Report No. 13109-PH

PhilippinesRecent Macroeconomic Developmentsand Reform EffortsJune 30, 1994

Country Operations DivisionCountry Department IEast Asia and the Pacific Region

FOR OFFICIAL USE ONLY

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Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization

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CURRENCY EOUIVALENT

Currency Unit - Peso (P)USS - P27.5

(as of December 1993)

ABBREVIATIONS AND ACRONYMS

ASEAN - Association of Southeast Asian NationsBOI - Board of InvestmentsBOT - Build-Operate-TransferBSP - Bangko Sentral ng PilipinasCARP - Comprehensive Agrarian Reform ProgramCPIP - Core Public Investment ProgramzO - Executive OrderIRB - Energy Regulatory BoardmRP - Effective Rate of ProtectionSOCC - Government Owned and Controlled CorporationHCV - Home Consumption ValueIMF - International Monetary FundLIBOR - London Inter-Bank Offer RateMITI - Ministry of International Trade and IndustryNFDA - National Economic and Development AuthorityNPC - National Power CorporationNSCB - National Statistical Coordination BoardOPS? - Oil Price Stabilization FundPLDT - Philippine Long Distance Telephone CompanyQRS - Quantitative RestrictionsRA - Republic ActVAT - Value Added Tax

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

PHILIPPINES

RECENT MACROECONOMIC DEVELOPMENTS & REFORM EFFORTS

Country Economic Memorandum

Table of Contents

Paae No,

Executive Summary .j.. . . . . . . . . . . . . . . . . . . . .

I. RECENT MACROECONOMIC DEVELOPMENTS . . . . . . . . . . . . . . .1

Overall Growth Performance ... . . . .. 1Investment and Savings ... . . . . .. 5The Labor Market, the Exchange Rate, and Competitiveness . . . 7

Fiscal and Monetary Developments . . . . . . . . . . . . . . . 11

The External Sector ... . . . . . ..... . . . . . . . . . 18

II. CONTINUING STRUCTURAL REFORMS . . . . . . . . . . . . . . . . . 25

Revenue Generation and Fiscal Improvements .. .... . . . . 25

Economic Liberalization ... . . . . ..... . . . . . . . . 28

III. MEDIUM TERM PROJECTIONS AND AID REOUIREMENTS . . . . . . . . . 37

Assumptions Behind the Projections .. 37

Projected Outcomes . . . . . . . . . . . . . . . . . . . . . . 39Financing Requirements. 41

Text Tables

1.1 Macroeconomic Indicators (1970-93). 21.2 Real Output Growth (1986-93). 41.3 Investment and Savings (1988-93). 61.4 Employment, Wages and the Exchange Rate (1988-93). 81.5 Structure of the Labor Force in 1980 and 1993. 91.6 National Government Cash Budget (1990-93) .14

1.7 Consolidated Public Sector Deficit (1986-93). 151.8 Monetary Indicators (1986-93) .17

1.9 Current Account Indicators (1986-93) .19

1.10 Capital Account Indicators (1989-93) .20

2.1 Main Revenue Generation Measures (1993-94) .26

2.2 Trade Policy Indicators (1980-95) .32

3.1 Macroeconomic Indicators (1992-97) .40

3.2 Financing Requirements (1992-97) .42

3.3 Official Development Assistance (1986-93) .43

Tlhis document has a resticted distribution and may be used by recipients only in the performance of their|official duties. Its contents may not otherwise be disclosed without WoTld Bank authorization.l

Text Figures

1 Real Income Growth (1950-93) . . . . . . . . .1

2 Power Shortages in Luzon, (1992-93) . . . . . .53 Real Effective Exchange Rate (1979-93) . . . .104 Import Content of Exports . . . . . . . . . . .22

STATISTICAL APPENDIX . . . . . . . . . . . .45

IBRD MAP No. 24105R1

This report was prepared by Erika Jorgensen (Task Manager) with the assistanceof Nam Pham (statistics), Lani Azarcon (background data), and Dharshani deSilva (formatting and editing).

THE PHILIPPINESt RECENT MACROECONOMIC DEVELOPMENTSAND REFORM EFFORTS

EXECUTIVE SUMMARY

i. After 10 years of stagnation or minimal growth--so that real percapita income in 1993 was lower than in 1977--the Philippine economy started asignificant upward trajectory in 1993. An increased rate of investment andcontinued capital inflows from abroad signal strengthening private sectorconfidence. Moreover, new efforts to raise revenue have resolved much of theuncertainty over fiscal balances. The indications are that the economic policyreforms that the country has instituted together with the decisive beginning oninfrastructure improvemento (particularly in power) could have significanteffects in sustaining growth in the medium term. However, this will dependcrucially on continuing measures to keep public finances sound, to stimulatecapital formation, to maintain competitiveness by liberalizing the economy, andto secure necessary financial support from international donors.

Economic Performance in 1993

ii. While the economy has generally seemed poised for growth for well overa year, persistent power shortages through 1992 and most of 1993 and continuinguncertainty engendered by a decade of "stop and start" implementation of policyreform undermined economic performance until mid-1993. output and income begana gentle recovery in 1993, ending the year 2.4 percent higher. Investmentstrengthened to almost 24 percent of GNP, as capital spending by both the publicand private sectors on power generation soared. Exports of manufactures boomedby 20 percent in dollar terms, fostering total merchandise export growth of 16percent. Import volume surged by 21 percent, driven by a 40 percent increase inimported capital equipment, especially power generators. The consequentdeterioration of the current account was financed by new borrowing. ininternational capital markets and increases in portfolio and direct foreigninvestment inflows.

iii. Capital spending by the public sector, especially because of heavyoutlays by the National Power Corporation on power generation capacity, pumpedup public investment to 6.0 percent of GNP in 1993. As a result, while theNational Government held its deficit to 1.4 percent of GNP, despite higherallotments to local governments, the deficit of the consolidated public sectorrose to 2.7 percent of GNP (from 1.9 percent in 1992). As a complement to the"pump-priming" impact of greater public investment, the Government also usedmonetary policy to spur growth through the first half of the year, but theauthorities reasserted stability when increased liquidity began to feedinflationary expectations and interest rates began to rise again.

iv. Overall, 1993 witnessed a number of positive developments withimplications for medium-term growth. The electricity shortages that have plaguedthe country for years appear to have been brought under control. Significant newrevenue measures have been put in place. Inflation remains reasonably low; andan autonomous Central Bank has been established. After a decade of exclusion,the country obtained an international credit rating and returned to borrow ininternational credit markets. Capital inflows continue, although foreign direct

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investment has not yet responded strongly as in other East Asian countries; andstock market performance in 1993 was the best in Asia, signalling private sectorconfidence that a sustained recovery is under way.

v. Sustained higher growth will require that competitiveness of theeconomy be the centerpiece of economic policy making, with due attention paid tocoordination of policy. For example, appreciation of the real exchange rate andincreases in the minimum wage are gradually pricing the Philippines out ofunskilled labor intensive manufactures, despite historically high levels ofliteracy and educational attainment relative to its per capita income. Anotherpolicy area important for long term competitiveness is external debt management,which needs to be especially prudent now that access to international markets hasbeen reestablished, balancing investment needs today against possible threats tothe public purse in the future. Sustainability of growth will also require thedevelopment of the rural sector and more robust performance of agriculture aswell as further diversification of exports. Thus, despite the clear improvementsln economic performance in 1993, and the indications of strong outcomes so farin 1994, some caution about prospects is still warranted.

Continuing Structural Reforms

vi. The severe power outages in 1993 were the most immediate cause of slowrecovery in that year; but hesitation by domestic and foreign investors to commitsufficient resources to the economy could threaten growth prospects for the restof 1994 and beyond. The improvement in investment rates in 1993 is fullyaccounted for by power sector projects alone. For the recovery to strengthen,investors must commit to projects spread across the economy. The bolstering ofprivate sector confidence by continuing the program of macroeconomic stabilityand economic liberalization is therefore crucial.

vii. The Government's recent efforts to complete the missing elements ofits program of structural reforms should go a considerable way towardsdissipating investors' doubts. The Government has taken important strides inimproving revenue generation and in enhancing economic liberalization. TheCongress has recently broadened the value-added tax to cover service sectors, andadditional tax reform is being examined by a new task force; it is expected thatthis will lead to recommendations on new taxes on corporate and personal incomesand to further rationalization of the tariff structure. The exchange rate hasboen almost completely freed of restrictions, foreign investment has been furtherencouraged by shortening the list of excluded sectors and by opening the bankingsector to foreign investors, and private investment has been facilitated throughthe introduction of Build-Operate-Transfer and other arrangements for privatesector participation in infrastructure. Thus, the improvements in macroeconomicmanagement, the decisive start towards easing power shortages and otherinfrastructure constraints, and the increased recognition of the private sectoras the engine of economic growth should have laid a solid basis for developmentover the medium-term.

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Aid Reauirements

viii. The prospects for medium term growth of GNP above 5 percent per annumare good. The responsiveness of private investment is expected to prove moresupportive of sustained recovery than in past upturns; and trade and foreignexchange liberalization have reduced the danger to growth poised by surgingimports. The hard-won confidence of the private sector should continue to grow,unless the Government fails to sustain and strengthen the current posture ofopenness and competitiveness. The projections of growth and the related externalfinancing requirements assume that the Government implements sound macroeconomicmanagement, especially fiscal improvements and continued economic liberalizationto improve the business environment. Continued improvements of the tax, tradeand foreign investment regimes and of domestic competition will be key.

ix. In the absence of any serious policy reversals, more efficientinvestment and strong export growth, led by manufactures and not swamped byimport surges, will lead the economy to sustained annual GNP growth above 5percent. The growth path projected for 1994-97 will create sizable externalfinancing requirements. While foreign investment will contribute to flows, aidcommitments and disbursements at least as generous as in the recent past will beneeded to finance this path. For 1994, some exceptional financing is likelynecessary to cover the greater than $600 million remaining gap that has beenprojected without any 1994 Paris Club rescheduling. For 1995-97, annual newcommitments of around $2.5 billion may be needed, of which around 20 percentshould be fast disbursing on average.

I. RECENT MACROECONOMIC DEVELOPMENTS

Overall Growth Performance

1.1 From the 1950s through the 1970s the Philippines sustained economicgrowth rates consistently above 5 percent per annum. However, growth was alwaysfragile, and periods of rapid growth were generally brought to a halt by foreignexchange crises. This pattern of relatively moderate cyclical movements wasbroken by an episode of unprecedented severity in the mid-1980s in the wake ofthe international debt crisis. The harshness of the collapse of income in theseyears, and therefore the amount of ground that needed to be made up, is clearfrom Figure 1. The structural reforms of the 1980s and 1990s--most importantly,trade and foreign investment liberalization and reform of the financial sectorand the tax system--have succeeded in reducing the risk of balance of paymentsemergencies; but a new obstacle to growth emerged by the mid-1980s. Publicfinance pressures became severe as a result of the twin burdens of servicingmassive foreign debt held or guranteed by the public sector and financing fiscalexpenditures from domestic sources alone. In recent years, the impact of taxreform, privatization, and effective debt management have begun to improve thefiscal situation; and after three years of frustration, 1993 registered modestrecovery of real income growth. Still, sustaining the hard-won advances inrevenue generation and economic liberalization over the medium term remains theprimary challenge to attaining a higher growth path.'

Fig.1: Real Income Growth (1950-93)chanwg contnt price GNP)

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10 ......... - --- - - ......................

5. .....

0

-10I 505254565860624 66687072747878808284808890 93

Sourso: Nado Inoon. Aeoounts, Ndonal IaUtca Coordzwton Bowd.

For detailed analysis of the long-term performance of the Philippineeconomy, see World Bank, The Philippines: An Opening for Sustained Growth,Report No. 11061-PH, April 1, 1993.

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1.2 Intensified structural reform since 1986 had, by 1989, eliminated mostprice distortions and improved resource allocation. As a result, the Philippineshad been expected to continue the robust growth of 1986-89 through the early19909. Instead the economy experienced a ragged start to the decade. Economicperformance deteriorated in 1989, triggered by worsening terms of trade, anincrease in international interest rates, and high import growth that outpacedexports. Policy response to these developments was delayed: the Government didnot let the exchange rate depreciate for fear of jeopardizing the fiscal balance(through the impact on external debt servicing) nor did it adjust domestic oilprices to fully reflect international prices for fear of political repercussions.Stabilization remained out of reach through 1989 and 1990, partly because ofcontinued political unrest and a series of natural disasters but primarilybecause of swings in Government macroeconomic policies. Starting in 1991,however, the Government managed to squeeze the National Government deficit--from3.4 percent of GNP in 1990 to 1.2 percent in 1992 while CPI inflation fell from18.7 percent in 1991 to an average 7.6 percent during 1993 (see Table 1.1). Butthe cost of sustained fiscal and monetary tightening, together with growingshortages of power, was the continued stagnation of economic activity--GNPexpanded by only 0.4 percent in 1991 and 1.0 percent in 1992. As a result, realper capita incomes were lower in 1993 than they had been in 1977.

Table 1.1: Macroeconomic Indicators (1970-93)

1970-80 1981-85 1986-89 1990-92 1993

(percent)Real GNP growth 5.8 -1.7 5.6 2.2 2.4Real GDP growth 5.7 -1.1 5.2 0.9 2.0Inflation (% change in CPI) 14.5 18.2 5.9 13.9 7.6Export growthb 11.3 -2.0 12.2 3.6 9.0

(as percent of GNP)Current account deficit -2.7 -5.4 -0.7 -3.4 -5.9National government deficit n.a. -2.9 -3.1 -2.2 -1.4Gross domestic invcstment 27.3 24.8 18.7 21.4 23.5National savings 25.9 20.6 18.0 18.0 17.7

a. 1973-80.b. Expots of goods cad non-factor ervices in consant pesos.

Source: National Statistical Coordination Board; Bangko Sentral ng Pilipinas; World Bank suff ertinates.

1.3 Macroeconomic management remained a challenge through 1992 and 1993.Liberalization of foreign exchange transactions in 1992 led to a surge of inflowsof foreign resources attracted by high domestic interest rates and improvedpolitical and policy stability. These inflows led to an appreciation of thepeso, hurting the export industry and growth. Despite these difficulties, theimpact of accumulated policy reform was starting to be realized towards the endof 1992. A Brady-type commercial bank debt restructuring was successfullycompleted in December 1992, significantly reducing the Philippines' external debtburden, and allowing a return to voluntary borrowing in the international capitalmarkets in 1993. Furthermore, in March 1993, the Philippines successfully

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completed an IMF Standby Arrangement. However, two factors dampened investmentand growth--electricity shortages and uncertainty about revenue mobilizationsufficient to finance much-needed infrastructure inveztment lingered through mostof 1993. It was not until a1r,:_t the end of 1993 that the government and theprivate sector's concerted efforts to augment power generation capacity finallyalleviated the electricity supply problem, while it has only been in the firstquarter of 1994 that the Government has put in place measures to enhance revenuegeneration that substantially reduce the risk that future fiscal gaps mayjeopardize sustained growth.

1.4 Performance in 1993. The economy gained strength through 1993. Thedepreciation of the exchange rate since August 1992 and the alleviation ofelectricity shortages by end-1993 nourished modest output (GDP) growth of 2.0percent last year which, when supplemented by inflows of remittances, yieldedoverall GNP growth of 2.4 percent. This modest pickup in output in 1993 afterseveral years of stagnation intensified demand pressures in the second half ofthe year. Inflation worsened slightly, to end the year at 8.4 percent (December1992 to December 1993 rate). Interest rates also increased, and the 91-dayTreasury bill rate, which had dipped below 10 percent in June 1993, rose above16 percent by December. Over the same period, the current account deficitwidened sharply, from less than 2 percent of GNP in 1992 to almost 6 percent ofGNP in 1993. Concern about the steadiness of macroeconomic policy was reignited,especially because of the extended and continuing struggle to fill the fiscalgap, spurring the Government to tighten monetary policy, improve prospects forrevenues, and conclude negotiations on a new program with the IMF.

1.5 Growth in 1993 was driven by higher fixed capital formation, at 23.5percent of GNP, which contributed to strong expansion of the construction sector,and export growth of 9 percent in volume terms. As power shortages finallyabated, manufacturing output began to increase late in the year, but only enoughto fuel growth of less than 1 percent in the sector (see Table 1.2).Manufacturing was led by transport equipment, chemicals, non-metallic mineralproducts, wood products, and footwear and wearing apparel, and driven generallyby robust expansion of export production. However, the food and beveragessubsector, constituting almost half of all manufacturing, responded only slowlyto the improving power situation, posting a 2 percent contraction for the year.Construction expanded strongly, reflecting the rush of investments in powergeneration and in telecommunications, as new entrants to the sector providedadditional telephone lines and cellular services. Agriculture, which hadperformed strongly in the first half of the year (compared to the droughtconditions of 1992), suffered setbacks to finish the year with 2.0 percentgrowth. Its growth was moderated by a contraction in output of corn, coconut,and bananas in the third quarter driven by the prolonged dry season, althoughlivestock and poultry posted a 5.6 percent gain for the year.

