IMF warns of risk of abrupt exit

The International Monetary Fund (IMF) has warned member-countries of the dangers of pulling the plug too soon on stimulus packages that the Philippines, for instance, adopted in response to the global economic downturn.

The warning aired by IMF managing director Dominique Strauss-Kahn in Berlin on Friday was especially significant for the Philippines, whose proposed capital outlay for 2010 was reduced by P15 billion.

Kahn said global growth, and by extension prospects of growth for emerging markets like the Philippines, remains tentative and likely sluggish over the immediate- and medium-term horizon.

The French-born IMF head urged member- countries to “err on the side of caution as they decide when to exit from their crisis response policies.”

He suggested that the dismantling of fiscal- and monetary-policy responses to the global financial crisis be done only when economic recovery has taken hold and the rate of unemployment fallen to more moderate levels.

This message, however, seemed lost on Philippine fiscal planners, as they submitted under next year’s budget program a capital outlay of only P220.9 billion, which is P14.9 billion lower than that outlined in President Arroyo’s budget message requiring capital expenditures (capex) reaching P235.8 billion.

Former budget secretary Benjamin Diokno was the first to cry foul on the issue, similarly warning the government that a capex reduction at this point could significantly weaken local output or the gross domestic product, which expanded at a tentative 1.5 percent pace in the second quarter.

The Philippines barely escaped falling into an economic stupor when it grew by just 0.4 percent in the first three months.

Such a reduction was especially worrisome, as spending for public infrastructure would fall to just P117.9 billion in the proposed budget from P161.3 billion under the President’s budget message earlier, Diokno said.

Senior government officials, asking to remain anonymous on account of the sensitive nature of the budget cut, said this development is a classic “Type-1” error, or one in which fiscal stimulus is withdrawn too early.

“From where we sit, the year 2010 is too early to withdraw the fiscal stimulus and refuse not to spend,” the official said.

Economists especially look out for developments pointing to so-called Type-1, Type-2 error, where the early dismantling of fiscal stimulus packages is considered egregious and the late implementation of monetary adjustments even more so.

Should the budget planners persist on this line of thinking, then the government is risking the likelihood of growth cut short even as it was just starting to push higher, according to the official.

“We continue to hold the position that the government should still expand its expenditure program, both for capital outlay and social services,” the official said.

• ABS-CBN

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Tags: International Monetary Fund