The Philippines WT/TPR/S/149 
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I. ECONOMIC ENVIRONMENT 
(1) INTRODUCTION  
1. Economic growth in the Philippines has resumed following the Asian financial crisis, with an 
average rate of over 4% annually during 1999-04, including more th an 6% in 2004.  Nonetheless, 
nominal GDP per head surpassed 1999 levels only  in 2004 (US$1,026).  At the same time, 
unemployment has risen to almost 12%.  The eco nomy remains frail and vulnerable to external 
shocks, and this is compounded by the Philippines' declining international competitiveness.  Improved 
productivity is essential to meet the increasing comp etition from China and other low-cost economies.  
Philippine exports, which are concentrated in el ectronics, performed better in 2004, but have 
benefited less from China's econom ic expansion than have exports  from other regional economies, 
and have recovered slowly since the 2001 global recession.  Investment has almost stagnated, and 
most growth since then has come from private cons umption, supported by rising overseas remittances. 
2. The lack of competitiveness reflects deep-seate d macroeconomic and structural problems.  
The Philippines’ growth prospects thus hinge on comprehensive macroeconomic, institutional, and 
other structural reforms to promote macro-stability,  efficiency, and investment.  These reforms would 
improve the economy's performance and increase its r esilience to external shocks.  Broad fiscal 
reforms are needed to reduce persistently larg e budget deficits and ove rall public debt levels 
(including external) which have only just edge d below GDP, and generate  substantial external 
financing requirements, a major source of vulnerabi lity.  Increased investment, including FDI, and 
related reforms would promote productivity and help  establish robust growth, as would renewed trade 
liberalization.  After being returned in the 2004 elections, the Government reiterated the need to 
implement significant macroeconomic and structur al reforms to reduce the budget deficit and to 
promote efficiency.  The timely and sustained im plementation of these and other needed reforms 
remains the key to sustainable economic recovery. 
(2) RECENT ECONOMIC PERFORMANCE  
3. Growth has been restored since the last Re view of the Philippines, averaging over 4% 
annually during 1999-04.  Although dropping to 1.8% in 2001, it accelerated to 4.7% in 2003 and 
6.1% in 2004 (Table I.1).  However, the ec onomy remains frail and the recovery uncertain, 
constrained by fiscal as well as structural pr oblems, and vulnerable to external shocks.1  Domestic 
factors hampering economic growth since 1999 include  the political crisis in 2000, the persistent 
budget deficit resulting in burgeon ing public debt and associated  large external financing 
requirements, and the long-standing institutional and governance weaknesses, which inhibit private 
sector development.2  Addressing these would promote sustained longer-term growth and help 
alleviate poverty by increasing employment.  Despite higher rates of growth since 1999, unemployment rose to 11.8% in 2004 after stabilizi ng at 11.4% during 2002-03 .  Although inflation 
more than halved from 1999-03 to 3%, it jumped to 5.5% in 2004. 
                                                     
