The Philippine economy recorded another relatively strong performance in 2005.Public sector deficits and debt were reduced in real terms and the VAT reform law, passed in May 2005, was fully implemented by February 2006 following a number of challenges and delays. Progress on implementation of the fiscal reform program, coupled with the economy’s resilience to various shocks—ongoing political tensions, higher oil prices, agricultural slowdown—boosted financial markets as reflected in a stronger peso, higher private capital inflows, and falling borrowing costs and spreads for the public sector. Improved tax administration and governance are now needed to ensure that recent policy reforms translate into sustained deficit and debt reduction as well as more effectively implemented public resources for infrastructure and social programs. |
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GDP grew by 5.1 percent in 2005 while GNP growth was 5.7 percent. Although growth slowed relative to 2004, the period marked the first in a decade of two successive years of growth higher than 5 percent. Private consumption drove economic growth, expanding by nearly 5 percent helped by strong remittance flows, that amount to about 13 percent of GNP (not including the considerable remittances entering via informal channels). By contrast, investment and export performance were disappointing. Gross capital formation fell in 2005 by 4.3 percent, with a steeper decline in durable equipment investment. Weak global demand for Philippine electronic products led to a general slowdown in exports, which, coupled with weak investment, slowed import demand. Public consumption contracted in the second half of 2005 as government tightened expenditures to contain its deficit. Droughts brought on by El Niño in the first half depressed growth in the agriculture sector to 2 percent. Industry, propelled by strong manufacturing activity in the chemicals, furniture and fixtures, and petroleum industries, grew by 5.3 percent. The service sector continued to lead overall output growth, expanding by 6.3 percent and contributing over 47 percent to overall GDP. Despite the economy’s relatively robust growth in the last two years, unemployment remains high at 10.7 percent, while a fifth of those classified as employed are underemployed. Of the 750,000 jobs created last year, only about 13 percent were in the formal sector with paid wages and salaries, whereas 42 percent were for unpaid family workers and the rest were self employed. More than a third of the jobs created were in the agricultural sector, but given its sluggish growth, productivity in the sector has remained low. The number of Filipinos deployed overseas in 2005 was close to one million bringing the total to above 8 million, of which about 3 million are Filipino residents. Average inflation in 2005 increased to 7.6 percent reflecting higher oil prices and power tariff adjustments, and notwithstanding appreciation of the peso. As of February, inflation remained at 7.6 percent. In September and October, the central bank raised its key overnight borrowing and lending rates reflecting the higher price environment and ongoing adjustments by the U.S. Federal Reserve. However, the market determined 91-day Treasury bill rate remains below prevailing inflation at 5.25 percent. The national government deficit declined to 2.7 percent of GDP in 2005 from 3.9 percent in 2004 mainly as a result of expenditure tightening. Despite the passage of a number of revenue bills in 2004 and 2005, revenue improvements contributed only 0.3 percent to the deficit reduction, whereas expenditure cuts, distributed across the major spending categories, contributed 0.9 percent. Nonetheless, 2005 marked the first time since the Asian crisis that the tax effort improved, with tax revenue increasing from 12.4 to 12.7 percent of GDP. Back to top |
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