_o i RESTRICTED REPORTS DESK Report No. FE-44 WITHI41N ONE )NEERJ This report was prepared for use within 1the Bank and its affiliated organizations. They do not accept responsibility for its accracy or completeness. The report may not be published nor may it be quoted as representing their views. ATKTDTATTAnT AT n AMY TTCnD P PnNTrTTTTNT ATIT TIM1T nDMVTMT TXTTDT A TTAT T T17VT C)PMVTT A CAT A TTAT CURRENT ECONOMIC POSITION AND PROSPECTS OF THE PHILIPPINES June 2, 1965 Far East Department CTjRRFNCY EOTTTVAT,ENTS I peso U.S. $ . C.5 1 U. S. dollar P. 3. 90 -1 million pesos U.-S. $256, 000 1 million U. S. dollars P 3, 900, 000 Th plippi4ne,, eXchMnEffl r-ate is a f ree market r ate. hsi wa t1~ nl~ for foreign exchange transactions other than export receipts. The effective rate of exchange for most export earnings is 3. 51 pesos to the dollar as ZU/o of the foreign exchange proceeds must be surrendered to the Central Bank at the rate of two pesos to the dollar. TABLE OF CONTENTS Page No. BA.SIC DATA ............................................... SUMARY AND CONCLUSIONS ..................................... i -ii I. Introduction ............ ......... ......... 1 II. The Political and Administrative Background ......... 3 Political Developments ........................... 3 Administrative Changes ......................... Conclusion ................................. 6 III. Recent Economic Developments ....................... 6 Overall Growth and the Use of Resources . 6 Development in the Main Sectors .................. 8 Agriculture ............................. 8 Export Agriculture ................. 9 Domestic Agriculture ............... 9 Fisheries ........ ....... ..... e....... .... 10 Mining ................................. 11 Construction ...e......................... 11 Manufacturine .......................... 11 The Public Sector ................ e.......... 13 IV. Recent Financial Developments ....................... 16 ovprall Rpview .................... ..... 16 The Internal Financial Situation 18 Money Supnniv----------.-----------.-------...-.-18 Credit to the Public Sector 19 r-! f.n flia Prvnf. 0,o-fnr ...........0000eet-----20 Short-term Outlook .....................0.. 22 Thp Balance of Payments ........................... 22 V. Th F~r~mr~~niFiin~i1 ii-1rc~------------------- ------ 2 V- Them Rnnnnamin e nj Pi nqn cl iAinok . 24 The Outlook for Growth in 1965-1970 .............. 24 Then FiVAna lnca P-rospnect +. ...e....- -- -- ---- Creditworthiness ................................. 27 STATISTICAL APPEIDIX ..................................... ANNEX .......... ... . ....... ......... ........ . . . Rc en Tre n anuu rU osecsu n Ag r -uu e ********* e**** Export Agriculture .............. .............. 1 vumoI i o P -4-4uuIvue ********************************** C BASIC DATA Area: 115,000 sq. miles Population (1964 estimate): 30.7 million Rate of growth (long-term): 3.1% p.a. Population density (per sq. mile): 267 Population density (per sq. mile of arable land): 667 Gross National Product (1964 est. at 1963 prices): 17,900 million pesos Rate of growth (long-term): 5-6% p.a. (1964) 5-6% Per capita (1964, U.S. $) 150 Gross Domestic Product at Factor Cost (1964): 16.600 million pesos of which, in percent: Agriculture 32 Mining 2 Manufacturing 19 Construction 4 Percent of GDP at Market Prices: 1963 Long-term Gross investment 13.4 12.4 Gross savings 15.6 11.1 Balance of payments current account deficit (-) 22 - 1 Investment income payments (-) - 1.1 1.1 Government current revenue 10.9 9.9 Rescurces Gan as of Investment 10 Many and rrlif. nlnnvP_r.-,i n n ~ f2 1 dollar = P3.90 1964 Rate of Change ril 4-,*1 Tr- - 0 P71 Time and Savings deposits 2,380 25% p.a. sector 4,000 25% p.a. n F-n n r'd - Unzr LenuIg to private sectUor u CU? psat Rate of change in prices 48% 51 p.a. S2 - Public Sector Operations 1963 Long-term Rate of Change Government current receipts 1,876 8.5% Government current expenditures 1,691 8.5% p.a. Surplus/Deficit 185 - Government capital expenditures 310 n.a. Public investment expenditures n.a. n.a. Total external assistance to public sector 70 n.a. External Public Debt (in million U.S.4) 1964 Total debt (including undisbursed) 342 Total annual debt service 5 Debt service ratio 6.3% Balance of Payments (in million U.S.$) 1963 Long-term Rate of Change Total exnorts 727 5.2% Total imports 618 3.0% Wet invisiblp 7 -- Net current account balance 166 -- Mid-Fifties 1964 Commodity concentration of exports 73% 84% (or 6 monthst (or 4 months' (in million U.S.$) Commitments Total 44 Soft assistance 29 1H1ardl assistance 1 1k6JU± UVIULr U.S. 20 %Ja par 7 Summary and UCclusons~ . The growth of the Philippine econoray in the l9-0's was impressIve. Annual increases in real output exceeded 6%. Growth at this rate made it possible to raise average income per person substantially in the face of a rapid increase in population estimated at more than 3% annually. Such performance is matched by few of the poorer underdeveloped countries among which the Philippines belong with an average income of roughly $150. 2. Practically all sectors of the economy contributed to this achievement. Increases in agricultural production, although somewhat below the average, played an important part in the expansion. Most of the gains in agriculture came, however, from extending the area under cultivation rather than from improvements in generally low yields. Manufacturing was the most dynamic source of growth, increasing output by almost 101o a year and raising its share in national product to about 20/, and a sizeable group of aggressive and able industrial entrepreneurs established itself, 3. It is difficult to identify all the factors that contributed to this rapid development of industry and industrial entrepreneurship. Very important among them certainly was access to foreign exchange at far less than its real cost in terms of local currency. In combination with an import program which restricted the import of finished goods and thus ensured a sheltered market. under valuation of exchane meant high profits for Philippine manufacturers. 4. However, as the 1950's came to a close, conditions changed. Growth slowed down. indicating that the incentives were wearina off as the easy and relatively inexpensive opportunities for creating import stbstitution induqtrips were heing exhausted. Stagnatinv productivity in domestic agriculture became a factor limiting the size of the local market. But most imnortant nf all the svtm of Pexhanre controls threatened to break down, as export earnings stagnated, evasion of controls and illinit canital outfinw snread. and corruntion discredited the system. 5. Beginning in 1960, successive steps were taken towards the establishment o- fafrem exchnge ystm_. in nynn (.q( (r)nn1m8_.d in early 1962 -When the present Administration took office. The free -^k n ,-.,4- -+- rl n + 1200 +1O AnI- I-- Myrll n -r er gifli rni,iall- half that rate before the decontrol program was begun. Exchange reform the detriment of manufacturing and, to some extent, savingz available would result from the free working of the exchange system needed to be mouu.L1eu, parf uiUryi 11 .LdVUV Ui !UC~U±idubuiULLL G.LIU tAUmieva VA.. wuou The framework for such policies was embodied in the tFive-Year Integrated Socio-Economic Programi that was worked out in collaoration With a team from the Bank and became effective in early 1962. - 11 - 7. implementation of the Program ran into difficulties. These were primarily of a political nature as the Administration and the Congress were unable to cooperate effectively. As a result, new tax measures and legislation designed to establish a new framework for growth were not enacted. The Administration also encountered greater difficulties than anticipated in adapting the adninistrative apparatus to the enlarged task which the Program envisaged for the public sector to undertake in helping the economy to grow, 8. As a consequence of these various difficulties, economic growth was less than it might have been in view of the potential. Nevertheless, output grew by 5/o - 6% in 1963-1964, This acceleration was primarily the result of fast growth in export earnings from agri- cultural commodities where remarkable increases in output were achieved in response to the higher exchange rate, favorable weather conditions and strong world markets. In 1964, there was also a large increase in manufacturing output, as the industry recovered from the initial adverse impact of the exchange reform and as rapid expansion of credit in 1963 made possible investment in new plant. 9. As for the future, it is unlikely that exports will continue as the source of dynamic growth. Some major commodities face the prospect of declining prices, Others are confronted by limited markets or supplies. Altogether, it is estimated that annual growth of export earnings is unlikely to exceed 3% in 1965-1970, Thus if national product is to expand significantly. other sectors of the economy, par- ticularly manufacturing and domestic agriculture will have to accelerate their growth. 10. Such growth will have to continup to originate nredominant1v in the private sector. As past experience has shown, the private sector nosqesses the initiative and the abilitr to attain Prowth- But for these forces to become fully operative, the public sector will have to help, more than it has in the nast, in the form nf infrqtriin.turt invRtrntnts. agri- cultural development schemes, and transfers of capital. Such transfers will h of narti.nilar imnortance to the mannfacturing industry which is not now generating a surplus sufficient to finance out of their own funds investmnt of a size -which the notentinl would warrant. and nrivat long- term financing is scarce. At present, major obstacles - financial, oraniational and aministrative - mtand in t'h. wav of' the nuhlin spctor undertaking a commensurate effort along these lines. Presidential and congre-s-sional eleonsnn aren to.e hi heldl in Novmbe'hr 1Q9_~ Action on baq!i(. issues is unlikely during the campaign. And the pace at which improve- metscn be aciee qhiTp,, ,.'li r .111 ha r1ofprmn,i nrl in ln~ra~miv the ability of thenEdt Administration and Congress to cooperate effectively. 11. As a consequence, growth of output is likely to be fairly slow requirements will be correspondingly small. To the extent that these 11(:4 U I L L it e U J LJD 0011OW-Vir) UI1IU~'.Y O1 C .J Ui -i' "J5 .ii-V i LS J.S.- JJ terms. However, if after 1965 conditions are conducive to a much J-L1iV tiit-,1LU U11 VLIU U, the~ needU foL ext L. UV.L.L vi)U.1.11f5 4 U11I .L. UVS 1960's is likely to reach amounts which, if assumed on conventional terms, would leave little room for conventional borrowing in the 17(V' I. Introduction 1. The growth of the.Philippine economy Cuiing the decade of the 19501s was imnressive- Annul inrr4ans in remi nitnit PYp.r1P.C 6 T r-rth at this rate made it possible to raise average income per person substantially in th- fan. nf q rani increas in nn ation Ptimtod at more than 3 annually. Such performance is matched by few of the poorer developing roughly 150. Rapid growth in the 1950s was accompanied, and largely made n dep.~artureV \fom .4 tradi.'iOaa l paten of inn .1 .JJ. sLt00uILiIl aml consequently, production. The share of agriculture in total output declined from J+0%(9 in. 1/0,5 to 33%;- by the end of the decade. M - raised its contribution from 10% to 20% and a sizeable group of aggressive and able idustrial entrepreneurs established itself. 2. The growth of the lyou's occurred in response to a partlcular set of opportunities that were created by a combination of propitious ciruumstances and favorable Government policies. Among the latter, the most consequential act of the Government was the decision in 1949 to stop the rapid loss of exchange reserves by establishing exchange controls, while maintaining the pre-war rate of exchange. Granting access to foreign exchange at far less than its real cost in terms of local currency became the Governmentts most effective instrument in opening up opportunities for profitable investment in manufacturing production for the local market, while it discouraged the flow of capital into the traditional fields of activity, particularly export agriculture. 3. These opportunities were further enhanced by deliberate use of quantitative controls for protection of the domestic market against imports of finished manufactured products, by far-reaching exemption from taxation and by liberal credit policies. As few manufacturing establishments other than facilities for processing agricultural commodities existed in 1950, and as imports of finished manufactured products were large, there was a ready market for domestic manufacturing industries producing import sub- stitutes. 4. Among the propitious circumstances that made such policies and the rapid growth that followed from them possible, the basic strength of the Philippines' balance of payments position was probably the most important factor. Over the larger part of the 1950ts, the country did not experience protracted balance-of-pamaents difficulties. Export earnings, supported by the privileged position of major exports in the United States market and favored by fairly stable prices. rose by 45% during the decade. In the early 19501s, U.S. Government expenditures, including war-damape navments, still were high. Thereafter, private capital inflows and aid from official sources ran at a level around %50- A million in a an or rmahly 1PCX 2 rchanon Pnrnings_ Finallv. the Philippines entered the 19501s with large exchange reserves, part of .4..L~.,jI L.ULlo.U U ;u U JcLL -, UU OupL t.3J Ilm;iu U AU..1C;1U J.U._U_LPJUZ)* _J J_i a 4.4. U1'0I vil _JVVI Va0J4a at± 4L U4 ± generated in demand for foreign resources was small. Over the decade, impowts inreased t was-t-wca ate the onlyeae In ime ords, growth in real output was twice as fast as the increase in imports. Furthermore, growth in real output exceeding 6% a year was sustained by a fairly low investment rate. Official data suggest an incremental capital: output ratio around 1.5. This remarkably low ratio undoubtedly gives too favorable a picture of the productivity of investment during this period. It is known that official statistics understate investment, and the undervaluation of exchange expressed itself in the undervaluation of imported capital goods. Nevertheless, investment during the 1950's probably was highly productive. Savings were not much short of investment so that, although comparatively low, they did not need to be supplemented by a large inflow of capital. 6. However, as the decade came to a close, conditions changed. Growth slowed down, indicating that the incentives were wearing off as the easy and relatively inexpensive opportunities for creating import substitution indus- tries were being exhausted. Unbalanced growth which had left the productivity of domestic agriculture almost untouched, made itself felt as a factor limit- ing the absorptive capacitV of the domestic market. But most important of all, the system of exchange controls threatened to break down. Export earn- ings stagnated. There was widespread evasion of controls and illicit capital outflow. An increasing portion of exchange earnings had to be eanarked for imports necessary to maintain the existing level of production. Corruption discredited the system. Rampant speculation further aggravated the situation and reserves dwindled. 