 
1 Adverse external developments that have hampered economic performance since 1999 include the 
world economic slowdown in 2001, the Iraq war, and the SARS outbreak in 2003, which affected tourism. 
2 There were also on-going security concerns, especially in Mindanao, which were compounded by the 
military mutiny in July 2003.  WT/TPR/S/149 Trade Policy Review 
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Table I.1 
Selected macroeconom ic indicators, 1999-04 
  1999 2000 2001 2002 2003 2004a 
National accounts (Percentage change) 
Real GDP (1985 market price) 3.4 4.4 1.8 4.3 4.7 6.1 
Private consumption 2.6 3.5 3.6 4.1 5.3 5.8 
Government consumption 6.7 6.2 -5.3 -3.7  0.5 -0.8 
Gross fixed capital formation -2.0 24.0 -7.3 -5.0 2.9 5.1 
Net exports of goods and non-factor services 3.6 17.0 -3.4 3.6 4.4 14.0 
Unemployment rate (%) 9.8 11.2 11.1 11.4 11.4 11.8 
Prices and interest rates (Per cent, unless otherwise indicated) 
Inflation (CPI, percentage ch ange) 6.7 4.3 6.1 3.0 3.0 5.5 
Deposit rate (period average) 7.3 7.4 7.5 4.2 4.2 4.3 
Lending rate (period average) 11.8 10.9 12.4 8.9 9.5 10.1 
Money, credit (end period) (Percentage change) 
Money supply (M1) 40.0 -1.8 0.3 21.2 8.6 10.0 
Money supply (M2) 19.3 4.8 6.9 9.6 3.3 8.2 
Money supply (M3) 19.3 4.6 6.8 9.5 3.3 8.2 
Credit to private sector -1.2 8.1 -3.0 1.2 1.8 3.6 
Exchange rate      
Nominal exchange rate indexb 2.6 -9.0 -8.9 -1.6 -11.2 11.9 
Real effective exchange rate indexb 8.7 -6.8 -4.9 0.4 -10.0 -4.3 
PhP/US$ 39.1 44.2 51.0 51.6 54.2 56.0 
Fiscal policy (Per cent of GDP, unless otherwise indicated) 
National government balancec -3.8 -4.0 -4.0 -5.3 -4.6 -3.8 
Total revenue 16.1 15.3  15.5 14.3 14.6 14.4 
Tax revenue 14.5 13.7 13.5 12.5 12.5 12.3 
Total expenditure 19.8 19.3 19.6 19.6 19.2 18.3 
Current 17.6 17.5 17.9 .. .. .. 
Non-financial public sector balanced -3.2 -4.5 -4.8 -5.7 -5.7 -5.1 
Non-financial public sector debte 83.6 88.3 87.6 93.9 101.2 99.2 
Public sector total debt  72.0 79.0 78.4 86.0 94.5 .. 
Domestic debt 33.1 32.2 34.6 37.7 40.1 .. 
Savings and investment      
Gross national savings 28.2 29.4 20.8 23.3   20.9 21.7 
Gross domestic investment 18.8 21.2 19.0 17.6 16.6 17.2 
Savings-investment gap 9.4 8.2 1.8 5.7  4.3 4.5 
External sector      
Current account balance  9.5 8.2 1.8 5.7 4.2 4.7 
Remittances 8.9 8.0   8.5 9.4 9.6 10.0 
Net merchandise trade  6.5 5.0 -1.0 0.5 -1.6 -1.8 
Value of exports 44.9 49.1  43.9 44.8 43.9 45.8 
Value of imports 38.4 44.1 44.9 44.3 45.5 47.7 
Services balance -3.5 -3.2 -2.9 -1.3 -1.5 -1.1 
Capital account 0.0 0.1 0.0 0.0 0.0 0 
Financial account  -3.1 -5.5 -1.8 -2.1 -6.7 -2.7 
Direct investment 2.3 1.9 1.6 2.2 0.2 0.4 
Table I.1 (cont'd) The Philippines WT/TPR/S/149 
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  1999 2000 2001 2002 2003 2004a 
Balance of payments  4.7 -0.7 -0.3 -0.9 0.1 -0.3 
Terms of trade, 1995=100 127.27 124.94 123.25 114.93 .. .. 
Merchandise exports (percentage ch ange) 18.8 8.7 -15.6 9.5 2.9 9.9 
Merchandise imports (percentage change) 4.1 12.2 -4.2 7.2 5.8 8.2 
Services exports (percentage change) -35.8 -17.3 -20.7 -3.0 -2.8 23.3 
Services imports (percentage change) -25.6 -14.8 -18.8 -21.7 3.1 5.8 
Gross official reserves (US$ billion)f 13.2 13.0 13.4 13.1 13.5 12.9 
in months of imports 3.9 3.6 4.0 3.9 3.7 3.3 
Gross external public debt (end period)  67.0 67.4 72.9 69.9 72.4 66.2 
in US$ billion 51.0 51. 2 51.9 53.6 57.4 55.6 
National government gross financing requirementsg 23.7 22.2 21.4 23.2 23.7 24.4 
Foreign 4.1 3.7 1.9 5.1 5.6 4.1 
Debt service ratioh 14.1 12.4 15.8 16.4 17.2 14.5 
.. Not available. 
a Preliminary. 
b Index based on 2 January 2003=100 after 2000 (previously 2000=100). 
c National definition.  Includes privatizati on receipts of the national government, and excludes net deficit from restructuring  the 
Central Bank. 
d Includes the National Government, Centra l Bank-Board of Liquidators, 14 monitored government-owned enterprises, social 
security institutions and local government, as well as Public  Sector Borrowing Requirement (PSBR) adjustments (January-
September only). 
e Gross debt net of sinking fund and social security institutions' holdings of nationa l government securities.  May include oth er 
debt held by other parts of the non-financial public sector.  
f Excludes gold. 
g The deficit plus amortization of medium- a nd long-term debt, the stock of short-term debt at the end of the last period, and 
market financing on behalf of th e National Power Corporation.  
h As a percentage of goods, services receipts and income. 
Source:  Central Bank of the Philippines, Annual Report,  various years;  IMF (2004), Philippines:  2004 Post Program 
Monitoring Discussions Staff Report, Country Report No. 04/317, October [online].  Available at:  
http://www.imf.org/external/pubs/f t/scr/2004/ cr04317/.pdf;  IMF (2005), Staff Report for the 2004 Article IV 
Consultations and Post-Program Monitoring Discussions,  Country Report No. 05/105, Washington DC, 
March 2005 [Online]. Available at:  http://imf.org/external/pubs/ft/scr/2005/cr05105.pdf;  and the Philippine 
authorities. 
4. Growth during the review period has been ma inly due to private consumption, which, 
supported by overseas remittances, accounted for over 80% of growth in 2003.  After contracting in 
2001 due to the world recession, exports, especially of electronics, increased slowly, albeit 
substantially in 2004.  Private investment has contributed little to growth;  gross fixed capital 
formation recovered slowly in 2003 and 2004 afte r declining in the previous two years.  Fiscal 
pressures, exacerbated by rising debt service pa yments, have also curtailed essential public 
infrastructure investment.  The Ph ilippines has been unable to attract  sufficient foreign investment, 
partly because of the higher cost of capital due to increased risk-adjusted interest rates associated with 
its high risk (Section 6).3  Uncertain fiscal and other policies, security concerns, weak institutions, and 
poor infrastructure continue to deter private, especially foreign, investment.4  The Philippines' 
business environment also appears to be less conduciv e to private investment than in many other, 
                                                      
3 Short-term interest rates in the Philippines are among the region's highest, and according to the 
Economist Intelligence Unit's country risk rating (based on  77 indicators of political stability and other measures 
of credit quality), the country became ev en riskier in 2004 given its heavy indebtedness and sluggish pace of 
reform ( The Economist , "Emerging-market indicators", 26 February 2005, p. 98).   
4 World Bank (2004c). WT/TPR/S/149 Trade Policy Review 
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including neighbouring, economies.5  Its relative international co mpetitiveness has also seemingly 
declined sharply.6  Competition for foreign direct investment (FDI) is likely to intensify as China and 
other neighbouring low-cost countries continue to be increasingly attractive to FDI and become more 
competitive in major export markets, such as the United States and the EU, especially in clothing, 
following the removal of quotas in 2005.7 
5. Services (including utilities and construction) c ontinue to dominate the economy, representing 
60.7% of GDP in nominal terms in 2004 (60.6% in 1999) (Table I.2).  Led by transport, 
communications, trade and financial services, the sector  has been the key driver of growth since 1999, 
with real growth averaging over 5% (7.3% in 2004).  The share of manufacturing in nominal GDP 
also rose slightly from 21.6% to 23.0% during 1999-04, while that of agriculture (including fisheries 
and forestry) contracted substantially from 17.1% to 15.3%, although it rose from 14.8% in 2003.  Favourable weather conditions, complemented by gove rnment programmes, have helped agricultural 
growth to rise in real terms to 4.9% in 2004, just behind manufacturing (5.0%).  The authorities expect services to continue to spearhead growth in  2005 with real growth of 6.6%-7.0% envisaged on 
the back of robust exports from business outsour cing activities, namely call centre operations.  
Agriculture and manufacturing are expected to exhi bit real growth in 2005 of 4.2%-4.4% and 4.2%-
6.4%, respectively. 
Table I.2 
Basic economic and social indicators, 1999-04 
  1999 2000 2001 2002 2003 2004 
Real GDP (1985 prices, PhP billion)  918.2 973.0 990.0 1, 033.0 1,081. 5 1,148.0 
Real GDP (1985 prices:  US$ million) 49,344.1 52,289.2 53,207.2 55,514.2 58,122.2 61,696.4 
Nominal GDP (PhP billion) 2,976.9 3,354.7 3,631. 5 3,959.6 4, 299.9 4,843.5 
Nominal GDP (US$ million) 76,157.0 75,909.4 71,215. 6 76,732.0 79, 329.7 86,428.6 
Nominal GDP per capita (US$)  991.9 988.5 908.8 954.0 963.8 1,026.0 
GDP by industry at 1985 prices (Annual percentage change) 
Agriculture, fisheries and forestry  6.5 4.3 3.7 3.8 3.8 4.9 
Mining and quarrying -8.4 11.3 -6.5  51.0   16.8 4.3 
Manufacturing 1.6 5.6 2.9 3.5  4.2 5.0 
Services  4.0   4.4   4.3   5.1   5.8 7.3 
Construction   -1.6   1.4 -23.1 -5.7 -2.6 8.9 
Electricity, gas, and water   3.1 4.2   0.7   4.3   3.2 3.9 
Wholesale and retail trade 4.9 5.2 5.6 5.8 5.7 6.8 
Transport and communications 5.3 10.4 8.8 8.9 8.6 12.2 
Finance 1.9 0.9 1.2 3.4   7.1 8.4 
Table I.2 (cont'd) 
                                                      