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Table 1.2: Real Output Growth (1986-93)(percent)

1986-89 1990 1991 1992 1993

GDP 5.2 2.7 -0.2 0.3 2.0Agriculturc 3.3 0.5 1.4 0.4 2.0Industry 5.6 2.5 -2.6 -0.5 1.8

Mining & Quarrying -0.9 -2.6 -2.9 6.7 0.7Manufacturing 5.7 2.7 -0.4 -1.7 0.7Construction 8.5 5.0 -15.7 2.8 6.7

Services 5.9 4.0 1.0 1.0 2.1

a. 1986 not available.

Source: National Income Accounts, National Statistical Coordination Board.

1.6 A determining factor in the Philippines' recent economic performancehas been the electricity situation, which has affected output, employment,investment, exports, and government revenues. Electricity shortages began in1990 and worsened through 1992 and the first semester of 1993. Record droughtsin Mindanao which devastated hydropower production compounded the shortage ofgenerating capacity resulting from delayed construction of new plants and themothballing of the 605 megawatt (MW) Bataan nuclear plant. The impact on outputwas most severe in the first quarter of 1993 because the brunt of shortages inthat year were borne by Luzon, which produces 65 percent of national output,while Mindanao was hardest hit in 1992. During January to March 1993, brown-outsin Luzon averaged six to nine hours as compared to an average one hour during thesame period of 1992. (See Figure 2.) The adverse effect on 1993 output has been

roughly estimated at around 1.5 percent of GNP.2

2 World Bank staff have estimated output losses at around 1.5 percent of

GNP. The National Economic Development Agency (NEDA) calculated a similar

magnitude of 1.3 to 1.6 percent of GNP, while the Philippine business communityhad higher estimates of 1.8 to 2.4 percent of GNP.

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Fig. 2: Power Shortages In Luzon, (1 992-93)(average daily hours of brownout each month)

10

4 .......... ... .. //..... .. .......

2 --....--..........-..--........-. -. -.

0JFMAMJJASONDJFMAMJJASOND

Sourme: Nalondl Power Copoxdon, PtNllppk*s

1.7 To address the crisis, the Government brought the private sector intoa "fast-track" power generation program. Using Build-Operate-Transfer (BOT) andrelated innovative financing arrangements, the Philippines, a pioneer in thisarea, has so far signed 26 agreements with the private sector for theconstruction, financing, operation, and management of power plants, involving atotal capacity of 3660 MW, compared to total existing generating capacity ofaround 6,800 MW. This program has had the intended effects, with new privategenerating capacity of 1300 MW operational by the end of 1993. With a reportedreserve level of about 100 MW, the National Power Corporation (NPC) announced thepower crisis officially over in January 1994. Nevertheless, reserve capacitystill remains low: NPC estimates that over the next 5 years, generating capacitywill need to double to avert a recurrence of the power crisis.

Investment and Savinos

1.8 Gross domestic investment levels in the Philippines have been steadilyimproving. Despite electricity shortages, 1993 registered total investment ofalmost 24 percent of GNP, as compared with the average level of 19 percent duringthe 1986-89 boom. Investment has not yet regained the high average 27 percentof GNP of the 1970s, but its modest upward trajectory for the last two years hasbeen fostered equally by gains in public and private investment. Public

investment in 1993 attained a level of 6.0 percent of GNP while privateinvestment equalled 17.5 percent of GNP (see Table 1.3).

Table 1.3: Investment and Savings (1988-93)(as percent of GNP)

1988 1989 1990 1991 1992 1993

Gross investment 19.0 22.4 24.7 19.9 20.8 23.5Public 3.2 4.1 5.4 4.8 5.5 6.0Private 15.8 18.3 19.3 15.1 15.3 17.5

National savings 18.0 18.9 18.6 17.7 19.0 17.6Public 0.5 0.9 1.1 4.1 4.3 3.9Private 17.5 18.0 17.5 13.6 14.7 13.7

Foreign vingsb 1.0 3.5 6.1 2.2 1.8 5.9

Public uving-investment gap 2.7 3.2 4.3 0.8 1.2 2.1of which: National Govt. deficit 2.9 2.1 3.4 2.1 1.2 1.4

Private sving-investment gap -1.7 0.3 1.8 -1.5 0.6 3.8

a. Investment nd savis adjusted from National Income Accounts. Non-monitored corportions are excluded from the publicector, investment in the Comprehensive Agarian Reform Progrm is excluded from public invesment. Private shares arecalculated as reiduals.

b. Foreign savings equal the curmnt account deficit.

Sown.: National Economic and Development Authority.

1.9 Public investment, which has been edging up for the last five years,has been primarily driven by government efforts to leave more room in the budgetfor capital expenditures. Having been pumped up to unprecedented levels by thegovernment through the 1970s, public investment collapsed when the privateexternal flows with which they had been financed evaporated after 1983. Since1989, the government has struggled to increase funding for public investment,with some success. The expansion of public investment in 1993 emanated fromhigher capital spending by government corporations (particularly by NPC whosecapital expenditures increased from 0.7 percent of GNP in 1991 to 2 percent ofGNP in 1993 as it responded to electricity shortages). Since public savings fellslightly in 1993, higher public investment enlarged the public savings-investmentgap to 2.1 percent of GNP, matched by sharply higher foreign financing.

1.10 Private investment has been on the rise for the last two years andexpanded to 17.5 percent of GNP in 1993. The expansion was led by power sectorinvestments in the form of BOT arrangements with the government, which areestimated to have amounted to more than 1 percent of GNP last year. Whileprivate investment outside the power sector has not yet picked up appreciably,it is expected that new private investment will create greater expansion ofoutput than in the past, in response to the more competitive and open environmentfostered by structural reforms--the incremental capital output ratio is expected

to decline to more normal levels from its unusually high past levels, oftenexceeding 10. The behavior of private investment, which has generally claimedaround three-quarters of total investment spending, has in recent years beenprimarily a reflection of the confidence of the business community in policyBtability. For example, private fixed capital formation was discouraged untillast year by high real interest rates, driven partly by large public sectordeficits and the resulting uncertainty about future policy direction. Highervolatility of interest rates, inflation, and the exchange rate since the early1980s has also likely dampened investment. Foreign investment3 has beendepressed by political as well as macroeconomic instability, and so has not yetcontributed a large share of private investment in the Philippines, in starkcontrast to other ASEAN countries. These negative influences are recently on thewane, and investor confidence is slowly strengthening.

1.11 National savings continues to be low at 18-19 percent of GNP in 1991-93, as compared to its ASEAN neighbors and as compared to its own pastperformance (e.g., 26 percent of GNP on average in the 1970s). Even though grossnational savings have been augmented in recent years by increased flows fromabroad of worker remittances and transfers, it was solely larger foreign savingsthat financed expanded investment last year. It should be noted, however, thatthe distinction between foreign and domestic savings is now somewhat blurredbecause of the degree of openness of the capital account, with some substantivepart of foreign savings consisting of return capital flight. Moreover, whilenational savings needs to be increased significantly over the medium term, therecent high level of foreign savings is not the suspect phenomenon it was in thelate 1970s, when large current account deficits were matched by governmentborrowing on international capital markets and the funds were used to finance anambitious but inefficient public investment program. Instead, about 40 percentof foreign savings in 1990-93 consists of direct and portfolio investment, muchof which could be considered reverse capital flight, especially by overseasFilipinos, and a sign of improved private sector confidence.

The Labor Market. the Exchange Rate. and Comvetitiveness

1.12 Emvloqment Performance. In 1992, the labor market began to recoverfrom the impact of economic recession and natural disasters of the preceding twoyears. Unemployment, at 10.6 percent in 1991, was on a downward trend by thesecond quarter of 1992. Despite the severe power shortages in 1993 whichweakened the recovery of employment, unemployment continued to decline to 9.4percent of the labor force (see Table 1.4). Employment growth was led by theinformal services sector, as workers were pushed into self-employment, and byagriculture, which was recovering from drought. Job expansion in the industrialsector, which had been strong through 1991 and 1992, evaporated in 1993 in thewake of worsening electricity shortages. The National Economic DevelopmentAgency (NEDA) estimated power shortfalls to have affected over 40 percent ofworkers in the National Capital Region and over 5 percent of workers outsideMetro Manila, especially those in power-intensive industrial sectors and thoseemployed by small and medium firms less able to cope with outages. Most of theadjustment by labor has occurred as reduced work hours rather than lay-off.,

3 See paras. 1.42 to 1.44 below.

nudging the underemployment rate up slightly to almost 22 percent from itsalready high level of near 21 percent in 1992.

Table 1.4 Employment, WN ages and the Exchange Rate (1988-93)(percent, except as noted)

1988 1989 1990 1991 1992 1993

EmploymentOverall growth 5.8 3.3 1.4 3.2 3.4 2.9

Agriculture 1.9 -0.2 0.8 3.1 4.2 3.9Industry 15.4 7.7 -2.3 6.1 5.3 -0.5

Manufacturing 14.8 5.9 -3.4 6.2 6.3 -2.6Construction 18.6 15.1 4.0 5.2 4.3 4.5

Services 7.1 5.7 3.7 2.1 1.7 3.2

Unemployment rate 9.6 9.1 9.4 10.5 9.8 9.3

Underemployment rate 23.5 23.2 22.4 22.5 20.5 21.7

Minimum wazeshMetro-Manila 7.2 8.6 3.7 6.6 -10.9 -8.4Outside Metro-Manila 10.5 5.2 3.8 -9.7 -6.9 -5.4

Exchanue rteNominal (PesosfUSS) 21.1 21.7 24.3 27.5 25.5 27.1Real effective (index, 1980=100) 68.2 73.2 71.2 70.3 78.0 76.1

a. Percent of erployed workers wanting additional hours.b. Growth in non-rgriculture minimum wage deflated by CPI.c. Nominal rate is annual average Pesoa/USS. Real effective rate is annual averpg trade partner-weighted adjusted by

CPI; increase indicates appreciation.

Source: Philippines Statistical Yearbook; National Economic and Development Authority; World Bank stff esimates.

1. 13 The Philippine economy has failed over the last two decades to providesufficient numbers of wage-paying jobs in the modern sector for its growing laborforce. Sectoral shares of employment have changed only slowly, and the small*hifts that have occurred have been primarily from informal agriculture toinformal urban services. Agriculture overall has gradually lost employment tothe services sector, declining from almost 60 percent share of the labor forcein 1970 to 49 percent in 1980 and 41 percent in 1993. However, the share oflabor employed in manufacturing, where labor productivity is five times the levelin agriculture and three times that in services, has hovered at 10-12 percent forthirty years (see Table 1.5). Without sufficient absorption into highproductivity areas, incomes have been relatively stagnant, and the growingpopulation has created an elastic supply of unskilled labor in agriculture andservices and encouraged workers to look overseas for employment. Overseascontract workers have constituted a fairly steady 2 percent of the labor forcesince 1985.

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Table 1.5: Structure of the Labor Force in 1980 and 1993

1980 1993

Labor force (thousands) 17,308 26,879

As % of labor force:Employed 95.0 90.7

Agriculture 48.8 41.4Industry 14.5 14.2

Manufacturing 10.5 9.1Construction 3.4 4.1

Services 31.7 35.1

Unemployed 5.0 9.3

Memo item:Overseas contract workers (thousands) 214.6 686.5a

(as % of labor force) 1.2 2.6

a. 1992.

Source: Philippine Statistical Yearbook; Labor Force Survey, National Statistical Office.

1.14 Wages. Between 1988 and 1991, unskilled industrial wages were pushedupwards by increases in the legislated minimum wage, which was set at roughlydouble the average rural wage in the Philippines and above minimum wage levelsin Thailand, Indonesia, and Malaysia. Although compliance is far from universal,employment expansion suffered in the modern industrial sector, in biggercompanies and in foreign owned firms, where payment of the minimum wage is morelikely to be enforced. After rising strongly in real terms through 1991, thereal value of daily minimum wage rates declined through 1993 as minimum wagerates were on average held more or less constant (see Table 1.4). Despite muchpolitical attention to the erosion of the minimum wage, the Administrationresisted pressure to legislate minimum wage increases and continued to supportthe existing regionalized wage setting mechanism. However, in response topersistent political demands, the regional boards, in charge of wage settingsince 1990, granted increases in December 1993 that varied by region and byindustry but roughly averaged 13 percent in nominal terms overall and 16 percentfor Metro Manila. While insufficient to make up for the erosion in real valuesince 1991, these wage increases do discourage foreign investors from laborintensive production in the Philippines--the minimum wage has risen by over 13percent in dollar terms since 1991 for the country as a whole and by almost 18percent in dollar terms for Metro Manila.

1.15 Exchange Rate Movements and Competitiveness. Aggressive minimumwage policy in the late 1980s which was not countered by real exchange ratedepreciation has left the country with relatively high costs for unskilled labor,compounded by low productivity compared to the rest of the region. The nominalpeso-dollar exchange rate appreciated 7 percent from end-1991 to August 1992,

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prodded upwards by large portfolio investment inflows, but then fell by 12percent during 1993, spurred by increased import demand and non-trade payments

and lower interest rates on peso-denominated assets, as shown in Table 1.4.Nevertheless, Figure 3 illustrates the modest appreciation of the real effectiveexchange rate that has been accumulating since 1988, undermining the pricecompetitiveness of Philippine exports, especially in comparison to the realdepreciation over the same years experienced by Malaysia, Indonesia, and China.Stability of nominal wages through 1990 and 1991 (determined by the minimum wage)at least prevented further deterioration in competitiveness of the unskilledwage, but the situation worsened again with the minimum wage increases of 1993.While the Government should be aiming to link wage setting to labor productivity,maintaining the current decentralized determination of the minimum wage is areasonable compromise that tends to diffuse pressures to increase real wagelevels by mandate.

Fig. 3: Rea Effective Exchange Rate (1979-93) /a

120

. , ....................................................................

1 0 0 ..... ...................................

70 .:......

eo- 79 80 81 82 83 84 85 88 87 88 89 90 91 92 93

.1 IuM-IMo hainaa kndodh wmdaIon REI in bede-alnar wu.dd &Wa a4ua*d by CPL

@oum: tsInd Flnwc SWON, IRAF

1.16 An additional issue affecting the prospects for Philippine industryand the attractiveness of the country to foreign investors is that even forskilled labor, a factor for which the Philippines had long enjoyed a comparativeadvantage, the country is losing its cost competitiveness. Labor costs in 1992for unskilled workers, for managers, and for engineers in the Philippines

- 11 -

averaged below those in Malaysia and Thailand but above those in Indonesia,China, and Viet Nam.4 A rough indicator of overpriced industrial labor is thatthe manufacturing wage to GDP per capita, a ratio which captures whether returnsto labor in manufacturing are excessive compared to opportunities elsewhere inthe economy, is quite high in the Philippines--all the successful exporters inEast Asia had ratios close to 1.5 in the late 1980s while the Philippines' ratiowas 2.7 in 1988. Thus, some modest real depreciation would improve costcompetitiveness.

Fiscal and Monetary Developments

1.17 Macroeconomic management, while accumulating successes since theconsolidated public sector deficit peaked at 4.9 percent of GNP in 1990, remainsa delicate balancing act in the Philippines. A high level of foreign borrowingand poor management of public expenditure in the late 1970s left a costly legacyof public external debt. AB in many other highly indebted countries, heavyexternal debt was transformed into sizable domestic debt in the years after theinternational debt crisis, as domestic borrowing filled a fiscal gap worsened byexternal debt servicing; insufficient fiscal adjustment forced monetary policyto center stage in the ensuing attempts at stabilization. The burden of debtservice, both foreign and domestic, on public finances continues to be heavy, andthe vulnerability of fiscal balances to interest rate and exchange rate shockshas been only partly mitigated by recent rescheduling of external debt andImproved fiscal management. The sizable demands of infrastructure investment onexpenditure levels and the management of large capital flows in a liberalizedforeign exchange environment continue to challenge policymakers. With someadditional strengthening of revenue generation and expenditure management, thefiscal constraint to growth may finally be relaxed.5

1.18 Fiscal Revenues. The Philippines has improved its revenue performanceover the last few years, showing a steady rise in the ratio of tax revenues toGNP from 11.4 percent in 1988 to 15.3 percent in 1993. This achievement has gonea long way to bringing the country's tax effort more into line with its ASEANneighbors' but further progress is necessary to cover the Philippines' unusuallyhigh debt servicing and its substantial need for infrastructure investmentcompared to its neighbors. In 1993-94, numerous new revenue measures, bothlegislative and administrative, have finally brightened the fiscal picture, as

4 See Osamu Kawaguchi, Foreign Direct Investment in East Asia: Trends.Determinants, and Policy Implications, Internal Discussion Paper Report No. IDP-139, East Asia and Pacific Regional Series, World Bank, April 1994.