7. Thus the framework of policies which had been so successful during most of the 1950ts, proved inefficient and unworkable by 1959, and conviction grew that devaluation had become unavoidable. The decision taken in early 1960, however, provided not only for devaluation. It also envisaged that exchange controls should be dismantled and a free exchanLe system established. By successive steps, the effective rate of exchange was raised and payments liherali7ePi in 19(0 and 1961 Farlv in 1Q(2 when the nrre,ent Administra- tion took office, the program was concluded by the introduction of a virtually free exchange s-r ys nd a free3i exchane virate in+ h 1inlch setled at -q+.9 o o-r)nec dollar, as compared with the rate of two pesos to one dollar before the de- ontf.oln pinrogrm wasz beg3in_ TM-iT asq a radricaln chnge- indeed,l esq-peially q. it changed the distribution of income in favor of exports, i.e. principally commercial agiul-e,t ijg d etrime;nt- of manvn"nufctrg A probablyr depressed savings available for domestic investment. 8. Liberalization of the exchange regime was regarded widely in the aware that the incentives for growth which would result from the free working of the exchang systm neededaAAo 1e; molif-ed. pjj -a rt4-icc.-Irl in a, ~,ror of manufacturing and domestic agriculture, in order to accelerate growth. The frame1work1 IUor stuch policies wa embO-LtZUU .LJ1U 1j± ±1- J..1UZL.~ U -- Economic Program for the Philippines" that was worked out in collaboration WL U11 Ct Ut:dJIII .1 rom Ulle Ba[ik ad beca[me effetiv iti tel ±y -7k-Jc-* 9. me objectives Of the Progran may be sunTiarzed4 aO UllUwO It sought to increase gross domestic product by an average rate of 6% a year over the period 1963-1967, with annual growth rates rising from U to 7,. £ UI ou%.oll t"luvw i~ UU LuO CLL;tUIIIp±±_L3itZU, _U WO,Z) t;OUJ.iW1LUt:U UI)CU G.L DZ UU1!&5OU_%. investment would have to be raised to 16.1% of gross domestic product. It was be_Lie-ved thlat, _Lith daLpopriate_ po_licies,b domtic_L sa V_[1rL,icldn reinvested foreign earnings, could provide some 90% of the investment resources required. As a supplement, a gross foreign capital inflowp including donations, of $'1,292 million would be needed. Debt service, remittance of profits and additions to exchange reserves were to absorb 715 million so that the net inflow required was estimated at $577 million. 10. As a direct means of encouraging private investment, particularly in manufacturing, it was proposed that legislation be enacted concerning tariffs, investment incentives, and foreign investment. It was further envisaged that the Uovernment would expand considerably its lirect participa- tion in the economy: a large progran of public investment in infrastructure and agricultural development schemes was drawn up and legislation was pro- posed for raising revenue substantially above its traditional share of 9'0 - 10% of GNP. Finally, it was envisaged that the public sector, being through the Development Bank of the Philippines and the social security schemes the major source of long-term financing, should actively use its position for stimulating and directing private investment in preferred areas. 11, A new agency was created in the Government, the "Program Implementa- tion Agency" (PIA). It was to be the focal point of all activity under the Program, its responsibilities ranging from the preparation of necessary legislation, through project analysis, to effecting the changes rdquired in the institutional set-up and the procedures of the Government if it was to cope effectively with its greatly enlarged responsibilities and functions. Special arrangements were made to attract a group of competent and energetic people from both the private sector and Government agencies to PIA. 12. This report deals with developments since early 1962. It is primarily an analysis of the reasons why the high hopes, with which the Program was begun, were fulfilled only partially, and of the conclusions that can be drawn for the prospects of the econonc. However, in evaluating the evidence and appraising the performance during the period under review, one should bear in mind that the institutional changes that were sought and that were necessary to fulfill the Program, clashed in many respects with the traditions of the country. They were therefore difficult to accomnlish within the tenure of one Administration. II. The Political and Administrative Background Political Developments 13. Political tradition in the Philionines is anti-statist. It subscribes to the view that a government circumscribed in its activity and Fnnowered to arnnropiate throu,h taxation onlv a small nart of national income best serves the causes of political freedom and economic advance. Wdith the rPntion of the -Nuklbanahan move . n - a rvol t. amons- thp rural population of Central Luzon which began in the early post-war period and was not finally crushed untl 19).-hiS tradi tion hasg not. yetf bhi-n 0 -LLVL _LJ Y kiC_L_LU lr,U* 1 V11 U Ui t, UV L U _L11U O C L6 d._ LLI U111L U IiC3D. Vi UlJIl It UU~V into violence, but these outbreaks were localized and directed towards -. L4 .11lo P . .LU d_L U.LeV uU.LL'_LUIO -LI it:.L UU~i tw1u LCLVV 0U UI~ U d t .)LIL; government. This limitation on executive power is aggravated by the separaiLon 1 ofn exeuuLve arid legislative oranuhes, by wte electoral system which allows different parties to control the executive and the Congress, and by the nature of party organization. There are only two major political parties, the Liberals and Nacionalistas. Both are essentially conservative. Shifts of alliances within parties are frequent, and transfers of allegiance from one party to the other are not uncommon. There is therefore little basis for strict party discipline. 13. These basic obstacles aside, conditions in the last three years were not favorable for enactment of a strong legislative program. Macapagal, a Liberal, was elected President in late 1961 over the incumbent Nacionalista candidate. However, majorities of the Nacionalista party were returned to both Houses of Congress, President Macapagal managed, through defections from the opposition, to obtain control for his party in the House of Representatives. But control over the Senate eluded the Liberalso After an intensive campaign in 1963, the Liberal party had a majority in the Senate for a brief period, but defections to the opposition again reduced it to the minority position. 16. For various reasons, among which the party alignment in the Congress no doubt was one, the Administration and the Congress were not able to establish an effective working relationship. As a result, little progress was achieved in adapting the legal framework to the requirements of changed economic circumstances, particularly in the fields of investment incentives, foreign investment and tariffs. New revenue measures and increased borrow- ing authority for the Government - which were preconditions for the increase in capital expenditures that was planned - were not approved. The exception was legislation on land reform which, with the support of the opposition party, was enacted in late 1962 and which may in time bring about improve- ments in the tentre system, 17. It is not likely that the legislative deadlock will be resolved in 1965. Presidential elections will be held in November this year. The Liberal party has re-nominated President Macapagal, and the Nacionalistas have also chosen their candidate. The election campaign has already begun. In such an atmosphere it would be unrealistic to expect basic issues to be dealt with0 18. On the broader economic scene, sharply nationalistic voices made themselves heard recently. On several occasions, demonstrations took place for a revision of the present 'status-of-forces agreement which would widen Philippine jurisdiction over American troops stationed in the Phil- ippines. Certain sections of the business community demanded an early end to theparity rights now enjoyed by American business in establishink plants and exploiting the country's natural resources and due to expire under existing treaties only in 197h. Particularly in manufacturing - which was hurt by the abolition of exchange controls - influential businessmen were urging That restrictions be imposed on new foreign investment. However, the meaning of these rumblings should not be exaggerated. After all, there has long been a nationalistic undercurrent against an overwhelming American presence. As regards foreign relations, especially with the United States, the ultimate outcome of these develop- ments may mean simply that the Philippines will strengthen its ties with Asian c.ountries and the less developed world so as to balance its present association with the United States. As regards foreign investment, new foreign enterprise may be excluded from certain areas of activity, but it seems unlikely that restrictions will be imposed that would seriously weaken the Philippinest attraction for foreign investment. No doubt the more extreme demands that are now being heard in this respect will subside as the pressures ease under which domestic manufacturing is presently laboring. 19. Nevertheless, there is a good deal of uncertainty with regard to the treatment of foreign investment and potential investors appear reluctant to commit themselves until present uncertainties are removed. Of particular relevance in this respect is the Retail Trade Nationalization Act which was enacted in 1954 but provided that it would be put into effect gradually over a 10-year period. When the Act became fully effective last June, two major questions of interpretation had remained unresolved: first, what constituted 'sales to final consumerst from which foreign businesses were to be barred henceforth; second, whether American enterprises had to be owned 100I by U.S. citizens in order to qualify for exemption from the Act under the parity privileges accorded by the Laurel-Langley Act. As the Act is presently interpreted, sales to final consumers would include sales by manufacturing comanies to other manufacturers. wholesalers and the Government, and 100% U.S. ownership would be required of American businesses. Several suits challenging the legality of this interpretation are rendinp., Until they are decided, uncertainty will continue to prevail. Administrative Changes 20. On the administrative side. some nroaress has been made in re- organizing the structure of government agencies and revising their procedures so as to adapt them more closely to the enlarged task of the public sector. Considering the enomous dimensions of the task in the context of a govern- ment an-aratus that was to an unusual extent ill-orenared for the task of development because it is infested with inter- and intra-departmental rivalries- and where action is stifled hv a multinlicity of rules and regulations and politicians have traditionally enjoyed considerable influence, the annnmnlishments are nprhan. nni. nif.n as meager aq t-ev might seem in the abstract and as they might be regarded in relation to the hopes that wnrp hnld out. when the. nrim.Pnf. AriTini.qftrat.ion tookc nffinin in 19(62- 91- Theren isz no doubtif thatf PTA is! stfill gropning to findl thine q+. Pri.v way in which to accomplish the purposes for which it was created. However, less obvious if funds had been available more nearly in line with the origin- to political influence and encumbered by traditions of 'fair' regional - o - Ustrioution woula prooaoy nave actea as a strng s-imuwus on ne exis.g departments. However, as it was, PIA had to impose increasingly severe economies with respect to Government outlays. And towards the end of 196 they found themselves in the anomalous position of having to apportion and enrorce cuts in expenditure for development purposes rather than increasing the absorptive capacity of government departments. This not only weakened the position of PIA vis-A-vis the departments, but also absorbed the great- er part of their energies in the day-to-day task of managing the Government's finances. 22. Poor performance of the customs bureau needs to be singled out because, in the absence of exchange controls, its failure to enforce the effective application of tariffs and to keep smuggling in check, had serious consequences. It appears that smuggling and underdeclaration of imports for customs purposes are threatening some domestic industries, entail a considerable drain on foreign exchange and involve the loss of sizeable revenue to the Government. Efforts are now underway to attack this serious problem by enlisting the help of the Philippinest major trading partners in devising means which would reduce the scope for under- declaration. Conclusion 23. In conclusion, the last three years have not seen the increase in the Government's authority, ability and financial capacity to conduct the economic affairs of the country that would have been necessary to establish a new basis for sustained rapid enonomic growth. In 1963 and 1964 the Philippines were fortunate that the rapid expansion of export agriculture largely mitigated the effect of these shortcomings in Govern- ment performance so that overall growth was nevertheless sizeable. However, it is unlikely that export agriculture will continue to grow rapidly. Thus the basic problem still is to shift the source of dynamic growth to domestic production and,in facilitating this shift, the Government will have a major role to play. At the moment it is uncertain when significant progress in this direction will be achieved, but it is unlikely before the elections next November. III. Recent Economic Developments Overall Growth and the Use of Resources 24. In the last two years, growth in real output and income recovered somewhat from the slow nae to which it had receded in 1962 when the difficulties of adjustment to the new exchange regime were at their most acute and the construction boom collaned under conditions of tight credit. National income statistics in the Philippines are not reliable indicatorc of antnaI evnlonments and 4t does not seem useful to attempt assigning precise figures to the economy's performance. As a rnnall P.qt.iTnq.P i.1-hp Ct-rI1T1-h in rail r-tniif-nf noMivai iT~C n 1 QiA anrl IQA), apne;lrq to be in the range of 5% - 6% a year. This rate compares favorably with grow1 h in h ar0nlier '19As. and rougly matches perforance in the lat-er 19501s. - 7 - 25. There is no doubt that growth in 1963 and 1964 was considerably more rapid than it had been in the preceding two years. The largest contribution to growth originated in agricultural production for export which responded swiftly to the opportunities opened up by the higher exchange rate and strong demand in the world market. Boom conditions again prevailed in the construction industry. But perhaps the most remarkable achievement was the continuing expansion of manufacturing production which, consicinrin the cnnstints iinder which this inrlitrV lnbored. nttests to the resilience,ability and ingenuity of the Philippines' industrial entrepreneurs. 