Economic Crisis and Response in the Philippines Essay

The Global Economic Crisis pulled countries down from around the globe to a recession. Wide-ranging declines in many aspects of growth characterize the overall impact it had had on the global scale. Following the Asian economic crisis in 1997, the present global economic crisis imposes new challenges to the Philippines as a developing country. Following are expositions of the macroeconomic impacts of the crisis in the Philippine setting, its implications in the prevalent poverty scenario, and policies and programs undertaken by the government in response to the crisis. Overview of the Global Economic Crisis The 2008 global economic crisis started upon the bursting of the US housing bubble, which was followed by bankruptcies, bailouts, foreclosures, and takeovers of financial institutions and national governments. During a period of housing and credit booms, banks encouraged lending to home owners by a considerably high amount without appropriate level of transparency and financial supervision. As interest rates rose in mid-2007, housing prices dropped extensively, and all institutions that borrowed and invested found themselves suffering significant losses. Financial institutions, insurance companies, and investment houses declared either declared bankruptcies or had to be rescued financially. Economies worldwide slowed during this period and entered to a recession. The crisis, initially financial in nature, has now taken a full-blown economic and global scale affecting every country to the left and to the right of the United States, and wreaking havoc in the level of both industrialize d and developing nations. The Philippine Situation before the Crisis The Philippines has long been undermined with long-term structural problems such that sustainable economic development is yet to be a dream come true. According to the pages of Philippine economic history, the country has been dominated by a sequence of growth spurts, brief and mediocre, followed by shard to very-sharp, severe, and extended downturns—a cycle that came to be known as the boom-bust cycle. As such, economic growth record of the country has been disappointing in comparison with its East Asian counterparts in terms of per capita GDP. What makes matters worse is the seemingly perennial  impoverished state of its inhabitants, that is, in 2007, an absolute poverty incidence of 13.2 percent—higher than Indonesia’s 7.7 and Vietnam’s 8.4 percent—has been recorded, and thus giving further testimony of the unequal distribution of wealth that keeps growth and development a far reach for the Philippines. Macroeconomic Impacts of the Crisis The Philippines, points Professor Diokno of the University of the Philippines, has been affected by the crisis in a decline in three aspects: exports, remittances from overseas Filipino workers, and foreign direct investments. Heavily dependent on electronic and semiconductor exports, the Philippines has seen a downward trend in its export earnings as countries in demand of these exports are now in recession. The recession has also put to risk the jobs in the developed countries which include those where migrant workers are employed. Consequently, OFW remittances decreased and grew a meagre 3.3% in October 2008. Foreign direct investments (FDI) lowered because of investors losing confidence in the financial market. Lower FDIs mean slower economic growth. Impacts of Asset Markets, Financial Sector, and Real Sector The freeze in liquidity in US and European financial markets reversed capital flows to developing countries and induced a rise in the price of risk which entailed a drop in equity prices andexchange rate volatility. However, following the effects of an increase in the foreign currency government bond spread, the Philippine stock market was actually one of the least affected by the crisis with the main index of the stock market dropping only by 24 percent, a relatively low percentage change in comparison to those of other countries across Asia. Similarly, from the period between July 2008 and January 2009, the peso devaluated only by 3 percent which explains why the peso was one of the currencies least affected by the crisis. This minimal effect on the stock market and the Philippine peso can be attributed to the recovery of asset prices across the Asia-Pacific region recovered in early 2009 as foreign portfolio investments surged. Financially, the banking system in the Philippines has been relatively stable, because of reforms that were put in place since Asian financial crisis in 1997. Maintenance of high levels of loan to deposit ratios together with the decline of the ratio  of nonperforming loans to total loans kept