S For further analysis of the fiscal situation, see World Bank, ThePhilippines Country Economic Report: Public Resource Mobilization and ExpenditureManacement, Report No.10056-PH, February 20, 1992.

6 On average for 1977-88, the Philippines collected the least tax revenueas a share of GNP of any ASEAN country, obtaining only 11 percent of GNP in taxrevenues while other ASEAN countries ranged from Thailand at 14 percent toMalaysia at 22 percent.

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detailed in Chapter II although further follow-through is needed to guaranteepublic finances over the medium term.

1.19 Historically, the bulk of tax revenues have come from indirect taxes,accounting for about two-thirds of total tax revenues: the key contributors havebeen import duties, license and business taxes (including VAT since its inceptionin 1988), and excise taxes, each accounting for about one-fifth of tax revenues.Direct taxes have raised only about one-third of revenues,' performing far belowpotential because of low collection rates. Categorized differently, about two-thirds of taxes arises from domestic taxes and one-third from international tradetaxation. Lastly, non-tax revenues have contributed another 2-3 percent of GNPto total revenues, of which privatization has been an additional modest resourcefor the National Government in recent years, yielding P1.9 billion in 1992 andP1.7 billion in 1993. For 1994, privatization sales are expected to yield muchlarger income--of at least P25 billion for the National Government (or around 1.5percent of projected GNP). Importantly, rather than treating these receipts asrevenue, the Government is applying much of them to amortization of domesticdebt, as is appropriate for asset sales.

1.20 The tax structure has been changing only slowly since the tax reformsof 1986-88. Import duties are declining in importance, having provided over one-quarter of taxes at the beginning of the 1980s, as other taxes gain importanceand as trade liberalization reduces the average duty rate. Much of theImprovement in tax effort, however, has originated from distortionary financialtaxes (such as the Gross Receipts Tax on financial intermediaries and otherdocumentary taxes on financial transactions), which have grown to almost 10percent of taxes from a negligible level in 1986 and from taxes for which the taxbase has expanded rapidly in recent years, such as imports and interest income.Various administrative reforms and the recent move towards computerization of theBureau of Customs and the Bureau of Internal Revenue are expected to improvecollections of income tax and VAT especially, which will allow movement away fromdistortionary taxes.

1.21 Revenue collections in 1993, at 17.3 percent of GNP, slightly downfrom the preceding two years, were dampened by the abolition of the specialimport levy in 1992 and by diminished loan repayments from government-owned-and-controlled corporations (GOCCs). The Government pursued its revenue targetsthrough an accelerated privatization program, a new law increasing cigarettetaxation, increases in other taxes, and further administrative improvements. Tofill the fiscal gap for 1994 and beyond, the Energy Conservation andEnvironmental levy of P1 per liter of imported oil was implemented in August, andthe payments to the National Government began out of the surplus in the Oil PriceStabilization Fund (OPSF). Given the large accumulated surplus in the OPSF,funds were not exhausted until end-year despite the flow deficit. The Governmentthen increased retail petroleum product prices, in February 1994, by an average15 percent (but as much as 100 percent for some products), but widespreadpolitical protests persuaded the Government to roll back the retail priceincreases and withdraw the special levy. The estimated PIO billion of annual

7 Of which individual and corporate income taxes constitute another fifthof total tax revenues.

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revenues lost have now been replaced by alternative measures put into place in1993-94, as discussed in Chapter II below, which place the country closer to itsgoal of continuing to increase revenues by around 0.5 percent of GNP each year.

1.22 Fiscal Expenditures and Deficit. The National Government has cut itsdeficit by more than half since 1990, from 3.4 percent of GNP to 1.4 percent,with the adjustment falling on current expenditures. Savings in domesticinterest payments generated by a steady decline in interest rates and continuedcompression of operations and maintenance expenditures were only somewhat offsetby an expansion equal to almost 1 percent of GNP in allotments of revenue tolocal government units, as shown in Table 1.6. The structure of fiscalexpenditures remains quite inflexible, with debt service still absorbing almost30 percent of National Government expenditure (compared to closer to 5 percentof expenditure in 1980); three-quarters of interest payments are on domesticdebt. Salaries and wages claim close to another 30 percent, leaving publicinvestment by the National Government with only a one-sixth share of the budget(or about 3 percent of GNP). Transfers of more revenue to local governments in1993, amounting to almost 10 percent of total expenditure--a pattern which is tocontinue into the future as decentralization is fully implemented--add toinflexibility. With the investment and operations and maintenance budgets inneed of expansion to foster private sector growth, further expenditure cuts mustlikely look to reduction of the wage bill (through streamlining of the civilservice) and declines in domestic interest payments (through reduced fiscaldeficit levels, and, in the short run, careful monetary management that minimizesthe risk premium component of domestic interest rates).

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Table 1.6: National Goverrunent Cash Budget (1990-93)

1990 1991 1992 199?

As % of GNP

Revenues 16.8 17.5 17.6 17.3

Tax Revenues 14.1 14.4 15.1 15.3Bureau of Intemal Rcvenue 9.6 9.2 9.7 9.7Bureau of Customs 4.3 5.1 5.3 5.4

Non-TaJx Revenues 2.7 3.1 2.5 2.0Asset Sales & Privatizationb 0.3 0.3 0.4 0.2

Expenditures & Net Lendine 20.2 19.6 18.8 18.7

Currcnt Operting Expenditures 16.5 15.6 15.6 14.9Personnel Services 5.8 5.7 5.4 5.3Maintenance and Operations 2.8 2.9 2.4 1.9Interest Payments 6.6 5.9 5.8 5.2

Foreign 1.7 1.5 1.2 1.4Domestic 4.9 4.5 4.6 3.8

Othee 1.3 1.0 2.1 2.5Capital Expenditures 2.9 3.2 3.6 3.2Equity and Net Lending' 0.8 0.8 -0.4 0.7

Deficit (-) -3.4 -2.1 -1.2 -1.4

In billion pesoS

FtmancingDeficit 37.2 26.3 16.0 20.6

Net External Financing 4.1 6.9 14.4 11.2

Gross External Financing 24.4 23.1 34.1 36.8

Less: Amortization 20.3 16.2 19.7 25.6

Net Domestic Financing 33.1 19.4 1.6 9.4

GNP (billions of pesos) 1,078.4 1,262.5 1,377.9 1,501.2

a. Prelirninary.b. In 1992, P10.4 bilion of privetizstion proceeds is included as negative lending rather than as revenue.c. Icludes subsidies, tax expenditures, allotments to local govermnents and transfers to the Oil Price

Stabilization Fund.d. Includes outlays for Comprehensive Agarian Reforn Program land acquisition and credit; for 1992, P10.4 billion

of privatization proceeds included as negstive net lending.

Source: Department of Budget and Managernent.

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1.23 Movements in the deficit of the consolidated public sector, reducedby one-third since 1990, have been determined not only by National Governmentbalances but also importantly by three other sources of imbalance: (i) lossesby the Central Bank, until its restructuring in 1993; (ii) deficits in the oilPrice Stabilization Fund, a problem now on its way to resolution; and (iii) thefinancial situation of the GOCC9, an ongoing issue (see Table 1.7).

Table 1.7: Consolidated Public Sector Deficit (1986-93)(as % of GNP)

1986 1987 1988 1989 1990 1991 1992 1993

Public sector deficit -5.91 -1.8 -3.3 -3.8 -4.9 -2.0 -1.9 -2.7

Non-financial public sector deficit -4.3 -1.3 -2.1 -2.8 -4.2 -1.3 -1.5 -2.9National governmnent -5.2 -2.5 -2.9 -2.1 -3.4 -2.1 -1.2 -1.4Monitored nonfinancial corporations -1.1 0.0 0.4 -0.3 -1.8 -0.6 -0.8 -1.8Oil Price Stabiization Fund 0.0 0.0 0.0 -0.9 -0.1 0.8 0.4 -0.5Adjustmnents for intra-govemment

transfers 2.1 1.1 0.5 0.6 1.2 0.6 0.1 0.8

Centml Bank income -3.1 -1.6 -2.1 -2.3 -2.0 -1.7 -1.6 -1.1Governmnent financial institutions -2.1 0.1 0.2 0.3 0.3 0.2 0.3 0.4Adjustments and other' 3.5 0.9 0.7 0.9 1.0 0.8 0.9 0.9

a. Includes ocial security institution surpluses, local government surpluses, and intr-public sctor tansfen.

Sowre: Departmenl of Fnance.

1.24 Losses of the Central Bank, averaging about 2.3 percent of GNP since1983, have been an important element in the overall public sector deficit. Theservicing of considerable foreign exchange liabilities assumed from governmentfinancial institutions in the wake of the debt crisis created large and growingdeficits for the Central Bank. These deficits both depleted the revenues of theNational Government which had to cover the losses and limited monetary policyoptions. The financial restructuring of the Central Bank in 1993 (discussed inChapter II) greatly benefitted monetary management through augmentation of itsfinancial strength and independence.

1.25 The OPSF has at times been a major drain on fiscal revenues, forexample, in 1989 when its deficit exceeded PS billion. The Fund was intended tosmooth adjustment to changes in world oil prices. Since it has proved quitedifficult politically to raise oil prices, it has tended to run excessivedeficits as world oil prices rise. This potential drain on public sector coffersis being stemmed by ongoing energy pricing reforms (described in Chapter II)geared to depoliticize pricing by putting in place automatic oil priceadjustments which will restrict the accumulated gains or losses of the OPSF tolevels that will not have macroeconomic impact.

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1.26 The consolidated deficit has also been affected by the spendingpatterns of the GOCcs, dominated by NPC. Despite large transfers from theNationai Government and high power tariffs, NPC has run large deficits of as muchas 1.5 percent of GNP in recent years. A spurt of capital spending in 1993 toadd new capacity and relieve the power crisis was the main contributor to thewidened GoCC deficit. continued high investment levels by NPC for the next fewyears will continue to contribute to the consolidated public sector deficitalthough internal cash generation should cover more of NPC outlays than in thepast.

1.27 With public funds scarce into the foreseeable future, and withinvestment needs in power generation alone estimated at $1.3 to S2.0 billion peryear, the Government has turned to innovative arrangements with the privatesector to finance infrastructure needs. The Philippines has been a pioneer inPrivate sector participation in power generation, already contracting throughBuild, Operate and Transfer; Build, Transfer, and Operate; and other schemes forinvestments that will almost double existing generation capacity. Financingarrangements of these sorts are being pursued now in other infrastructure areas,with great potential to relieve some of the pressure on public investment.

1.28 For the investment expenditures that remain with the public sector,a fundamental ongoing issue is the timeliness of proiect implementation. TheGovernment planned to frontload its investment spending for 1993, in what ittermed its "pump-priming program," so that public investment could have maximalimpact on demand and encourage an earlier economic recovery. Capitalexpenditures of P50 billion by the National Government and P77 billion for GOCCswere identified. As it turned out, actual capital expenditures, at P96 billion,fell below the original programmed level of P127 billion, although publicinvestment still expanded from 5.5 to 6.0 percent of GNP from 1992 to 1993. TheGovernment has assessed that implementation problems arose from a number ofsources: slow releases of advice of allotment and of notice of cash allocation,problems with bidding procedures, poor performance by contractors, right-of-waydifficulties, and the presence of squatters on some project sites. TheGovernemnt is exerting efforts to resolve these problems.

1.29 Given the experience with "pump-priming" during 1993, a Core PublicInvestment Program (CPIP) for 1994 has been approved by the NEDA Board to assureadequate and timely funding for priority public investment projects. The CPIPlists projects in power generation and transmission, water supply, basiceducation, housing, social services, disaster mitigation, and irrigation thatwill be protected from any budget cuts that may become necessary during thefiscal year. It will cover around two-thirds of the capital outlays planned bythe National Government; and for these projects, 60 percent of budgetaryrequirements are to be released in the first half of 1994.

1.30 Monetary Management. The volatility of inflation has reemerged as anissue in macroeconomic management since 1991. Expanded fiscal deficits in 1989-90, peso depreciation in 1990 and 1992-93, and minimum wage increases in 1991 and1993 have aggravated inflation. Monetary management of these events has beencomplicated by foreign exchange liberalization and the return of substantialflight capital since 1991. International reserves have mounted, andsterilization of these inflows has increased domestic interest rates, attracting

- 17 -

further portfolio investment. As has been true since 1983, in the absence ofsufficient fiscal adjustment, monetary policy has had -^ czmpensate by being morerestrictive, which tends to drive up interest r-tes and F-preciate the exchangerate.

1.31 The Government hoped to spur long-awaited growth in 1993 by "pumppriming" or front-loading public investment, as discussed above. Monetary policywas also expansionary, as the authorities lowered the amount of Treasury billsauctioned to increase liquidity in the economy. This measure, taken early in1993, immediately lowered interest rates and initially tended to reduce theGovernment deficit, increase credit to the private sector, and reduce thepressure on the peso to appreciate. Between April and June, the T-bill rate fellby 1.5 percentage points to 10 percent, the lowest level for a decade. However,by increasing broad money growth to an annual average of 25 percent (as comparedwith an average of 15 percent during the previous three years) (Table 1.8), thispolicy also raised inflationary expectations. Increased uncertainty aboutmacroeconomic policy caused the movement of interest rates to reverse course; andthe peso suffered a speculative attack at end-September during which it lostabout 7 percent of its value in a few days. To reassert stability, theGovernment took several measures to reduce liquidity in the economy, includingincreasing the auction of T-bills and imposing 10 percent reserve requirementson common trust funds (off-balance sheet items of commercial banks). Grossinternational reserves grew modestly through 1993, from $5.2 billion to $5.8billion, representing 3 months of imports and sufficient funds for the centralbank to calm the foreign exchange market, if necessary.

Table 1.8: Monetary Indicators (1986-93)(percent, except as noted)

1986-89 1990 1991 1992 1993

Broad money growth 19.0 18.4 15.5 11.0 24.6Inflation (% change in CPI) 6.4 14.2 18.7 8.9 7.6

Treasury-bill rate (91-day) 15.2 23.7 21.5 16.0 12.4Commercial lending rate 16.5 24.1 23.1 19.5 14.7

Gross ofricial rcserves (S million) 2,200 1,993 4,470 5,218 5,801(mos. of imports of goods & services) 2.5 1.5 3.3 3.3 3.0

a. End-of-period M,.

Source: International Financial Statistics, IMF; Bangko Sentral ng Pilipinras.

1.32 Since 1991, when prices rose by 18.7 percent, consumer price inflationhas moderated. The year 1992 saw increases of only 8.9 percent, squeezed furtherto 7.6 percent overall for 1993. Monthly inflation in 1993 followed a downtrend

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until June, when it hit an historic low of 6.6 percent (12 month rate), aided byslack domestic demand. Inflation edged up through the second half of the year,aggravated by the 18-centavo per kwh increase in rNPC's electricity tariffsimplemented in May 1993 and boosted by higher food prices from July throughNcve.bcr. An increase in the minimum wage at the end of 1993 also added toinflationary pressures at the start of 1994. Overall, the rising domesticliquidity discussed above allowed inflation to accelerate through the second halfof 1993, ending the year at 8.4 percent and rising to 10.5 percent in February1994. However, the tightening measures put in place and the projected tightfiscal stance for 1994 are expected to reduce inflation to 8 percent by the endof the year.

1.33 Despite the pressures nudging interest rates upwards again over thelast year or so, real ex post returns on Treasury bills fell from 6.5 percent in1992 to 4.5 percent in 1993, having exceeded 8 percent during 1986-90.Underlying this improvement has been the steady reduction in public sectorborrowing and increasing private sector confidence in macroeconomic stabilitywhich has reduced the risk premium while a more stable exchange rate has reducedthe depreciation premium demanded by investors. Commercial lending rates alsobecame more favorable for borrowers, who had paid over 9 percent in real termsduring 1986-90 and in 1992; rates dipped below 7 percent in real terms for all1993 (based on an average nominal rate of 15 percent).