26. It appears that overall growth in real output and income did not. fall hort. hy much, i at all, of the targetsset bv +.hp 1irPYPnr Program. Thus overall, the resources available to the economy from contributions by the various sectors differed significantly from the eXPecttions-andA the design, --- of thne Program. Real output1 ndir income from export agriculture and construction increased much more and the public sector grew more slowly. This deviation from the expected. pa I. 11[ Uld _UIIjL bdl . U ULZ441U ±0± L-1 UOt5 U0± _1UUL_ the psychological and institutional barriers to a free flow of surplus funds from export agriculture to other sectors of the economy, except investment in real estate; second, the weakness of incentives for a voluntary movement of funds into other sectors, principally manufacturing and domestic agriculture, including large development schemes in live-stock and food crops, because the Government was frustrated in its efforts to enhance the attractiveness of investments in these fields; third, the weak- ness of the Government's redistributive machinery in overcoming these various impediments through compulsory action. i.e. taxation or similar means. For all these reasons, together with the serious weakness of effective customs administration, capital outflow and payments for unessential and unrecorded imports were substantial. They exerted considerable pressure on the balance of payments. In 1964, it reached such magnitude that it became imperative to subordinate to defense of the exchange rate alnd exchange reserves all other goals. As it was not feasible to abandon, even partially, the free exchange system and as the Government, even with strict economies in expenditures, needed to borrow increasingly from the banking system, this meant in effect that credit to the private sector had to be made very tight in 1964. Although it is difficult to see what alternative course of action could have been taken in the circumstances, such policy was tantamount to curbing growth in those sectors which have to rely on credit for financing expansion. Its effect will probably become apparent in 1965 and 1966, but its severity is difficult to predict as established firms no doubt sought to evade the credit saueeze by contracting sunnlierst credits abroad. 28. For Ink of nHPnunt stnti!nt.ins it is imnr.ihl t.n h nreci.e about the level of gross domestic savings and the amount and direction of inves:zxent._ Pro-eve-r, sno generapl statemernts can bez mdel woith a reasonable degree of confidence. It appears that savings were not around 11% - 12% of GNP. However, gross domestic investment fell o by a cunsUle margin Tis was so partly because the gross SU .J .V U - LIU UJ4L -L%.LC.L I U It±, ;I1 I U _~L l- I .L -L L J.(II UI It- U1UUI U"-Ltl position of foreign investment and the slow pace of project preparation U4 L. I E; V U kJL': Otk L ) WCLO IILLUIL £l L--00 LIL Z2JY t ~U. OUb LA[IU PJ.iLi.43_ L _ reason was a substantial outflow of capital, originating presumably in th(, expor sectUo InVe UM.U1, LE I -LILL"C. E,UL; UU L_l TBUHfUiLL UUI"JLig ctn1u domestic agriculture was considerably less than programmed, while it kll L4 _L1VC; Ld1U1I 1 It::GL CMe d U . U C:tr,L--LLU.L ULU-t- ILIU±LUU_Lur stocks) was substantially higher. 29. It appears also that over the last few years a substantial -eteriorauo ocurrein the reative income position of wage earners, Available data, admittedly of limited reliability, suggest that since 1960 real wages of industraal workers have declined by more than one-tenth, thus continuing a trend that has been underway since the mid-fifties. No firm statistical basis exists for analyzing which income groups were favored by this shift to the detriment of wage earners. It may well have been to the benefit of the high income groups, If this were so, it presumably helped raise savings. Nevertheless, savings were not very high in relation to GNP. Looking ahead to the future, a reversal of decline in real wages may entail difficulties in maintaining a satisfactory level of savings. In fact, early in 1965 the minimum wage law was amended, raising the minimum wage in industry from four to six pesos. It is not yet certain whether this increase will be spread over a period of time and what effect it will have on other wageso, 30. The conclusion to be drain from the foregoing analysis of growth and the use of resources in the past three years appears to be that despite considerable growth the Philippines have not yet been able to establish a firm basis for sustained rapid growth in the futureo This statement is not meant to detract from the accomplishments of this period. It is rather meant to focus attention on the fact that the prospects for continued rapid growth of export agriculture are not bright over the next several years and that overall growth will decline, unless growth in other parts of the economy can be accelerated. Developments in the Main Sectors of the 2conomy Agriculture 31. All through the 1950ts, the share of agriculture in total national product declined rapidly as agricultural output grew much more slowly than the rest of the economy, particularly manufacturing. Since the new exchange regima took effect in 1962, this trend appears to have been halted and the contribution of agriculture stabilized at roughly one-third of the national product. During crop years 1962-1964, agricultural output is estimated to have risen by about 5% a year, on theaverage. It thus appears to have performed in a much more dynamic fashion than it had in the latter part of the 1950ts when the annual rate of growth was around 3% - 3.50. This acceleration was brought about entirely by rapidly expanding output in Pxnort aprinulture which reached an annual rate of 7.5% - 8%. In contrast, available data suggest that growth of domestic agriculture slowed down to an annnal rate below Y90 __J A * t PLYPOI'li 1i91'_LUUL1, ur'e 32. During the past few years, conditions were unusually favorable for expanding production of agricultural export commodities. Most important among them was the increase in the exchange rate in 1962 which boosted the peso income from exports by about 40% as compared with the period 1959-1961. Demand on the world markets was strong for all of the Philippinest major export commodities -- coconut products, sugar, logs and lumber, and abaca. In dollars, export prices in 1963-1964 were only slightly higher than in 1959-1961, but roughly 10% higher than in 1955- 1957. Furthermore, climatic growing conditions were favorable. The result, was that in 1963-1964 export earnings were about one-fourth higher than in 1959-1961, taking into account estimated unrecorded exports in the earlier period. In terms of pesos at current prices, the increase in income resulting from the growth of export earnings and the devaluation of the currency together was equivalent to roughly two-fifths of the total increase in GNP (at current prices) in 1962-1964. The magnitude of this contribution to growth of income -- about twice the traditional average share of export earnings in GNP -- again underscores the importance of export, agriculture in recent growth. Implicitly, it also demonstrates the shift in income distribution towards exporters which has occurred since the new exchange regime was introduced. 33. There is some question, however, whether growth at this pace can be sustained. It appears that the high level of earnings attained in 1963 and 1964 was largely the result of an unusual combination of favorable factors that is not likely to persist as a stimulating force over "he next several years. Thus the Rains made in the recent past might be viewed as having anticipated in large measure a more uniform growth spread over a longer period. In the Annex to this report. recent trends in export agriculture and the prospects for growth are discussed in some detail. 34. In summary. as can now be foreseen the utnut of Philinnine export agriculture can be expected to grow by about 3' a year, but the annuaL increase in earnings is likely to be only 1% - 2o. on the average.. over the next five to six years. The consequences of this outlook are perhaps not so imortant for the foreign exchange situation, considering that the level of export earnings in 1964 was very high. They appear to be more significant for the Prowth f inrnmp. he-ainP thi in1iv that in order to sustain the rate of growth achieved in 1963-1964, output in the domestic seror nf the eoonomv wonii- hAvin in .n..qP mnh morP raniH1v than it has in the recent past. Domestic Agriculture 35. Domestic agriculture has long been the sector in the economy where it. haz: beepn moTqf diffiniillt. to ;qnhipv qu n.qi-.qinPH1 growth andl raisep prodinn at a rate above population increases and more nearly in line with the onsierabl pontianl thatnf exiits -in tis.. s%fcto.r- eetees h 9~ saw a fairly steady rise in agricultural production for the domestic market, brthtn abutip m ostlyduyicresingwhee and werea nignif ciatio r0 ti than loy improving productivity where gains were insignificant. By 1960, it appeared th4at in, norMan-l crop years production. Uould sfi ome h - 10 - requirements of staple foods, although imports around $80 - $100 million were still needed in subsidiary foodstuffs, particularly dairy products, meat and fish. However, it seems now that this assessmient no longer holds true. In the last few years, growth of output has slowed down below 3%. and substantial imports of staple foods, mainly rice, will again be required. '40- Tf. i. diffinult to qqv to whnt Pttnt other thnn infqvor- able weather and some diversion of land to sugar were responsible for t.his poo-r performannc. However itn- + seems sanfe o say tnj+hat. little has bepn accomplished during the last few years in removing any of the basic o*stacles t ,o- JA rapid grwt;n A^-+-J,i agriilture i.e. -jniif'fjr-jnn+ irrigation, lack of improved seeds which are responsive to fertilizer, in Luzon, the lack of co-ordination among a multiplicity of agencies engage I nL eALjCt . UL U J4L_LL OV-__LU LVA1LJ__L%,C1VdU"~4 +.~~L4 alienation of public lands for large-scale private development schemes, andu ins,ui.LJ. UL11j, abbL±±en o tu A1k:1.r1tZ1j_LL16 cILU P1U%,q-OO_L16 LC.L L_LU_L a. - of these problems have been receiving increasing attention, but the progress Llat ha beenj madeI II asU beenj Utoo~U reentiL LAo hadvU dafLUCU ed p1oA-1LV -n. .LLI .-nI case, much more needs to be done in order to accelerate growth in the future. 37. Recent trends in output of major commodities and the outlook for the future are dealt with in the Annex to this report. In conclusion, there is ccnsiderable room for improvement in the performance of domestic agricul- ture. In some cases, it will undoubtedly take many years before basic problems are overcome. Production of rice, for instance, is unlikely to increase by much more than 3% a year for some time to come. However, there is a sufficient number of other lines of production, including particularly livestock, whose potential for growth can more readily be realized that it should be possible to raise total output of domestic agriculture by more than 4% a year. Whether this rate will be reached, depends largely on continuing progress in improving the Governmentts agricultural services and on the availability of sufficient Government funds to support an expanded development effort in this sector. Fisheries 38. Fishing has so far been a relatively minor industry in the Philippines, contributing roughly 3% of GNP. Moreover, domestic production has remained insufficient to meet consumption requirements so that about 15% of total supply has come from imports. Statistics on fish production from sources other than commercial vessels are unreliable so that no accurate record of the growth of total production is available. However, production of fish from commercial vessels has increased very rapidly. by about. 20% annually, in 1960-1963. This increase has been made possible by substantial investments in new vessels which expanded the size of the commercial fishing fleet by 45% during this period. This expansion is clearly a result of the industrvs increased nrofitnhilitv after the new exchange rate raised the cost of competitive imports. 39. The prospects for further expansion of fish production are good. If' cnnsime-r r' eferenc fory iprn-e+.ar --4ities can bea ovewrrncme +he-re 1*nngnY. to be considerable room for further import substitution. Moreover, per- Vt.ru c.L Ll aite i.e.UL.L Lc planwtsevero, sAtlo e UciLL LLLLand structure facilities, i.e. ice plants, cold storage, canning plants and port facilities, are fast becoming a bottleneck to the industry's further expansion. Construction of new facilities was long held up by inter- departmental rivalries. It appears now that the newly created Fisheries Commission will be able to proceed with the preparation of construction plans, although it is not yet certain that sufficient funds can be made available to finance the scheme. Mining 4o. The Philippines have rich mineral deposits whose potential has so far not been tapped fully. Mineral production contributes about 1% - 2% of GNP. A wide range of ores is being mined, including precious and base metals. Exploration for oil has not yet been successful. Some coal is mined now, but there are no known commercial deposits of coal suitable for coking, Exploration is continuing in conjunction with plans for the establishment of a domestic steel industry. 41. Almost the entire mineral production is exported, earning roughly ,60 million annually. The increase in the exchange rate in 1962, therefore, brought a considerable boost in income to the industry but its response has been slow. Total output increased only by 2% - 2.5% a year between 1959-- 1961 and 1963-1964. However, growth in production accelerated in 196h and considering the investment that has been made recently in opening up new mines, it seems likely that output, and export earnings, will rise by 4% - 57 annually over the next few years* Over the longer run, expansion could be considerably faster, particularly when exploitation begins of large deposits of high-grade nickel and iron ore in Mindanao for which bids have been invited. Cons truction 42. The construction industry, contributing some 3% of GNP, has enjoyed a strong boom in the last two years after recovery from the slump in 1962. Boom conditions will probably continue into 1965. There is no reliable statistical information on the total value of, or value added by, construction in the Philippines as a whole. For the Manila area, it appears that the value of construction in 1963-1964 was at least one-third above the average level of 1959-1961. The main impetus behind this boom has been the construction of new, high-priced residential and commercial areas in suburban Manila, while much-needed low-cost housing continued to be neglected and plant construction did not show any marked increase. Manufac turing 43. Manufacturing industry grew rapidly in the 19501s under heavy protection from quantitative import controls and with the support of undervalued foreign exchange and liberal credit expansion. By 1960. after a decade of an annual expansion of output by almost 10%, manufact- urinp contributed rouehlv 20% of GNP and emnloved some 127, of the active labor force. The larger manufacturing establishments accounted roughly for 80 of ontnut and 246 of emnlovmnt and it was here that most of the growth had taken place. The large number of small establishments and workeshonpsq dlid pnrobablyT not expaAndl outputif nicni-Pn-inflr andl their relative j~ j-,. ~ j . - . ~ share no ua1 manufac turig outpuu declinea, out tney are far more important as a source of employment than the larger establishments. By 1u, a wide variety of non-durable consumer goods was being produced in the Philippines and some inroads had been made into the field of durable consumer gocdse However, the im ustry remained heavily dependent on imports of raw materials and semi-finished goods, partly because at the going exchange rate there was little incentive for extending production into the earlier stages. Capital goods were also almost entirely imported. 