profitability of local banking generally high despite the crisis. To the country’s fortune, no meltdowns occurred as during the previous 1997 Asian crisis. Fall in the growth rate of personal consumption and expenditures and fixed investment assail 2008. Personal consumption expenditure, the largest contributor to GDP growth, behaved a downward trend from a sharp drop from 5.8 percent in 2007 to 4.7 percent in 2008, and 3.7 percent in 2009. GDP growth during fourth quarter of 2008 and first quarter of 2009 fell to 1.7 percent, a staggering fall from 5.7 percent average for the three previous years. Furthermore, a contraction of 29.2 percent in the manufacturing sector involving electricity, gas, water, trade and finance services. The service sector also had its share of downturns as growth in the fourth quarter and first quarters of 2008 and 2009, respectively, suffered from a meagre growth of 2.1 percent, a far contrast from the 6.7 percent average from the last three years. However, the Philippines has generally endured the least declines in comparison with other East Asian countries despite recorded declines. For instance, OFW remittances, though at a slower pace, still grew in the first half of 2009. Impact of fiscal deficit and external accounts To counter adverse effects of the crisis, the Philippine government felt the need to increase its expenditures. Apart from government expenditure, of primary concern was the weak revenues generated by the government with fiscal deficit reaching P111.8 billion in the first quarter of 2009 as compared to P25.8 billion in the same period of the previous year. Despite suffering the least in terms of the stock exchange and financial markets among East Asian countries, the Philippines lagged in tax effort in comparison to other nations. Meanwhile, private sector flows in the external account declined and led to a net outflow of $708 million in 2009, a sharp turning away from a net inflow of $507 million in 2008. This eventually led to a fall in stock prices and depreciation or devaluation of the peso. Poverty and Social Impacts Impacts on households and communitiesAn increasing number of the Filipino workforce has become frustrated due to unemployment and low standards of living in the country. Thousands of Filipinos leave the country every day to  seize better income opportunities and promise their children a better and secure future. Moreover, around five million of Filipino children are unable to go to school and are forced to work on the streets or in other various workplaces where they can find some food or other means to fill their appetites. Impacts on wealth and income and its distribution across different social divisions The country was having sound economic indicators before the 2008 economic crisis. Average income per capita was increasing while poverty incidence showed a downward trend. Average income per capita rose by 2% in 2007 and 2008, whereas poverty incidence dropped from 33.0% in 2006 to 31.8% in 2007 and 28.1% in 2008. Output growth plunged in 2009, causing real mean income to fall b y 2.1%, resulting in an upward pressure on poverty incidence (grew by 1.6%). Most hit are households with associations to industry resulting in the average income to drop to levels below that of 2007. Similarly, wage and salary workers were hit significantly. Surprisingly, the poorest 20% did not suffer the same fate they suffered in crises past. Clearly, the global economic crisis put a halt on the highly promising growth trend of the Philippine economy and forced 2 million Filipinos into poverty. Coping strategies i. Finances According to recent studies (2009), close to 22% of the population reduced their spending, 11% used their existing savings for consumption, 5% pawned assets, 2% sold assets, 36% borrowed money and 5% defaulted on debts. ii. Education To reduce spending, households had to risk the quality of education of their children. Some children were transferred from private to public schools, while some were withdrawn from school. Moreover, parents reduced the allowance of the students, and resorted to secondhand uniforms, shoes and books. iii. Health Coping strategies may have negative effects on their long-term health as these affected households commonly resort to self-medication, or shift to seeing doctors in government health centers and hospital. Many households in the urban sector shifted to generic drugs while rural households tended to use herbal medicines. Policy Responses Efforts of poverty alleviation, reduction, eradication The Medium-Term Philippine Development Plan (MTPDP) was implemented during  the Ramos Administration and later on continued by the following administrations to help reduce poverty in the