1.34 The closely intertwined behavior of money, inflation, interest rates,and the exchange rate in 1993 reflects the increased complexity of monetarymanagement in the Philippines. With liberalized interest rates and foreignexchange transactions, the stance of monetary policy is closely and explicitlylinked to the levels of interest and exchange rates: influencing one largelydetermines the other two. Part of the impetus for restructuring of the CentralBank in 1993 (discussed in Chapter II) was to equip monetary policymakers withfinancial assets and independence so that they could carry out effective marketoriented monetary policy that takes these interdependencies in the economy intoaccount.

The External Sector

1.35 Since the 1960. at least, periods of strong growth in the Philippineshave most usually been halted by a foreign exchange crisis brought on by surgingimports. High import intensity during past growth episodes was encouraged bysustained overvaluation of the exchange rate during the 1970. and tariffexemptions for imports by priority sectors. However, the combined long-termimpact of the promotion of a modern export sector and the structural reforms ofthe 1980s and 1990s has improved the potential for sustained growth withoutbalance of payments crises. Trade and financial sector liberalization,privatization of government-owned corporations, and most recently, the move toa market-determined exchange rate have diminished import intensity.

1.36 In 1993, the current account deteriorated dramatically, from a levelof 1.8 percent of GNP for 1992 to 5.9 percent for 1993 after having improvedthrough 1991 and 1992 (see Table 1.9). This worsening can be traced to awidening trade gap, as healthy export growth of 15.8 percent in dollar terms wasoutstripped by an 21.2 percent upsurge in imports. Net service receipts

- 19 -

experienced a modest decline in 1993, after doubling between 1992 and 1993,driven by worker remittances, which stabilized in 1993 as lower domestic interestrates proved less attractive, and by insurance and freioht payments, which rosewith imports. Net transfers also fell slightly in 1993, further worsening thecurrent account balance.

Table 1.9: Current Account Indicators (1986-93)

1986-89 1990 1991 1992 1993

Current account balance (in S million) -334 -2,695 -1,033 -999 -3,289Current account balance (% of GNP) -0.7 -6.1 -2.2 -1.8 -5.9

Merchandise exports (in S million) 6,364 8,186 8,840 9,824 11,375Merchandise export growth (in %)' 14.2 4.7 8.0 11.1 15.8

Traditional exportsb 4.1 -13.8 -7.3 18.0 -12.5Non-traditional exports' 17.0 8.4 10.4 10.2 19.8

Merchandise imports (in S million) 7,590 12,206 12,052 14,519 17,597Merchandise import growth (in %) 20.3 17.2 -1.3 20.5 21.2

Capital equipment 34.1 28.8 -5.3 36.1 39.4Raw materials and intermediatc goods 23.2 7.8 0.7 15.6 16.2

Overseas worker remittances (growth in %)d n.a. 7.6 26.3 37.2 1.9

Interest payments (in $ million) 1,843 2,154 2,157 1,898 1,822

a. Growth of S value.b. Coconut, sugar, pineapple, and bananM products; abaca fibers; logs and lumber; copper concentmtes; and gold.c. All other exportu, including nanufactures.d. Growth in S value of personal income component of factor receipts and worker remitance component of

transfen.

Source: Balance of Payments, Bangko Sentrl ng Pilipinas; Teriff Commision; World Bank atff esnimates.

1.37 The current account deficit in 1993 was financed by almost $900million in commercial borrowings from the Euromarkets and over $800 million indebt rescheduling; net foreign investment flows of around 5600 million; otherborrowings; and a modest drawdown of net international reserves of the CentralBank. The caDital account records overall net foreign investment (direct andindirect) for 1993 at $599 million, 17 percent below 1992 levels (see Table1.10). Net direct foreign investment was recorded in the balance of payments at$763 million, with large outflows dampening the strong inward surge. Portfolioinflows boomed to $2.3 billion in 1993, attracted by the bullish local stockmarket and rising domestic interest rates. However, portfolio investmentoutflows increased sharply in 1993 to $2.4 billion, creating a small netportfolio outflow as non-resident investors took profits from earlier investmentsand as resident investors (whose outward portfolio investments jumped by over $1

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billion) responded to relaxed rules for outward investment.' For non-residents

alone, net portfolio investment inflows totalled $897 million for 1993, up from

$155 million in 1992.

Table 1.10: Capital Account Indicators (19S9-93)(in $ millions)

1989 1990 1991 1992 1993

Total net foreign investment 843 480 654 737 599

Net direct foreign investment 566 532 544 697 763Inflows' 575 554 571 798 1,137Outflows 9 22 27 101 374

Net portfolio investment 277 -52 110 40 -164Inflows 386 152 227 566 2,257Outflows 109 204 117 526 2,421

Net long-term disbursements& 604 1,225 1,186 812 2,202Net short-term capital' 309 945 948 1,139 320

Increase (-) in net reservesd -300 45 -1,755 -1,689 168

Memo itemsTotal external debt' (S billion) 28.5 30.4 32.2 32.4 35.9

(% of GNP) 67.8 68.6 70.1 60.2 64.9

Total debt servie'J(% of exports of goods & services) 30.9 29.1 23.6 29.9 19.7

a. Includes debt conversion.b. Includes implicit inflows from Paris Club and commercial bank rescheduling.c. Icludes errors and omissions and balancing item; for 1992 includes $469 million for purchase of collateral.d. Reserves of central bank only; includes net credit from IMF..Includes private non-guaranteed debt, IMF credit, and short-term debt; from Debtor Reporting System.

f 1992 debt service reflects payments connected to commercial bank debt restructuring.

Soure: Balance of Payments, Bangko Sentral ng Pilipins; Debtor Reporting System, World Bank.

1.38 Imports. The removal of a temporary import surcharge in May 1992 andthe demand for equipment to battle the worsening power outages stimulated importsthrough 1993. Import growth was dominated by arrivals of capital goods(contributing half of import growth), in particular power generating sets andaircraft (for newly privatized Philippine Airlines and others) which should beconsidered one-time adjustments and lumpy purchases respectively. Power

1 CB Circular 1389 (April 1993) removed the need for Central Bank approvalfor many such transactions.

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generator equipment and aircraft constituted 16 percent of overall imports in1993; these categories alone equalled the total increase in imports from 1992 to1993. Imports of raw materials and intermediate gczSs also expanded strongly(contributing another third of import growth), in anticipation of rising demandfor production of electrical equipment, metal products, and chemicals. Finally,consumer good imports boomed by 28 percent but constitute only 9 percent of totalimports. Thus, a good part of the trade deficit can be attributed to fixedinvestment and inventory restocking in preparation for a recovery of output.

1.39 Exports. Merchandise export growth in dollar terms has risendramatically, from 4.7 percent in 1990 to 15.8 percent in 1993, led by non-traditional exports, especially manufactures. The real appreciation of theexchange rate in 1992, propped up by sterilization of large foreign exchangeinflows, severely undercut the profitability of Philippine exporters and dampenedgrowth in that year, more than countering some improvements in the policyenvironment for exporters (discussed in Chapter II). With a correction in thevalue of the peso since mid-1992 and the gradually improving power situation,exports surged in 1993, led by manufactures, sugar, and fish products. However,in the past, high export growth has been virtually matched by high imports of rawmaterials and intermediate goods, leaving net exports too small to provideimpetus to the economy. During 1986-89, merchandise import growth exceededmerchandise export growth by over 6 percent on average. This gap has narrowedfrom 1992 to 1993; and the dominance of import composition and growth by capitalgoods improves the likelihood that imports will add to growth rather thanthreaten it.

1.40 The import intensity of Philippine exports has always been high,especially for its two big merchandise export earners--electronics and garments.But the cumulative impact of reforms of the past decade--trade, financial, andforeign exchange liberalization and privatization--is beginning to be felt. Theaverage import content of electronics and garments exports, the two biggestmerchandise export earners, for the period of 1977-85 was 75 percent and 60percent respectively; this ratio has gradually diminished, to average 58 and 55percent for the period 1986-93. Thus, it is not unrealistic to expect netexports to grow concomitantly with gross exports over the next few years.

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Fg9.4: Import Content of Exports (1977-93)

0.9

0.8 . . .. .. ... .......... ....................... ...............

- Eleotronics0.7- X .. .. ....vV..A..+Canars

0.577 78 79 80 81 82 83 84 85 88 87 88 89 90 91 9-2 93

Sowos: Bawi ol Payqmrro, BSP

1.41 An important addition to revenues from merchandise exports for thePhilippines has always been the earnings of migrant labor. Total overseasworkers' remittance' remained stable in 1993 at $2.6 billion, after surging by37 percent in dollar terms in 1992. The 1992 jump was somewhat exceptional andresulted from greater confidence of overseas workers in the domestic bankingsystem, following the foreign exchange liberalization of 1992, and improvedmervices by Philippine banks to overseas workers.

1.42 Foreign Direct Investment. Between 1986 and 1992, the Philippinesreceived $3.2 billion in foreign direct investment, only 5 percent of the totalforeign direct investment flows to East Asia (including China). The UnitedStates was the source of 38 percent of these flows; Japan provided 26 percent;12 percent originated in Europe; and 10 percent flowed from Hong Kong. Clearly,the Philippines needs to attract a larger share of the total investment flows tothe region, since foreign direct investment is seen as the conduit for technologyand managerial know-how as well as providing capital for investment.

' Including the personal income component of total factor receipts and thepersonal remittance and migrant transfers portions of total transfers in thebalance of payments.

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1.43 In 1993, foreign direct investment inflows surged above $1 billion,beyond the record level achieved in 1988, but net foreign direct investment(adjusted for outflows) expanded by a modest 9 percent.10 This response in1993, following the 28 percent increase in net direct investment flows in 1992,constitutes evidence that the Government's efforts to improve the investmentclimate are beginning to have an impact; but so far, net investment flows remainwell below what is required for growth of East Asian proportions. In particular,the lifting of restrictions on foreign ownership and simplification ofbureaucratic processes set out in the Foreign Investment Act (Republic Act or RA7042 of 1991) have not yet elicited enough of a positive response from foreigninvestors. NEDA attributed the somewhat disappointing net flows in 1993 tocontinued recession in source countries, the power crisis and other inadequateinfrastructure services, and the continued perception of law and order problems.

1.44 Recent cross country analysis by the World Bank has identified thethree most important longer-term determinants of foreign direct investment inEast Asia to be stability and size of the domestic market, labor cost, andforeign investment policy. Improving the environment for private investment ingeneral--through consistent macroeconomic policy, development of infrastructureand human resources, and liberalization of trade and investment regulations--wasfound to be far more effective than special policies focussed on attractingforeign investment. It is clear that the Philippines must continue to reinforcethese areas. Surveys of Japanese investors by the World Bank and by Japan's MITIreveal that the priority policy areas for the Philippines to attract moreJapanese investment are to persuade investors that political risk has diminished,that economic growth and stability will be maintained, and that improvedinfrastructure will contribute to the reduction of business costs." In theshort term, a targeted approach such as the promotion of the Subic Bay Freeportmay help to restore investor confidence.

1.45 External Debt. Total external debt of the Philippines rose from $2.3billion at end-1970 to $17.5 billion at end-1980 and stood at $35.9 billion atend-1993 or 65 percent of GNP. High levels of foreign debt are the legacy of thegovernment's access to easy international borrowing in the 1970s to expand itspublic investment program and have rendered the country and the public pursevulnerable to changes in international interest rates. Further, with most of thedebt publicly guaranteed, public finances became sensitive to exchange ratemovements. Initial efforts to reduce the Philippines' debt burden, which by 1986had risen to a peak of 93 percent of GNP"2, focussed on debt service reduction

1° Measured differently, foreign investment approvals recorded by the Boardof Investment rose even more steeply--by 54 percent for the first 11 months of1993 as compared to 1992 (excluding power generators).

11 See Osamu Kawaguchi, Foreign Direct Investment in East Asia: Trends.Determinants, and Policy Implications, Internal Discussion Paper Report No. IDP-139, East Asia and Pacific Regional Series, World Bank, April 1994.

12 The ratio to GNP of the stock of total external debt.

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through rescheduling.'3 Then, a first phase Brady-type operation was undertakenin January 1990, involving a buyback of $1.3 billion of commercial debt at a 50percent discount. Debt-equity swaps and other debt conversion programs have alsoreduced the stock of external debt by over $2 billion.

1.46 A second stage comprehensive restructuring of commercial bank debt wascompleted in December 1992. Almost $4.6 billion was restructured according toa voluntary menu approach, involving buybacks of $1.3 billion at a 48 percentdiscount and isBuance of new money bonds, collateralized par bonds, and interestrate reduction bonds. This operation yielded substantial up-front debt servicerelief and effective debt reduction as well as altering the structure ofPhilippine debt, particularly reducing the share of variable interest rate debtfrom 42 percent at end-1991 to 23 percent at end-1992. The response ofinternational markets was rapid: the secondary market price of Philippine NewMoney Bonds rose from 50 cents in 1989 to over 90 cents by end-1993."4

1.47 Between 1986 and the present, the Philippines reduced the burden ofits foreign debt stock from 93 percent to 65 percent of GNP and the burden ofdebt servicing from its peak of 45 percent of exports of goods and services in1987 to below 20 percent. This level of debt service is lower than that of anyhighly indebted Latin American country (where the regional average for debtservice was 38 percent of exports last year) as well as below that of Indonesia.

1.48 The comprehensive restructuring of commercial bank liabilities clearedthe way for the Philippines to return to international capital markets in 1993.The National Government issued a 3-year $150 million Eurobond in February 1993at a modest spread over U.S. Treasuries. In July 1993, international creditrating agencies, Moody's and Standard and Poor's, assigned ratings to this issueof Ba3 and BB- respectively, below investment grade but almost comparable toMexico, Venezuela, and Hungary and less risky than Argentina and Brazil.'5 Withthese development., a number of public and private Philippine entities have begunto tap international markets for finance. Over $1 billion in bonds were issuedin 1993, by the Development Bank of the Philippines, Philippine Airlines, thePhilippine National Oil Company, the National Power Corporation (with governmentguarantee), Philippine National Bank, and others. The rush to access the marketprompted the central bank to set an overall ceiling for borrowing by publicagencies and corporations of $2.5 billion for 1994, to ensure that overall debtlevels remain under control."

13 The Paris Club provided two reschedulings in 1984 and 1986, thenextended the previous agreement from mid-1991 until March 1993. Private banksalso rescheduled Philippine obligations in 1985 and 1987.

14 In June 1993, the Central Bank completed the reorganization ofcommercial debt by closing the $3 billion revolving trade facility.

is In October 1993, the Japanese Credit Rating Agency provided thePhilippines with a country rating of BB, opening access to the samurai market.

" These new borrowings are modest compared to Latin American activity inthe market last year, when Argentina issued $3.5 billion in international bonds,Mexico issued $7.5 billion, Brazil $4.7 billion, and Venezuela $3.6 billion.

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II. CONTINUING STRUCTURAL REFORMS

2.1 The process of econc-ic policy refcrmE _.he Philippines has recentlygained new momentum. W_It Et:ts and starts s snce 1980, Philippineadministrations have undertaken liberalization and improvements in the structureof the trade regime, the financial sector, agricultural marketing and pricing,the regime for foreign investment, and the tax system. The accumulated weightof these reforms has been sizable, especially since the bold liberalization ofthe foreign exchange market, the removal of most restrictions on foreigninvestment, and the adoption of phased tariff reduction in 1991-92. However, theresponse of domestic and foreign investors until quite recently has beenhesitant, partly because of the power crisis but also because the uncertainnature of policy implementation created doubts about the Government's dedicationto the reform process. Over the last year and with growing momentum over thelast few months, the Government has put in place sufficient conditions for anenthusiastic private sector response--by eliminating "brownouts" and also bydeepening and broadening the reach of policy reforms.

2.2 The Government has outlined the two pillars of its ongoing economicprogram. The first is enhanced revenue generation, which the Government sees askey to keeping inflation in single digits and allowing interest rates to fall.The second pillar of the Government's program is continued economicliberalization. The key achievements of this program since the beginning of 1993have included the enactment of a variety of revenue generation measures,accelerated privatization, financial restructuring of the Central Bank, progresson energy sector pricing reform, and the fostering of greater competition in thetransport and telecommunications sectors. In recent months, further progress hasbeen registered, with the broadening of coverage of the value-added tax (VAT),the privatization of Petron Corporation, the opening of the banking sector toforeign investment, and the expansion of eligibility and incentives for privatesector participation in infrastructure with a new Build-Operate-Transfer (BOT)law. The process of structural reforms is not yet complete--follow-through isneeded in the areas of revenue generation, trade liberalization, and anti-trust--but the cornerstone for higher growth has finally been laid.