44. With the introduction of the new exchange regime in 1962, the aegree of protection enjoyed by manufacturing was reduced considerably. At the same time, the cost of imported raw materials and capital goods rose substantially, while generally tight credit in early 1962 and increased competition from imports did not permit prices to be raised so as to relieve the squeeze on profits. In the latter part of 1962 and in 1953 easier credit and the resultant increase in monetary purchas- ing power provided some relief. However, little was done to put into effect the various remedial measures that were originally intended to mitigate the adverse effects of the new exchange regime on manufacturing development. Though some tariffs were raised by executive order, a revision of the Tariff Code was not enacted. Moreover, due to inefficient customs administration, effective tariff protection was considerably less than official rates would suggest. Smuggling and underdeclaration of imports are causing difficulties in several major industries, particularly textile and cigarette manufacturing, and the range of goods affected appears to be widening. Some progress was made in co-ordinating the policies of the Government lending institutions, but the volume of lending for refinancing existing manufacturing enterprises and financing new ones has so far been small. Comprehensive legislation on investment incentives was not passed, except that extensive relief from taxes and duties was granted to the textile industry. 45. Nevertheless, output continued to grow and excess capacities in some fields were absorbed so that by 1963, when credit was available, sizeable investments in new facilities were being undertaken. These were reflected in the rate of output growth accelerating from 5.7% in 1962 to 9.% in 1964. Although production indices are unreliable and it is impossible to determine with some accuracy the level or growth of output, they are believed to reflect the general trend. This belief is substan- tiatei by less comprehensive data from other sources on growth of output since 1961. In the cement industry, production has increased by 25%, Similar or even higher increases were attained in the textile, paper and chemical industries. Some manufacturers of durable goods, especially in the fields of metal fabricating and machinery. doubled their output. Local car assemblies, almost non-existent a few years ago, are now able to qunnlv 80o of the local market. )I(-) Agreate financial data on qelentad manufanturing enterprises. which probably are representative of the best-run companies, show some in.enting rdnnmnnts Tt innenr. that in the nPrind 19q9-1961 to 1963 the profit margin on sales fell drastically, However, by expanding sales (anti t rent pries) ypr alosn e 1uit athese nnp waoru ahe to maintain their rate of profit on equity at about 18%. This seems to be vr V ~ U n-1J. JU ~AVL 4- LAJVIA ' Td .TA.? VnM 1& nC ^nL. 1Z 1 Q t more efficient operation. However, improvements in these directions have entailed the need for greatly increased debt financitig and aggravated the liquidity problems of many companies, These problems were probably manageable as long as credit was generally available, as it was during the latter half of 1962 and in 1963. However, since the beginning of 196L, the situation has changed. Credit has become very tight and is likely to remain so in lyo>. 47. The credit outlook as well as the particular difficulties which manufacturing companies, whose debt-equity position is generally deteriorating, appear to experience in obtaining additional credit, do not augur well for a continuation of growth around 10% a year in the immediate future. In addition, it would appear that the prospects are not bright for early enactment of much-needed measures in support of future industrial expansion. Together, these difficulties are likely to act as a brake on the pace at which the considerable opportunities for further expansion are exploitedo The opportunities appear to exist particularly in food processing (fruits and vegetables as well as fish and meat), textiles, building materials (including cement, prefabricated housing, sanitary ware), metal fabricating (particularly automotive and machinery parts), chemicals (fertilizer, soda ash, miscellaneous petro- chemical products), electrical machinery and equipment, as well as iron and steel where two plants with a combined capacity of 500,000 tons are currently planned. With favorable Government policies, including in particular access to long-term funds for refinancing and financing new facilities, it should be possible to expand manufacturing output by 8% - 10% annually over the next five years, but over the next two years growth mightbe slower because it is not likely that such policies will become effective before 1966. The Public Sector 8. Tradionally, Filipinos -- or at least those who carry politic- al weight -- have looked with disfavor upon a large public sector playing an important role in the economy of the country. This attitude has effectively kept public expenditures at a relatively low levela Total expenditures of the national and local governments, although rising slightly in relation to GNP during the 1950ts, stayed in the range of 13% - 141 of GNP. Revenues, heavily concentrated on indirect taxation, rose almost parallel to expenditures so that. with the exception of presidential election years in which expenditures tended to jump, the need for the Government to resort to borrowing from the banking system remained limited. However, as the decade of the 19501s drew to a close, pressure for increased expenditures. particularly for education. mounted and the growth of expenditures tended to outpace the rise in revenues so that overall deficits began to annear regularly. This tendenov added appreciably to the difficulties of keeping monetary expansion under reasonable control. L9. Wrhf_n the nrt-sttnt Administra.fion tookr office in aryly 196, 1 was its intention to break the limitations which existing sources of revenm had imboe on g ess oew reven e pendture designed end, it placed before Congress new revenue proposals that were designed n 1. IA) UU1nrit1ouUe UUOnA." - L,3uu mili:on, or aiosr one-rnra of tne amount o P. 4,800 million by which national government renrenue in FY 1963-1967 was expected to exceed total collections in FY 1956-1960 (at estimated post- devaluation prices). For reasons discussed earlier, these measures were not acted upon. Nevertheless, through increases in the tax base ana improved collection, including particularly the settlement of arrears, revenue increased by more than 50' in the period 1960-1961 to 1963-1904. Tax revenue went up even more rapidly, by 60%, and rose in relation to GNP from 7.5% to nearly 9%. 50. These increases represent a creditable achievement. Yet the rapid expansion of current expenditures absorbed almost entirely the increase in revenue which occurred during the period. Thus the National Government's current surplus rose only insignificantly in absolute amount, and declined in relation to total revenue. In relation to ONP it barely exceeded 1%. No doubt, the increase in current outlays involved a sizeable amount that went towards purposes of doubtful economic priority: subsidies, originally intended as a temporary cushion against the effect of devaluation on the prices of staple foods, tended to become a normal part of expendi- tures and rose to P 100 million a year. An equal amount was spent in 1963-1964 on an emergency employment program of limited economic usefulness. Various corporations and enterprises required increased transfers to meet their losses. But, to a large extent, the increase in current expenditures went into economic and social services of high priority, including a much- needed raise in salaries. 51. Capital outlays, on the other hand, rose only marginally, from P 330 to P 360 million, between 1960-1961 and 1962-1964, and their share in total outlays declined from 24% to 18%. Thus only limited progress was achieved in improving the country's lagueinF infrastructure, partic- ularly roads, and in pushing the development of domestic agriculture through nublic investment schemes in irrigation. flood control and opening up new land. Lack of funds, caused by both the failure to levy7 addithional taxes and the sharn growth of current outlays which exceeded original expectations, was primarily responsible for the disannointing nerformance. But difficulties in effectively organizing the departments concerned with development outlays also played a role. Some nrogress annears to have been achieved in this field and some improvement in the allocation of capital funds has become noticeable. Snh imnrovements would nrobably have been more annarent if more funds had been available above those unavoidably channelled into pork barrel Lnnkina ahead, it woul annear that any nrogress that may be made in overcoming existing organizational and administrative obstacles an larer ap tal epernditure woiA he frnstrated by financial limitations. Although somewhat stricter control over current outlays would help, relief of thiS situation wTill have to cnn nrinrinally thronh additional taxation. This is clearly demonstrated in the current yearls budget. Official -stimates o ta rvene in lo6-loQA zhma nn inerp-inp- of only 1 100 million. or 5.5%, above the 1963-1964 level, and these estimates may be too high Ure du ct - othe - _L _LV I 10 revnue to -r s reduction in other revenue, total revenue this fiscal year is likely to - 15 - exceed that of the previous year by only P 40 nillion, or 2%. This rather poor prospect is due principally to two factors. First, recent legislation which granted tax exemptions to the textile and certain chemical industries as well as diverted certain revenues to the support program for Virginia tobacco. Altogether, a loss in revenue of P 125 million was involved. Second, the increasing share of National Government revenue that is transferred to local authorities, resulting from the provision made some time ago that, :in addition to existing statutory trans- fers, 30o of the increase in income tax collections above the 1958/59 level be transferred. 53. The Government has this year again recommended to the Congress new revenue measures, These include increases in personal and corporate income taxes (present maximum rates are 60% and 30% on incomes exceeding P 500,000 and P 100,000, respectively) and in levies on gasoline and diesel fuels as well as a new export tax. Together, these measures are estimated to yield about P 275 million. However, it does not seem likely that any of these measures will be approved this year. At the earliest, such legislation might be passed in 1966 after the coming elections. Against this background of a rather small prospective increase in revenue and the expectation that current expenditures are bound to rise further, any increase in canital outlays would raise the overall budget deficit. Financing such higher deficit would entail, in one way or another, increased recourse to borrowinz by the Government. q. One could nerhans armiA that in the rnn+x. t. of the financial situation of the public sector as a whole, financial considerations need not ditAr thi: Nationl lnurnmint frnm inrP:r1 herroin fn finance additional capital expenditures. Considering the existing non-financial obtcls if. J.q~ rio+ lirr +.hn+. nn7ri+nl c~t~A .v~hir +.hp Mqt±.AnP1 Government and government corporations could exceed the Government's current sur-lus - +us the +orporatioLnT fiinr+o Annl mvfrorn-nI borroi,dng by much more than perhaps P 250 million. This amount would correspond roughl11y to the annual net generation of funds by th.- Service Insurance System (GSIS) and the Social Security System (SSS) which expenditures stretched to the limits of absorptive capacity, the public ' (A ~. J±L'J.~ V.) J.U J ~ %A ~ U V %UJ _CL . L CX V %J.L jJJ.L Q .2.V ( '4IAB resort to bank credit0 However, in the Philippine case such approach of domestic savings, particularly their availability in the form of long- teri .LUIds to those sectors of the economy, such as manufacturingp WhIch largely depend on borrowed funds to finance their investment. The govern- ment insurance schemes are major sources of such fund5s Therefore any diversion of their surplus to financing Government capital expenditures would tend to reduce investment in sectors of the economy which have demonstrated their productivity. On balance and despite the urgent need to raise Government capital outlays, it would seem that such diversion of funds would adversely affect growth of incore . In other words, growth of income through expanding activity in the private sector is dependent on transfers of capital from the public sector. In order to provide for these transfers and to finance increased public investment, public savings must be raised. It does not seem likely that this objective can be reached without substantial additional taxation. rV. Recent Financial Developments and the Short-tenn Outlook Overall Review 55. The exchange reform of early 1962 greatly increased the importance of internal financial, and particularly credit policies in determining the course of the economy. First, because exchange controls were eliminated, maintenance of internal financial stability became the single most important means of preserving the exchange rate and/or the level of exchange reserves. Secondly, the function of stimulating selectively growth in particular sectors of the economy was transferred from exchange dontrols to selective credit controls, encompassing the lending activities of the commercial banks and the major long-term lending institutions, in conjunction, of course, with the various instruments at the disposal of the Government. 56. Performance with regard to selective credit policies will be dealt with later. As regards internal financial stability, the Philippines has since 1962 gone through a full cycle of restraint, progressively rapid expansion culminating in the fall of 1963, and a re-institution ot restrict- ive policies in early 1964. Exchange reserves have gone through a corres- ponding cycle as it has been the policy of the Central Bank to support the exchange rate at P 3.90 to the U.S. dollar. 57. Shortly after the Philippine authorities had begun in early 1964 to slow down the expansion of credit, the DIF insisted that as a condition for -he renewal of the standby arrangements, which had been in existence since April 1962, the Government impose certain limitations on domestic credit. These took the form of a ceiling on the amount by which the net domestic assets of the Central Bank were permitted to rise during the twelve-month period beginning April 1964. Included was a specific limit on temporary borrowing from the Central Bank by the Government for budget- ary purposes which was more restrictive than pertinent Philippine legislation. Altogether, the increase permitted in net domestic assets of the Central Bank amounted to P 130 million, or roughly 6% of the amount outstanding at the beginning of the period, with the provision that any new borrowing abroad by the two government-owned banks, the Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP). be charged against the ceiling. 