country and improve on the economic welfare of the Filipinos. The Ramos Administration (1993–1998) targeted to reduce poverty from 39.2% in 1991 to about 30% by 1998. The Estrada Administration (1999–2004) then targeted to reduce poverty incidence from 32% in 1997 to 25-28% by 2004, while the Arroyo government targeted to reduce poverty to 17% by creating 10 million jobs but this promise was not fulfilled by the administration. As for the current Aquino Administration, the 2011-2016 MTDPD is still being drafted. President Benigno Aquino III has plans to expand the Conditional Cash Transfer (CCT) program from 1 to 2.3 million households, and several long term investments in education and healthcare. Also, last September 2010, Aquino met with US Secretary of State, Hillary Clinton, duri ng the signing of the $434-million Millennium Challenge Corporation (MCC) grant in New York. The MCC grant would fund infrastructure and rural development programs in the Philippines to reduce poverty and spur economic growth. Macroeconomic and Social Protection programs To respond to the recent financial crisis, the Philippine government, through the Department of Finance and National Economic and Development Authority (NEDA), crafted a PhP 330-billion fiscal package, formally known as the Economic Resiliency Plan (ERP). The ERP is geared towards the stimulation of the economy through tax cuts, increased government spending, and public-private sector projects that can also prepare the country for the eventual upturn of the global economy. The implementation of ERP is spearheaded by NEDA with the following specific aims.To ensure sustainable growth, attaining the higher end of the growth rates; To save and create as many jobs as possible; To protect the most vulnerable sectors: the poorest of the poor, returning OFWs, and workers in export industries; To ensure low and stable prices to supports consumer spending; and To enhance competitiveness in preparation for the global rebound. Regional responses Poverty incidence remains to be one of the highest in the region with the  continued low domestic private investment. To overcome legal, political and institutional constraints, regional financial cooperation must be encouraged. The ASEAN+3 financial cooperation can promote further the development of domestic financial markets to facilitate the intermediation of Asian savings within the region, as well as attract foreign investment. Such alternative sources of funding would reduce Asia’s reliance on foreign currency borrowing and along with, the risk exposure of the region to maturity and currency mismatches.Moreover, the Network of East Asian Think Tanks has recently proposed the establishment of the Asia Investment Infrastructure Fund (AIIF) to prioritize the funding of infrastructure projects in the region to support suffering industries. The AIIF, as well as multilateral institutions especially the Asian Development Bank, also promotes greater domestic demand and intra-r egional trade to offset the decline in exports to industrialized countries and narrow the development gap in the region. Prospects for Growth in the Future Poverty reduction for the Philippines in the years to come is promising, bearing in mind where she left off prior to the economic crisis. Nevertheless, it is still a tough challenge. Figures persistently reflect a Philippine poverty reduction campaign that pales in comparison with other ASEAN countries. In addition, a blistering population growth rate sinks more Filipinos below thepoverty threshold placing the country’s laudable long term economic growth under its shadow. Taking into account that the Philippine economy has a significant reliance on remittances from Overseas Filipino Workers (OFWs), past threats demonstrated the resiliency of the Philippine economy despite external shocks. In spite of the disaster in Japan (3rd largest market for Philippine exports) and the geopolitical tensions in West Asia, the Philippine economy looked unfazed. New York-based Global Source Partners stated, â€Å"The Philippine economy has already proven to be quite resilient in the face of varied external shocks in the past, especially bolstered by a strong external position and capable monetary management. This time should not be much different.