5 World Bank (2004a).  The Philippines' relatively low ranking (70th out of 103 countries) in the 
Business Competitiveness Index published by the World Economic Forum also reflects significant productivity 
constraints at the micro-level (World Economic Forum, 2004). 
6 According to the World Economic Forum's Growth Competitiveness Index, the Philippine’s 
international competitiveness ranking dropped from 66th in 2003 to 76th in 2004 (one of the largest falls of any 
country) (World Economic Forum, 2004).  Among the reas ons for the deteriorating rank were the poor quality 
of public institutions (corruption, regulatory and cont racts environment) and the macroeconomic environment 
(government waste and macro-instability).   
7 Clothing is the Philippines' second largest single export, and the Government is trying to improve the 
industry's competitiv eness.  Nevertheless, since cl othing accounts for about 6% of  total exports, the negative 
effects on the economy of ending of the ATC as from 2005 are likely to be moderate.  The Philippines WT/TPR/S/149 
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  1999 2000 2001 2002 2003 2004 
Ownership of dwellings and real 
estate 0.6 0.0 -0.5 1.7   4.0 6.0 
Public administration 3.1   1.7 0.9   1.5   5.1 6.8 
Private services 5.8   4.8 4.4 5.5   2.9 1.6 
GDP by industry at current prices (Per cent) 
Agriculture, fisheries and forestry  17.1 15.8 15.1 15.1 14.8 15.3 
Mining and quarrying 0.6 0.6 0.6 0.8 1.0  1.1 
Manufacturing 21.6 22.2 22.9   23.1 23.3 23.0 
Services 60.6 61.4 61.4  60.9 60.8 60.7 
Construction 5.5 6.5 4.9 4.7 4.4 4.5 
Electricity, gas, and water 2.9 2.9 3.2 3.1 3.2 3.2 
Wholesale and retail trade 14.1 14.1 14.2   14.0 14.0 14.1 
Transport and communications 5.4 5.9 6.8 7.0 7.3 7.6 
Finance 4.8 4.4 4.4 4.3 4.4 4.4 
Ownership of dwellings and real 
estate 7.0 6.6 6.5 6.4 6.3 6.1 
Private services 11.3 11.4 11.9 12.2 12.5 12.5 
Government services   9.8 9.5   9.3   9.1   8.8 8.1 
Share in employmenta       
Agriculture 38.8 37.1 37.2 37.0   36.6 36.0 
Mining and quarrying 0.3 0.4 0.4 0.4 0.3   0.4 
Manufacturing 9.9 9.9 9.9 9.5   9.6 9.7 
Services 51.0 52.6 52.5 53.1 53.5 53.9 
Electricity, gas, and water 0.5 0.4 0.4 0.4 0.4   0.4 
Wholesale and retail tradeb 15.7 16.3 18.0 18.7 18.3 18.6 
Construction 5.5 5.4 5.4 5.3 5.5 5.4 
Transport and communications 6.9 7.2 7.2 7.2 7.5 7.7 
Hotels and restaurants .. ..   2.3 2.3 2.4   2.5 
Financing, insurance, real estate and 
business services 2.5 2.6 2.8   2.8 3.1 1.6 
Community, social and personal 
services 19.9 20.7 16.4 16.4 16.3 17.7 
.. Not available. 
a As of January each year. 
b For 2001 and 2002, includes repair of motor vehi cles, motorcycles, personal and household goods. 
Note: Figures may not add due to rounding. 
Source:  Data provided by the Philippine authorities and the National Statistics Office.  
6. With gross national saving exceeding gross domes tic investment, the current account balance 
has recorded surpluses;  although these rose in 2004 from 4.2% to 4.7% of GDP, they have declined 
since 1999 (from 9.5%).  A significant source of na tional savings and current account surpluses are 
overseas remittances, which continued to rise substa ntially in 2004 to US$8.5 billion or 10% of GDP 
(US$6.8 billion, or 8.9%, in 1999).8  The authorities expect these to grow by 6.0% in 2005, and 
thereby to continue providing strength and stability to the peso and thus help to stabilize import prices 
and overall inflation.  The trade balance as a shar e of GDP has declined since 1999, and was again 
                                                      
8 The significance of remittances highlights the importance to the Philippines of overseas economies 
opening their service markets to foreign personnel (GATS Mode 4). WT/TPR/S/149 Trade Policy Review 
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negative in 2003 (-1.6%) and 2004 (-1.8%).  The fina ncial account deficit has fluctuated since 1999, 
rising to 6.7% of GDP in 2003 when inward FDI slumped and net portfolio investment was unusually 
negative.  This was reversed somewhat in 2004 when  the deficit contracted to 2.7% of GDP due to 
higher foreign direct and portfolio investment.9  International reserves, which have been relatively 
stable since 1999, declined from their peak of US$13.5 billion (equivalent to 3.7 months of 
merchandise imports) in 2003 to US$12.9 billion (3.3  months) in 2004.  Gross external public debt 
peaked at US$57.4 billion in 2003 ( 72.4% of GDP) before falling to  US$55.6 billion (66.2%) in 2004.  
The associated debt/service ratio al so peaked at 17.2% in 2003, droppi ng to 14.5% in 2004.  If left 
unchecked, the relatively high level of external public debt and accompanying government foreign 
financing requirements, which almost tripled to US$5.6 billion from 2001 to 2003 (US$ 4.1 billion in 
2004), might generate pressures to further restrict imports in order to increase international reserves. 
(3) MACROECONOMIC POLICIES  
7. Persistent fiscal deficits and resulting larg e public debt pose the greatest risk to macro-
stability.  The associated large external financi ng requirement is a drag on the economy and makes it 
vulnerable to external shocks, such as swings in c onfidence, rising global interest rates and oil prices, 
and international recession.10  High public indebtedness reflects th e national government deficit, and 
the large accumulated debt of government-owned and controlled corporati ons (GOCC).  The total 
non-financial public sector deficit rose from 3.2% to  5.7% during 1999-03, be fore falling to 5.1% 
in 2004.11 
(i) Fiscal policy 
8. Fiscal policy, tightened since 2002, remains expansionary.  After peaking at 5.3% of GDP in 
2002, the national government deficit declined to 4. 6% in 2003 and returned to its 1999 level of 3.8% 
in 2004 (Table I.1).  National Government debt in 2003 exceeded revenue fivefold, and debt service 
payments amounted to over one  third of total revenue.12  Such debt reduces the private sector’s access 
to finance, and crowds out public investment in essential infrastructure as budgetary funds are 
increasingly committed to servicing debt.  Rising deficits of GOCCs' entities, especially the National 
Power Corporation (NPC) and the National Food Au thority, compound the problem and have until 
recently offset reductions in the national government deficit;  the NPC’s deficit of 1.5% of GDP in 
2004 accounted for nearly 30% of the non-financial public sector deficit.13  The non-financial public 
sector debt, which exceeded GDP in 2003, was expected  to fall slightly to 99.2% of GDP in 2004.  
Mounting contingent liabilities compound the Govern ment’s potential indebtedness.  These include 
                                                      
