 2022, due to continued easing of quarantine measures, progress in vaccinations and macroeconomic policy support,” the IMF executive board said at the conclusion of the 2021 Article IV consultation with the Philippines on Aug. 6.
It issued the report as the government placed Metro Manila under a strict lockdown to contain the spread of the Covid-19 Delta variant.
The IMF said the Philippine economy was recovering after a major, pandemic-induced economic downturn of 9.6 percent in 2020. The government deployed a comprehensive set of policy responses that helped to mitigate the socioeconomic impact and maintain financial stability.
“While a moderate economic recovery started in the third quarter of 2020, the second COVID-19 wave of infections that emerged in early 2021 will likely slow the economic recovery in the first half of the year,” it said.
Inflation rate averaged 4.4 percent in the first half of 2021, above the government’s target band of 2 percent to 4 percent, reflecting primarily food supply shocks and the price impact of pandemic-related transportation supply restrictions.
Meanwhile, a sharp import compression in 2020 resulted in a current account surplus of 3.6 percent of GDP. Vaccination started and is poised to accelerate from midyear.
“Medium-term economic growth is forecast to return to the pre-pandemic rate of 6.5 percent. Headline inflation is expected to decrease to 3.3 percent by end-2021, as the transitory drivers taper off and reach the mid-point of the target band over the medium term,” the IMF executive directors said.
It said that with the economic recovery, the projected rebound in investment, and a more expansionary fiscal policy stance, the current account surplus is expected to narrow in 2021 and reach a deficit of 1.8 percent of GDP in the medium term.
“The risks to the outlook are larger than usual and tilted to the downside, given risks of a protracted pandemic and uncertainty around the vaccine program. Banks benefit from strong capital and liquidity buffers but are facing rising asset quality risks,” the IMF executive directors said.
The executive directors commended the government’s comprehensive policy response to the COVID-19 pandemic, which helped cushion the socio-economic impact. Strong fundamentals and prudent macroeconomic policies also helped to maintain macro-financial stability.
They noted that there are larger-than-expected uncertainties, including related to the pandemic and the vaccination program. They underscored the importance of continuing supportive macroeconomic policies and prioritizing health policy responses to sustain the recovery.
The IMF executive directors agreed that the expansionary fiscal stance strikes an appropriate balance between recovery needs and fiscal prudence, with the priority given to health, social, and infrastructure spending.
They noted that the Philippines has some fiscal space to respond flexibly if downside risks materialize. They also welcomed the authorities’ commitment to fiscal consolidation, and emphasized the benefits of adopting a medium-term fiscal strategy, centered on revenue mobilization and expenditure control, to anchor their commitments.
At the same time, they recommended gradually phasing out direct budgetary financing to safeguard the central bank’s operational capacity and independence.
They welcomed the authorities’ emphasis on structural reforms to improve the business environment and foster more sustainable, inclusive and greener growth. They stressed the importance of investment in training and education to facilitate sectoral reallocation. Directors also encouraged efforts to increase spending on social protection, strengthen public service delivery and implement climate-related initiatives.