† The new administration of President Benigno â€Å"Noynoy† Aquino III faces three key constraints on Philippine growth: Tight fiscal situation due to weak revenue generation Poor infrastructure (i.e. transportation, power, etc.) Pessimism in investment resulting from corruption and political instability Fortunately, the government offers various projects to loosen these restrictions. Data from the quarterly ING Investor Dashboard Survey showed stability in investor confidence for the Philippine economy over the first two quarters of 2010. She even scored a 157 in the third quarter of the same year. This is well on the higher percentiles of the â€Å"optimistic† range and a mere 3 points from the â€Å"very optimistic† level. These figures emerge in the midst of decrepit infrastructure and a lack of efficient institutions. Subsequently, the prospect of the Philippine economy improving into the â€Å"very optimistic† range is very bright. Presidential spokesman Edwin Lacierda declared that the Philippine economic competitiveness score improved from 56.526 the previous year to 63.291 in 2011 (based on The World Competitiveness Yearbook). Lacierda also boasts of infrastructure improvement pr ojects of the Department of Public Works and Highways scheduled to commence within one or two years. He attributes the stepping up of our competitiveness rating to the public-private partnership (PPP) projects next year. These projects raise optimism for the post-crisis economy of the Philippines ————————————————- Fiscal policy of the Philippines From Wikipedia, the free encyclopedia Fiscal policy refers to the â€Å"measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals.†[1] In the Philippines, this is characterized by continuous and increasing levels of debt and budget deficits, though there have been improvements in the last few years.[2] The Philippine government’s main source of revenue are taxes, with some non-tax revenue also being collected. To finance fiscal deficit and debt, the Philippines relies on both domestic and external sources. Fiscal policy during the Marcos administration was primarily focused on indirect tax collection and on government spending on ecnomic services and infrastructure development. The first Aquino administration inherited a  large fiscal deficit from the previous administration, but managed to reduce fiscal imbalance and improve tax collection through the introduction of the 1986 Tax Reform Program and the value added tax. The Ramos administration experienced budget surpluses due to substantial gains from the massive sale of government assets and strong foreign investment in its early years. However, the implementation of the 1997 Comprehensive Tax Reform Program and the onset of the Asian financial crisis resulted to a deteriorating fiscal position in the succeeding years and administrations. The Estrada administration faced a large fiscal deficit due to the decrease in tax effort and the repayment of the Ramos administration’s debt to contractors and suppliers. During the Arroy o administration, the Expanded Value Added Tax Law was enacted, national debt-to-GDP ratio peaked, and underspending on public infrastructure and other capital expenditures was observed. Contents [hide] * 1 Revenues and Funding * 1.1 Tax Revenue * 1.1.1 Income Taxes * 1.1.2 E-VAT * 1.1.3 Tariffs and Duties * 1.2 Non-Tax Revenue * 1.2.1 The Bureau of Treasury * 1.2.2 Privatization * 1.2.3 PAGCOR * 2 Spending, Debt, and Financing * 2.1 Government Spending and Fiscal Imbalance * 2.2 Financing and Debt * 3 History of Philippine Fiscal Policy * 3.1 Marcos Administration (1981-1985) * 3.2 Aquino Administration (1986-1992) * 3.3 Ramos Administration (1993-1998) * 3.4 Estrada Administration (1999-2000) * 3.5 Arroyo Administration (2002-2009) * 4 References * 5 External links ————————————————- Revenues and Funding[edit source | editbeta] A comparative graph of Revenue and Tax Effort from 2001-2010[3] A comparative graph of Tax and Non-Tax Revenue contribution from 2001-2010[4] The Philippine government generates revenues mainly through personal and income tax collection, but a small portion of non-tax revenue is also collected through fees and licenses, privatization proceeds and income from other government operations and state-owned enterprises. Tax Revenue[edit source | editbeta] Tax collections comprise the biggest percentage of revenue collected. Its biggest contributor is theBureau of Internal Revenue (BIR), followed by the Bureau of Customs (BOC). Tax effort as a percentage of GDP has averaged at roughly 13% for the years 2001-2010.[5] Income Taxes[edit source | editbeta] Income tax is a tax on a person’s income, wages, profits arising from property, practice of profession, conduct of trade or business or any stipulated in the National Internal Revenue Code of 1997 (NIRC), less any deductions granted.