Revenue Generation and Fiscal Improvements

2.3 The struggle to resolve fiscal imbalances on more than a year to yearbasis has plagued governments of the Philippines since the cut-off ofinternational borrowing in 1983. Significant progress in reducing fiscaldeficits occurred in 1990-92, but mostly through expenditure cuts rather thanimprovements in revenues. With a serious need for investment in infrastructureand social services to underpin growth, the Government has been working to fillthe fiscal gap which threatens macroeconomic management for the medium term, withsignificant headway over the last year. In 1993-94, the Government has increaseda number of tax rates, expanded the tax base, and made improvements in taxadministration to raise revenues. Since February 1994, the Government has workedhard to replace the P10-12 billion in expected revenues from the withdrawn P1levy on oil products. In addition, government revenues have been boosted byproceeds from the sale of privatized assets; but the Administration hasrecognized that such one-time income from asset sales cannot substitute for

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recurrent revenues. Much of the proceeds for 1994 will be appropriately setaside for debt retirement. As a result of all these actions, it is expected thatrevenue collection should improve from its current 17.3 percent of GNP to over19 percent in 1997. Lastly, fiscal prospects are greatly improved by thefinancial restructuring of the Central Bank in 1993, the losses of which were amajor drain on national government revenues and a chief limitation on firmmonetary management.

2.4 Various tax rates have been increased by the Congress and by theexecutive branch in the quest for higher revenues. In 1993, after a difficultpolitical battle, the excise tax on cigarettes was increased, a change thatshould net over P2 billion per year; a higher rate of the documentary stamp taxwas imposed, estimated to yield over P6 billion on an annual basis. In 1994, thestock transaction tax was increased from .25 to .50 percent of the gross sellingprice, which is expected to yield PO.6 billion in additional revenues. (SeeTable 2.1.) While higher taxes are crucial in the short-term, somewhatoffsetting the beneficial impact for the Treasury is the drag these particularmeasures create on the development and efficiency of the financial sector.

Table 2.1: Main Revenue Generation Measures (1993-94)

Measure Type of Action Date EstimatedAdditional Revenue'

(P billion)

Withholding VAT on government contractors Legislative Apr-93 1.4Cigarette tax increase Legislative Jun-93 2.3Documentary stamp tax increase Legislative Dec-93 6.1Minimum customs charge of 3% Administrative Apr-94 3.1 to 10.0Stock transaction tax increase Legislative May-94 0.6Expansion of VAT to services Legislative May-94 8.3Land conversion tax Legislative proposed 0.3Dividend income withholding tax increase Legislative proposed 1.2

a. Estimatc of full-year revenue in 1994 prices.

Source: Department of Finance.

2.5 The tax base has also been expanded to yield greater revenues for thegovernment. In 1993, withholding of VAT was extended to government contractorsand suppliers. In 1994, the Congress broadened the tax base for VAT to covermost previously exempted areas, including telecommunications services; roadfreight and other transportation; lease and sale of real property; restaurantsand caterers; hotels and motels; and books, newspapers, and broadcasting. Thisreform is estimated to yield an additional P8.3 billion (0.5 percent of GNP)annually. Also in 1994, a minimum 3 percent customs charge was applied byadministrative action to all zero-rated goods and certain currently exempt

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items,"7 to be extended over time to goods imported under projects registeredwith Board of Investments (BOI). The revenue yield from the minimum tariff isprojected to grow from about P3.1 annually to P10 billion by 1996. The expansionof the VAT and the modification of tariffs are both changes that improve taxstructure while enhancing revenues.

2.6 In addition, the Government has been striving to improve taxcollection through a number of measures, including the establishment of separatetreatment for large taxpayers and increasing penalties for tax evasion. TheBureau of Internal Revenue will begin monitoring the tax returns of largetaxpayers;": the 1000 largest taxpayers in Metro Manila have been notified andissued Taxpayer Identification Numbers. This procedure is expected to augmentcollection of VAT by as much as 1.5 percent of GNP over the next three years.Such efforts, and many others in the area of collection, merit the full supportof the Government since they increase the fairness and transparency of the taxsystem.

2.7 A number of new measures are under consideration by the Congress andthe Administration, the most important of which are listed in Table 2.1. Inaddition, a 2.5 percent withholding tax on export sales, creditable againstincome tax, has had its implementation delayed until July 1994; despite theseverity of revenue needs, this measure, by increasing the effective tax rate,could have possible deleterious effects on a vital sector--exports. The minimum3 percent tariff put in place in April 1994 is to be extended to BOI registrants.The Administration is also appraising major revisions of BOI exemptions bynarrowing the sectors covered, reducing the length of tax holidays, and by notrenewing exemptions nor granting them for plant expansions.19 Morecomprehensive tax reform is also in the works. A new Task Force on Tax andTariff Reform has been at work since February 1994 to suggest improvements to thetax system and the tariff code. By mid-1994, it is expected to providerecommendations on a modified income tax for corporations and an asset-basedminimum corporate tax (similar to one in operation in Mexico), aimed atincreasing corporate tax collections above their current level of 2 percent ofGNP, as well as any further revisions to the VAT. By February 1995, the groupis to set out suggestions on the individual income tax, restructuring of the taxincentive system, simplification of excise taxes, and tariff changes.

17 Including logs, rattan, coral and natural sponges, fertilizer, electricgenerating sets, and shipping vessels.

I As mandated by Republic Act (RA) 7646 In February 1993 and ExecutiveOrder (EO) 83 in April 1993.

it With the approval of the 1994 Investment Priorities Plan, which lists60 priority areas eligible for BOI incentives, compared to 261 areas in 1990, theBOI has already restricted tax and duty free importation of capital equipment andtax holidays to three years instead of five, and excluded expansion projects fromeligibility for tax holidays, except for export oriented firms and garment firmsexporting under quota.

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2.8 Other Measures with Fiscal Impact. The program of privatization hashad great success since its inception in 1986 in encouraging private investment,attracting foreign investment, and eliminating government subsidies, exemptions,

and guarantees. Since 1986, 130 governrment-owned-and-controlled corporations(GOCCs) have been slated for privatizaticn (out of a total 301 GOCCs), and 419"transferred assets" were assigned for disposition. From 1987 to end-February

1994, privatization generated P98 billion for the government (of which foreign

investors provided around P20 billion) from sales of 81 GOCCs and disposition of

314 transferred assets. The largest of the GOCC sales have been 40 percent of

Petron Corporation (the oil refining and distribution subsidiary of the

Philippine National Oil Company) for P14 billion in December 1993 and 67 percent

of Philippine Airlines for 11 billion in 1992.21 In 1994, privatization isexpected of additional Petron shares, of the Manila Hotel Corporation, andpossibly of National Steel Corporation. Altogether, P50-60 billion in grosssales are anticipated in 1994, with the National Government to receive around P30billion. As of end-March 1994, P34 billion in gross sales were already underway,of which P28 billion will eventually go to the National Government treasury.With such generous inflows expected in 1994, rather than treating the full amountas revenue, the Government plans to set aside proceeds equivalent to 1.2 percentof GNP to reduce public sector domestic debt.

2.9 The financial restructurinq of the Central Bank2 in 1993 moderateda major source of past public sector deficits and established a strongindependent monetary authority, the Bangko Sentral ng Pilipinas (BSP). Mostexternal liabilities and non-performing assets were transferred to a separatesettlement entity; and the new central bank received P220 billion in governmentsecurities bearing market rates to assure its financial health and to conduct

open market operations. Its substantial capital base (of P10 billion, toincrease to P50 billion in 1995) and independent board with private sectormembers make the BSP both financially strong and politically independent enoughto puroue convincingly an anti-inflation strategy. Although the NationalGovernment will now bear directly the financial burden of servicing old CentralBank debts, improvements to monetary policy with concomitant beneficial impacton interest rates (and so on debt servicing) should lead to improvements in theoverall public sector deficit.

Economic Liberalization

2.10 Structural reforms have been underway in the Philippines for well overa decade. In recent years, a new round of comprehensive liberalization has beenundertaken. The key components of reform since 1991, described below, have been

X Non-performing assets were acquired from government-owned financialinstitutions in 1986 as part of the restructuring of those institutions.

21 In the first two months of 1994, 87 percent of Philippine Shipyard andEngineering Corporation was sold for P2 billion; and 72 percent of shares ofPaper Industries Corporation of the Philippines, the only timber and papercompany in the country, for P2 billion.

= Mandated by RA 7653, signed in July 1993.

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deregulation of the foreign exchange market, opening of most sectors to foreigninvestment and the encouragement of private participation in infrastructurefinancing, reduction of tariffs and removal of c.uantitative restrictions,rationalization and deregulation of the energy sector, deregulation of transport,and demonopolization of the telecommunications sector. While tradeliberalization and anti-monopoly policy still merit further attention by theGovernment, together these policy changes constitute significant economicliberalization and set the stage for improved economic performance.

2.11 Foreign Exchance Market. Although the Philippine balance of paymentshas always had a certain degree of de facto openness, given the large flows ofremittances from overseas Filipinos, foreign exchange trading was limited to afew registered dealers, and exporters were required to surrender all foreignexchange earnings. Starting in 1992, the Philippines has moved to virtuallycomplete convertibility of the peso 3 Foreign exchange retention by exporterswas increased first to 40 percent and then to 100 percent, easing access todollars. Non-trade exports were exempted from foreign exchange regulationscompletely. Transactions such as repatriation of profits, dividends, and capitalwere permitted, complementing the relaxing of restrictions on foreign investment.Foreign currency accounts can be freely utilized. The interbank foreign exchangemarket shifted to full off-floor trading in 1992, encouraging broaderparticipation and leading to daily transactions volumes almost ten times thelevels before the liberalization. As a result, the peso exchange rate is nowstrongly market-determined. Although the central bank remains an active playerin the market, albeit one with much less control over the exchange rate, themarket now provide immediate feedback on the Government's macroeconomic policymaking. This deregulation has also been a great boon to exporters who haveaccess to foreign currency denominated loans--total use by exporters of ForeignCurrency Deposit Unit loans ballooned to $1.6 billion in 1992 and $4.6 billionin 1993.

2.12 Foreign Investment. Attracting larger foreign investment flows hasbeen a top priority for the Ramos Administration, which has worked to extend theachievements of the Aquino Administration in this area. The most importantaction in this area has been the relaxation of the regulations governing foreign

n Only minor restrictions on foreign exchange transactions have beenretained: multiple exchange rates operate for oil imports because of the forwardexchange cover arrangements linked to the OPSF (which will be eliminated as partof the overall deregulation of the oil sector): and foreign exchange to servicedebts may be purchased from the banking system only for loans registered with theBSP (to assist the monetary authorities in monitoring foreign borrowing). Also,outward investment by residents of over $1 million requires BSP approval. TheMonetary Board relaxed the restriction on repatriation of dividends frominvestments in non-priority sectors under the debt-equity conversion program inJune; and it plans to encourage the broadening of the list of eligibleparticipants in the foreign exchange market beyond banks to other authorizeddealers.

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investment in 1991 with the promulgation of the Foreign Investment Act, RA7042 Y The Act allows entry and 100 percent foreign equity in all but a fewsectors on a short "negative list." This approach to foreign investmentregulation has also been used with success in Malaysia, Thailand, and Indonesia;it creates zransparency by identifying clearly which areas are not open tounrestricted foreign investment and by reducing bureaucratic discretion regardinginvestment entry. Specifically, foreigners are allowed to own up to 100 percentof the equity in any enterprise that exports at least 60 percent of output orthat does business in sectors not included in the negative list. Restrictedsectors include public works construction, natural resource extraction, retailtrade, a few selected professional activities, and banking. These rules are aclear improvement from the previous regime, which had generally allowed only 40percent ownership, and render the foreign investment regime comparable instructure and equity allowances to those of its neighbor.

2.13 As part of its drive to attract more foreign investment to thecountry, In March 1994, the Government submitted legislation amending the ForeignInvestment Act to eliminate part of the negative list ("List C," which wasscheduled to be published by August 1994 to identify additional areas restrictedto foreign investors on the grounds that they are already being adequately servedby local enterprises). The Administration has also submitted amendments of theAct and other laws regulating foreign investment to Congress to further easerestrictions2 and to reduce the number of sectors for which majority foreignownership is currently prohibited (under negative "Lists A and B"), includingretail trade. This further liberalization should produce benefits of greaterforeign investment flows and improved efficiency of the sectors involved as newforeign entrants strengthen domestic competition.

2.14 In an important development for the financial sector, majority foreignownership of domestic banks and fully-owned domestic branches of foreign banksis now allowed in the Philippines. RA 7721, signed into law in May 1994, allowsfor entry of up to 10 additional foreiqn banks and further scope of operation forforeign banks already in the country. The new entrants, 6 allowed within thenext 5 years and another 4 upon approval of the President, will be limited to 6branches and will need minimum capital of $7.5 million. No limits were set onsetting up subsidiaries in the country or buying into existing domestic banks aslong as 70 percent of the assets of the banking sector remain controlled bydomestic banks with majority Philippine ownership. By increasing competition in

X Other actions have been taken to improve the environment for foreigninv-stors. Full and immediate repatriation of dividends, profits, and capitalfrom foreign investment was put into place as part of foreign exchangeliberalization in 1992. Streamlining of procedures for obtaining work permitsand visas for foreigners also occurred in 1992. In 1993, the maximum length ofland leases has been extended from 25 to 75 years, giving foreign investorsgreater security of tenure.

t For example, reducing the minimum equity requirement for foreign ownednon-export firms and natural resource based export firms from $500,000 to$150,000.

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the banking sector, this law will improve efficiency and quality of bankingservices.

2.15 Build-Operate-Transfer (BOT) Erhemes have been central in attractingprivate sector participation and foreign investment in the financing ofinfrastructure. The Government enacted the BOT law2 in 1991 to invite domesticand foreign private investors to invest in infrastructure facilities in thePhilippines, primarily through financial arrangements of a "Build, Operate andTransfer" type. The Act primarily aimed to minimize the negative impact of thepower crisis by expediting investment in power generation. In this area, it h-.smet with great success--the Government's "fast-track" program in the power sectorwas able to mobilize much-needed financial resources and helped to mitigate theimpact of the crisis as 1300 MW of private capacity were made operational by end-1993. Nevertheless, the experience of private sector participation in powergeneration has not been exempt of problems. Insufficient competition and thelack of an appropriate regulatory framework resulted in high costs, high risksto the public sector, and the threat of inefficient operation in many of thesecontracts. Recent contracts have shown, however, that costs can be substantiallyreduced through the introduction of competitive bidding. In 1994, the Governmentamended the Act with RA 7718 to officially authorize other modes of financialarrangements2 and to encourage investment by the private sector in a widevariety of infrastructure activities in addition to power generation.Implementing Rules and Regulations, to be issued, should permit flexibility sothat the private sector can invest in competitive activities without restrictivegovernment intervention while allowing the Government to take appropriateregulatory measures for activities with large externalities or potential fornatural monopoly.

2.16 Trade Liberalization. Trade reform has been underway in thePhilippines since 1980, during which time tariff levels have been lowered andrestrictions removed on many import items. However, the government has tendedto alternate between periods of tariff reduction and episodes of removal ofquantitative restrictions (QRs). The repeated delays in the schedule ofliberalization have occurred in response to balance of payments crises and underpolitical pressure from threatened industries. This hesitant implementation overthe years has undermined private sector confidence in the government's commitmentto openness. Nevertheless, after years of effort and especially in the wake ofthe tariff reform of 1991, the trade regime is now more or less comparable tothose of its East Asian neighbors. The average nominal tariff on imported goodshas declined to 25 percent in 1993 from a level of 43 percent in 1980, and isscheduled to drop again to 22 percent in July 1994, as shown in Table 2.2.Tariffs elsewhere in ASEAN countries now average between 10 and 20 percent. Asa result, the effective rate of protection is projected to decline modestly from

X As RA 6957 of 1991, an Act Authorizing the Financing, Construction,Operation and Maintenance of Infrastructure Projects by the Private Sector, andfor Other Purposes.

2 Such as those that involve leasing, rehabilitating, and developingadjoining real estate.

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25 percent in 1990 to 22 percent in 1995, and protection in the manufacturingsector, which began the 19809 at 40 percent, will fall to 32 percent.

Table 2.2: Trade Policy Indicators (1980-95)(percent)

1980 1990 1993 1995w

Effective rate of protectionb 24 25 26 22- in manufacturing 40 35 37 32

Average tariff- unweighted 43 28 25 21- import weighted n.a. 19 16 15

Quantitative restrictions- items covered 52 8 3 n.a.- imports coverd 37 13 5 n.a.

