Budget gap pressures RP to print money: IMF

Budget gap pressures RP to print money: IMF

MANILA (Dow Jones): International Monetary Fund (IMF) has
warned that the Philippines' burgeoning budget deficit raises the
risk of the central bank printing new money to finance the
national debt and providing bailout loans to the government.

The IMF raised the specter of monetization to service the
heavy financing requirements of the budget in a "working paper"
on the preparations being made by the central bank to switch to
inflation targeting as its main policy plank later this year.

The IMF warned that the fiscal slippages over the past two
years could hamper efforts to achieve inflation targeting.

When a U.K. investment bank recently raised similar fears to
the IMF's, the central bank was livid, and vigorously denied it
would monetize the national debt under any circumstances.

Even so, the question of whether the Philippines will be able
to deflate its ballooning budget deficit is regarded by many in
the market as the most daunting challenge faced by President
Gloria Macapagal Arroyo's economic managers.

Poor tax collection and weak privatization proceeds caused the
budget deficit to balloon to 136 billion pesos (US$2.65 billion)
in 2000, more than double its original target.

The failure to run a tight fiscal ship pressured the peso and
sporadically caused interest rates to spike last year.

So far, the monthly ceiling targets for 2001's planned deficit
of 145 billion pesos haven't overshot. But some analysts believe
the government isn't out of the woods yet.

"Fiscal slippages over the past two years have raised the
domestic financing requirement of the budget, and unless
contained, may create pressure for monetization...and increasing
the risk it (central bank) might have to provide direct credit to
the government," the IMF said.

The IMF is also concerned that a fiscal jam could result in
the central bank providing direct credit to the government.

Monetization most commonly refers to a central bank printing
new money to buy debt, a step that floods the markets with cash
and generally brings interest rates lower.

The Philippines is confronted by a different set of economic
problems. For one thing, prices are rising not falling, with the
government forecasting inflation averaging 6 percent to 7 percent
in 2001, compared to 4.4 percent last year.