9 The negative financial account is due mainly to larg e outflows recorded as "other investment", which 
includes loans, currency and deposits, and trade credits.  According to the authorities, current monitoring and 
reporting problems in trade and foreign exchange data reduce the reliability of estimated trade credits.  The 
Philippines’ balance of payments also records sizeable outflows under Net Unclassified Items (or "errors and 
omissions") due, according to the authoritie s, to inadequacies in the databases used to compile such statistics.  
Net Unclassified Items amounted to a deficit of US$1.4 billion (2.4% of total trade) in 2004 (January-
September).  This makes interpreting the data difficult (IMF, 2004b). 
10 Public sentiment is likely to remain brittle until substantive reforms are made.  For example, one 
rating agency downgraded the Philippines’ sovereign debt rating in January 2005, largely due to on-going fiscal 
concerns and inadequate tax reforms. 
11 The non-financial public sector deficit includes the national government, Central Bank-Board of 
Liquidators, 14 monitored government-owned enterprises, social security institutions, and local government. 
12 World Bank (2004c). 
13 A proposed 40% hike in average generation tariffs in September 2004 and the Government’s 
decision to absorb PhP200 billion of NPC’s debts from 200 5 is expected to reduce its deficit in that year to 
0.75% of GDP.   The Philippines WT/TPR/S/149 
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state guarantees on loans to GOCCs and build-opera te-transfer contracts, as well as non-funded 
benefits under state pension schemes and liqui dity support extended to troubled banks.14 
9. The Government's macroeconomic priorities incl ude reducing the public sector deficit to 1% 
of GDP and achieving a balanced budget (albeit not  until 2010, as provided for in the Medium-Term 
Philippine Development Plan (MTPDP) 2004-10) th rough revenue and expendi ture initiatives and key 
structural measures to restart the reform process, such as electricity privatization and reducing waste 
and corruption through public sector  rationalization (Box I.1).  Key fiscal priorities include expanding 
revenues and achieving budgetary savings, while at  the same time increasing expenditure on 
infrastructure and social programmes.  The MTPD P 2004-10 also recognized the need to address 
macroeconomic, especially fiscal, instability, as well as corruption, excessive bureaucracy, and 
regulation. 
Box I.1:  Policies of the new administration 
The President's inaugural speech, on 30 June 2004, announced the following ten-point agenda:  
- create 6-10 million jobs, support 3 million entrepreneurs, and develop 1-2 million hectares of land 
for agri-business; 
- ensure education for all children; 
- balance the budget; 
- link the entire country via a transport and digital infrastructure network; 
- provide power and water to all barangays (neighbourhoods); 
- decongest metro Manila; 
- develop the Subic-Clark corridor into the region’s most competitive international service and 
logistic centre; 
- computerize the electoral process; 
- bring peace to Mindanao;  and 
- reconcile the divisive issues generated by previous popular revolts. 
The President recognized in her St ate of the Nation Address (SONA) to Congress in July 2004 that the 
most urgent problem was the chronic budget deficit that had squeezed infrastructure investment and programmes necessary for peace.  The Admini stration’s key fiscal priorities include: 
- expand revenues, spending on infrastructure and social programmes, and find budgetary savings; 
- revenue measures would be legislated, aimed at raising PhP80 billion (1.6% of GDP), including 
(a) a gross income tax system, (b) changes to the VAT (as yet unspecified), (c) a telecom franchise 
tax, (d) indexation of excise taxes on alcohol, tobacco and petroleum products, (e) rationalization of fiscal incentives, (f) introduction of a targeted ta x amnesty, and (f) creation of a performance-driven 
framework for revenue agencies; 
- raise another PhP20 billion through administrative measures such as increasing efficiency and 
reducing costs, increasing specific charges and fees, raising duties on petroleum products, and 
increasing profit transfers from government corporations; 
- privatization of electricity assets to provide ch eaper power, and reiterate to Congress the priority 
passage of the delayed TRANSCO Franchise Bill to facilitate sale of the national electricity grid; 
- re-engineering of government agencies to reduce waste and corruption, including closing of further 
offices;  and 
- increase spending on areas of critical social need, such as health, clean water, and education, and 
the need to advance land reform and for Congre ss to pass the "farmland as collateral" bill. 
Source: IMF, Philippines:  2004 Post Pr ogram Monitoring Discussion , Country Report No. 04/317, 
October, 2004 
                                                      
14 The Government’s estimates of contingent liabilitie s of PhP708 billion (16% of GDP) at end-2003 
included only estimates of the value of direct guarantees on GOCC loans (World Bank, 2004c). WT/TPR/S/149 Trade Policy Review 
Page 8 
 