A. Projection based on scheduled tariff reductions, including revisions subsequent to EO 470b. Using tariffs only, not price comparisons; see Table 4 in the Statistical Appendix for details.

Source: Tariff Commission; World Bank staff estimates.

2. 17 The tariff reform of 1991 (EO 470, issued July 1991) revised thetariff code, lowering overall levels of tariff protection and the dispersion ofrates across subsectors. It set out a four-year phasedown of rates, capped at50 percent, with most items at 3 to 30 percent. Capital equipment, formerlytaxed at an average rate of 30 percent, moved to a rate of 10 percent (or 20percent if produced domestically). The impact of the reform is captured byestimates of its revenue cost: rising from under $400 million in 1992 to near$800 million in 1995. Since July 1991, further Executive Orders have reduced*ome tariffs but increased others, overall slowing the rate of decline of tariffscalled for under EO 470.X The revisions have on net retarded the removal ofprotection in the manufacturing sector especially. Effective rates of protection

3 Table 4 in the Statistical Appendix presents the pattern of protectionby sector for as a result of the tariff changes laid out in EO 470 and subsequentROn. Because it uses only tariffs for computation, rather than pricecomparisons, these figures cannot include the impact of quantitativerestrictions. Thus, the impact on protection of the retention of QRs on someagricultural products, an action that has received much attention, cannot be seenin effective protection rates protected here.

2X Increasing tariffs on commodities such as oil and agriculturalproducts, which more than offset the temporary reduction of tariffs to zero onelectric generating sets and cement.

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will moderate to levelB close to those originally scheduled under EO 470 by 1996,but the interim levels have been significantly higher. For example, in 1993,protection for rm_nufacturing importables averaged E2 percent rather than the 43percent set under the original EO 470.

2.12 New efforts on tariff reform are underway. The minimum import dutyof 3 percent introduced in April 1994, established as a revenue generationmeasure, reduces differences in protection by cutting down the share of importsentering the country duty-free. More importantly, the Task Force on Tax andTariff Reform set out a renewed program of tariff reform (designed by the NEDABoard Committee on Tariff and Related Matters) to the Cabinet in May 1994. Thisphased revamp of tariffs would lead to a uniform tariff of 5 percent by 2001.The first phase, a rationalization of tariffs set out under EQ 470 would setminimum and maximum rates of 3 and 30 percent to be put in place by end-1995; thesecond would reduce towards two rates, 3 and 10 percent during 1996 to 2000; thefinal stage would set a uniform 5 percent rate from 2001. Exceptions at ratesup to 100 percent may be allowed for basic industries registered with BOI as"pioneer' and some commodities currently or recently under quantitativerestrictions. As a first step during the next few months, tariffs on capitalgoods and spare parts are to be reduced to 3 or 10 percent rates, to be followedby lowered tariffs on textiles and garments. While lower average tariffs wouldcertainly stimulate further efficiencies, limiting the extent of exceptions tothe rate structure is crucial to avoid increasing the dispersion of protectionbetween industries.

2.19 Import liberalization, the process of lifting auantitativerestrictions on import categories, has been riddled with periodic interruptionsin implementation, far more than the process of tariff reduction. Yet, thenumber of restricted items has been reduced from almost 3000 items in 1980 to 183items at end-1993. As shown in Table 2.2, this action represents a reduction incoverage from 37 percent of imports in 1980 to around 5 percent in 1993.However, the number of items under QR increased during 1993 due to the impositionduring the year of restrictions on 57 commodity categories, mostly related tograins and livestock products, and the failure to remove others on schedule,especially in agriculture and transport. While only a small number of importitems are today subject to administrative restriction, the resulting pricedistortions impose efficiency costs on some important areas of the economy. Forexample, the prohibition of imports of trucks and buses was estimated to increasethe price paid by Philippine customers by an estimated 53 percent in 1991,30with costly implications for domestic freight charges. Import restrictions onnew trucks and buses were removed in September 1992 and importation under QRs ofvery large used trucks and buses3' made less restrictive in May 1993; but theGovernment has yet to bolster this piecemeal progress with bolder action toencourage competition in the sector. Similarly, the retention of import

30 From Center for Research and Communications (1991), "Import Policies forRoad Transport Equipment," mimeo, Manila, Philippines (October).

3' Used trucks over 18 tons gross vehicle weight (gvw) and buses over 12tons gvw can be imported with few restrictions.

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restrictions on corn has kept domestic prices around 50 percent higher than worldprices" and retarded the development of the poultry and livestock industry.

2.20 While the overall stance cf Philippine trade policy is now liberal,backsliding on QR policy during the past year has fueled doubts in the donorcommunity and the private sector about the Government's ability to follow throughon difficult policy actions. The Government has stated its intention to useadministrative orders in June 1994, when Congress is out of session, to lift QRson processed meats and rescind the administrative component of the QR on coalproducts. A speedy ratification of the Uruguay Round Agreement of the GATT andaggressive action to eliminate import restrictions on the broad range ofagricultural products negotiated for tariffication under the GATT (including allagricultural items except rice) would demonstrate the Government's seriousnessabout trade liberalization.

2.21 Another source of distortions in the trade regime has been the unusualmethod of import valuation used in the Philippines. Since 1972, the country hasused Home Consumption Value (HCV), basically the first level wholesale price inthe country of origin rather than the export price, as the basis for importduties. Since the globalization of import pre-shipment inspection and the strictenforcement of HCV in 1992, the faults of this system have become strikinglyclear. Goods originating in different countries can face greatly differingvaluations, and Philippine importers face continued uncertainty about theirlanded cost from shipment to shipment. These problems do not arise out ofimproper implementation of the system but reflect the inherent difficulties anddistortions of HCV. Use of HCV has been estimated to increase valuation by anaverage but highly variable 15 percent, implying losses of roughly 5 percent of

tariff revenues when the switch is made to an internationally accepted standard.Legislation is pending in both Houses of Congress. Because of the Government'sconcern about technical smuggling, a two step transition has been agreed, witha shift from the current system to Brussels Definition of export prices inJanuary 1995 and then to the GATT transactions value by July 1999.

2.22 Enercr Pricing Reform. Reform of the energy sector is a priority ofthe Ramos Administration. Following the passage of RA 7638 in December 1992which established the Department of Energy, the Government has been movingtowards rationalization of the electricity sector and deregulation of the oil

" Based on monthly data between September 1986 and June 1993, the MetroManila wholesale price for corn averaged 50.1 percent above the import cif price

of corn landed in Manila. During 1992 when the peso rose sharply, the monthly

tariff equivalent varied between 17 and 121 percent but still averaged only 53percent for the year. In 1993, the price difference averaged 59 percent for thefirst half of the year.

n GATT valuation, used almost exclusively by OECD countries who havelittle interest in tariff revenues, places the burden of proof of valuation onthe country's customs agents, while Brussels Definition Valuation (BDV) placesthe burden on the importer to present evidence if the declared valuation falls

outside average values for such items. In the region, only Taiwan, South Korea,

Hong Kong, and Japan use the GATT valuation method.

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industry over the next 3 years. Substantial tariffs hikes have been adopted, andthe Government is in the process of adopting pricinz measures such as automaticmarket-based oil pricing (to Etabilize the OPSF at a low level) and gradualremoval of cross-product subsidies and forwarc c-v-r; ard non-pricing measures,cuch as removing QRs on petroleum product 4mports. For electricity, recentchanges have depoliticized the pricing followed by the National Power Corporation(NPC). Prices now include a Fuel and Purchased Power Cost Adjustment(implemented in April 1994), a formula which automatically recovers any increasein NPC's costs due to changes in the prices of fuel oil, diesel, coal, and steam,including the cost of power purchased from private power generators. A ForeignCurrency Exchange Rate Adjustment (ready to be put in place) will adjust NPCelectricity prices for changes due to exchange rate fluctuations of the peso(vis-a-vis the US dollar and the Japanese yen) of NPC's debt service on principalof foreign currency loans and NPC's foreign exchange denominated operatingexpenses. An adjustment in the structure of wholesale tariffs is also beingimplemented. These improvements in tariff setting will help place NPC on a soundfinancial footing and induce more efficient consumption patterns. At the sametime, the wide involvement of the private sector in power generation through BOTand related arrangements has expanded the already substantial role of the privatesector in energy; this involvement should mobilize additional financial resourcesand, to the extent that more competition is introduced, improve efficiency andeventually allow energy prices, especially electricity tariffs, to moderate>.

2.23 Deregulation of the Transport Sector. In the past, heavy regulationof entry and exit and pricing in the transport industry kept transport costshigh, with deleterious effects on the rest of the economy: exportcompetitiveness was undermined; internal markets remained fragmented, preventingdomestic competition from developing; and economic activity focussed on Manila.The Government has reacted with a broad program of deregulation of land and seatransport. Using administrative orders, entry and exit has been eased,competition on major routes has been encouraged, and rate setting has beenliberalized. These changes are being established in the law through theTransport Services Act currently in Congress. When considered together with theprivatization of Philippine Airlines in 1992 and the potential privatization ofports, these actions have greatly improved the regulatory structure of thetransport sector.

2.24 Demonopolization of the Telecommunications Sector. Telecommunicationsservices in the Philippines have suffered from high prices, chronic unmet demand,and poor quality, comparing unfavorably with other East Asian countries andhindering foreign investment and tourism. Until recently, telephone service wascompletely dominated by the Philippine Long Distance Telephone Company (PLDT),which generated high profits but poor service to customers. Starting in 1989,regulators began to allow limited entry by other companies, by authorizingadditional international voice gateways; and the development of cellulartechnology began to provide some competition to traditional telephone service.Then in April 1993, taking a bold though interventionist step to improve PLDT'sservices, the Government made use of its authority to appoint the majority of

34 Retail power tariffs in the Philippines are the second highest in Asiaafter Japan.

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PLDT's Board of Directors through government owned shares. It has used thisinfluenc- to push PLDT to improve its efficiency and increase previouslyneglecte investment. Responding to the regulators' encouragement, five newtelephone carriers with international gateways and five cellular telephonecompanies are now under operation.

2.25 While demonopolization of the telecommunications sector is now welladvanced, it was accomplished in an ad hoc fashion. The Government needs ageneral policy to combat the widespread problem of market dominance; the lack ofa strongly enforced anti-monopoly statute at present continues to plague othersectors, to which the Government needs now to turn. Comprehensive antitrustlegislation that prohibits price fixing, market division, and boycott agreements,enforced by a strong central antitrust agency, would do much to ensure thatdomestic competition flourishes.

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III. MEDIUM TERM PROJECTIONS AND AID REOUIREMENTS

3.1 Previous chapters have indicated that the accumulated impact ofstructural reforms has been significant and that a record of sound macroeconomicmanagement has started to emerge. The medium term (1994-97) projectionspresented below are predicated upon continuing and deepening of these reformefforts in a stable macroeconomic, political (including law and order) andexternal environment. These projections present a consistent and conservativescenario in which a strengthening recovery results in sustainable growth above5 percent a year by 1997 and presents the implications of such a scenario forbalance of payments financing needs.

3.2 The projections indicate that aid flows continue to be critical forthe economy over the medium term. The generous flow of disbursements fromofficial loans and grants since 1988 supported economic growth and financedpublic sector investment. Aid disbursements from 1988 to 1993 amounted to anannual average of around $2.5 billion (about $1.8 billion of aid and $650 millionof Paris Club rescheduling), based on average annual multilateral and bilateralcommitments of $2.3 billion. Aid flows of at least an equivalent magnitude arecalled for over the next few years, to allow the Government to complete itsprogram of structural reforms and provide the infrastructure and social servicescrucial for sustainable growth.

Assumptions Behind the Pro-ections

3.3 Key Policy Assumptions. The projections presented here assume, firstof all, that the growing political stability and reassertion of law and orderthat has taken hold since the election of President Ramos in 1992 will continueto gain strength. The Government is expected to implement vigorously the twopillars of its economic reform agenda: (i) sound macroeconomic management, andespecially fiscal improvements; and (ii) continued economic liberalization aimedat improving the business environment for both domestic and foreign investors.As a result, real GNP growth exceeding 5 percent per annum could be attainableover the medium term, driven by rebounding investment and solid export growth.

3.4 Fiscal improvements include the following. Firstly, tax revenues areexpected to increase because of new tax measures such as the expanded value-addedtax and improved revenue collection, from 15 percent of GNP In 1993 to almost 17percent in 1997, raising overall revenues to 19 percent of GNP in the same year.Secondly, expenditures will be prioritized through regular expenditure reviewswill give due weight the need to remedy the inadequacy in infrastructure andsocial services. As a result, public investment is assumed to be relativelyhigh, at around 6 percent of GNP, during the projection period even withsignificant private participation in provision of infrastructure services.Lastly, project implementation is expected to improve as the Government addressesinstitutional weaknesses and the constraints that have arisen from the changingrelationship between the National Government and local government units. Theestablishment of a Core Public Investment Program, a set of priority projectswhose implementation will not be delayed even when there are budgetaryshortfalls, and improved fiscal efficiency of government-owned-and-controlledcorporations through institutional reforms and privatization will speed project

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completion. Given these efforts, it is assumed that aid utilization will improvesteadily.

3.5 Economic liberalization is assumed to continue and deepen. Asdiscussed in Chapter II, this should lead to reduced effective rates ofprotection through lower and more unified tariff rates, more liberalized foreigninvestment regulations, participation of the private sector in almost allinfrastructure sectors, and more efficient financial intermediation. Efforts topromote exports through streamlining of procedures and provision of informationwill continue to be made; and foreign exchange rates will continue to bedetermined by the market.

3.6 Main Economic and Financial Assumptions. The scenario is drivenprimarily by assumptions about export growth, import elasticities (or the importintensity of growth), and the magnitude and efficiency of investment.

(i) Strong export Qrowth of manufactures and other non-traditionalproducts is crucial to underpin any sustained growth scenario forthe Philippines. While prospects for primary commodity exportsare uncertain given quota-driven sugar exports, banned logexports, and declining coconut exports, exports of manufacturedgoods, now constituting around 80 percent of total exports, havesubstantial potential. With further opening of the economy andincreasing competition, manufactured exports are projected togrow by over 9 percent on average in real terms for 1994-97,compared with 5 percent average growth during the last decade.

(ii) Imports are also expected to grow as the economy expands. Importgrowth relative to income growth (i.e., the income elasticity ofimports) is expected to be lower than in the recent pastreflecting liberalized foreign exchange markets and tightaggregate demand management through improved fiscal policy. Theimport intensity of growth was high during 1990-1993 (withimports increasing by around 3 percent for every percent increasein income), spurred by trade liberalization, a rising peso, andthe beginnings of a recovery. The income elasticity of importsis expected to revert to its long-run average of around 1.5 overthe next few years.

(iii) Further, the accumulated impact of structural reforms shouldallow for greater levels and efficiency of investment. Grossdomestic investment has already risen from 20.8 percent of GNP in1992 to 23.5 percent in 1993 and then is projected to expand to27.1 percent of GNP by 1997. Private investment is expected toincrease from 15.3 percent of GNP in 1992 to 21.5 percent in 1997as the environment for business improves. Increased competitionshould lead to more efficient investment patterns; and betterscrutiny of public investment, with increased focus oninfrastructure services, will reduce operating costs for businessand elicit a higher output response. As a result, theincremental capital-output ratio is projected to decline to a

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level of 5-6 over the next few years, as compared to an East Asiaregional average of 4.

3.7 The OECD countries are assumed to grow moderately at an average 2.8percent a year, while oil prices hover near $15 a barrel. World inflation isprojected to be low at an average 2.8 percent, and thus LIBOR is projected ataround 5 percent. With its recent return to access to international capitalmarkets, the Government now has the additional option of borrowing from privatecreditors once more. Because the terms for private borrowing are far lessfavorable than those for official flows, only small public sector borrowings fromprivate creditors are assumed in these projections, as part of a prudentcommercial debt management strategy.

Projected Outcomes

3.8 The main macroeconomic outcomes of the most likely scenario arepresented in Table 3.1. The nascent recovery is expected to strengthen through1994, with GNP growth rising to 3.6 percent, as the beginning of a period ofsustained higher growth of around 5 percent a year. Studies of long-term growthin the Philippines indicate that 5-6 percent growth is sustainable. Theexpansion through 1994 will be fueled by robust export growth of 10 percent involume terms, led by manufactures, that recoups the setbacks of recent years andgradually improving investment performance. Over the medium term, real growthof total exports is projected to settle down to around 6-7 percent, while grossinvestment rises above 27 percent of GNP by 1997. Continued income growth willallow per capita consumption to expand by over 2 percent annually by 1997. Atthe same time, the Government's policy efforts will reduce the consolidatedpublic sector deficit from an already reasonable 2.7 percent of GNP in 1993 toabout 2 percent of GNP. At this level of public borrowing, single digitinflation will be maintained, and crowding out of private investment will bem;.nimal. Continued cautious monetary policy, it is assumed, will maintain lowinflation without undermining external competitiveness and will aim at mild realdepreciation of the Peso.