58. These were very restrictive provisions, indeed, because during the same period the Central Bank was expected to withdraw some P 270 million from circulation in the form of profits from the export retention scheme by which 20% of export proceeds have to be sold to the Central Bank at the rate of two pesos to the dollar, as against the free market rate at roughly twice that level. Thus, barring a large increase in exchange reserves or a reduction in commercial bank's reserve requirements, the program meant in effect that money supply would have to contract. More- over, as it turned out the Government was unexpectedly successful in carrying out its program of withdrawing its deposits from the private commercial banks and transferring them to the PNB and the Central Bank. These transfers involved some P 200 - P 250 million in 1964, of which roughly P 150 million went to the Central Bank. Their effect was further - 17 vi. restrictA.J. I- -1. - -- UL. Urio 'Jqualty in the private commercial oanking system. Towaras the end of the year, when the Governmentfs need for credit reached its seasonal peak, it was becoming apparent that money was very tight. Various devices had to be employed to prevent the Central Bank's net domestic assets from exceeding the ceiling set by the IDT and illiquidity threatened the Government's General Fund. Eventually, adjustments of the ceiling were agreed upon with the IMF. These revised the ceiling by P 50 million, thus allowing net domestic assets of the Central Bank to increase by a total amount of I 180 million during the 12-month period covered by the agreement. In addition and outside the ceiling, the Central Bank was permitted to advance up to P 200 million to a govern- ment agency to finance rice imports. 59. There is no doubt that the Philippine authorities deserve a great deal of credit for the determination with which they corrected the financial imbalance that developed during 1963 and that, had it been allowed to continue, would no doubt have threatened seriously the main- tenance of internal and external financial stability. From the point of view of their effect on economic growth, these restrictive policies may even have been too tight. Yet in the circumstances it is difficult to see what alternative course of action could have been taken, consider- ing that all throuF.h 1964 the authorities had to cope with the ever-present threat of speculation against the exchange rate which under the existing free exchange systen could not be remedied by direct means but only by the admittedly blunt instrument of general monetary restriction. There is, however, a certain irony in the situation because the speculative threats against the e:change position were only remotely related to the basic strength or weakness of the peso as determined by internal financial. policies. They were rather largely the result of the uncertain legal status of the presunt arrangements whereby the free exchange rate is permitted to be aboa't twice the official rate ard the Central Bank continues the retention scheme. There are those who argue that these arrangements were legal only as long as the act authorizing the Central Bank to levy a margin fee on foreign exchange and providing for decontrol was in force. 60. Depending on its interpretation, this act expired in April or December 1964. Several suits challenging the legality of present arrange- ments are pending before the Supreme Court. Should the Court's decision go against the Central Bank, repercussions could be serious, particularly as some P 270 million currently withdrawn annually from circulation under the retention scheme would be injected into the economy. Unless Congress voted new taxes, especially on exports, in compensating amounts, which it is unlikely to do this year, one course of action would be an even more restrictive credit policy in order to maintain internal financial stability. Such policv would depress growth. Alternatively, the exchange rate could be raised. Both these alternatives would clearly have undesirable con- seauences and it would be preferable if changes in the exchange regime could be deferred until Congress has approved new taxes, particularly on eP.onnrtst I-1VtlUY _'Juppi.Ly U.I. Thilloin V"LV-1tab UCL-Umr~e inteUrnal- -Linanarl dlevelopraentLs as they were reflected in changes in the money supply: Factors Affecting Money Supply kin million pesos) Increases in Gross Credit U 0 1 10U MU Public 3 2 Private 639 03 938 7 increases in Contractionary Items -5906 - 300 - 838 - 646 Non-ionetary Deposits, Mlisc. -59 - 319 - 5(D - 37o Profits from Retention Scheme 53 19 - 270 - 268 Increases in Net Dom. Credit 669 206 322 94 Increases in Exchange Reserves - 345 79 128 - 175 Increases in Money Supply 324 285 450 - 81 620 The cycle through which Philippine monetary policy has gone during the past three years, is readily apparent from the preceding table. Since end-1961, money supply expanded by 30%, or at an annual rate of 9% vhich does not seem excessive, considering that during this period the currency was devalued and real output rose by approximately 5% a year on the average. However, there were very large variations from year to year in the rate of expansion. In 1961 and 1963 -- both election years -vwhich are customarily associated with substantial credit expansion -- money supply expanded by 17%, Both of them were followed by periods of tight credit. This was particularly so in 1964, when net domestic credit expanded by less than 4%. The year was also marked by two brief periods of speculation against the going exchange rate which lead to some reduction in net exchange reserves. The consequent withdrawal of money from circulation exceeded the expansion in net domestic credit so that overall money supply declined by nearly 3%. 63. Over a period of time Philippine authorities have quite obviously been able to maintain overall financial stability. However, the abrupt changes and reversals of policy, which have accompanied basic stability, are not conducive to smooth growth, One would hope that in the future a more consistent policy will be followed. For rdasons explained below, there are good reasons to be hopeful that in 1965 the extremes of past election years will be avoided. In any case, the established capability of Philionine authorities to correct excessive monetary expansion quickly and effectively suggests that they may be expected to perform equally well in this respect. in the future.- if the need should arise. UJ40 OVAUUbs as~ UAMpified by uneL whoVlsale prc index~ for locally produced commodities for domestic consumption which appears to be most representative of internally determined price movements, have risen by about 20% since the end of 1961. Almost half of this increase occurred in 1963 when rpid monetary expansion was translated into inflationary pressure on prices. In 1964, the increase in prices was less than no, and prices, except for foodstuffs, remained almost constaat in the second half of the year, reflecting the restoration of financial stability. For price movements over the 19o0-1964 period as a whole, the persistent rise of prices of agricultural commodities, particularly food, was the most important factor. This rise was probably largely unrelated to inflationary pressures, but rather reflected tenporary shortages resulting from an inefficient distribution system and delays in imports. In contrast, prices of manufactured products rose very lit1e. Credit to the Public Sector 65. Net domestic credit, disregarding the contractionary effect of accumulating profits from the export retention scheme, expanded by P 1,140 million between the end of 1961 and end 1964. Of this increase, the public sector absorbed roughly 40%. Following the very considerable expansion of net credit to the public sector in 1961, a net contraction occurred in 1962. The large deficit of the National Government in the previous year was turned into an overall budgetary surplus in 1962, as the customary contraction occurred after an election year, revenues increased sharply and expenditures lagged while the new Administration was seeking to lay the foundation for its development program. For the same reasons, there was also a sharp curtailment of the credit needs of government-owned corporations and other government and semi-government entities. 66. This situation was sharply reversed in 1963 when the monetary effect of transactions in the public sector once again became expansionary in the amount of R 230 million, as compared with a net contractionary impact of P 70 million a year earlier. Final data for 1964 are not yet available. Preliminary information indicates that despite attempts on the part of the Government to economize on outlays, the net credit needs of the public sector exceeded those of 1963 by P 90 million. This expansion was in sharp contrast to the severe tightness which in 1964 was imposed on the private sector. These developments are indicative of the weakening financial situation of the Government which, as explained above, results principally from the fact that, in the absence of new tax legislation, voted and very largely justified expenditures have begun to outpace the increases in revenue. 67. If the Governnentts present expenditure program for 1964/1965 is carried out, this tendency towards increased overall deficits will increase in 1965. In brief, the financial position (cash basis) of the public sector has changed as follows during the past few years: - 20 - Consolidated Fiscal Operations (in million pesos) (Rev.Est.) Fiscal Years 1960/61 1961/62 1962/63 1963/64 1964/65 National Government Revenues 1,263 1,424 1,778 1,931 1,968 Ecpenditures -1.386 -1.08 -1.781 -1.992 -2.1lh6 Lags (+), leads (-) in net expenditures + 132 - 90 - 71 - 51 - 17L Cash Surplus/Deficit + 9 - 74 - 74 - 112 - 352 Net Borrowing by Gov't - 131 - 341 - 67 - 130 - 79 Total Surplus/Deficit - 122 - 15 - 11. - 242 - 431 Financing: Net borrowing abroad 2 34 -83 43 166 Net dom. borrowing from l 92 75 106 4o non-bank sources Net dom. borrowing from 106 289 149 93 225 banks and use of cash Total 122 4l5 141 242 431 68. The preceding table shows the sharp increase which has occurred in the overall deficit since 1960/1961, with the exception of 1961/1962 in which exceptionally large internal borrowing by the Development Bank of the Philippines produced a deficit approaching that expected in 1964/1965. Compared with 1963/1964, the deficit in the current year will be nearly P 190 million larger. It seems somewhat doubtful whether external financing of P 166 million will be reached, although this amount includes the proceeds of a l?15 million issue in New York which was success- fully sold. However, any shortfall in financing from this source would probably entail corresponding cuts in expenditure so that it would not raise the deficit to be financed internally. According to the revised estimates for 1964/1965, P. 225 million would have to come from increased net credit from the banking system, as compared with P. 93 million in the previous year. It is not yet known what the borrowing needs in 1965/1966 will be. However, taking into account semi-government entities not covered by the table above, it would appear that the total requirements for net bank credit, including a drawdown of cash balances, of the public sector in 1965 may well be around P 300 million, or roughly of the same magnitude as in 1964. Credit to the Private Sector 69. Credit to the private sector accounted for 60% of the total expansion in net domestic credit that occurred between end 1961 and end 196h. However, the annual rate of private credit expansion varied shrl~ The peJ rl 19-~104), anbe di;videdl Jno 4-'-- A-4-4- During the first two years, net credit rose at an annual rate of nearly shar'o reversal of this trend so that net credit contracted in the first hal of i. ;ome expansion occurred later in the year, Cut altogetner net credit rose by only 2% in 1964., 70. Fluctuations in the expansion of gross credit to the private secuor were not nearly as wude as in net credit All through the period 1961-1964, savings and time deposits as well as net miscellaneous accounts, par tULcularly capital accounts, of private commercial banks rose substant- ially. These increases made it possible to maintain in 1964 an expansion of gross credit by nearly l55. At this rate, expansion was still very much less than in 1963 when it had reached 30/o, and towards the end of tne year the business community began to complain strongly about the tightness of credit. It is probably true that during 196K tight credit U"ve.uped into a brake on economic growth. To some extent, the overall expansion of credit to the private sector seems to have been too small, Uearing in minU ha mue tors of tue eUonomy uau are capaue U rapid growth, i.e. particularly manufacturing, have to rely largely on OLLa.u -- - -Z'- Lt. ___ - _ -.- A- _ t, - - - - - 2 - . 1* outLsde fiancing [or Wit-ei- iruvesume UnV alu UI Ualm creuiu I- 1i bL."L the most important means of channelling funds from surplus sectors into L41J~ ll v_lt C. Ut:L.;ULUO r7l. nowvT ven more 4ipor-- ____ _umP 4n-ug u-"u 1 I-Le ~ nowerjtv , evOUl 111U1tz AJLI)U1 "E~l U Ucill OUI[t- 01I U clr U i UL U'.,aL additional credit available were probably deficiencies in the allocation "J.a.~ -I U* . U L'U.A. O.jJjJ aO. UILCL U Vajli U UJr I-A-L V _LL1 ._/L4 ii-L U IJ- v - hard those sectors of the economy whose continuing growth would have required simnort through increa.Pd credit_ while at. thp same time financing of trade, commercial agriculture, real estate and consumption absorbed an excessively large part of the total additional credit avail- able. But it is a difficult matter to judge whether in the existing circumstances and with the instruments at the disposal of the authorities these deficiencies could have been avoided. Selective credit controls are diffinIt. En administer in the hest, of circumstances. Conditions are perhaps particularly unfavorable in the Philippines where banking institutions have a long tradition of commercial financing and close ties with the trading and export agricultural communities, both as clients and shareholders. Besides, throughout 1964 commercial banks were in a difficult liquidity position and therefore were reluctant to increase their financial engagement in sectors of the economy such as manufacturing whose needs are essentially for long-term funds. 