Preliminary Considerations of an Inflation Targeting Framework for the Philippines

The Philippines' economic performance in the last four years has been commendable, notwithstanding the difficult conditions in late 1997. Growth, which virtually came to a halt in the early 1990s, picked up in 1993 and accelerated steadily to almost 7 percent by end-1996, fueled by an expansion in exports and investment. At the same time, the fiscal position strengthened, inflation was successfully brought down to single digits, and with large capital inflows, particularly in 1996,...
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The Philippines' economic performance in the last four years has been commendable, notwithstanding the difficult conditions in late 1997. Growth, which virtually came to a halt in the early 1990s, picked up in 1993 and accelerated steadily to almost 7 percent by end-1996, fueled by an expansion in exports and investment. At the same time, the fiscal position strengthened, inflation was successfully brought down to single digits, and with large capital inflows, particularly in 1996, gross international reserves rose to record levels. This reversal of economic fortunes has not been easy to accomplish and, in fact, is largely the result of major reforms undertaken in the past decade which liberalized the economy and laid the foundation for investment and export-led growth. Nevertheless, important structural problems remain and as the Philippines prepares for a new era of sustainable growth, it will face many challenges. These include fiscal consolidation to raise public savings over the medium-term and reduce the reliance on foreign savings, addressing banking sector vulnerabilities through strengthened supervision and prudential regulations, maintaining low inflation, reducing poverty and improving income distribution.2 In this paper, we explore the challenge to achieve a lasting reduction in inflation.