World Bank Document

RESTRICTED Report No. EAP-16a Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized CURRENT ECONOMIC POSITION AND PROSPECTS OF THE PHILIPPINES Public Disclosure Authorized August 10, 1970 Public Disclosure Authorized East Asia and Pacific Department CURRENCY EQUIVALENTS Before Feb. 21, 1970 US$ 1000 Pesos 3q90 Pesos 1,000 US$ 256.40 Pesos 1 million US$ 256,400 After Feb. 21, 1970 US$ 1000 Pesos 6.00 (rate used in the report; official rate is floating between F5.80 and 26.,30) Pesos 1,000 US$ 166.67 Pesos 1 million US$ 166,667 FISCAL YEAR In the Philippines the Fiscal Year covers the period July 1 to June 30. This report is based on the findings of an Economic Mission which visited the Philippines from April 3 to May 8, 1970. Its members were: Rudolf Hablutzel Chief of Mission Miss H.J. Goris General Economist George C. Maniatis General Economist K. Bengt 0. Holmgren General Economist Jose Datas-Panero Industrial Economist Norton N. Franklin Consultant for Employment (II0) Mirko Lamer Agricultural Consultant This report was reviewed by the Economic Committee in July 1970. TABLE OF CONTENTS Page No. BASIC DATA SUMMARY AND CONCLUSIONS i - v I. RECENT DEVELOPMENTS A. Background 1 B. Economic Growth and Sector Developments 3 C. Infrastructure Program 7 D. Money and Credit 9 E. Balance of Payments Problems 12 F. The Stabilization Program 18 II. THE FOUR-YEAR PLAN A. Introduction 24 B. Overall Targets 24 C. Government Investment 27 D.. Public Finance 29 E. Administrative Changes and Policies 34 F. Private Investments 37 G. Agricultural Development 39 H. Planning for Industry 45 I. Employment 55 J. Education 57 K. Family Planning 59 III. BALANCE OF PAYMENTS OUTLOOK A. Exports 61 B. Imports and Invisibles 63 C. Short-Term Debt 67 D. Capital Requirements 68 Annex PRE-INVESTMENT ACTIVITIES STATISTICAL APPENDIX BASIC DATA Area 297,000 square kilometers Population Total (1970 mid-year) 38.5 million Rate of growth 3.5% Density 130 per square kilometer Gross National Product Total 1969 (current market prices) P31.1 billion Growth rate 1968/1969 6.3% Per capita GNP 1969 US$207 Gross National Product by Expenditure (percent) 1962 1968 Private consumption expenditure 70.1 757 Government consumption expenditure 8.8 9.3 Gross domestic capital formation 19.6 22.3 Net exports of goods and services -7.2 -4.2 Net factor income from abroad -o.5 -1.3 Errors and omissions 1.2 -1.6 100.0O 100.0 Net Domestic Product by Origin (percent) 1962 1969 AgrIculture, fishery and forestry 307 3§7 Mining and manufacturing 20.4 18.9 Others 48.8 45.5 1L00.0 100.0 Balance of Playents (US$ million) 1959 1964 1969 Merchandise export -1:5 =7 3 Merchandise import -524 -780 -1,131 Net services -95 -1 -132 Net transfer payments 131 109 152 Current account balance 56 85 -238 Net long-term capital 79 32 101 Bas'Lc balance 135 117 -137 Major Exports (percent) 1969 Coconut products 19 Sugar products 18 Forest products 33 Mineral products 19 Others 11 BASIC DATA Page 2 Foreign Exchange Reserves (US$ million) March 1969 March 1970 International reserves a/ 218 197 Net reserves b/ 46 -111 External Debt (US$ million) c/ APril 1970 Long term 624 Medium term 457 Sub-total l,Of Short term 329 Total I,N1 1970 1971 Debt service d/ 460 309 Debt service ratio d/ 32.5% 20.5% Central Government Operations (million Pesos) FY 1963 FY 1969 Revenue 1,77U 2,862 Current expenditures 1,493 2,873 Capital expenditures 390 844 Net cash operating deficit e/ 186 637 IMF Position Quota US$110 million Drawings outstanding US$100a5 million Par value - up to Feb. 21, 1970 P3.90 per US$1 After Feb. 21, 1970 P5.80 to P6.30 (floating) Bank/IDA Operations Bank loans outstanding (Dec. 31, 1969) US$197 million Undisbursed US$89 million a/ Net reserves of commercial banks plus gross reserves of Central Bank. b/ Net reserves of commercial banks plus net reserves of Central Bank. _/ Public and private debt. d/ Assuming debt rescheduling. e/ Including government corporations. SUMMARY AND CONCLUSIONS 1. Up to 1969 the Philippine economy has been growing at a satisfactory rate. GNP increased at about 6.2 percent a year since 1966, compared with just over 5 percent in the preceding three years. This acceleration has been achieved through stepped-up investments, both private and public, and was accompanied by a reversal from a balance of payments surplus position into a sizeable deficit, substantial losses of reserves, and short-term borrowing abroad. Prices moved up at a moderate pace of about 4 percent a year. 2. Agriculture and forestry have been making greater advances than other sectors. Contributing factors were the introduction of new rice varieties, making the country self-sufficient in this crop for the first time last year, the provision of additional irrigation, a modestly