[6] Income tax in the Philippines is a progressive tax, as people with higher incomes pay more than people with lower incomes. Personal income tax rates vary as such:[7] Annual Taxable Income| Income Tax Rate| Less than â‚ ±10,000| 5%| Over â‚ ±10,000 but not over â‚ ±30,000| â‚ ±500 + 10% of the excess over â‚ ±10,000| Over â‚ ±30,000 but not over â‚ ±70,000| â‚ ±2,500 + 15% of the excess over â‚ ±30,000| Over â‚ ±70,000 but not over â‚ ±140,000| â‚ ±8,500 + 20% of the excess over â‚ ±70,000| Over â‚ ±140,000 but not over â‚ ±250,000| â‚ ±22,500 + 25% of the excess over â‚ ±140,000| Over â‚ ±250,000 but not over â‚ ±500,000| â‚ ±50,000 + 30% of the excess over â‚ ±250,000| Over â‚ ±500,000| â‚ ±125,000 + 32% of the excess over â‚ ±500,000| The top rate was 35% until 1997, 34% in 1998, 33% in 1999, and 32% since 2000.[7][8] In 2008, Republic Act No. 9504 (passed by  then-President Gloria Macapagal-Arroyo) exempted minimum wage earners from paying income taxes.[9] E-VAT[edit source | editbeta] The Expanded Value Added Tax (E-VAT), is a form of sales tax that is imposed on the sale of goods and services and on the import of goods into the Philippines. It is a consumption tax (those who consume more are taxed more) and an indirect tax, which can be passed on to the buyer. The current E-VAT rate is 12% of transactions. Some items which are subject to E-VAT include petroleum, natural gases, indigenous fuels, coals, medical services, legal services, electricity, non-basic commodities, clothing, non-food agricultural products, domestic travel by air and sea.[10] The E-VAT has exemptions which include basic commodities and socially sensitive products. Exemptible from the E-VAT are:[11] 1. Agricultural and marine products in their original state (e.g. vegetables, meat, fish, fruits, eggs and rice), including those which have undergone preservation processes (e.g. freezing, drying, salting, broiling, roasting, smoking or stripping); 2. Educational services rendered by both public a nd private educational institutions; 3. Books, newspapers and magazines; 4. Lease of residential houses not exceeding â‚ ±10,000 monthly; 5. Sale of low-cost house and lot not exceeding â‚ ±2.5 million 6. Sales of persons and establishments earning not more than â‚ ±1.5 million annually. Tariffs and Duties[edit source | editbeta] Second to the BIR in terms of revenue collection, the Bureau of Customs (BOC) imposes tariffs and duties on all items imported into the Philippines. According to Executive Order 206, returning residents, Overseas Filipino Workers (OFW’s) and former Filipino citizens are exempted from paying duties and tariffs.[12] Non-Tax Revenue[edit source | editbeta] Non-tax revenue makes up a small percentage of total government revenue (roughly less than 20%), and consists of collections of fees and licenses, privatization proceeds and income from other state enterprises.[13] The Bureau of Treasury[edit source | editbeta] The Bureau of Treasury (BTr) manages the finances of the government, by attempting to maximize revenue collected and minimize spending. The bulk of non-tax revenues comes from the BTr’s income. Under Executive Order No.449, the BTr collects revenue by issuing, servicing and redeeming government securities, and by controlling the Securities Stabilization Fund (which increases the liquidity and stabilizes the value of government securities[14]) through the purchase and sale of government bills and bonds.[15] Privatization[edit source | editbeta] Privatization in the Philippines occurred in three waves: The first wave in 1986-1987, the second during 1990 and the third stage, which is presently taking place.[16] The government’s Privatization Program is handled by the inter-agency Privatization Council and the Privatization and Management Office, a sub-branch of the Department of Finance.[17] PAGCOR[edit source | editbeta] The Philippine Amusement and Gaming Corporation (PAGCOR) is a government-owned corporation established in 1977 to stop illegal casino operations. PAGCOR is mandated to regulate and license gambling (particularly in casinos), generate revenues for the Philippine government through its own casinos and promote tourism in the country.[18] ————————————————- Spending, Debt, and Financing[edit source | editbeta] A comparative graph of National Revenues and Expenditures from 2001-2010[5] A comparative graph of Domestic and External Sources of Financing from 2001-2010[5] A comparative graph of Total National Debt from 2001-2010[19] Government Spending and Fiscal Imbalance[edit source | editbeta] In 2010, the Philippine Government spent a total of â‚ ±1.5 trillion and earned a total of â‚ ±1.2 trillion from tax and non-tax revenues, thus resulting to a total deficit of â‚ ±314.5 billion.