 
10. The major fiscal weakness and contributor to persistent budget deficits  is inadequate tax 
revenues.  These continued to fall, to 12.3% of GDP  in 2004 (14.5% in 1999) , partly due to revenue 
forgone (equivalent to some 2% of GDP) through  the pervasive use of potentially distorting tax 
incentives, such as for ex port-oriented enterprises, and increased tax avoidance, if not evasion.15  The 
cost-effectiveness of tax expenditures in promo ting investment is questionable (Chapter III)16, and 
they distort resource allocation and facilitate tax avoidance by making the tax system more complex 
and less transparent.  Until recently, the real value of  specific excise taxes had also fallen substantially 
due to unchanged rates.  Low tax revenues may also  undermine the effectiveness of fiscal policy in 
contributing to macroeconomic stability and efforts to improve human capital through, for example, 
expenditure on education and health, protection of  the poor, and to address critical shortcomings in 
infrastructure.  In addition, reforming the internal  tax system would enable the Government to reduce 
reliance on import duties as a source of revenue, whic h is a possible obstacle to sustainable tariff 
reductions.17 
11. Expenditure rationalization and civil service refo rms are envisaged to promote efficiency and 
to improve financial management, accountability, and control.  A medium-term budgetary framework 
was adopted, and a National Government Accounti ng System (NGAS) introduced in January 2002.  
Control procedures were improved by requiring internal  audit units to be introduced in all government 
agencies from 2003.  The Commission of Audit was al so restructured and its external auditing 
functions strengthened.  Since October 2004, public  agencies have been preparing rationalization 
plans aimed at eliminating redundant positions .  Reforming the public pension scheme would 
contribute to fiscal consolidation.  While contribu tion rates were increased recently and costs cut to 
enable pension funds to run small cash surpluses,  the Social Security System, which covers non-
government employees, could face financial difficulti es by 2015 due to weak asset management and 
high benefits in relation to contribution rates.18  A more coherent and open government procurement 
system, based on international competition to ensure value for money rather than using it as an instrument of industrial policy, would also contri bute to fiscal consolidation and efficiency.   
(ii) Monetary and exchange rate policy 
12. The Central Bank (BSP), which, according to th e authorities, was granted full independence 
in 1993 under the New Central Bank Act (RA No. 7653), remains committed to price stability, the 
main monetary policy objective.
19  This was reinforced by the adoption of inflation targeting in 
January 2002.  Annual targets are set for "headline inflation".20  The target was set at 4.5% to 5.5% in 
2002 and 2003, and 4% to 5% in 2004.  While infla tion was kept well below targeted levels in 2002 
and 2003, it accelerated above the 2004 target to 5.5%, due mainly to higher food, fuel, and transport 
prices.21  Targets for 2005 were recently revised  upwards from 4.0%-5.0% to 5.0%-6.0%.22  Annual 
                                                      
15 World Bank (2004c).  
16 World Bank (2004c). 
17 Revenue losses from tariff cuts could also be minimized by simultaneously removing tariff 
concessions and relaxing restrictive tariff quotas to allow more dutiable agricultural imports.  
18 IMF (2004a). 
19 The authorities indicate that the Central Bank has full  independence.  It selects monetary instruments 
free from governmental influence, and is no longer involved in quasi-fiscal and developmental financing 
functions.  Explicit limits apply on the amount and du ration of advances or loans it extends to government. 
20 Headline inflation, the annual percentage change in the CPI published by the National Statistics 
Office (NSO), measures average prices of a standard "basket" of goods an d services.  The NSO also measures 
core inflation, which is headline inflation after excludi ng rice, corn, fruit, vegetables, LPG, kerosene, oil, 
gasoline, and diesel.  Core and headline in flation have tracked each other closely. 
21 The target was also revised upwards to take acco unt of the NSO’s shift to  a newly-based (from 1994 
to 2000) CPI, which, according to au thorities, raised measured headline in flation by about half a percentage 
point. The Philippines WT/TPR/S/149 
 Page 9 
 
 
inflation, running at 7.9% in December 2004 and ove r 8% in early 2005, is still likely to exceed the 
revised 2005 target due to the continued rise in global oil prices.23  Nevertheless, the Central Bank 
believes that average inflation for 2006 will return  within the targeted range of 4.0% to 5.0%. 
13. Monetary policy is conducte d through open market operations, reserve requirements and 
transactions under rediscounting facilities, which use a market-based pricing mechanism.  The policy 
instrument is the interest rate.  Despite the IM F's perceived need for th e Philippines to tighten 
monetary policy to curb inflation, the BSP’s key policy interest rate remained unchanged at 6.75% 
(reverse repurchase rate) and 9.0% (o vernight repurchase rate);  it was last increased in July 2003.  
According to the BSP’s latest monetary policy assessment, inflationary pressures remain tied to 
transitory supply-side factors that are best mitig ated by appropriate non-monetary policy measures to 
facilitate timely importation, distribution, and deliv ery of certain commodities.  Money supply growth 
accelerated in 2004 after declining sharply in 20 03, but remained below 10% for all monetary 
measures (M1, M2, and M3).   
14. The Philippines continues to have a floating excha nge rate regime with the peso’s value set by 
the market.24  The BSP intervenes in the exchange rate market, according to  the authorities, only to 
smooth out excessive exchange rate volatility, and monetary policy is not  used to meet any particular 
exchange rate objectives.  It nevertheless monitors  the foreign exchange market to assess the likely 
impact of currency movements on inflation.  The auth orities also indicate that a specified target exists 
for gross international reserves (GIR) of US$16 billion at end 2005.25  The peso’s nominal and real 
exchange rates have depreciated almost continuous ly since 2000, including by 11.9% and 4.3% in 
2004, respectively.  The peso de preciated nominally against the U.S. dollar by 43% during 1999-04, 
but has remained relatively stable in recent years, depreciating by 5% in 2003 and 3.3% in 2004.26 
(4) STRUCTURAL MEASURES  
15. Reform progress to date has been mixed, due ma inly to weak or inconsistent implementation 
in key areas.  Tackling structural problems could help the Philippines meet its economic challenges. 
16. Reducing the burgeoning overall pub lic debt requires the budget deficit and GOCCs' losses to 
be contained.  Boosting tax revenues is the key to  sustained improvement in  the budget deficit.  Tax 
reforms along with improved collection and compliance to reduce evasion are needed.  The mis-use of 
tax measures as an instrument of industry policy ra ther than a source of government revenue, which 
has distorted resource allocation and eroded the tax base through the proliferation of tax incentives, 
could also be curtailed (section (3)(i)).  The eros ion of the internal tax base has necessitated a 
minimum corporate income tax (levied at the rate of  2% on gross income), which tends to vitiate the 
                                                                                                                                                                     