favorable development of rural credit, and rapid exploitation of forest resources. As a result, 40 percent of the increment in GNP in the last three years originated in agriculture and forestry, and their share in GNP increased to about 32 percent. The second largest contribution to growth (perhaps 30 percent) originated in manufacturing and mining. The latter is an increasingly important and export-oriented sector with substantial future potential; manufacturing is largely inward-oriented, protected, and comparatively inefficient, so that rapid expansion of plant in some branches has led to under-utilization of capacity, as the limits of the domestic market were reached. Its heavy import dependence makes manufacturing vulnerable to adverse changes in the country's balance of payments position. Export industries on the other hand, e.g. wood processing, are plagued by structural problems such as uneconomic size and location. 3. Exports since 1966 have virtually stagnated, mainly because of a decline in coconut products and abaca, and a stagnation in the volume of sugar exports at a level well below the quota available in the U.S. market; this was offset by increases in logs, copper and other exports, but total earnings increased only from $828 million in 1966 to $855 million in 1969, while merchandise imports continued to grow at a rapid pace from $853 million to $1,131 million. Only about 10 percent of imports are finished consumer goods, mostly essential items like cereals, fish and dairy products. 4. The deteriorating trade balance, reinforced in 1968 by adverse developments in the invisible account, in turn caused speculation against the peso in the form of unrecorded exports (explaining the drop in official exports of copra), diversion of invisible receipts to unofficial channels, and reliance by investors on excessively short-term credits from abroad. 5. In the course of 1969, during the election campaign which led to the reelection of President Marcos in November, monetary and fiscal discipline was relaxed to the point of causing a 32 percent increase in domestic money supply, with a net increase, after partial neutralization through a decline in foreign reserves, of 19 percent. Government deficit - ii - financing was responsible for virtually all of this. Heavy short-term borrowing from abroad continued, and the year 1970 started with the prospect of amortization and interest payments falling due in the amount of over $500 million. 6. Already in November 1969 severe import restrictions had to be imposed; in December a fiscal austerity program was announced; and in February 1970 a stabilization program was incorporated in a Standby Agreement with the IMF. The agreement provided for a floating exchange rate, abolition of exchange and trade restrictions, limitation of new borrowing abroad, a program of monetary stabilization through tightening of credit and budgetary restraint, and introduction of new tax measures. The floating exchange rate, which moved quickly to around P6 per $1, was accompanied by the requirement to surrender 80 percent of major export proceeds at the old par rate of P3.90 per $1 and sterilization of the resulting exchange profits by the Central Bank. 7. Progress in implementing the Standby Agreement up to July has been on the whole satisfactory. However, given the comparatively dis- tressing balance of payments prospects and the absence of positive exchange reserves, the resulting degree of devaluation under the floating rate has imparted a strong upward push to prices in import-dependent sectors, while creating large windfall gains to exporters not affected by the exchange surrender scheme. In May, after protracted debate in Congress, this scheme was replaced by an export tax of 10 percent for unprocessed and 8 percent for semi-processed exports; this further improved the position of the four main exports as well. 8. In the meantime, some social unrest had occurred; partly in response to this, a law was passed to increase minimum wages by a third. This will further increase cost and price pressures. The floating exchange rate of about P6.10 per $1 may have temporarily undervalued the peso. However, with the ongoing price movements the prospective equilibrium level remains uncertain. 9. A draft Four-Year Plan for 1970/71 to 1973/74 was submitted to the National Economic Council in May 1970. It incorporates a set of reasonable and comparatively modest macro-economic targets, by taking account of the severe balance of payments constraint that has arisen, at the start of the Plan, from the present short-term foreign debt problem, and of the inevitable economic retrenchment associated this year with the effort to stabilize the monetary situation.

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