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Table 3.1: Macroeconomic Indicators (1992-1997)

1992 1993 1994 1995 1996 1997(actual) (proiected)

% chance in constant pesos

GNP 1.0 2.4 3.6 4.4 5.0 5.5GDP 0.3 2.0 3.5 4.2 5.0 5.5

Exports GNFS 3.9 9.0 10.2 7.1 6.3 5.9Manufactured exports 11.1 18.8 12.5 10.0 8.0 7.5

Imports GNFS 17.5 13.7 12.3 6.7 6.2 6.5

% chaneeInflaLon (CPI) 8.9 7.6 10.0 7.0 7.0 7.0

As % of GNPGross domestic investment 20.8 23.5 23.7 24.3 25.9 27.1

Private 15.3 17.5 17.6 18.3 20.3 21.5Public 5.5 6.0 6.1 6.0 5.6 5.6

Current account balance -1.8 -5.9 -3.8 -2.8 -2.7 -2.7

National government budget (deficit -) -1.2 -1.4 -1.5 -0.4 -0.2 -0.5

Total external debt, 60.2 64.9 65.1 64.4 62.3 60.1

As X of exports of roods and servicesTotal external debt service' 29.9 19.7 18.3 16.7 17.0 16.3

S. Debt tocks and interest payments am projected based on Debtor Reponing System. World Bank.

Sore: Balaace of Payments, Bazgko Sentrl ng Pilipinas; NatiorAl Income Accounts, National StatisLicalCoordination Board; InternatiorAl Fuancial Statistics, IMF; Debtor Reponing System, World Bank; WorldRnk stff estimates.

3.9 The current account balance is expected to improve via variouschannels including the recently liberalized exchange rate, reduced effectiveprotection rates, continued expansion of labor-intenoive manufacturing exportsand continued trend growth of non-factor services, factor income, and transfers.With the rescheduling of commercial bank debt completed in 1992 and modestdependence on new borrowings, the debt service ratio will continue to declinefrom its current 20 percent of exports to around 17 percent. The current accountdeficit of 5.9 percent of GNP in 1993 is expected to decline gradually to below3 percent of GNP. Current account deficit. into the future, unlike those duringthe transitory boom of 1986 to 1989, are expected to be the counterpart of risingforeign investment and not inflated by rising foreign debt service and importsfor consumption.

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Financing Reauiremernts

3. 0 A sustained recovery : require _=ea_ ly rising foreign inflowssince don.estic savings are projectea to rise unry micsEtly over the next fewyearB. in particular, financing m_st be found to cover public investmentrequirements in infrastructure as well as the social sectors. The necessarydisbursements from new aid commitments for the period 1994-97, as Bhown in Table3.2, are calculated to fill the financing gap that remains after accounting forknown sources of financing--estimated disbursements from the existing pipelineof loans, including from actual and likely commitments in 1994; financing froma new three-year IMF program; and estimated private capital flows. New ParisClub rescheduling is not included. No new bond issuance by the public sector for1995 and beyond is included, and only $400 million of privately issued bonds eachyear are assumed. The resulting financing gap, shown as disbursements from newcommitments (and any rescheduling) in Table 3.2, is substantial even for 1994,at over $600 million, and rises sharply since no new commitments are assumed for1995-97. The need for continued official development assistance is clear.

3.11 The scenario presented here shows total gross financing requirementsfor 1994-97 at just over $22 billion, implying that the Philippine economy willneed to attract an average of over $5 billion each year in capital inflows fromall sources--official aid disbursements, debt rescheduling, and foreign directand portfolio investment. Such flows are not unattainable. For 1988 to 1993 onaverage, net foreign investment flows averaged $715 million, aid flows(disbursements) averaged $1780 million, and Paris Club rescheduling added another$640 million on average per year, with total financing averaging over $3 billionannually during the period and rising.35 For the future, financing inflows willneed to continue at the level achieved in 1993, when almost $6 billion wasmobilized--$3.7 billion in aid disbursements and Eurobond borrowings, $800million from rescheduling, and over $1 billion in various private capital flows.

M In 1992, exceptional financing requirements of $6 billion were matchedby inflows to carry out the Brady-type debt restructuring.

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Table 3.2: Financing Requirements (1992-97)(in US$ million)

1992 1993 1994 1995 1996 1997(actual) (proiected)

Gross Financina Requirements 6,007 5,883 6,629 5,490 5,228 4,837Non-interest current account deficit -899 1,467 382 -66 -325 -646Debt service due 5,159 4,473 5,182 5,094 4.956 4,852

Interest 1,898 1,822 2,119 2,266 2,487 2,654Amortization 3,261 2,651 3,063 2,828 2,469 2,198

Change in net reserves' 1,747 -57 1,065 462 597 631

Financing Sources 6,007 5,883 6,229 5,490 5,228 4,837Private capital 515 1,229 2,814 2,259 2,424 2,657

Net foreign investment' 737 599 2,114 1,559 1,724 1,957Short-term capitald -496 320 300 300 300 300Private non-guar. LT disbursements 274 310 400 400 400 400

Net credit from IMF 61 111 -43 -112 -13 -157

Public LT disbursements 5,431 4,543 3,858 3,343 2,817 2,337From existing pipcline 5,431 4,543 3,202 1,976 1,408 994From new commitmentsf 0 0 656 1,367 1,409 1,343

Memo Items:Paris Club rescheduling credits 1,007 211Commercial bank rescheduling 688 607 478

a. Debt service due is before Paris Club and commercial bank rescheduling.b. Of cenzal bank only and not including net credit from IMF.c. Direct and portfolio invensment; also debt conversion for 1992-93; S926 million in 1994 and S264 million in 1995 from privatization.d. 1992 includes outflow of $469 million for purchased collateral.c. Includes inplicit inflows from rescheduling in 1992-93, S865 million in Eurobonds for 1993 and S600 raillion in 1994; for 1994-97, based

on standard profiles from commitments as of December 1993 and projected new commitments in 1994.f. Includes rescheduling, if any.

Source: Bangko Sentral ng Pilipinas; Debtor Reporting System, World Bank; World Bank stff estinates.

3.12 Past Aid Flows. Since the introduction of the Multilateral AssistanceInitiative in 1989 to marshall increased official assistance for the Philippines,the country has benefitted from augmented official development assistance flowsin support of its development program. Commitments of aid during 1988 to 1993totalled $13.8 billion, of which half has come from bilateral sources. (SeeTable 3.3.) Government owned and controlled corporations are implementingprojects accounting for over 50 percent of commitments. The leading recipientsector has been energy, power, and electrification, claiming 24 percent of totalcommitments, as donors have addressed the sector's urgent and sizable needs. Thetransportation sector received 19 percent of assistance, followed in importanceby three sectors: water resources; industry, tourism, science and technology;and emergency, structural, and budgetary support; each with over 10 percent.Overall disbursement performance has been good, with the ratio of annualdisbursements to undisbursed commitments at around 25 percent, because of a high

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proportion of fast-disbursing program loans (which constituted over 60 percentof total disbursements for 1986-90, about one-third in 1991-92, and over one-quarter in 1993). Project loan disbursement has improved in the last two years,as the Government has worked to remove implementation bottlenecks and find moreroom in the budget for counterpart funding.

Table 3.3: Official Development Assistance (1986-93)

1986 1987 1988 1989 1990 1991 1992 1993'

(in USS million)Medium and Lone Term Loans

New Commitments 846 1,111 2,052 2,418 2,566 2,638 2,281 1,824Multilateral 472 347 913 1,349 1,319 1,174 891 802

IBRD 151 342 505 801 1,008 564 630 431ADB 321 0 401 548 311 610 246 370

Bilateral 374 764 1,139 1,069 1,247 1,464 1,390 1,023

Disbursements 912 998 938 1,324 1,769 1,648 2,298 2,694Multilateral 348 396 423 671 987 686 940 994

IBRD 202 260 263 469 600 409 633 671ADB 142 130 157 198 381 277 307 287

Bilateral 564 602 515 653 773 962 1,358 1,700

Grants 94 86 162 243 246 242 229 187Multilateral 12 8 4 21 24 29 23 18Bilateral 82 78 158 222 213 206 169

a. Prliminary.

Source: Bangko Sental ng Pilipinst; Department of Finance.

3.13 The rising flow of disbursements from the aid commitments that thePhilippines has received has been crucial to finance the current account andallow growth to recover. Between 1988 and 1993, official development assistanceflows (both multilateral and bilateral disbursements) averaged $1.8 billion peryear and covered 45 percent of the country's gross financing requirements. IfParis Club reschedulings are included as a form of bilateral assistance, then theratio rises to 65 percent. These aid flows were also considerable as a share ofnational income, averaging 3.6 percent of GNP over the same years, compared toan average 1.6 percent of GNP for all lower middle income developingcountries." In 1993, aid flows quickened as the country received $1.7 billionin official bilateral development assistance disbursements, another $1 billionin multilateral disbursements, and $187 million in grants.

X Figure is for 1990 from World Development Report.

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3.14 Aid Recruirements. Based on the projected gross financing requirementsfor 1994 to 1997 presented here, official aid flows must continue to finance atleast the same proportion of total external financing requirements as in therecent past. However, financing needs for the rest of 1994 remain large,estimated at over $600 million, indicating an immediate need for additional ParisClub rescheduling and/or new quick-disbursing loans. For 1995-97, new officialcommitments on the order of $2.5 billion per year will be needed to finance thegap and allow growth to strengthen (compared to average annual commitments of$2.3 billion during 1988-93). For 1995-97, the proportion of quick-disbursingloans averages 20 percent, below historical levels, but most of that money willbe needed in 1995 and 1996. About 30 percent of commitments in 1995 will needto be quick-disbursing loans rather than project loans to guarantee sufficientdisbursements in that year; otherwise, commitments will need to be greater than$2.5 billion. The need for fast-disbursing assistance will fall to about 25percent of commitments in 1996 and to 10 percent in 1997, if new commitmentsremain at $2.5 billion. Such continuing aid flows will be justified only if theGovernment ensures that foreign assistance will be well-utilized by adhering toits ongoing reform program, which will be monitored closely by donors.

3.15 Downside Risks. Financing needs for the projected growth path couldbe even higher if the economy is buffeted by further natural disasters at homeor economic shocks from abroad such as rising world interest rates, tradeprotectionism, or slower than expected growth in trading partners. Backslidingin ongoing economic liberalization, delays in enhanced revenue generationefforts, or uneven macroeconomic management on the part of the Government couldsignificantly undermine growth prospects. On the other hand, the flows offoreign investment assumed here are conservative; there is a good chance thatrealized private inflows will respond more positively than posited to theImproving economic opportunities in the Philippines and provide headroom forgrowth higher than in these baseline projections.

SrATLISCAL APPENDIX

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THE PHILIPPINES:RECENT MACROECONOMIC DEVELOPMENTS AND REFORM EFFORTS

Statistical Appendix

Table of Contents

PsaaNo.

1.1 Gross Domestic Product: Composition, Shares,and Growth, 1985-93 ... . . . . . . . . . . . . . . . . 46

1.2 National Product and Expenditure, 1985-93 . . . . . . . . . 47

2.1 Balance of Payments, 1985-93 . . . . . . . . . . . . . . . 482.2 External Debt: Disbursements and Repayments, 1985-93 . . . 492.3 External Debt: Interest and Debt Outstanding, 1985-93 . . . 50

3.1 National Government Cash Budget, 1990-93 . . . . . . . . . 513.2 Consolidated Public Sector Deficit, 1986-93 . . . . . . . . 52

4 Effective Protection Rates., 1991-95 . . . . . . . . . . . . 53

Table 1.1: Gross Domestic Product: Composition, Shares, and Growth, 1985-93

1985 1986 1987 1988 1989 1990 1991 1992 1993

In millions of pesos at current prices

GDP at market prices 571,883 608,887 682,764 799,182 925,444 1,077,237 1,248,011 1,351,559 1,466,325

Agriculture 140,550 145,810 163,927 183,515 210,009 235,956 261,868 294,922 317,918

Industry 200,548 210,528 235,094 280,957 322,964 371,347 424,504 443,813 482,693

Mining and quarrying 11,893 14,144 14,354 15,275 15,446 16,659 17,504 16,263 16,621

Manufacturing 143,851 149,958 169,627 204,784 230,163 267,485 315,938 326,839 349,595

Services 230,785 252,549 283,741 334,710 392,471 465,795 561,639 612,824 665,714

Percentage of GDP In current prices

GDP at market prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Agriculture 24.6 23.9 24.0 23.0 22.7 21.9 21.0 21.8 21.7

Industry 35.1 34.6 34.4 35.2 34.9 34.5 34.0 32.8 32.9

Mining and quarrying 2.1 2.3 2.1 1.9 1.7 1.5 1.4 1.2 1.1

Manufacturing 25.2 24.6 24.8 25.6 24.9 24.8 25.3 24.2 23.8

Services 40.4 41.5 41.6 41.9 42.4 43.2 45.0 45.3 45.4

In millions of constant 1985 prices O

GDPat market prices 571,883 591,423 616,923 658,581 699,448 718,069 716,522 718,941 733,097 1

Agriculture 140,554 145,725 150,414 155,292 159,964 160,734 162,937 163,571 166,853

Industry 200,548 205,164 213,389 232,052 249,175 255,484 248,718 247,384 251,788

Miningandquarrying 11,893 12,313 11,232 11,704 11,389 11,091 10,770 11,495 11,571

Manufacturing 143,851 146,453 154,604 169,316 179,152 183,925 183,111 179,947 181,289

Services 230,785 240,534 253,120 271,237 290,309 301,787 304,867 307,986 314,456

Constant growth rates (percentage)

GDP at market prices 3.4 4.3 6.8 6.2 2.7 -0.2 0.3 2.0

Agriculture 3.7 3.2 3.2 3.0 0.5 1.4 0.4 2.0

Industry 2.3 4.0 8.7 7.4 2.5 -2.6 -0.5 1.8

Mining and quarrying 3.5 -8.8 4.2 -2.7 -2.6 -2.9 6.7 0.7

Manufacturing 1.8 5.6 9.5 5.8 2.7 -0.4 -1.7 0.7

Services 4.2 5.2 7.2 7.0 4.0 1.0 1.0 2.1

Source: National Income Accounts, May 1994 Revision, National Statistical Coordination Board.