22 The inter-agency planning body, the Developm ent Budget and Coordination Committee (DBCC), 
sets the targets.  The target for 2007-10 was set at 3.0% to 4.0%.  Inflation may deviate from the target due to 
volatile prices of unprocessed foods and oil products, signi ficant policy changes that directly affect prices (e.g. 
taxes, incentives, and subsidies), or natural factors aff ecting the major part of the economy.  The BSP must 
provide an Open Letter to the President to  explain any deviation of inflation from  the targeted level.  It issued an 
Open Letter in January 2004 to explain why 2003 inflation was below the target and again in January 2005 
when the 2004 target was exceeded.   
23 Philippine Daily Inquirer , "BSP sees February inflation rate at 8.3-8.8%", 1 March 2004, p. B3. 
24 The Philippines maintains an exchange rate system free of restrictions on payments and transfers for 
current international trans actions (IMF Article VIII). 
25 The Central Bank sets the GIR target and reports it to the Development Budget Coordination 
Committee (DBCC), which consists of representatives from various agencies, including the Departments of 
Finance, and Budget and Management, the national Economic and Development Authority, the Bureau of the 
Treasury, and the Office of the President. 
26 The BSP made modest purchases of foreign exchange in late 2004 (IMF, 2005). WT/TPR/S/149 Trade Policy Review 
Page 10 
 
 
tax relief from tax incentives.  It also requires the G overnment to rely on tariffs for a substantial share 
of tax revenue;  they accounted for over 7% of tota l tax revenue in 2002.  Re placing tariffs with less 
distorting indirect taxes could result in a substantial welfare gain to the economy.27  The Government's 
announced measures to boost tax revenue by PhP 80 billion addresses many of these issues (Box I.1).  
However, implementation has been slow;  only the higher excise taxes on alcohol and tobacco, 
yielding about 0.2% of GDP, have been implemente d (January 2004).  It also remains unclear how 
and to what extent tax incentives are to be rationa lized.  Investment incentives are to be consolidated 
into a single law currently being debated by Congress that will better target activities.  But, while it 
places a 20-year limit on their duration, it does not significantly reduce the la rgest incentives, such as 
tax holidays for exporters, and even proposes new incentives.  Other announced revenue-generating 
measures include raising excise duties on petroleum products, which is proving difficult as prices are 
already high due to rising world oil prices, and increasing transfers from profitable government corporations.
28  A major  proposal, expected to yield an additional PhP60 billion annually, is to raise 
the VAT rate from 10% to 12% and to remove ma ny non-standard exemptions on goods and services, 
including gradually introducing VAT on electricity  over four years and taxing basic foodstuffs like 
sardines, noodles, cooking oil, sugar, and milk, at  a reduced rate of 6%.  Tax administration and 
collection is being improved, including the introducti on of performance criteri a for revenue agencies, 
such as for customs and internal revenue. 
17. Poorly performing GOCCs continue to  be a substantial fiscal burden.  Improving their 
efficiency by promoting more competitive markets would benefit the economy, and pricing reforms to 
ensure cost recovery along with their accelerated pr ivatization would contribut e to fiscal consolidation 
(Chapter III).  Reducing these losses is closely tied to electricity reforms;  the state-owned NPC has 
the highest deficit (PhP52.5 billion as of September 2004,  equivalent to 1.5% of  GDP).  Such reforms, 
including deregulation to achieve a competitive market  and privatization of ge neration plants and of 
the national electricity grid (TRANSCO) are again a government priority after lengthy delays (Chapter IV).  These measures would raise the sector’s efficiency and minimize the risk of supply 
shortages by facilitating much needed private invest ment.  An important impediment to market access 
and competition in services is FDI caps of 40% in key markets, such as utilities and 
telecommunications (Chapter IV).  On-going stre ngthening of the regulatory regimes to safeguard 
competition in these network services would also  promote efficiency and lower prices. 
18. The financial sector, including the banking system, is being restructured (Chapter IV).  
Despite the strengthening of the regulatory a nd supervisory framework in line with BIS 
recommendations, the banking sector remains fragile  due mainly to the high incidence of non-
performing loans (NPLs).  While banks are being en couraged to voluntarily offload NPLs to private 
entities, low bank capitalization remains a prudential concern and contributes to the low growth in 
loans.
29  The banking sector’s efficiency could be increased through greater competition.  An 
extended three-year moratorium, introduced in Ma y 2000, prevents new domestic and foreign banks 
from being established (thereby limiting entry to th e purchase of an existing bank).  New foreign bank 
branches also remain prohibited and foreign equity in a domestic bank is capped at 60%, although this 
was lifted temporarily for seven years to allow up to  full foreign ownership of one existing local bank 
until May 2007.   Improved financial intermed iation would foster more efficient investment and 
thereby contribute to sustained economic growth. 
                                                      
27 Tariffs are a relatively "expensive" type of tax distortion.  One study has estimated the welfare gains 
from switching tariffs to output taxe s as the revenue instrument could be as high as US$0. 24 for each dollar of 
tax receipts, equivalent to 0.2% of GDP (Can Erbil, 2004). 
28 Tariffs on oil and petroleum imports were raised from 3% to 5% from 2005. 
29 IMF (2004a). The Philippines WT/TPR/S/149 
 Page 11 
 
 
19. While the Philippines is now more open, trade barriers still impose unnecessary large 
economic costs.  Further trade liberalization c ould improve efficiency by providing greater 
competition.  However, tariff reductions were recen tly "re-calibrated" and rates selectively raised on 
many products in response to industry requ ests for assistance to provide time to improve 
competitiveness, and revenue concerns stemming from inadequate tax receipts (Chapter IV(4)(ii)).  
Resuming trade liberalization, including for sen sitive agricultural products, and accelerating other 
structural reforms, would boost productivity, which a ppears to be lowest in agriculture and services.  
A number of structural problems that have traditiona lly hampered labour productivity would also need 
to be tackled, such as poor infrastructure, low quality schooling, weak technological capacity, and a 
generally poor investment climate.30 
(5) DEVELOPMENTS IN TRADE  
20. Merchandise exports recove red slowly from the 2001 global downturn in demand for 
electronics, remaining around 44% of GDP until rising to 45.8% in 2004, still below the 2000 level of 
49.1% (Table I.1).  Exports decreased by 15.6 % in 2001, and recovered slowly, especially in 2003 
when growth fell from 9.5% to 2.9%.  Growth was stronger in 2004 (9.9%).  Growth in merchandise 
imports has outstripped GDP, rising from 38.4% in 1999 to 47.7% in 2004.  Imports have grown 
relatively strongly, except for a decline of 4.2% in 2001 (8.2% growth in 2004).  Exports and imports of services have declined substantially since 1999 from a GDP share of about 6% and 10% to 4% and 
5% in 2004, respectively.  However, service exports jumped by 23.3% in 2004. 
(i) Composition of merchandise trade 
21. The Philippines continues to rely heavily on manufactured exports (Chart I.1), which 
accounted for 89.8% of exports in 2003 (92.0% in 1999).  They are mainly electronic circuits, other electrical machines, and computer, telecommunications, and office equipment.  Combined, these represented 69.6% of total exports in 2003, down from 74.6% in 199 9.  Of these products, the main 
category, "electronic integrated circuits and micro assemblies", declined from 44.4% of total exports in 
1999 to 36.9% in 2003, while "office machines and ot her telecommunications equipment" rose from 
24.2% to 28.7%.  Clothing exports  still represented about 6% of exports in 2003.  Manufactured 
goods continue to account for most imports (79% in 1999 and 2003).  They included mainly office 
machines and telecommunications equipment, which increased their share of imports from 38.7% in 
1999 to 44.0% in 2003, and chemicals (8.1% in 2003).  The share of mining imports was 12.4% in 2003 (10.8% in 1999), and comprised mainly fuels. 
 
