Inclusive Growth Key to the Philippines’ Covid-19 Recovery

Moody’s Analytics has once again slashed its economic growth forecast for the Philippines to four percent, pointing to the country’s prolonged pandemic shutdown combined with lean government support. Moody’s revised projection is even lower than last month’s 4.9% growth outlook, and far below the government’s 6-7% pre-pandemic growth targets. Once pegged as the next Asian tiger economy, the Philippines could now be one of the last economies in the region to recover from the Covid-19 economic crisis.

Amidst the bad news for Manila, however, there are some positive signs. Notably, the country’s fuel marking programme has proved to be a resounding success in collecting essential government revenue— revenue that may otherwise have been lost to the illicit fuel trade. According to Asian Development Bank (ADB) estimates, revenue losses from unpaid excise and value added taxes in the sector exceed P37.5 billion (US$744 million) annually. In order to crack down on this illicit trade, the Philippines partnered with SGS Philippines and Swiss security firm SICPA to implement a comprehensive petroleum marking programme.

Fuel marking utilises a unique chemical marker that can be added to petroleum products, such as gasoline, diesel and kerosene, at a molecular level. The marker acts as a “fingerprint,” and provides a tamper-proof method of authentication for products on the market. Authorities can then test, identify and differentiate petroleum products based on these markets.

According to the Department of Finance, the scheme has helped collect more than P270 billion (US$5.35 billion) in duties and taxes, the equivalent to more than 28 billion litres of marked fuel products. Overall, the initiative is projected to help generate an additional P20 billion in government revenue this year, with Finance Secretary Carlos G. Dominguez III calling on the Bureau of Internal Revenue (BIR) to “go for the gold” in its pursuit of tax duties.

The additional revenue is sure to prove vital, as slowing economic growth is sapping Manila’s coffers at the same time as the government is needing to spend more on managing the pandemic. The Philippine economy contracted 75 percent last year, with the country experiencing its worst recession since World War II. Meanwhile, restrictions on the Manila capital region alone are costing the national economy P105 billion (US$2.1 billion) each week.

The economic impact of Covid-19 on Filipinos’ everyday life has been devastating. Despite widespread calls for another round of stimulus money, direct fiscal spending to fight the pandemic as a share of gross domestic product (GDP) is less than six percent, or $200 per person. Investment in the country is 25 percent below pre-pandemic levels, unemployment has nearly doubled, and several groups have called on the government to ramp up efforts to minimize pandemic-induced economic scarring

In fact, Capital Economics senior Asia economist Gareth Leather has argued that the Philippines’ fiscal position is strong enough to survive monetary easing measures and further rounds of stimulus spending. The real risk, Leather warned, lies in failing to spend enough. “There hasn’t been enough fiscal support- more businesses have gone bankrupt, and it’s likely to mean that the long-term scarring is going to be much bigger than would otherwise have been the case,” he said.

Indeed, the key to turning around the Philippines’ shaky economic situation will be identifying the key priorities in which to invest the badly needed revenue recouped from initiatives like the fuel marking programme. Last year, the unemployment rate averaged 10 percent, made worse by the hundreds of thousands of overseas Filipino workers displaced and repatriated due to the pandemic. In fact, last year’s employment figures were the worst on record, undoing all gains realised in previous years that saw unemployment drop to 5 percent in 2019.

At the same time, the impact of the pandemic on the informal sector is near impossible to measure. This sector tends to be largely undocumented, and without the usual safety nets offered to registered businesses such as paid leave, health insurance, and other labour privileges. With more than 38% of the Philippines’ labour force estimated to belong to this sector, the scale of the damage is surely devastating.

It is unsurprising, then, that the government is throwing so much of its weight behind closing tax loopholes and cracking down on illicit markets. If ADB estimates are correct, and unpaid excise and value added taxes in the petroleum sector truly exceed P37.5 billion each year, the full implementation of the fuel marking programme will be a gamechanger for the country.

“Properly collecting all taxes due from the oil industry is indispensable to this effort. This will help us surmount the global health emergency and bring the country back to the path of inclusive growth. A better future for our people depends on this,” urged Dominguez earlier this year.

If Manila is to have any success in undoing the cycle of poverty, joblessness and health crises wrought by the Covid-19 pandemic, the government is going to need all the public revenue it can collect.