Table 1.2: National Product and Expenditure, 1985-93

1985 1986 1987 1988 1989 1990 1991 1992 1993

In million pesos at current pricesProdud:

GDPatfactorcost 531,027 565,399 623,139 742,446 904,819 989,352 1,133,784 1,217,554 1,312.529Net Indirect Taxes 40,856 43,488 59,625 56,736 20,625 87,885 114,227 134.005 153.796GDPatrmarketprices 571,883 608,887 682,764 799,182 925,444 1,077,237 1,248,011 1,351.559 1,466,325Net factor income -15,809 -12,611 -11,938 -7,360 -11,318 5,320 18,059 31,959 43,631Gross national product 556,074 596,276 670,826 791,822 914,126 1,078,418 1,262,487 1.377.938 1,501.188

Exedke:

Total consumption 464,352 492,960 539,663 630,948 737,462 875,904 1,040,269 1,149.733 1,249,846National government 43,520 48,431 57,333 72,183 88,186 108,843 123,885 130,524 127,318Private 420,832 444,529 482,330 558,765 649,276 767,061 916,384 1,019,209 1,122,528

Gross Fixed Capital Formation 99,818 102,374 112,663 142,226 192,665 248,954 250,147 282.783 349,698Nonfinancial Public Sector 21,268 17,294 19,285 22,998 32,854 45,468 51,582 66.618 73.957

Central Government 8,796 11,683 12,913 15,234 20,861 29,155 37,607 46,125 40,315Nonfinancial Pub. Enterp. 12,472 5,611 6,372 7,764 11,993 16,313 13,975 20,493 33,642

Private Sector 78,550 85,080 93,378 119,228 159,811 203,486 198,565 216,165 275,741ChangesinStocks -12,121 -4,933 6,813 6,967 7,245 11,211 2,180 5,618 3-994

Imports of GNFS 125,205 136,235 179,030 215,292 280,118 358,548 406,698 455,018 587.448Exports of GNFS 137,030 160,187 182,179 226,431 263,880 296,415 369,377 393,706 462.384Resourcebalance 11,825 23,952 3,149 11,139 -16,238 -62,133 -37,321 -61,312 -125,064

Gross national saving 85,936 109,650 116,894 159,370 181,246 204,674 256,731 282,789 286,031

Percent of GDP In current pricesTotal consumption 81.2 81.0 79.0 78.9 79.7 81.3 83.4 85.1 85.2

National government 7.6 8.0 8.4 9.0 9.5 10.1 9.9 9.7 8.7Private 73.6 73.0 70.6 69.9 70.2 71.2 73.4 75.4 76.6

Gross Fixed Capital Forrnation 17.5 16.8 16.5 17.8 20.8 23.1 20.0 20.9 23.8Nonfinancial Public Sector 3.7 2.8 2.8 2.9 3.6 4.2 4.1 4.9 5.0

Central Governnent 1.5 1.9 1.9 1.9 2.3 2.7 3.0 3.4 2.7Nonfinancial Pub. Enterp. 2.2 0.9 0.9 1.0 1.3 1.5 1.1 1.5 2.3

Private Sector 13.7 14.0 13.7 14.9 17.3 18.9 15.9 16.0 18.8Changes in Stocks -2.1 -0.8 1.0 0.9 0.8 1.0 0.2 0.4 0.3

Imports of GNFS 21.9 22.4 26.2 26.9 30.3 33.3 32.6 33.7 40.1Exports of GNFS 24.0 26.3 26.7 28.3 28.5 27.5 29.6 29.1 31.5Resource balance 2.1 3.9 0.5 1.4 -1.8 -5.8 -3.0 4.5 -8.5

Gross national saving 15.0 18.0 17.1 19.9 19.6 19.0 20.6 20.9 1'.5

Sorce: Halo.m Income Accaa. May 1994 Reviuj, NalI S5tic CoOMd=0o Board.

(in millions of US dollars)

1985 1986 1987 1988 1989 7990 1991 1992 1993

Exports of Goods & NFS 6.864 7,702 8,065 9,487 10.674 11,106 12,087 14,244 15,875Merchandise (f.o.b.l 4,629 4,842 5,720 7,074 7,821 8.186 8,839 9,824 11.375Non-factor Services /a 2,235 2,860 2,345 2,413 2,853 2,920 3,248 4,420 4,500

Imports of Goods & NFS 5,961 5,868 7,861 9.440 11,845 13.832 13.699 16,698 20,537Merchandise (c.i.f.) 5,111 6,044 6,737 8,159 10,419 12,206 12.052 14,519 17,597Non-factor Services /b 850 824 1,124 1,281 1,426 1,626 1,647 2,179 2,940

Resource Balance 903 1,834 204 47 -1,171 -2,726 -1,612 -2,454 -4,662

Net Factor Income -1,317 -1,321 -1,221 -1,212 -1,332 -762 -306 573 674Factor Receipts /c 1,053 931 1,109 1,179 1,516 1,843 2.320 3,007 3,028Factor Payments /d 2,370 2,252 2,330 2,391 2,848 2,605 2.626 2,434 2,354

Total Interest 1,758 1,546 1,913 2,051 1,863 2,154 2,157 1,898 1,822

Net Current Transfers 379 441 573 775 1,045 793 883 882 699Current Receipts /a 388 445 575 778 1,047 796 884 891 713

Workers Remittances 111 163 211 388 360 262 329 315 324Current Payments 9 4 2 3 2 3 1 9 14

Current Account Balance -36 954 -444 -390 -1,458 -2,695 -1,035 -999 -3,289

LT Capital Inflows -380 927 -575 1,123 1,447 1,705 1,840 1,549 2,801Foreign Investment 12 127 307 936 843 480 654 737 599Net LT Borrowing 1,143 374 -578 187 604 1,225 1,186 812 2,202Disbursements f 1,745 1,530 1,332 1,248 1,475 2,513 2,076 5,705 4,853Repayments /f 602 1,156 1,910 1,061 1,179 1,493 1,486 3,261 2,651Other LT Inflows (net) /g -1,535 426 -304 0 308 205 596 -1,632 0

Short-term and Other lnflows /h 1,247 -743 961 -59 311 945 950 1,139 320

Changes in Net Reserves Ai -832 -1,138 58 -674 -300 45 -1,755 -1,689 168

Net credit from IMF 190 25 -163 -70 128 -337 183 58 111

Gross Reserves 1,093 2,459 1,959 2,059 2,324 1,993 4,470 5,218 5,801

Mamo Items:Nominal Official Exchange Rates:

Annual average 18.61 20.39 20.57 21.10 21.74 24.31 27.48 25.51 27.12End-of-year 19.03 20.53 20.80 21.34 22.44 28.00 26.65 25.10 27.70

a. Excludes investment income, government Economic Support Fund, personal income, and commissions and fees.

b. Excludes investment expense, personal income, and commissions and fees.c. Includes investment income, personal income, and commissions and fees.d. Includes investment expense, personal income, and commissions and fees.e. Includes government Economic Support Fund.f. Debtor Reporting System; disbursernents include implicit inflows from Paris Club and commercial bank rescheduling; repayments are scheduled amortization.

g. Discrepancies between DRS data and BOP data on long-term borrowing.h. Includes short-term capital, errors and omissions, and balancing item.i. Refers to reserves of Central Bank only.

Source: Debtor Reporting System. World Bank; Balance of Payments, Bangko Sentral ng Pilipinas.

Table 2.2: External Debt: Disbursements and Repayments, 1985-93(in millions of US dollars)

1986 1986 1987 1988 1989 1990 1991 1992 1993 /p

DisbursementsPublic & Publicly Guar. LT Debt 1,460 1,430 1,252 1,248 1,356 2,222 1,816 5,431 3,432Official Creditors 717 759 1,126 1,081 1,234 1,370 1,446 1,902 2,783Multilateral 391 341 405 424 654 853 659 845 1,01 "

Bilateral 326 418 721 658 580 517 787 1,057 1,764l

Private Creditors 743 671 126 167 123 852 370 3,529 649Bonds 0 0 0 0 0 575 263 3,348 325

Commerical Banks 413 531 9 8 0 167 47 54 87

Private Non-Guaranteed LT 285 100 80 0 119 291 260 274 310Total LT Disbursements 1,745 1,530 1,332 1,248 1,475 2,513 2,076 5,705 3,742

IMF Purchases 323 269 161 94 302 0 457 213 177 1

Net Short-Term Capital -80 -297 108 -31 189 425 452 -464 220 4

RepaymentsPublic & Publicly Guar. LT Debt 451 846 1,094 1,108 693 1,418 1,374 3,118 1,697Official Creditors 335 536 405 387 372 440 639 693 1,382

Multilateral 142 210 269 347 332 388 409 438 492Bilateral 193 326 136 41 39 52 230 255 890

PrivateCreditors 116 309 689 721 321 978 736 2,425 315Bonds 86 56 145 222 173 182 140 79 1 /

Commerical Banks 11 98 409 461 89 745 536 2,274 96

Private Non-Guaranteed LT Debt 151 185 108 100 206 62 112 143 210Total LT Repayments 602 1,156 1,910 1,208 1,179 1,493 1,486 3,261 1,907

IMF Repurchases 190 303 353 196 196 345 295 155 64

p/ preliminary.

Source: Debtor Reporting System, World Bank.

Table 2.3: External Debt: Interest and Debt Outstanding, 1985-93(in millions of US dollars)

1985 1986 1987 1988 1989 1990 1991 1992 1993 /p

InterestPublic & Publicly Guar. LT Debt 801 1,017 1,210 1,463 1,543 1,480 1,384 1,276 1,586

Official Creditors 326 476 524 579 612 746 757 825 1,131

Multilateral 250 322 377 388 381 444 479 495 540

Bilateral 76 154 146 191 231 302 278 330 591

Private Creditors 475 542 686 884 932 734 627 452 455

Bonds 74 73 76 67 49 31 72 78 210

Commercial Banks 370 405 560 768 843 668 520 346 190

Private Non-Guaranteed LT Debt 139 130 132 123 134 87 66 40 58

Total LT Interest 940 1,147 1,342 1,586 1,677 1,567 1,450 1,317 1,644

IMF Service Charges 68 78 83 74 84 99 95 82 73

Interest on ST debt 750 400 365 341 402 100 73 74 93

Debt Outstanding and Disbursed n

Public & Publicly Guar. LT Debt 13,696 19,260 22,917 22,454 22,188 23,886 24,833 26,004 29,103 °

Official Creditors 6,978 8,471 11,005 11,745 12,461 15,247 17,207 18,611 21,311

Multilateral 3,491 4,195 5,016 4,774 4,981 6,272 6,668 6,908 7,413

Bilateral 3,487 4,276 5,989 6,971 7,480 8,975 10,539 11,703 13,898

Private Creditors 6,718 10,789 11,913 10,709 9,727 8,639 7,626 7,393 7,792

Bonds 839 886 864 628 422 824 952 4,220 4,533

Commerical Banks 4,516 8,423 9,347 8,382 8,039 6,647 5,800 2,396 2,41 5

Private Non-Guaranteed LT 2,600 2,294 1,834 1,611 1,189 1,201 1,362 1,030 1,083

Total LT DOD 16,296 21,554 24,751 24,065 23,377 25,087 26,195 27,034 30,187

Use of IMF Credit 1,168 1,266 1,260 1,094 1,177 912 1,086 1,100 1,210

Short Term Debt 9,157 5,382 3,796 3,864 3,952 4,426 4,943 4,363 4,483

p/ preliminary.

Source: Debtor Reporting System, World Bank.

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Table 3.1: National Government Cash Budget (1990-93)

1990 1991 1992 1993f

In billions of Resos

Revcnues 180.9 220.8 242.7 260.2

Tax Revenues 151.7 182.3 208.7 229.7Bureau of Intemal Revenue 104.0 116.3 133.9 145.9Bureau of Customs 45.9 64.4 72.9 81.7

Non-Tax Revenues 29.2 38.5 34.0 30.5Asset Sales & Privatization' 3.4 3.4 5.1 2.7

Exeenditures & Net Lending 218.0 247.1 258.7 280.9

Curmt Operating Expenditurs 178.0 196.5 215.0 223.3Personnel Services 62.2 72.4 74.3 80.1Maintenance and Operations 30.2 36.2 33.7 29.1Interest Payments 71.1 74.9 79.6 77.3

Foreign 17.8 18.6 16.5 20.7Domestic 53.3 56.3 63.1 56.7

Othee 14.5 13.0 27.4 36.8Capital Expenditurs 31.7 40.7 50.2 47.3Equity and Net Lendinge 8.4 9.9 -6.4 10.3

Deficit t-l -37.2 -26.3 -16.0 -20.7

a. Preliminary.b. In 1M, 10.4 billion of privatization proceeds is included as negative lending rather

han as revenue.c. Includes subsidies, tax expenditures, allotments to local govermnents and transfers to the

Oil Price Stabilization Fund.d. Includes outlays for Comprehensive Agrarian Reform Program land acquisition and credit;

ibr 1992, S10.4 billion of privatization proceeds included as negative net lending.

Sowrce: Department of Budget and Mangement.

- 52 -

Table 3.2: Consolidated Public Sector Deficit (1986-93)(in billions of pesos)

1986 1987 1988 1989 1990 1991 1992 1993

Public Sector Deficit -35.2 -12.1 -25.9 -35.1 -53.5 -25.3 -25.9 -39.9

Non-financial Public Sector Deficit -25.6 -8.7 -16.4 -25.5 -45.0 -16.1 -20.3 -44.0National Government -31.3 -16.7 -23.2 -19.6 -37.2 -26.3 -16.0 -20.6Monitored Nonfinancial Corporations. -6.8 0.2 2.9 -3.0 -19.1 -7.4 -10.7 -27.5OPSF 0.0 0.0 0.0 -8.5 -1.5 10.1 5.4 -7.9Adj. for Intra-gov't Transfers 12.4 7.7 3.9 5.7 12.9 7.5 0.9 11.9

Central Bank Income -18.2 -10.7 -16.9 -20.9 -22.0 -21.2 -21.8 -16.0Government Financial Institutions -12.4 1.0 1.8 2.7 3.1 2.4 3.8 6.1Adjustments and other 21.0 6.3 5.6 8.6 10.4 9.6 12.4 14.0

a. Incudes social security institution surpluses, local government surpluses, and intra-public sector tansfers.

Source. Department of Finance.

- 53 -

Table 4: Effective Protection Rates' (1991-95)

Before Aug. 1991 Jul. 1992 Jul. 1993 Jul.1994Sector Group Aug.1991 to to to to

Jun. 1992 Jun. 1993 Jun.1994 Jun. 1995

ALL SECTORS 25 24 27 25 22Exportables -3 -3 -3 -3 -3Importables 47 46 52 48 43

AGRICULTURE, FISHERYAND FORESTRY 4 5 6 5 3

Exponables -5 -5 -5 -5 -5Importables 42 48 52 45 38

MINING 4 5 5 5 5Exportables -2 -1 -1 -I -1Importables 25 26 26 26 26

MANUFACTURING 35 34 38 35 32Exportables 0 0 °0 0 0Importables 48 46 52 48 44

a. Weighted average effective protective rates based on tariffs only (not price comparisons), including tariffadjustments implemented after E.O. 470 (E.O. Nos. 478, 1, 2, 8, 61, 94, 115 and 148).

Source: Research and Monitoring Branch, Tariff Commission.

IBRD 241 05R1

16 270 ire ies-

CLASSIFICATION OF PROE'INCETBY GEOGRAPHICAL RE. IONS PH ILIPPIN ES

I LOCOS VI WESTERN VISAYAS1 1 z: No", 38 Ai- 2<2 I.-z S.' 30 "Cpi PROVINCE CAPITALS? Jdooo 40 A,, B ATAriES1 PF-gqs-c- 41 * NATIONAL CAPITAL

CORD .ERA ADM N[STRATIVE 42 Nepg-o Ooc-ed--oREG ON CAR 43 3& -- PROVINCE BOUNDARIES

5 At o VIl CENTRAL V'SAVAS

6 rp ngo-Aporoo 44 Cebr6 K. ~~~g. Ap.,.. 44 C~~~__b_ REGION BOUNDARIES

7 -ono nPronce 4 5 Neg-os Or-n,oe lifgoc 46 Bo-o9 B-ng-el 47 Squ Loo . INTERNATIONAL BOUNDARiES

11 CAGAYAN VALLEY V1II EASTERN VISAYAS

10 Botones 48 Northerr Son,r _ p1 1 Cag.oy- 49 WRsern Som,or onu12 I2obolo 50 E.oer,- So.,., 5 CAR Tuougoor13 N. VI.cy- 52 Leyt vgon Tob,k K2 LOoETERS 0 100 20O 300

111 CENTRAL LUZON 53 B -ron 2f __

15 N-evq Ecio iX WESTERN MINDANAO -7oLES O s 100 ISO 20016 To-1c 54 Zo-boong d.I Norte 3\ -

1 7 Zo-boo,es 55 Zeb g d.1 5 S, F.,-d. b.rroqo,.18 P-mporoo 56 B.650 ne Oo,pnbo19 loCon 57 SuY 13

6' 20 Batoo- 58 Toortoo igo',NATIONAL CAPITAL X NORTHERN MINDANAAOREGION (NCR) 59 S.,,goo d. None Io

SOUTHERN TAGALOG 60 C-g-ion 1521 Aur= 61 Agson delNorte 16aoion 2122 Queon 62 M- om.. Orenots L U Z 0 N23 RooF 63 Mtso-is Occidentl 17 Son 724 Coel. 64 B.k,d-on ongopo lB_125 Laogoun 65 Ag-oon del S.,r - NSA26 Botngos U SOUTHEPN MNDANAO 0ng c 27 7M..dQ- 66 S-ngoo del S,r 20 I28 Minadoo Ontrnbl 67 Dno sOrientl Ma J I D V29 Mnrdor Ocodeftl 68 Doygo del Nani. 26 22 32 Do.t

30 Reti- 69 Danc d4tl Sur 3 3Lu6n 4 CATANDUANES3 31Pala-c,, 70 Sou,th Cotbboto/8ono \3

V BICOL X CENTRAL B .NDANAO / 732 C - sNortr 71 Lono del Nonet-

33 Cam:I,, o S., 72 Lonoo delur S.on,broo 2 7> t Isopi35 Aiboy 74 Mogicndnl 336 S7 Mosi 75 Suiton Kvclarat MINDORo37 Masbate

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