72. The lending activities of the long-term lending institutions, particularly the government-owned institutions such as the DBP as well as the Government Service Insurance System and the Social Security System, which altogether provided some 25% of the total increase in credit to the private sector in the period 1961-1964, modified somewhat the allocation of credit in favor of manufacturing. Nevertheless, almost one-half of total credit expansion went into trade, real estate and consumption. Agriculture received about 201Z, of which the largest part was obtained by export agriculture. The share of industry was about 30% on the average for the period as a whole, but it declined to about 25% in the past two years. develop for a relaxation of the restrictive monetary policies pursued inflationary pressures in the economy and on exchange reserves, barring f,bp mrsqc I-j I -i a n--'r" ne o ,~ the- --em- 1ou~ on the -7 II -A - -± U _LQ LILJy 41 U -IL 'L 1 retention scheme. At the same time, it is unlikely that relaxation of __,Z 00JV -0 Y~ nu, k U~I U L U U1~ iho U_L C3U1LUUY mrlav~iittL u with the IMF which was renewed in April 1965, authorities will have to --L SVJ 4S VJlu .LrSV Utl IS.J11_ UCL.L iiiWa. UUU1 0. .L on wer VVL~ Uu UIL money supply would be permitted to increase by 5 - 6% in 1965, that retention scheme and increases in private non-monetary deposits and miscel- lacos ccuns would3 be the same as inl6 C,ationa-U1Ul gross:Z creditu macy be available in the order of P 900 - 9 950 million in 1965. Of this amount, Wne PDU Stjur, as caLuLLaUUu boUve, may X-qullu auout iUU million. The remainder, P 600 - P 650 million would be available to the private sectwr, compared with P 575 million in 196. Thus there would seem to be some room for a more liberal credit policy towards the private sector, but if the needs of the public sector materialize as estimated above, relaxation of private credit cannot be much. The Balance of Payments 74. Since the introduction of the new exchange regime, the annual volume of recorded exchange transactions has nearly doubled and now stands at nearly $2,800 million. This was the result of sharp and roughly parallel increases in both receipts and payments. Recorded export receipts rose from $h19 million in 1955-1957 and $500 million in 1961 to a level above '700 million in 1963-1964. This was a very encouraging development. Import payments e.xpanded on a much smvaller scile, except for 1964 when imports rose by 16%. However, there were at the same time steep increases in certain invisible payments particularly for travel abroad and miscellaneous purposes, and especially in unidentif- iable payments that showed up in very large negative errors and omissions, reaching 135 million, or 10% of total payments, in 1963. It seems likely that this item will be even larger in 196h. 75. To some extent, the sharp increase in errors and omissions probably reflects the difficulties which the authorities have encount- ered in collecting statistical information since payments were liberal- ized.. However, the principal cause appears to be in smuggling activity, including underdeclaration of imports, and perhaps also some unrecorded capital outflow. An analysis of the trade statistics of the Philippines' major trading partners would suggest that Philippine data understate imports in 1963 and 1964 by more than * 100 million a year, or about 16o. Judging by the same source, understatement of exports is not an important problem, involving perhaps :20 - 030 million a year. These figures would seem to substantiate the conclusion that the large errors and omissions item, which has appeared in the balance of payments since 1963, is anost entirely due to unrecorded imports, while unrecorded capital outflows may u in tne order of 'p$u - Iu million. Such explanation would under- score the weakness of the administrative apparatus, particularly the customs, which has so far failed to provide the support which a free exchange system needs to ensure a reasonably efficient use of the countr7is exchange resources, and for which restrictive monetary policy can be but a blunt substitute of limited effectiveness. 76. The behavior of export earnings has been one of the bright spots in the Philippines' economic performance since early 1962. Making reasonable allowance for unrecorded exports in 1961, exports in 1963-1964 were .307 higher than in the last year before full decontrol. Somewhat higher export prices contributed to this remarkable achievement* But mainly it was attained by higher export volumes in practically all the Philippines' major export products, including in particular acconut products and logs and lumber. 77. In view of the apparently large amount of smuggling, an analysis of imoorts, as officially recorded, is only of limited usefulness. As already mentioned, the level of recorded imports remained practically unchanged at roughly $600 million between 1961 and 1963 so that the balance of trade moved from a deficit of about $100 million to a surplus of equal size. In 1964, however, imports were probably around $700 million, the increase probably reflecting with some lag the inflationary pressures that developed towards the end of 1963. The largest absolute increase occurred in imports of industrial raw materials, reflecting the increased manufacturing activity last year. Overall, however, the composition of imports by end-use has remained practically unchanged over the last five years: roughly 15% of imports consist of finished consumer goods, raw materials and supplies account for 68%, and capital goods make up the remaining 17%. 78. From the beginning of 1962 until mid-1964, the Philippines had a cumalative current account surplus of $200 million. During the same period recorded capital flow showed a surplus of $15 million. This surplus was the result of gross inflows, including reparations from Japan, official grants and loans and private financing, of $188 million and repayments as well as other outflows of $173 million. In fact, inflows may have been larger, particularly in the form of supplierst credits arranged by the private sector. However, altogether it does not seem that over the last few years the Philippinest total medium - and long term external indebtedness has increased by a substantial amount. Such debt disbursed and outstanding at the end of 1964 is estimated at $400 million. Of this amount, $176 million is public debt. Including the undisbursed portion of loans contracted, external public debt amounted to $342 million at the end of 1964, requiring maximum service payments of about $6 million a year. In relation to current exchange earnings, these payments do not constitute a heavy burden, requiring only 6% of earnings. 79. The recorded flows of exchan-e receipts and payments show a surplus of $215 million in the period 1962-mid-1964. Of this amount, errors and mnissions monstituted $177 million. The remainder. $38 million, went towards building up exchange reserves. In the second - 2h - half nf 1 96L, net exchnan r.nrvPs cntind to rise Andl rnehedA $100 million, thus exceeding by 0465. million the level of December 1961. This is a si7eable imnrovement, but.in relation to the PIlipninot current payments, some $800-$900 million, exchange reserves are still low anA rpnni-rp n -ni-3no hinili-irin- continuance of the present exchange regime, it does not seem likely that the next. year or- so will brin major4- chne in th-hlpins oeg exchange position. The immediate outlook for export earnings is favorable. A ~ ~ ~ ~ ~ ~~ 1 teprr shotag ofedbe i itewol marke is4 expcte to h oldl the price of coconut products at least at the high 1964 level and may well ra is e it o Other major exports ShOu"l also- do wel.1 1inor exports --4 may respond favorably to the exemption granted them last December from the () renon. Considering the eover4meno4 t plans to import about 600,000 tons of rice in 1965 to counteract a poor domestic crop and the, posblt of son re-ato of1 crdi poiy amport _ __- 1_ - inl96 may well exceed the high level of 1964. However, if speculation against the exchange rate reSulting from n uR; cerin legal status of hue ptrulk exchange regime can be kept within reasonable bounds, there appears to be no reas:-on for concern about the short-run outloke uver Lie loUger run, the exchange situation may be more difficult, and this is discussed in Ute fo.Llowiu. chaper. V. The Economic and Financial Outlook 81. The Philippines possesses an impressive potential for diversified growth in all the major sectors of the economy except traditional export agriculture, where prospective market conditions do not favor a contin- uing rapid increase in output and income, very suostantial increases in supplies for the domestic market are possible through increased production along established patterns, through pushing further in import subsTitution, and developing new lines of production. Over the longer run, these poss- biitLes for growth could be bolstered by accelerating the sale abroad of diverse products, including those of manufacturing industries. The Outlook for Growth in 1965-1970 82. In the immediate future, strong obstacles stand in the way of translating the Philippines! economic potential into actual growth of output and income. As discussed earlier, removal of these obstacles is tantamount to establishing a new framework for economic growth in the 19601s. It encompasses financial and organizational reforms designed to enable the public sector to provide more active support to the expansion of productive activities by the private sector. It also requires action along various fronts with the aim of channelling private initiative and investment into those fields where their contribution to the growth of the economy is likely to be optimal. Such reforms are difficult to achieve in the best of circumstances. In the Philippines, these inherent difficul- ties have been aggravated by the divergent forces of party politics. Any attempt to forecast economic growth over the next five to six years requires some assumption about the political circumstances after the elections of LU V Z11"IJUA J-7~ k ±U 0 11~ Wit LV-LLVVj.1; I VuI 0.CZ L U I Ict UUtz EI CZ-- U111UU LIULLI UIZ arbitrarily that beginning in 1966 the next Administration and the Vung t w CLU- v t LU eUvie tagre on Ulne Ueiravue progr-m 01 cloU ion[ C1U cooperate in instituting the necessary legislation. This assumption IrLp.esC,, of course, that no basic changes will take place in o965 and that the impulses emerging from a reactivated body politic and a revitalized public sector wil cegin to make themselves felt signifi- cantly only in 1967. 83. Agriculture as a whole may increase output by 465% a year on the average, as compared with 5.5% in 1961-1964. Commercial agri- culture, producing mainly for export, will probably contribite less to growth of output than in the recent past, because the market prospects for the main commodities, coconut products and sugar, are not favorable. Food crops are unlikely to increase much in the early years of the period as more rapid expansion is contingent upon expanded irrigation facilities, better extension services, improved seeds that are responsive to fertilizer (pa:.ticularly rice and corn), progress in land reform and a consistent land policy of the Government. Livestock production has been assumed to grow at an accelerating rate, going up from 5% to 9%. There has been growing interest by the private sector in this field, and the Government is currently considering various schemes which may lead to a consider- able expansion. Fishing is likely to grow at a fairly rapid rate, aver- aging perhaps 6% a year. Commercial fishing has attracted considerable amounts of private investment in recent years and this will probably continue. The growth of forestry output may slow down considerably if, as seems desirable in the interest of resource conservation, logging is restrictede 84. It seems possible that, with new mines coming into operation over the next few years, the growth of output will accelerate markedly over the recent rate of 4% - 4e1% pDa. and may reach 7% over the period 1965-1970 as a whole. Output in manufacturing will probably increase more slowly over the next two years than in 196. considering that tight credit will probably further complicate the unresolved difficulties of the industry in establishing a new base for rapid growth. However, as these difficulties are overcome, annual growth is likely to accelerate markedly. reaching an annual level exceeding 10% in the latter 1960's. Growth of value added by construction has been assumed to slow down considerably. reflecting a substantial reduction in sneculative construct- ion of luxury housing and commercial building, Services have been assumed to Prow somewhat more slowly than the directly productive sectors of the economy, particularly trade which would be affected by the slower rate of exnort growth. On the haqi.q of theqp -Pftnral nrolpctions. national product is estimated to grow at an average rate of nearly 5% a year during the nrinrl 1Q(Y-1970. n.nans of PYnP.t1d iclinps in exort nrices. real national income would rise somewhat more slowly. Annual growth rates 16-l a Tee fromesout grw in somewha br aproxima ely fin 1961?-1970. These rates of growth are somewhat below those held feasible ~ l~ - I cn - ira- V 'ny PT-nevnm nnrl 1-1-ir fl.ha Tknnk mniq.q r) whica made independent estimates in connection with that pro-ram in 19l. However, it should be borne in mind that these earlier estimates assumed that it would be possible quickly to accomplish those improvements in the general conditions for growth in the public and private sectors which in fact turned out to be much more difficult to attain. Moreover, the assumption made here that progress in these areas will be held up by the coming elections and will then begin to influence growth only by late 1966 or early 1967, is reflected in fairly low growth rates for 1965 and 1966 which depress the average rate of growth projected for the period 1965-1970 as a whole. The Financial Prospects 86. Realization of the growth prospects discussed in the preceding section will require a substantial increase in investment over the level recently attained. Such increases will not only be necessary in order to support accelerating growth. It seems also likely that the investment required to achieve a given increase in output will rise as investment in infrastructure and agricultural development schemes becomes relatively more important and as manufacturing expands into more capital-intensive fields. Scarcity of reliable data on the level and pattern of investment in the past and uncertainty about the prospective pattern of growth make any estimates of future investment hazardous, Nevertheless, an attempt was made to work out the relationship between overall growth of output and total investment by means of an aggregate capital: output ratio. In the latter 1950's. this ratio was around 2.5, using post-devaluation prices, For the purpose of estimating investment requirements in the period 1965- 1970. an average ratio of 2.9 was used, rising from 2.8 in the early part of the period to 320 in 1969-1970. This assumption would imply that on the average 1% of GNP would have to be devoted to investment, but that this share would rise from about 12% - 13% in 1965-1966 to over 17% in 1970- A7_ On these aqznmntions_ total gross domestic investment would amount to P 18.7 billion, equivalent to US6 4.8 billion, over the six-year nprin9. A, this Pstimate was derived from certain general economic relation- ships, it is not possible at this stage to allocate it by economic sectors. HoweverP inreo-ment hv the nblic sector- considering investment require- ments in the various fields and the pace at which the technical and admin- sZ+a H icain"noy o gnvernment rPnartmentf and apenoies may be expected to exoand, may absorb some P- 4 - P 4.5 billion, This would include, in orer* of magnin J rnq-.ments in narniilture (including irrifation and flood control), roads and highways, power, water and the railroad as major fields oA f Ji tment Privnte investment unuld account for about three- fourths of the total. 88. On the assumption that a major effort in taxation will be made 4-l orAer to i"nas public svigs,! gross natinanl saings over the 1965-1970 period as a whole are estimated at about P 16 billion, or 12.7 on e aveag ofro 1.tiOn-16 income 9ile the arginal rat would be rising from 11.9% in 1964 to 13.9% in 1970, the marginal savings rate3 supporteu initially by nign1-er puoc savings and later by increased private, particularly corporate savings, would increase from 15% in 1965 to 2,oin 1970. These estimates are fairly optimistic, particularly for public savings but they should be attainable with a determined effort. 89. The resource gap which emerges approximates P 3.0 billion, roughly equivalent to US$70 million, or 15% of total investment outlays over the period as a whole. A gap of this magnitude would not seem to be unmanageably large, particularly if a marginal savings rate of 25% were reached by 1970 so that one might expect that in the 1970's the Philippines would be able to finance an increasing portion of their investment outlays from domestic resources. 