                                                     
 
30 Yap (2004). WT/TPR/S/149 Trade Policy Review 
Page 12 
 
 
Chart I.1
Product composition of merchandise trade, 1999 and 2003
1999 2003
(a)    Exports (f.o.b.)
Total: US$35.0 billion
(b)    Im ports (c.i.f.)
Total: US$32.6 billion Total: US$39.5 billion
Source:   UNSD, Comtrade database (SITC Rev.3).Non-electrical
machinery
1.2
Agriculture
9.9
Other mining  2.9 Non-electrical
 machinery
7.5 Other semi-
manufactures
3.7Other consumer goods  
4.5
Iron & steel  3.2Fuels
7.9
Chemicals
8.6Total: US$36.2 billionSemi-manuf.  2.7Mining  2.4Agriculture  5.1Other consumer
 goods   5.9
Mining   3.3Agriculture
6.6Other electrical 
machines
4.0
Non-electrical 
machinery
1.3Transport equipment  
     3.9
Electronic integrated circuits & 
microassemblies
36.9
Agriculture 
8.0Other  consumer
 goods   4.3
Fuels
10.1Mining
12.4
Iron & steel   2.9Other mining   2.3
Other semi-
manufactures
3.1Chemicals
8.1Clothing
6.2
Manufactures
79.1
Mining
10.8Electronic integrated circuits 
& microassemblies
44.4Transport equipment
  1.9
Clothing
6.4Other electrical
 machines
6.0
Office machines  & other 
telecom. equipment   
24.2
Other  0.5Other consumer goods  
5.2
Manufactures
92.0Manufactures
89.8
Semi-manuf.  2.8Office machines & other 
telecommunication
 equipment
28.7
Other   0.4
Other electrical 
machines
5.3
Transport equip. 3.9
Non-electrical machinery
4.7Other electrical 
machines
5.3
Office machines & 
telecom. equip.
38.7Textiles   3.8
Other  0.2Office machines 
& telecom. equipment.
44Transport equip.  4.2
Textiles  2.7
Other  0.2
Manufactures
79.4 Per cent
 The Philippines WT/TPR/S/149 
 Page 13 
 
 
Chart I.2
Merchandise trade by main orig in and destination, 1999 and 2003
1999 2003
(a)    Exports (f.o.b.)
Total: US$35.0 billion
(b)    Im ports (c.i.f.)
Total: US$32.6 billion Total: US$39.5 billion
Source:   UNSD, Comtrade database (SITC Rev.3).Other East Asia
7.6
Chinese 
Taipei
5.3China
3.4Oceania  3.4
Other 
East Asia
8.9Middle East
6.7
Japan
20.0Total: US$36.2 billionHong Kong, China
5.6Malaysia
4.2China
5.9
Singapore
6.7
Chinese Taipei
6.9Malaysia
6.8
Chinese
Taipei
5.0Middle East
7.1
Korea, Rep. of
6.4Japan
20.4Other East Asia
10.3
China
4.9East Asia
56.0Japan
13.3United States
29.9
Singapore
7.0
Hong Kong, 
China
4.0EU15
19.3East Asia
46.2East Asia
59.1
Japan
15.9Hong Kong, China
8.5United States
20.1
EU15
16.3
United States
20.5
Korea, Rep. of
8.7Oceania  2.3United States
19.4
Singapore
5.7EU15
9.1
Singapore
6.8EU15
8.0
East Asia
58.1Other
4.6
Chinese Taipei
8.5Other East Asia
8.4Other  
4.6
Other
4.4
Hong Kong, 
China
4.3Other
5.1
 WT/TPR/S/149 Trade Policy Review 
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(ii) Direction of merchandise trade 
22. The United States remains the Philippines' ma in trading partner, accounting in 2003 for 
20.1% of exports (down from 29.9% in 1999) and 19. 4% of imports (20.5% in 1999) (Chart I.2).  
Other major export markets in 2003 were the European Union (16.3%, down from 19.3% in 1999) 
and Japan (15.9%, up from 13.3% in 1999).  There has been a shift of exports towards Asian 
destinations;  East Asian economies as a group increas ed their share of exports from 46.2% in 1999 to 
59.1% in 2003.  The share of exports to ASEAN markets in 2003 rose to 18.2% (mainly Malaysia and Singapore) from 14.2% in 1999.  In 2003, imports  continued to be sourced mainly from Japan 
(20.4%), the United States, and other East Asian markets (37.7% excluding Japan), especially 
Singapore (6.8%) and Korea (6.4%).  The European  Union’s share of imports fell to 8.0% in 2003 
(9.1% in 1999);  ASEAN members accounted for 17.2% (14.6% in 1999), mainly from Singapore and Thailand. 
23. The Philippines' increased shar e of trade with ASEAN partne rs since 1999 may reflect trade 
diversion attributable to preferential tariff reductions extended by ASEAN members under AFTA.
31 
(iii) Trade in services 
24. The Philippines remains a net importer of services;  the services deficit as a share of GDP fell 
from 3.5% in 1999 to 1.1% in 2004 (Table I.1).  Travel accounted for about half of total services exported in 2003, followed by transport (19.6% ), communications (16.0%) and "other business 
services" (7.9%) (Table I.3).  The main services impo rts in 2003 were transpor tation (53.3%), travel 
(15.1%), "other business services" (11.1%), insura nce (7.3%) and "royalties and licence fees" (6.5%). 
Table I.3 
Trade in services, 1999-04 
(US$ million and per cent) 
  1999 2000 2001 2002 2003 2004a 
Services balance (US$ million) -2 ,712 -2,430 -2,050 -1,017 -1,227 -701 
Export of services 4,803 3,972 3,148 3,055 2,970 2,665 
of which (per cent) 
Transportation 12.0 22.4 20.9 20.6 19.6 16.7 
Travel 53.2 53.7 54.7 57.0 49.3 54.8 
Communications 8.8 4.6 10.4 10.1 16.0 14.0 
Insurance 1.1 1.7 1.5 1.1 1.8 1.9 
Government 0.5 0.9 1.1 0.9 0.5 - 
Construction 1.2 2.4 2.0 0.9 1.7 2.2 
Financial 1.4 2.0 1.0 1.0 2.0 1.3 
Computer & information 1.2 1.9 0.7 0.7 0.8 0.8 
Personal, cultural and recreational 1.2 1.1 0.5 0.2 0.3 0.3 
Other business services 19.3 9.0 7.0 7.3 7.9 7.8 
Table I.3 (cont'd) 
                                                      
