Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized AWorld Rank ' = Dcrelopmeni : Currency Un it - Peso : $1.00 - E;: PhP51.36 PhP1.OO - ; US$0.0195 [F ISCALYEAR January 1 - December 31 ASEAN Association of Southeast NCR National Capital Region AsianNations NGAS New Government Accountirlg AMC Asset Management Company System BIR Bureau of Internal Revenue NGO Non-Government Orgarrization I BOC Bureau of Customs hI PL Non-Performing Loan ; BOT Build Operate Transfer NRM National Resource and I' BSP Bangko Sentral ng Pilipinas Management j CMDC Capital Markets Development NSCB National Statistical I Corporation Coordination Board 1 COA Commission on Audit NSO National Statistics Office 1 COP Committee on Privatization ODA Overseas Development 1 CSC Civil Service Commission Assistance j DBM Department of Budget and OPIF Organizational Performance I Management I Indicator Framework j DOF Department of Finance PDIC Ph~lippineDeposit Insurance / DST Documentary Stamp Tax Corporation / EKB Expanded Commercial Bank PCEG Presidential Committee on / EPR Effective Protection Rate Effective Governance Reform , FIES Family Income and PPI Private Participation in Expenditure Survey Infrastructure 1 GAAP Generally Accepted Accounting PS E Philippine Stock Exchange Principles PSISSA Public Sector Institutional GDP Gross Domestic Product Strengthening and GNP Gross National Product Streamlining Agenda GOCC Government Owned and ROPOA Real and Other Properties Controlled Corporation Owned and Acquired HSRA Health Sector Reform Agenda ROSC Report on Standards and IOSCO International Organization of Codes Securities Commissions SEC Securities and Exchange IRA Internal Revenue Allotment Commission / LGC Local Government Code SEER Sector Effectiveness and / LGU local government unit Efficiency Reviews \ 1 LTDO Large Taxpayer District Office SSS Social Security System 1 MTPDP Medium Term Philippine VAT Value Added Tax Development Plan WTO World Trade Organization Vice- Presiden t: Jemal ud-din Kassum, EAP Country Director: Robert Van Pulley, EACPF Sector Director: Homi Kharas, EASPR Task Manager: Lloyd Mcl%ly, EACPF TABLE oF Contents : EXECUTIVE SUMMARY................................................................... .1. DEVELOPMENT ACHIEVEMENTS MIX SUCCESS AND DISAPPOIBfThIl 1 A. RECENT ECONOMIC PERFORMANCE HAS BEEN MODEST AND FR / B. POVERTY REDUCTION HAS STAGNATED .............................................. 1 C. POLICY DISCUSSION ............................................................................... 1 D. CONCLUSIONS ........................................................................................... I I 2. POLICY AND INSTITUTIONAL ACTIONS TO DELIVER RESULTS ....................10 A. STRENGTHEN FISCAL MANAGEMENT ............................................................. 10 Rebuilding revenues ................................................................................... 13 Containing contingent liabilities and managing fiscal risks ................................ 16 B. IMPROVE GOVERNANCE AND PUBLIC SECTOR PERFORMANCE ..........................16 Overview of governance outcomes ............................................................... 17 Public financial accountability and management .............................................19 Re-engineering government ........................................................................21 Judicial reform ......................................................................................... -24 C. STRENGTHEN PRIVATE SECTOR DEVELOPMENT ..............................................24 Protection of property rights ........................................................................25 Corporate governance ................................................................................ 25 Creditor rights and insolvency law ................................................................27 Competitive environment: foreign trade and investment regime .......................28 Infrastructure provisions .............................................................................30 Rural development ..................................................................................... 31 I D. STRENGTHEN AND DEEPEN THE FINANCIAL SECTOR .................................... 33 Banking system performance ....................................................................... 34 Policy environment for banking .................................................................... 35 Capital markets ......................................................................................... 