90. Export earnings are expected to grow, on the average, by just less than 3% a year in 1965-1970. Invisible earnings together with private donations will probably rEmain constant. Allowing for some small increase in invisible payments which implies somewhat stricter control over exchange payments than has existed since 1962, projected exchange earnings and net capital inflow as derived from the savings-investment gap would permit imports of goods to rise by 5% a year, or somewhat faster than GNP. This would imply a ratio or imported goods and services to final demand (con-. sumption, investment and exports) of 16.9 in 1965-1970, as compared with. 16.2 in 1961-1964. This ratio would seem to be rather high, although one right expect the projected fast growth of investment, which has a higher import content than the other components of final demand, to raise somewhat the Philippinest dependence on imports. The conclusion to be drawn is that over the next few years the savings-investment gap exceeds the balance-of-payments gap. This underscores again the need for the Government to give urgent attention to means of raising the savings rate. Creditworthiness 91. At present, it is not at all certain that a development effort as embodied in the preceding calculations will occur. As pointed out earlier, the political and, as far as the public sector is concerned, the organizational basis for such an effort still has to be laide Thus the foregoing estimates cannot give more than a rough indication of the economy's need for capital imports. As calculated above, the resource gap for the period 1965-1970 amounts to $740 million. To this amount, about $PluU million has to be added to allow for building up the level of exchange reserves to a more reasonable level, i.e. around 5200 million net. In addition, some capital outflow will probably continue, and $75 million has been allowed for this purpose. Furthermore, allowance has to be made for repayment of existing and new debt. It has been assumed that all new debt from official sources will be incurred on conventional terms and that suppliers' credits, perhaps $35 million a year, will carry an 8-year maturity. On these assumptions, a total amount of 8460 million has to DC provided for repayment. Altogether, then, a gross inflow of $l,375 million would be required during the period 1965-1970. 92. Of this amount, reparations from Japan and grants may provide about $170 million. Reinvested earnings of foreign companies, some inflow of new private foreign capital and some repatriation of Filipino cupltal may coiirioue anotner - million, providea tne current uncertainties over the future role of foreign enterprise in the Philippines are resolved satisfactorily. Of the remainder, roughly o-1-10o millon, suppliers' credits and similar private financing arrangements may account for some $20U-$250 million. This would leave roughly $6O-$W5 million to be provided by official sources, or about $100-$110 million a year. Borrow- ing such amounts on conventional terms would raise total debt service on both private and public debt to 13% - 14% of exchange earnings as projected for 1970, Debt service of such magnitude does not seem excessively large if the Philippines manage their financial affairs reasonably well. It probably would, however, leave a fairly small margin for further conventional borrowing in the 1970's, STAT7STICAL APPF!DIX TaD.le 1N0. .. External Public Debt outstanding 11. National Income Aggregates III Output of Main Agricultural Products IV. Agricultural Land Utilization V. Production of Minerals VI. Indices'of Manufacturing Output VII. National Government Revenue VIII. National Government Expenditure IX. Consolidated Fiscal Operations X. Holders of Government Securities XI. Factors Affecting Money Supply XII. Uses and Sources cf Funds of the Commercial Banking System XIII. Total Loans and Investments of Financial Institutions XIV. Composition of Credit Outstanding to the Private Sector XV. Price Indices XVI. Wage Indices XVII. Balance of Payments XVIII. Foreian Exchange Receipts and Disbursements XIX. Indices of Quantity. Price and Terms of Foreign Trade XX. Origin and Distribution of Foreign Trade XXI. Value of Exports (Continued on following page) Statistical Appendix (Continued) Table No. XXII. Vnlump and Tnit. ValnPe of Principal Exports XXIII. Val ue- of Imports XXIV. Imports Cassified by Use of Goods XXV. Foign Exchang R TABLE I: PHILIPPINES - EXTERNAl PUBLIC DEBT OUTSTANDING INCLUDIAG UNDISBURSED AS OF DEC.EBER 31, 1964 1ITH MAJOR REIOHTHIED ADDITIONS JA-NUAY 1-JANUARY 31, 1965 Debt Repayable in Forei,n Currency (in thousands of U.S. dollar equivalents) Debt outstanding Major reported December 31, 1964 additions Item Net of Including January 1 - undisbursed undisbursed January 31, 1965 TOTAL EXTERNAL PUBLIC DEBT 176,284 342,498 15,000 Publicly-issued bonds 1,077 /1 1,077 /1 15,000 Privately-placed debt 107,542 129,677 - sup'llr It .* cr d; 07 -19 Other 87,141 102,557 IBRD loans 41,463 103,031 - U.S. Government loans 26,202 98,713 - Eport-Import Bankl CT~ C_, AID /2 1,020 1,129 Loan from German Government - 10,000 /1 These are Philippines Govt. bonds held by non-residents and repayable in U.S. dollars at the prevailing free market rate of exchange. The interest on these bonds is 4% with maturities from 1964 to 1STo. Amount outstanding as of December 1964 is P 4,210,000; IFS free rate P 3.91 US$1.00. /2 Provision of foreign exchange, but not repayment, is guaranteed by the Philip- pines for the following AID loans: a) $5,300,000 to Batton Pulp and Paper Mill. b) $3,700,000 to Mindanao Portland Cement Co. c) $100,000 to Batton Pulp and Paper Mill. Statistics Division IBRD - Economics Department April 12, 1965 M-ul T-. 'MITT rMTTATICO OmT%AmV? n^WmArnTDATTAT corpTnp nAVhfMXTM0 AXT VVmVn%TAT Ict"t; Lc. la LJLL[W' 1:0A.)±± ftirilJ i VL.A±BJ 1Z L%J,rj ZL±i'J.vi VIMd rJA±±1'IA"WA PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DECEMBER 31, 1964 WITH IKAA e%n T1Tnn^nrnTn AnnTMYrTO rA%TTTAna 1 TA ITTTAMr ')I -i n t r' i Debt Repayable in Foreign Currency (in housands of U.,S. dollar equivalents) GRAND TOTAL Debt Outstanding (Beginning of Period) Payments During Period Including Year Undisbursed Amortization Interest Total 1965 342,498 46,258 8,A89 54,747 1966 311,240 37,972 15,295 53,267 1967 273,268 31,420 14,250 45,670 1968 241,848 2,325 12,936 37,261 1969 217,523 20,294 11,676 31,970 1970 197,228 15,907 10,559 26,466 1971 181,321 16,420 9,677 26,098 1972 164,900 15,707 8,775 24,483 1973 149,193 15,170 7,922 23,092 1974 134,023 14,488 7,110 21,597 1975 119,536 14,203 6,321 20,523 1976 105,333 14,100 5,548 19,648 1977 91,233 13,133 4,807 17,940 1978 78,100 12,409 4,105 16,515 1979 65,691 10,460 3,443 13,903 ,'. Lncluaes service on all aeot lstea in Table 1 preparea April 12, 10> Table II · National Income Aggregates (in Ytillion pesos at 1963 prices) Actual Estimate 1961 1962 1963 1964 GNP at market prices 15,473 16,152 17,013 17,917 Private consumption 12,198 12,479 12,87C 13,977 Public consumption 1.419 _1,544 1.642 1,7CO Total consumption 13,617 14,023 14,512 15,677 Private capital formation 1,894 1,640 1,868 1,915 Public capital formation 340 430 ___4 450 Total capital formation 2,234 2,070 2,298 2,365 Exports 2,129 2,219 2,835 2,730 Imoorts 2,500 _2,289 278 2,921 Merchandise balance - 371 · 70 97 Balance on current invisibles - 7 129 106 66 Current Foreign balances .- 378 59 203 - 125 Investment rate 14.4 12.8 13.5 13.2 Savings rate: average 12.0 13.1 14.7 12.5 Marginal - 40.2 43.2 - Ratio of imported goods and services to final derand 16.2 15.5 16.3 16.7 / The figures presented above are very rough estinates, based on official data which are not believed to be reliable indicators. Source: Central Bank of the Philiipines, Annual Report. Table III output of Main Agricultural Products (in !,Ouu m) Average 2/ .71955-1957 1960 1961 1-962 1963 196- Crop Years * 22162 16 L6 Exort CroE 33 Copra 1,187 1,339 1,398 1,hh 1,h95 1,585 Desiccated coconut 45 42 59 63 67 71 Sugai (centrifugal and muscovado) L,19() 1s139 1,35h 1,506 1,600 1,796 Abaca 118 95 11,5 116 128 142 Tobacco 40 64 60 70 68 66 Ramie 2 2 2 4 5 9 Rubbor 2 3 4 5 5 6 Food Crops Rice krough) 3,24 74 3,.U 3,705 3,910 ,967 3,823 Corn (shelled) 857 1,165 1,210 1,266 1,273 1,266 Fruits and nuts 616 675 701 934 1,006 1,211 Citrus 33 43 Sh 62 62 67 Root crops L,2 51 1,12 l,h5 1,334 1,360 1,345 Onions 11 17 18 20 15 jh Potatoes 8 7 10 11 15 35 Beans and peas 42 42 33 33 31 30 Other vegetables 166 162 147 167 152 155 Coffee 7 26 32 .3 33 33 Cacao 2 3 4 3 3 3 Peanuts (unshelled) 18 15 13 11 11 10 Fish 381 45 455 484 547 610 Commercial 124 120 1 1) 209 n.a. Municipal fisheries 219 :265 268 273 276 n.a. Fish -ponds 38 60 61 61 62 n,a. Table III (Continued) Average Crop Ycar 1955e-Ynr57 -i964 -19641 -1962 193 6 Meat and Poultry Products 215 2h2 223 229 235 247 Forestry Products (incl. board feet) Logs 1,775 2,677 2,797 2,871 3,324 4,123 Lumber .11 384 hl 396 526 718 Index of Agricult'uraL Production 105.4 120.8 20.6 129.8 134.8 112.3 (1955 - 100) 1 July.-June Preliminary 3 Including estimated quantities of unrecorded exports as follows: 1960:264; 1961:327; 1962:89; 1963: 6. Calendar years. Estimated. Source: Department of Agriculture and Natural Resources; Central Bank of the Philippines, Statistical Bulletin; information provided to nissionD .T_able TV Agriultural Land Utilizationi/ (in 1,000 hectares) roYas /95 -1957 1960 1961 1962 1963 1964 E,xporIt Crops L 5W 1.5ý8 1716 L8 1,8,._,952 2,.088 Coc-nut 992 1,059 1,200 1,284 1,392 1,500 Sugar cane 248 242 232 255 259 273 Abac a 221 175 175 183 182 186 Tob-,eco 69 96 91 100 97 95 Ramie 3 2 2 3 3 4 Rubber 5 5 10 14 18 24 Others 9 9 6 6 6 6 F,od Crops, 1.= 610D 62 5,2977 . Rice 2,722 3,307 3,198 3,179 3,161 3,130 Cnrn 1,617 1,845 2,045 2,016 1,950 1,942 Fruits and nuts 336 320 359 367 366 367 Citrus 21 23 28 29 29 30 Rtot crcps 282 289 282 261 264 256 onikns 4 7 6 6 5 5 Po tatoes 3 2 2 2 2 2 Beans and peas 71 78 63 67 69 69 Other vegetables 92 72 54 56 48 48 Co ff ee 20 31 39 50 42 43 Cacao 6 6 9 9 10 10 Pearuts 29 24 22 20 19 20 th ers 2 4 11 11 12 12 Total 6,752 7,596 7,834 7,913 7,934 8,022 1/ Crop area harvested. 2/ July-June. Source: Department of Agriculture and Natural Resources; information provided to the mission. Table V Production of Minerale (in 1,000 MT, unl-ss otherwise indicated) Average 1955-1957 L960 196;. 1962 1963 196h Gold (in 1,000 ounces) 102 411 42h 423 376 211 Silver (in 1,000 ounces) 507 1,133 813 676 767 398 Base Metals Iron ore 1,406 .1,139 1,171 1,387 1,385 796 Chromite 678 734 640 531 459 246 Copper (metal) 28 hh 52 55 64 31 Manganese ore 15 17 19 12 8 Zinc (metal) 5 3 h 1 Quicksilver (metal - 1,000 lbs) 178 231 241 210 201 105 Non-Metallics Coal 158 148 152 163 157 66 Rock asphalt 2 18 7 7 5 - Index of Mineral Production 111.5 126.7 134.3 136.6 138.6 153.*2 (1997 100)T January-June , Index for October-December 1964 / Preliminary S oirce: Bureau of Mines; Central Bank of the Philippines, Statistical Bulletin: information provided to mission. Table VI Indices of Manufacturing Output (1955 = 10o) Jan.-June July-Sept, 196o 1961 1962 1963 1964 196 T_tal Manufacturing 150.5 160.5 169.7 180.7 12Z3 192.8 Non-durables 152.0 156.4 165.6 175.3 188.8 181.8 Food processing 148.3 157.9 171.4 179.0 187.5 ¯ Beverages 152.5 157.5 169.6 205.0 222.6 Tobacco products 119.1 117.8 123.6 120.9 147.9 Textiles 278.3 282.4 304.2 321.7 351.6 Footwear, wearing apparel 52.6 47.1 52.0 51.0 50.4 Paper products 172.4 183.4 223.5 252.3 247.6 Printing, publishing 127.9 116.6 103.2 83.4 76.9 Leather goods 162.1 158.7 158.9 158.9 150.4 Rubber products 255.6 254.1 229.7 238.8 279.8 Chemicals (mcl. fertilizer) 135.7 144.3 154.7 167.2 172.1 Petroleum 182.3 184.8 185.9 173.0 179.4 Miscellaneous 120.1 129.1 137.6 75.6 105.1 Durables 143.2 179.8 189.3 206.5 238.0 24.6 Wood, cork 133.1 114.6 132.9 167.9 133.9 Furniture, fixtures 85.3 115.7 120.8 130.9 158.6 Non-metallic mineral products 171.8 199.7 198.5 210.0 229.9 (of which cement) (184.7) (214.3) (203.3) (214.8) n.a., Metal products 166.9 253.9 277.3 269.9 315.4 Machinery 67.8 123.6 130.6 121.8 120.9 Electrical machinery, appliances 196.4 278.8 259.5 307.4 327.7 Transport equipment 80.8 82.4 96.8 143.0 212.2 Miscellanecus 119.1 126.0 117.2 87.2 63.2 I/ Based on data furnished by co-operating firms whose number varied from year to year. Sour.ce: Centr'al Bank of theu Philippines, -tatistical Bulltn i nfrai prvie to the ion. Table VII National Government Revenue l/ (in million pesos) Fiscal Years (July-June) 9 61960/61 1961/62 1962/63 / a-96d/65 Tax Revcnue 908 978 L102 1 3561 1.665 Income Taxes 236 278 304 382 424 516 Excise taxes 269 268 267 303 372 306 Licenses, business taxes 197 244 295 365 440 521 Import duties 240 249 300 390 419 450 Other 54 55 68 84 95 115 Transfer to local gov'ts. - 88 _116 116o -.189 Other Revenue 26 285 32 414 371 303 Margin fee 16 89 83 19 - Operating and service. income 127 145 151 176 191 2c4 Inccme from gov't enterprises 8 11 16 2 2. Miscellaneous income 51 39 47 114 118 55 Repayment cf advances 11 13 12 8 18 22 Reparations 9) 6 4 7 - Interest on special fund deposits - - 19 Other 2 55 3 1 1 3 Total Revenue 1, 1,263 1,424 1Ge78 1re932 1,968 l/Includes General, Special, Fiduciary and Re parations Funds. 2/Preliminary-. 3/Adjusted for reduction in estimated revenues resulting from various tax relief measures. 4/Includes P 47.7 m. proceeds of the claims o)f the Philippine Government against t.he U.S. Governm.ent, on account of the devaluation of the US dollar in l934. Source: Budget, Messages; information provided to the mission by the Program Implementation Agency. Table VIII National Government Expenditures - (in million pesos) 2/ Revised Estimat Fiscl Years (July-June) 1959/60 1960/61 196l/2 1962/63 1963/6 1964/65 1. Economic Development 392 ß1 424 626 656 ?29 agriculture, natural resources 112 128 105 242 212 194 cmmferce and industry 31 53 54 55 65 61 Transportation, communications 222 276 230 282 325 412 Others 27 54 35 47 54 62 2.. 7-ocial Develooment 416 520 568 645 733 783 Education 321 377 433 480 582 591 Public health 76 106 110 123 116 173 Labor, welfare 19 37 25 42 35 19 3. National Defense 153 156 160 209 230 207 4. Justice, Police 52 60 68 90 102 96 5. General Government (inel. pensions) 115 111 144 162 209 260 6. Interest on Public Debt 26 28 44 49 62 71 Total Expenditure .L_54 ± 1,386 _t8 1,781 _1992 2,146 B _Ecoonidc Functions: a) Current exp. on goods, services 1,009 1,224 1,449 1,482 b) Subsidies 30 117 102 51 c) Transfers (current and capital) 169 209 227 229 d) Gross capital formation 200 231 214 384 1/ Includes General, Special, Fiduciary, Bond and Repar9tions Funds. 2/ Freliminary. Source: Information provided to the mission by the Program Implementation Agency. Table IX Consolidated Fiscal Operations (in million pesos) Rev. Estimates Fiscal Years (July - June) 1959/60 1960Z61 196]62 1962/63 196 64 1964/65 I. National Government Revenues 1,177 1,263 1,424 1,778 1,931 1,968 Expenditures -1,154 -1,386 -1,408 -1,781 -1,992 -2,146 Lags (+) and leads (-) in net.exp. - 99 +132 -_20 - 71 - 1 - 174 Cash Surplus/Deficit - 76 + 9 - 74 - 74 - 112 - 352 II. Exenditures(-If Gov't Corp. 1/ financed from borrowing outside Govt. - 0 4 - 341 --- 67 - 130 - III. Total Deficit (-) 166 - .122 - 415 - 141 - 242 - 431 IV. Financing 1.~ 8, 213' 166 1. Net bo:rrowing abroad 1 2 34 - 83 43 2. Net domestic borrowing 2241 24, 39? 