[5] Despite the national deficit of the  Philippines, the Department of Finance reported an average of â‚ ±29.6 billion in Local Government Unit (LGU) surplus, which is mostly due to an improved LGU financial monitoring system which the government implemented in the recent years. Efforts of the monitoring system include â€Å"debt monitoring and creditworthiness monitoring system, effective mobilization of second generation funds (SGF) to promote LGU development, and the implementation of a Land Administration and Management Project (LAMP2) which received a ‘very good’ rating from the World Bank (WB) and Australian Agency for International D evelopment (AusAid).†[20] Microfinance management in the Philippines is improving substantially. In 2009, the Economist Intelligence Unit â€Å"recognized the Philippines as the best in the world in terms of its microfinance regulatory framework.† The DOF-National Credit Council (DOF-NCC) focused on improving the state of local cooperatives by developing a supervision and examination manual, launching advocacies for these cooperatives, and pushing for the Philippine Cooperative Code of 2008. A standardized national strategy for microinsurance and the provisions of grants and technical assistance were formulated.[20] Financing and Debt[edit source | editbeta] Aside from Tax and Non-Tax Revenues, the government makes use of other sources of financing to support its expenses. In 2010, the government borrowed a total net of â‚ ±351.646 billion for financing:[21] | Domestic Sources| External Sources| Gross Financing| â‚ ±489.844 billion| â‚ ±257.357 billion| Less: Repayments/Amortization| â‚ ±271.246 billion| â‚ ±124.309 billion| Net Financing| â‚ ±218.598 billion| â‚ ±133.048 billion| Total Financing| | â‚ ±351.646 billion| External Sources of Financing are:[21] 1. Program and Project Loans – the government offers project loans to external bodies and uses the proceeds to fund domestic projects like infrastructure, agriculture, and other government projects.[20] 2. Credit Facility Loans 3. Zero-coupon Treasury Bills 4. Global Bonds 5. Foreign Currencies Domestic Sources of Financing are[21] 1. Treasury Bonds 2. Facility loans 3. Treasury Bills 4. Bond Exchanges 5. Promissory Notes 6. Term Deposits In 2010, the total outstanding debt of the Philippines reached â‚ ±4.718 trillion: â‚ ±2.718 trillion from outstanding domestic sources and â‚ ±2 trillion from foreign sources. According to the Department of Finance, the country has recently reduced dependency on external sources to minimize the risks caused by changes in the global exchange rates. Efforts to reduce national debt include increasing tax efforts and decreasing government spending. The Philippine government has also entered talks with other economic entities, like the ASEAN Finance Ministers Meeting (AFMM), ASEAN+3 Finance Ministers Meeting (AFMM+3), Asia-Pacific Economic Cooperation (APEC), and ASEAN Single-Window Technical Working Group (ASW-TWG), in order to strengthen the countries’ and the region’s debt management efforts*.[20] ————————————————- History of Philippine Fiscal Policy[edit source | editbeta] Marcos Administration (1981-1985)[edit source | editbeta] The tax system under the Marcos administration was generally regressive as it was heavily dependent on indirect taxes. Indirect taxes and international trade taxes accounted for about 35% of total tax revenue, while direct taxes only accounted for 25%. Government expenditure for economic services peaked during this period, focusing mainly on infrastructure development, with about 33% of the budget spent on capital outlays. In response to the higher global interest rates and to the depreciation of the peso, the government became increasingly reliant on domestic financing to finance fiscal deficit. The government also started liberalizing tariff policy during this period by enacting the initial Tariff Reform Program, which narrowed the tariff structure from a range of 100%-0% to 50%-10%, and the Import Liberalization Program, which aimed at reducing or eliminating tariffs and realigning indirect taxes.[22][23][24] Aquino Administration (1986-1992)[edit source | editbeta] Faced with problems inherited from the previous administration, the most important of which being the large fiscal deficit heightened by the low tax effort due to a weak tax system, Aquinoenacted the 1986 Tax Reform Program (TRP). The aim of the TRP was to â€Å"simplify the tax system, make revenues more responsive to economic activity, promote horizontal equity and promote growth by correcting existing taxes that impaired business incentives†. One of the major reforms enacted under the program was the introduction of the Value Added Tax (VAT), which was set at 10%. The 1986 tax reform program resulted in reduced fiscal imbalance and higher tax effort in the succeeding years, peaking in 1997, before the enactment of the 1997 Comprehensive Tax Reform Program (CTRP). The share of non-tax revenues during this period soared due to the sale of sequestered assets of President Marcos and his cronies (totalling to about â‚ ±20 billion), the initial efforts to deregulate the oil industry and thrust towards the privatization of state enterprises. Public debt servicing and interest payments as a percent of the budget peaked during this period as government focused on making up for the debt incurred by the Marcos administration. Another important reform enacted during the Aquino administration was the passage of the 1991 Local Government Code which enabled fiscal decentralization. This increased the taxing and spending powers to local governments in effect increasing local government resources.