The Philippine authorities, confrontedwith an unfavorable governance and macroeconomic environmentin 2001, established a consistent track record in 2001 instabilizing the economy and improving investor sentiment.The unfolding developments in 2002-03, however, pose athreat to a still fragile fiscal and institutionalenvironment, and can dim the prospects for attaining thePhilippines' target for higher growth and renewedpoverty reduction. Fiscal sustainability and thegovernment's ability to finance poverty-reducingprogramscontinues to be at risk from falling revenues,rising public debt and debt service, and off-budget risks.This constrained environment makes it doubly important tofocus on increasing fiscal flexibility through increasingrevenue collections and enhancing the discipline,efficiency, and equity of public expenditures. the objectiveof this public Expenditure, Procurement and FinancialManagement Review (PEPFMR) is to examine selected issues inthe allocation and managmeent of public resources ofinterest to the Philippine authorities, the World Bank, andthe Asian Development Bank (ADB). It aims to help theauthorities to establish more effective and transparentpolicies and processes for allocating and using publicresources to reduce poverty and promote economic growth.After the Executive Summary which summarizes the key PEPFMRfindings and highlights critical actions to improve themanagement of public expenditures, there are five sections.Most of the report is contained in three main sections:aggregate fiscal discipline, allocative efficiency, andoperational efficiency. A fourth section on decentralizationhighlights some issues as a prelude to a review of thedecentralization experience since 1991 and its impact onissues such as service delivery, equity, and efficiency.Themes such as accountability and transparency pervade thereport and have not been dealt with separately. The actionplan attahced to the Executive Summary indicates the mostpressing issues confronting the authorities. The moredetailed action plan at the end of this report contains thejoint recommendations of the Government and the task team.