37 Improving access to financing for SMEs and strengthening microfinance ............39 E. EMPOWER AhlD PROTECT THE POOR .............................................................39 Education ................................................................................................. -40 Health care ............................................................................................... 41 Ensuring access to other assets ...................................................................42 Social protection ........................................................................................ 42 Population growth ...................................................................................... 43 I 3. PROSPECTS ARE CONTINGENT ON ACTION AND CONTINUED SUPPORT.. 44 I' / A. ECONOMIC DEVELOPMENT PROSPECTS ........................................................ 44 . B. POVERTY REDUCTION PROSPECTS ............................................................... 46 / C. THE IMPORTANCE OF DONOR SUPPORT......................................................... 46 (This report is prepared by a team led by Lloyd I 1 McKay which included Joven Balbosa, Milan / Brahmbhatt, Gaurav Datt, Michael Engelschalk, I /Teresa Ho, Dana Weist, and Cheloy Tria. Other I I i major contributors were Richard Anson, Aldo 1I Baietti, Jayshree Balachander, Craig Burnside, i /Gary Fine, Sudarshan Gooptu, Arvind Gupta, 1 Vijay Jagannathan, Amitabha Mukherjee, Keith i j Oblitas, Rajashree Paralkar, Elliot Riordan and Chuck Woodruff. Vikram Nehru, Sean Nolan and / Zia Qureshi served as peer reviewers. / /Supervision from Sanjay Dhar, Homi Kharas and i Ivan Pulley is gratefully acknowledged. I EXECUTIVE 1. Post-1997 Development Outcomes 5. The Medium Term Philippine Devel Disappoint. From 1994 to 1997, Philippine Plan (MTPDP) growth targets of economic growth averaged 5 percent per percent per year are attainable, but annum and the incidence of poverty fell the key building blocks for sustained gr quickly, from 32 percent to 25 percent. an environment conducive to During these years, the government budget investment and productivi was balanced, exports were growing at private and public sectors-are around 20 percent per annum, investment And stronger growth must be was 23 percent of gross national product by increased participation in d (GNP), and there was optimism about the the poor to attain the desired prospects for lasting peace throughout the in poverty. Anything less country. further disappointment. 2. In contrast, from 1998 to 2001, economic 6. Key Policy Issues. Securing the sustaine growth averaged 2.5 percent and poverty increase in growth and ~artici~ationbv th reduction stagnated. Confidence was poor that is central to the MTPDP is likely to undermined by governance concerns which require further prompt action on priority culminated in impeachment proceedings issues in five critical areas: against former President Estrada, uncertainty Continue to strengthen fiscal management with regard to macroeconomic stability and reduce the fiscal deficit while arising from falling tax revenue and large maintaining strategic expenditures in fiscal deficits, rising stress in the banking education, health, social protection, sector; and renewed concerns regarding agriculture support services, and peace and the rule of law. Investment fell to infrastructure. This entails tax policy 17-18 percent of GNP. In 2001, these measures and public sector reforms to domestic difficulties were aggravated by a enhance revenues, to improve expenditure deteriorating external environment, which management and public procurement triggered a 16-percent decline in export (including a new procurement law), and earnings. Yet, despite these difficulties, gross strengthen the management of contingent domestic product still grew at 3.4 percent in liabilities. 2001, the highest among market economies Improve governance and public sector in the region. 1 jkctioning. In addition to the reforms of 3. Following the transfer of power in January public financial management noted above, 2001, the government has managed to there are two other areas of governance lessen macroeconomic concerns by reform that are key to strengthening the essentially meeting its budget deficit target, investment climate and improving delivery o'f containing inflation, and overseeing a return public services. These are, first, improving to financial market stability. Moreover, the rule of law, for example, by further improving governance and reducing poverty addressing law-and-order issues, have been reinforced as national priorities. A anticorruption efforts and the implementing capacity to move forward with structural planned judicial reform. The second is civil reforms was demonstrated by passage of service reform and bolstering the important power sector legislation. Together implementation capabilities