[22][24] Ramos Administration (1993-1998)[edit source | editbeta] The Ramos administration had budget surpluses for four of its six years in power. The government benefited from the massive sale of government assets (totalling to about â‚ ±70 billion, the biggest among the administrations) and continued to benefit from the 1986 TRP. The administration invested heavily on the power sector as the country was beset by power outages. The government utilized its emergency powers to fast-track the construction of power projects and established contracts with independent power plants. This period also experienced a real estate boom and strong foreign direct  investment to the country during the early years of the administration, in effect overvaluing the peso. However, with the onset of the Asian financial crisis, the peso depreciated by almost 40%. The Ramos administration relied heavily on external borrowing to finance its fiscal deficit but quickly switched to domestic dependence on the onset of the Asian financial crisis. The administration has b een accused of resorting to â€Å"budget trickery† during the crisis: balancing assets through the sales of assets, building up accounts payable and delaying payment of government premium to social security holders. In 1997, the Comprehensive Tax Reform Program (CTRP) was enacted. Republic Act (RA) 8184 and RA 8240, which were implemented under the program, were estimated to yield additional taxes of around â‚ ±7.4 billion; however, a decline in tax effort during the succeeding periods was observed after the CTRP was implemented. This was attributed to the unfavorable economic climate created by the Asian fiscal crisis and the poor implementation of the provisions of the reform. A sharp decrease in international trade tax contribution to GDP was also observed as a consequence of the trade liberalization and globalization efforts in the 1990s, more prominently, the establishment of the ASEAN Free Trade Agreement (AFTA) and membership to the World Trade Organization (WTO) and the Asia-Pacific Economic Cooperation (APEC). The Ramos administration also provided additional incentives to export-oriented firms, the most prominent among these being RA 7227 which was instrumental to the success of the Subic Bay Freeport Zone.[22][23] Estrada Administration (1999-2000)[edit source | editbeta] President Estrada, who assumed office at the height of the Asian financial crisis, faced a large fiscal deficit, which was mainly attributed to the sharp deterioration in the tax effort (as a result of the 1997 CTRP: increased tax incentives, narrowing of VAT base and lowering of tariff walls) and higher interest payments given the sharp depreciation of the peso during the crisis . The administration also had to pay P60 billion worth of accounts payables left unpaid by the Ramos administration to contractors and suppliers. Public spending focused on social services, with spending on basic education reaching its peak. To finance the fiscal deficit, Estrada created a balance between domestic and foreign borrowing.[22][23] Arroyo Administration (2002-2009)[edit source | editbeta] The Arroyo administration’s poor fiscal position was attributed to weakening tax effort (still resulting from the 1997 CTRP) and rising debt servicing costs (due to peso depreciation). Large fiscal deficits and heavy losses for monitored government corporations were observed during this period. National debt-to-GDP ratio reached an all-time high during the Arroyo administration, averaging at 69.2%. Investment in public infrastructure (at only 1.9% of GDP), expenditure for economic services, health spending and education spending all hit an historic-low during the Arroyo administration. The government responded to its poor fiscal position by under-spending in public infrastructure and social overhead capital (education and health care), thus sacrificing the economy’s long-term growth. In 2005, RA 9337 was enacted, the most significant amendments of which were the removal of electricity and petroleum VAT exemptions and the increase in the VAT rate from 10% to 12%