31 It is difficult to ascertain the effects of this tr ade on national welfare.  If increased imports from 
ASEAN members have on balance displ aced less efficient Filipino productio n, then such trade creation will 
have raised welfare.  However, if on balance increas ed ASEAN imports have displaced lower priced and more 
efficient imports from non-ASEAN sour ces because of the tariff preferences, such trade diversion may have 
reduced welfare.  Thus, discriminatory liberalization diff ers to non-discriminatory (or MFN) trade liberalization 
which is unambiguously welfare enhancing.  The Philippines WT/TPR/S/149 
 Page 15 
 
 
  1999 2000 2001 2002 2003 2004a 
Import of services (US$ milli on) 7,515 6,402 5, 198 4,072 4,197 3,366 
of which (per cent) 
Transportation 25.9 46.7 46.5 49.1 53.3 59.5 
Travel 17.4 15.7 23.6 21.4 15.1 13.4 
Communications 9.7 4.1 4.1 2.1 2.0 2.8 
Insurance 1.1 2.5 2.4 6.9 7.3 6.1 
Government 0.3 0.3  0.1 0.2 0.6 1.0 
Construction 2.2 1.9 5.8 3.0 1.5 1.1 
Financial 4.2 7.3 1.4 1.1 1.3 1.8 
Computer & information 1.3 1.5 1.6 1.1 1.0 0.9 
Royalties and licence fees 1.5 3.1 3.1 5.6 6.5 4.9 
Personal, cultural and recreational 1.8 2.0 1.1 0.4 0.4 0.3 
Other business services 34.6 14.9 10.4 8.9 11.1 8.1 
a Preliminary figures for January – September. 
Source:  IMF, Balance of Payments and International Investment Statistics, various years;  and the Philippine authorities.  
(6) DEVELOPMENTS IN FOREIGN DIRECT INVESTMENT (FDI) 
25. FDI remains an important factor in the co untry’s development.  Success in attracting 
significant inflows, however, has been hampered by investor uncertainty over economic stability, 
especially the fiscal position, political uncertainties,  the poor investment climate, and increased 
competition for FDI from neighbouring economies.  The Philippines is ranked as performing "below 
potential" in attracting inward FDI (i.e. h as high FDI potential but low FDI performance).32  
Improving the investment climate would facilitate sustained growth .  FDI improves labour and total 
factor productivity by increasing the amount of capital labour has to work with and by providing a vehicle for disseminating new technology and working methods. 
26. Since 1999, inward FDI has been erratic.  It slumped from US$1.7 billion in 2002 (2.2% of 
GDP) to US$0.2 billion in 2003 and 2004 (0.2%).  The Philippines’ stock of FDI fell from 
US$12.8 billion in 2000 to US$11.5 billion in 2003.
33  FDI approvals rose substantially in 2004 from 
PhP34.0 billion to PhP130.6 billion (first three quarters).34  In 2003, the approvals were mainly from 
investors in the United States (31%), Japan (26%), the Netherlands (11%), and Chinese Taipei (8%).  
Some 60% of approvals were in manufacturing,  followed by construction (8%), gas (5%), and 
communications (4%).  Net portfolio investment has also deteriorated, from US$7.7 billion in 1999 to minus US$0.7 billion in 2003.  It is expected to  recover somewhat in 2004, to US$0.6 billion. 
(7) P
ROSPECTS  
27. The authorities are targeting growth of betw een 5.3% and 6.3% in 2006, based on robust 
growth in industry and services, and of around 7% annually until 2010 (MTPDP 2004-10).  Inflation, 
although almost certain to again be above the 20 05 target, due mainly to higher food, fuel, and 
                                                      
32 The ranking is based on the Inward FDI Performance Index and the Inward FDI Potential Index.  The 
Philippines’ world ranking in FDI performance slipped from 87th in 1998-00 to 96th in 2000-03, while in FDI 
potential its ranking improved, from 69th in 1990-00 to 57th in 2000-02 (UNCTAD, 2004). 
33 UNCTAD (2004). 
34 Includes approvals by the BOI, Philippine Economic Zone Authority (PEZA), Subic Bay 
Metropolitan Authority, and Clark Development Corporation.   Most of the increase was the result of rises in 
BOI approvals sourced from Nauru (Department of Trade and Industry, 2004c). WT/TPR/S/149 Trade Policy Review 
Page 16 
 
 
transport prices, is expected by the authorities to re vert to the 4.0%-5.0% target range in 2006 and to 
subsequently fall to within 3.0% to 4.0%.  Th e national government budget de ficit, planned to be 
phased out  by 2010, is expected to fall to 3.6% of GDP in 2005.  However, the IMF’s moderate 
reform scenario projects inflation stabilizing at 4.0% from 2007, and slower growth, of 4.7% from 
2005 falling to 4.0% in 2010.35  This would coincide with a fa lling national government deficit of 
3.1% in 2010, a non-financial public sector defic it of 4.3%, and non-financial public sector debt of 
92.6%.  
28. Sustained future growth will require domestic  policy reforms, including reducing the high 
overall public debt and large external financi ng requirements, further trade and investment 
liberalization, and other structural reforms to impr ove productivity in order to compete with low-cost 
neighbouring economies.  While a number of key policy measures were announced recently, such as 
progressively eliminating the budget deficit and renewe d efforts to deregulate electricity and reform 
the banking sector, implementation and reform sust ainability remain uncertain.  Trade liberalization 
has slowed and slippage has occurred in some other key policy reforms.  Addressing these major 
policy concerns along with institu tional weaknesses, including ec onomic governance, and promoting 
more competition in services and in other markets,  along with a sounder more efficient financial 
sector, will also improve the investment and business cl imate needed to attract FDI and private sector 
development.  Without these reforms, growth  prospects are likely to remain uncertain. 
                                                      
35 Under its strong reform scenario, growth would fall in 2005 to 4.9% but rise gradually to 6.0% in 
2010 (IMF, 2005).