MANILA, Philippines ? The International Monetary Fund (IMF) said Sunday it has cut its economic growth forecast for the Philippines in 2008 given the slowdown in the global economy and rising food and fuel prices.

A visiting IMF mission from Washington led by Il Houng Lee said the country's gross domestic product (GDP) would grow by 5.2 percent this year, lower than its earlier forecast of 5.8 percent. The country achieved a 31-year high growth of 7.3 percent last year.

The IMF warned that food- and fuel-led consumer price hikes would remain close to double-digit levels in the coming months.

"The macroeconomic policy environment has become more challenging. The Philippines, together with its peers in the region, faces the twin challenges of a slowing global economy and escalating food and fuel prices," said the Washington-based mission, which conducted an on-site review from June 16 to 20.

The IMF's revised growth forecast is in line with the actual 5.2-percent growth in the first quarter and sharply lower than the previous quarter's expansion number of 6.4 percent.

Last month, the government revised its 2008 growth forecast to 5.7 to 6.5 percent from its previous target of 6.3 to 7.0 percent.

Citing past fiscal reforms, the IMF said the impact on the overall domestic economy of the deteriorating external environment had been limited.

"Nevertheless, continued prudent macroeconomic policy is needed to navigate through the challenging times ahead," it said.

The IMF mission added that efforts to cushion the poor from the impact of high food prices were adding to the fiscal burden of the government, which has abandoned its goal of a balanced budget this year.

The IMF also supported the government's "targeted pro-poor spending," referring to cash subsidies for poor households.

But it said the government must protect its fiscal targets for 2009 given revenue pressures arising from the legislated expansion of tax exemptions and the expected cut in corporate income taxes.

The IMF reiterated its support for the passage of new tax measures, particularly the streamlining of fiscal incentives offered to investors, as well as reforming the excise taxes on cigarettes and alcohol. The mission added that further improvements in tax administration were needed to boost tax revenues.

On monetary policy, the IMF said it was "appropriate" that the country?s central bank, the Bangko Sentral ng Pilipinas (BSP) had turned "hawkish"?or biased towards monetary tightening?given the sharp increase in consumer prices.

The IMF mission said there were already "second-round" effects from the fuel- and food-led inflation.

The central bank raised its key interest rate, its overnight borrowing rate, by 25 basis points early this month, the first monetary tightening measure in three years.

If inflation rises beyond the BSP's control, the IMF warned it would complicate macroeconomic management.

When consumer prices rise indefinitely, this tends to create panic among consumers and producers, creating further upward inflationary pressures.

"Inflation is expected to remain close to double-digit levels in the coming months as the recent increases in food and fuel prices filter through to the CPI (consumer price index)," the IMF said.

CPI refers to the basket of goods and services consumed by a typical household. Inflation is measured based on the changes in this key index.

In the first five months, inflation rate averaged 6.9 percent, overshooting the BSP's maximum target of 5.0 percent. In May, the inflation rate hit a nine-year high of 9.6 percent.

For the whole of 2008, the BSP expects the inflation rate to average at 7.0-9.0 percent and for next year, at 4.0-6.0 percent.