238 200 Banking system 190 228 305 163 96 197 Non-bank sources 41 14 92 75 104 40 3. Use of cash balances - 66 - 121 - 16 - 14 - 1 28 4. Total financing 166 122 415 141 242 431 1/ Includes borrowing by the Development Bank of the Philippines of P275 million, Source: Information provided to the mission by the Program Implementation Agency. Table X Holders of Government Securities (in million pesos) June June June June June Oct. End of Period 1960 1961 1962 1963 19-l96492 1. Banking Sstem 2.3 1,361.9 1,464.4 1L415.5 1,405.1 1439.6 a) Central Bank n.a. 1,194.2 965.7 1,010.9 1,026.5 b) Commercial Banks 270.2 449.8 394.2 413.1 2. Gov't Financial Institutions 141.0 140.1 169.0 185.9 252.0 _256.1 a) GSIS, SSS 134,4 144.4 213.8 208.8 b) Others n.a. n.a. 34.6 41.5 38.2 47.3 3. Gov'tTrust Funds 152.1 191.0 228.6 265.9 311.9 .314.1 4. Private Sector 21.9 27.4 27.3 40.2 39.8 41.3 Total 1,536.3 1,720.4 1,889.3 1,907.5 2,008.8 2,051.1 1/ Includes bond issues of the Development Bank of the Philippines (DBP). 2/ DBP bonds as of September 1964. Source: Central Bank of the Philippines, Statistical Bulletin; information provided to the mission. Table XI Faetors Affecting Money Supply Dec. Dec, Dec. June Dec. June Sept. Dec.] 960 1561 1962 1963 1963 1964 196h 1964 A. PUBLIC SECTOR 1. Bank Credit to the Natll Gov't, a) Gross Credit (i) Central Bank 735.8 767.2 826.4 700.1 811.h 803.4 708.0 (ii) Commrrercial Banks 113.5 395.6 325.8 478.3 422.5 398.0 422.3 (iii) Total W5Eý~3 1,162 . 8 1, 152 .5 1-17,16]T 1,JY J,201. 1,202.3 b) Cash Balances - 288.2 - 433.4 - 519.5 - 576.2 - 550.7 - 594.3 - 571.2 c ) Net Credit 3I1 T2-9-x =7 UO-2. 583.2' 607.1 631 2. Bank Credit to Local Gov't and Semi-Gov't Entities a) Gross Credit (i) Central Bank 487.0 658.5 702.2 724.9 749.8 756.5 758.0 (ii) Cormercial Banks 73.7 124.8 94.3 12h.8 187.0 206.9 286.1 (iii) Total ý60.7 7. 133 El4.7 93~ 963-. Z ,M b) Time and Savings Deposits - 170.0 - 289.0 - 352.5 379.6 - 390.3 366.3 - 360.5 c) Net Credit 39.7 '4.40 470.1 .3 597.1 M-3.-- 3. Offsets a)Counterpart Bal.., Trust Funds in CB I2.3 46.8 108.4 120.0 43.2 32.0 45.3 b) CB Dep. of Gov't Financiar Investmant -- ho.5 - c) Net Eisc. Acc. of CB, PNB 350.8 314.5 219.6 103.6 207.0 267.2 235.4 d) Total 393.1 45î1~1 52r " 250~ž 299.,2 280.7 4. Net Credit to the Public Sector 558.7 821.9 748.7 848.7 979.5 905.0 1,034.0 1,300 Cont 'cl. Table XI (Cont l d) fl fl - - ~ ~3/ Deo. Dec. Dec. Junb Wlp ' uve- 1960 1961 .1962 1963 1963 1964 1961 196h B. PRIVATE SECTOR 5-.Gross Bank Credit a) Loans, Discounts, Overdrafts 1,863.0 2,50126 3,003.3 3,413.2 3,937,5 4,212.3 4,325.7 b) Corporate Securities 2.2 2.2 3.8 3.6 7.2 3.6 2.9 c) Total 1,6 2,503.8 3x007. 3,I1.8 37 9~~215. s4, 6 ¯¯2 6. Offsets a Time and Savings Deposits 860.9 1,107.5 1,367.1 1,557,0 1,770.2 1,851.2 1,922.7 2,000 b) Net isc. Acets. of Private l/ 1/ Commercial Banks 1149.4 188.5 171.6 276.6 344.9 547.r' 563.Y 650 c) Total 1l 1 538.7 1,833.6 2,15.1 2,398~3 2 2,650 . Net Credit to the Private Sector 851,9 1,2û7.8 1,'68.4 1,583.2 1,829.6 1,817.4 1,842.9 1,871 8 Net Domestic Credit 1,413.6 2,029.7 2,217.1 2,431.9 2,809.1. 2,722,4 2,876.9 3,171 0. EXERNAL SECTOR 9. 'Foreign Assets 4,)TCentral Bank 322.0 159.0 184.3 227.6 328.3i/ 287.81/ 376.31/ 434.3 b) Commercial Banks (net) 159''3 133.0 234.0 220,0 93.1- 90.1- - 2h.8- -109.5 e) Total 472v3 ~2.0 ~~48.3 4-7 3 7 21,7 -377.9 35T. 32¯¯ 10. Offfsets JfTB~Foreign Li.abilities - 165.0 212,q 138.2 87.8 154.1 154.1 165.8 est. b) Revaluation of Foreign Assets (-Loss) - 99 - 62,6 - 81.3 36.5 188.7 308.2 368.9 456.3 c) Total - 9.9 -102.X 3.77 17T.7 ~¯27 462.35 23.0 =2. 1. Net External Sector 482.2 189,6 287.6 272,9 145.2 - 84.4 - 171.5 -297.3 D. MONEY SLTPLY 1,895.8 2,2:19.3 2,504.7 2,704.8 2,954.3 2,638.0 2,705.h 2,873.8 ae Between Periods 323.5 285,4 200,1 249.5 - 316.3 67.14 168.4 Footnotes on next page Table XI (Cont'd) Excludes borrowing abroad by the commercial banks. 2J Includes, as a liability, borrowing abroad by the commercial banks. 3/ Tentative estimate Source: Information provided by the Central Bank of the Philippines. Table XII Uses and Sources of Funds of the Commercial Banking System (in million pesos) Jan.-Sept. -196,1 19296:3 546 I. Uses of Funds 1. Increase in Earning Assets 922t5 498.5 1,073.0 492.9 a) Domestic securities -305.8 -.1 1071F.I 3.9 b) Loans, discounts, overdrafts 616.7 560.6 965.9 489.0 2. Increase in Cash and Deposits 36.8 137.5 65.2 -185.0 a) Cash, checks 19.1 765.91 b) Deposits with Central Bank 17.7 61.1 11.3 -125.9 3. Increase in Other Domestic Assets 396 - 70.3 13:-.6 92.9 4. Increase in Foreign Assets - 16.1 154.9 46.7 - 13.7 Total Uses of Funds 1,082.8 720.6 I.,316.5 387.1 II. Sources of Funds 1. Increase in Net Worth 96.7 109.5 167.7 118.2 2. Increase in Deposit Liabilities 609.3 677. 4 681.3 -122.7 a) Private demand deposits ~757 10,.8 165.5 - 96.2 b) Private time, savings deposits 246.6 259.6 4V3.1 152.5 Sub total 322.3 364.4 568.6 c) Deposits of public funds N 287.0 313.0 112.7 -179.0 3. Increase in Other,Iomestic Liabilities 1281 43.7 281.8 172,5 b 1 abl15 - 26 .1 27. 7 213.U Continued Table XII (Conttd.) 2/ Jan.-Sept.' 1961 1962 1963 1964 4. Borrowing frm the Central Bank 247,0 -140.9 3Z), 160.6 5. Increase in Foreign Liabilities 4/ 1.7 30.9 155.3 58.5 Tvtal Sources of Funds 1,082.8 720.6 L,316.5 387.1 1/ Consists of commercial banks, rural banks and Savings banks,, // Comprises only commercial banks and partially rural banks. Includes deposits with other domestic banks and other assets. Partially estimated. V / Comprises the national government, l.ca:l government and government-owned corporations. Includes bills payable, officerst checks and dividends payable. Includes amounts due to domestic banks and other liabilities. Source: Central Bank of the Philippines, Annual Reports and Statistical Bulletin; Central Bank News Digest; information provided to the mission. Table XIII Total Loans and Investrments of Financial Institutions l (inr millo pes75) Change Change Change Sep03 Ohange End of Period 1960 1961 1960-1961 1962 1961-1962 1963 1962-1963 1964 1963-1964 I. BANKS 1. Central Banky 1,031.1 1,109.0 77.9 1,202.4 93.4 1,195.1 - 7.3 1,151.9 - 43,2 Public 1,031.1 1,l09.0 77.9 1,202.: 93. 1,195.1 - 7.3 1,151.9 - Private - -- - . - -- - - 2. Commercial Banks 1,844.6 2 757.7 913.1 3,211.6 453.9 4.,229.7 ol8.1 4,65o.8 h61i Public ~82.0 5152 ~~~333.2 41.9 ~~¯100.3 60,43 189-.1 703.2 9.9 Private 1,662.6 2,242.5 579.9 2,796.7 554.2 3,625.4 828.7 3,987.6 362.2 3. Development Banks 5682 7. 903.h 107,9 998.0 94.6 1, 1- 1036 Public 6h.6 113.2 48.6 93c5 - 19.7 92,0 - 1.5 99.1 7.1 Private 503.6 682.3 178.7 809.9 127.6 5c6,o 96.1 1,002.5 96.5 h Rural Banks 63 .5 87.3 23,8 116,0 28.7 153.8 37.8 192.h- 38.6 PublI - - ~ - - - ~ - Private 63.5 87.3 23.8 116.0 28.7 153.8 37.8 192.4 38.6 5. Savings Banks -_56.9 42 .5 - 14.h 513.4 15.9 75.5 17.1 85,0 9.5 Public3 - ---- Private 56.,9 42.5 - 14.4 58.4 15.9 75.5 17.1 85.v 9.5 6. All Banks 3p56h.3 ,792.0 1,227.7 5,491.8 699.8 6,652.1 1,160.3 7,221.7 569.6 Public7 1,277.7 1,..7 37. ~597 ,710. ~~ 26. =,9. -1980.6 1, 95Z.2 6. Private 2,286.6 3,054.6 768.0 3,781.0 726.h h,760.7 979.7 5,267.5 506.8 Continued Table XIII (Contid,) Change Change Change Sep.30 Change End of Period 1960 1961 1960-1961 1962 1961-1962 1963 1962-1963 1964 1963-1964 .I. NON-3ANK INSTITUTIONS 1. Agricultural Credit Administration 78.5 79.2 .7 77.8 - , lh 79.1 13 77.9 1.2 Puxblic - - - Private 78.5 79.2 ,.7 77.8 - 1.h 79.1 1.,3 77.9 - 1.2 2, Social Security System 85,3 90.3 5.3 85.3 - 5,0 152,7 67,4 195.r _42.h Public - T.7 -2.1 o.ý 2 0L - - kol -24.0 44.1 Private 65.3 70.2 4.9 65.2 - 5,0 1o8.6 43,4 151.0 42.4 3. Govtt Service ts and Disbursements (in million US $) Average Jan...Nc>v Jan,-Feb. 195I-12 11960 .191 1962 1 63 196L 196 Egrjgg63W) !k92 1 713,2 9662 1,. 5-,9,p 25.2 Merchandise exports 428.7 504.3 446.6 544.1 698.8 699.1 92.5 Gold 6.0 12.2 12.3 13.3 12.7 lý.,8 2.9 US GovIt. expenditures 117.9 82.0 87.0 63.9 75.2 111.0 20.2 MiscellaneouLs invisibles 77.9 93.5 167.2 345.4 369.8 564.0 99.2 Disbursements Z33 660,3 82 - 22 92 l.142.5 .1.406.G 199.1 Merchandise imports 588.6 508.4 591.1 504.9 576.3 ~~¯667¯ Philippine Gov't. expenditures 13.8 10.7 10.4 9.3 1.3.3 18.2 3.0 Miscellaneous invisibles 70.9 141.2 200.9 412.4 558.9 719.1 101.1 Net Receirts - 42.8 31.8 - 89.2 40.1 8.0 - 16. 16.1 Loource: Central Bank of the Philippines, Statistical Bulletin: information provided to missione, Table XIX Indices of Quantfity, Price and Terms of Foreign Trade (1955 = 100) QuintupInde Price Index Terms Imorts Exports Imrits Exports of Trade 1955 - 1957 (Average) loo.4 L05. 4 102.0 101.4 99.4 1960 86.5 123.2 111.5 114.1 102.3 1961 99.0 L19.2 113.2 105.0 92.6 1962 93.7 -L30.6 115.4 106.2 92.6 1963 92.1 162.3 123.0 111.8 91.0 1963 (Jan. - Nov.) 91.4 162.15 122.8 112.6 91.6 1964 (Jan. - Nov.)' 11.8 168.3 124.1 111.3 89.2 Source: Central Bank of the Philippines, Statistical Bulletin; information provided to the mission. Table XX OrigLn and Distribution of Foreign Trade kValues (Ln million US$) Percentages Total U.S. Jauan NW Europe Others Total U.S. Japan NW Europe Others I. xorts 1955-1957 (Average) 428 236 73 80 39 100 56 17 18 9 l960 560 284 132 100 44 100 51 23 18 8 1961 500 269 125 72 34 100 54 25 14 1962 554 280 136 90 48 100 5C 25 16 9 1963 727 331 198 152 46 100 46 27 21 6 1964 (Jan. -Aug.) 497 245 126 91 35 100 49 26 18 II. Imrports 1955-1957 (Average) 556 331 56 65 104 100 60 10 11 19 196o 604 255 159 75 115 100 42 26 13 19 1961 611 289 108 92 122 100 47 18 15 20 1962 587 253 106 103 125 100 43 18 18 21 1963 618 254 105 102 157 100 41 17 17 25 1964 (Jan..Aug.) 513 203 102 86 122 100 40 20 16 24 Source: Central Bank of the Philippines, Statistical Bulletin; information provided to the mission. Table XXI Value of Exports (in million Usp$)5 Average Jan.-Aug. Jan.-Aug. 157 1960 1961 1962 1963 196,3 1964 Coconut Products 1/ IL W9 122 168 24L 1485 Copra 128 139 88 113 168 101 92 Coconut cil 21 16 16 31 41 29 39 Desiccated coconLut 13 19 14 15 18 11 12 Copra cake or meal 5 5 4 9 11 7 7 Sugar L02 143 144 .160 1 129 Centifugal 97 133 135 122 147 115 108 Molasses 4 5 4 5 8 6 10 Other 1 5 5 5 5 - 11 Abaca and Manufactures _16 45 _328 38 22 2.2 Unmanufactured 34 42 29 25 32 21 21 Abaca rope 2/ 2 3 -3 3 6 1 2 Forest Products 48 102 105 128 12 111 A1i Logs 38 85 85 107 146 92 91 Lumber 7 7 7 5 7 4 5 Plywood 2 6 8 11 16 9 15 Others 1 4 5 5 10 6 8 Mineral Products 51 60_ 5 66 41 _.1 Copper concentrates 10 18 18 19 32 8 19 Mixed concentrates 3/ 11 11 9 10 10 8 5 Iron ore 11 9 8 9 11 6 7 Chromite ore 13 17 17 9 9 5 5 Manganese ore - - - 1 Other 6 5 4 4 4 4 5 Continued Table XXI (Cont'd) Average Jan.-Aug. Jan-Aug. 1~52157g 1960 1961 196, 1963 1963 1964 FruAts and vegetables 4/ _9. 101 14 11 8 10 PinY.apple (canned) 7 10111 7 6 7 Pineapple (juice) 3 1 2 2 3 2 2 Ot) ier 1 2 2 1 1 - 1 Tobacco 7 12 12 10 10 .Raw 4 7 8 11 12 9 9 Cigars and others 1 - 1 1 - 1 1 All Other Exports /-1 10 14 16 21 16 16 15 Total Exports 428 560 499 555 727 477 497 1/ Exports of coconut products are known to be understated in the period prior to 1963. For an estimate of the understatement see Table III. 2/ Includes mats and other minor abaca products. 7/ Includes non-monetary gold in mixed concentrates. 4/ Excluding coconut products. / Differs from exports in the Balance of Payments principally by the amount af non-monetary gold exported. Source: Central Bank of the Philippines. Table XXII joueand Unit Values of' Princiual ENTscrts Average Jan.-Aug. Jan.-Aug. 1955%1957 1960 __1961 1-962 _ 19633 19631 --1964 I. Volume (1,000 MT) Copra 1/ 905 80 627 78 1,033 634 535 Coconut Oil 94 60 74 146 195 124 150 Desiccated Coconut 51 59 59 63 70 45 45 Copra dake or meal 98 81 88 142 162 101 123 Sugar, centrifugal 843 1,090 1,0?1 961 1,027 814 762 Abaca, unmanufactured 117 101 84 92 113 75 72 Logs 2/ 758 1,455 1,543 1,760 2,309 1,438 19557 Lumber 2/6 60 8 44 54 29 43 Copper concentrates 71 165 162 158 285 156 168 MiNed concentrates 51 - 46 48 46 31 27 Iron ore 1 ,0 6 Chromite ore 705 746 613 364 480 251 235 Pineapple, canned 26 45 43 40 32 25 29 Pineapple, juice 3/31 12 24 22 28 20 22 Tobacco, raw 10 8 18 23 24 18 20 II. Value (US$ per MT) Copra 142 173 141 145 163 159 172 Coconut Oil 221 267 216 213 239 231 263 Desiccated coconut 269 322 246 240 262 256 279 Copra Cake or meal 49 62 48 63 70 70 57 Sugar, centrifugal 115 122 126 127 142 141 141 Abaca, unmanufactured 291 416 345 267 280 279 295 Logs 4/ 50 58 55 61 70 64 59 Lumber 4/ 117 117 87 116 123 140 127 Copper concentrates 156 109 ill 117 ill 118 113 Mixed concentrates 211 - 196 209 225 225 193 Iron ore 8 9 C 9 8 9 Chromite ore 1-9 23 28 20 19 19 20 Continued Table XXII (Cont'di) Average Jan.-Aug. Jan.-kag. 1955-1957 1960 1961 1962 1963 1963 1964 Pineapple, canned 146 156 233 288 219 225 229 Fineapple, juice 5/ 99 110 83 97 100 105 97 Tobacco, raw 447 500 444 493 500 509 482 1/ Fxcludes substantial amounts of unrecorded exports prior to 1962. In million board feet. In million liters. I Per thousand board feet. / Per thousand liters. Source: Central Bank of the Philippines. Table XXIII Value of Imports Average Jan.-Aug. Jan.-Aug. 195 -1957 1960 1961 1962 1963 1963 1964 Food 85 1028 105 62 80 Cereals 34 25 49 28 59 31 Coffee, tea etc. 5 3 3 2 2 2 Dairy products 30 24 24 31 19 13 Meat and fish 21 28 20 18 16 11 Othurs 9 5 7 8 9 5 Tobacco 7 1 - 1 1 1 - Raw rubber 1 6 6 3 3 1 3 Rubber products 13 3 4 4 4 3 3 Textile fibres 6 20 23 29 26 16 15 Textile yarns, fabrics and made-up articles 74 31 23 26 21 14 13 Clothing and footwear 2 1 - 1 2 1 3 Crude oil, petroleum products 55 60 49 58 62 41 L8 Paper, paper products 19 17 22 16 16 10 15 Medical, pharm. products 12 10 11 6 8 5 6 Manufactured fertilizer 7 7 9 14 4 2 8 Other chemicals 27 38 42 41 42 31 33 Base metals 49 57 59 50 53 31 50 Manufactures. of metals 18 14 16 16 16 9 13 Non-electric machiner 71 87 120 105 113 70 93 Electric machinery, appliances 22 21 26 21 29 20 23 Continued Table XXIII(Cont'd.) Average Jan.-Aug. Jan.-Aug. 1955-1957 1960 1961 __ 12 1963 1963 1964 Transport equipment 31 110 59 63 67 4-1 66 All other imports 42 36 40 46 46 25 41 Total "Imports 555 604 611 587 618 383 513 1/These data are based on customs returns. It is believed that they understate by a considerable amount the imports coming into the Philippines. Source: Central Bank of the Philippines. Table XXIV Imports Classified by Use of Goods Value (f.o.b. - in million US$)Jan.-.Nov. Percentage Jan...Ncv. 1960 196 9 1962 1963 1964 1960 1961 1962 1963 1964 I. Producer Goods 1. riachinery, equipment 152 112 94 101 119 :25 18 16 16 17 2. Unprocessed raw materials 60 73 101 105 i10 10 12 17 17 16 3. Semi-prccessed ra, materials 252 287 265 289 328 42 47 45 47 47 4. Supplies _.6 _ 44 37 9 8 5 6 Total. 520 515 504 524 594 86 84 86 85 86 II.Consumer Goods 1. Durables 5 5 5 5 ? 1 1 1 1 1 2. Non-durables _9 _1 _8 92 ._* 1. 1- 14 1 Total 84 96 83 94 99 14 16 14 15 i III.Grand Total 604 611 587 618 693 100 100 100 100 Surce: Central Bank of the Philippines, Annual Reports information provided to the mission. Table XXV Foreign Exchange Reserves (in million US$) Aug. Dec. April Sept. Dec. Feb. Flnd of Period _1957 -i O9r 196:1 1962 196n 1,64 1 196 /1965 I.Commercial Banks 1. Gross assets 68.7 79.4 76.o 63.7 76.3 81.3 88.3 78.2 90.4 n.a. n.a. 2. Liabilities 14.4 10.2 4.0 4.52 10.5 18.2 50.3 66.2 65.3 n.a. n.a. Net Assets 54.3 69.2 72.0 59.2 65.8 63-¯ 38.0 11.3 251 12¯ 10.L TI.Central Bank Gross Assets 154.9 70.8 120.1 44.1 75.0 99.1 109.5 92.4 114.3 123.3 111.2 TII.International Reserves 209.2 140.0 192.1 103.3 140.8 162.2 14 103.7 139.4 1358 __1.6 IV.Central Bank Liabilities 1. Net IMF debt position 1/ 6.0 11.0 -7.0 -9.6 15.8 15,8 15.8 13.8 9.5 9.5 :2. Netes and advances payable 2/ - 40.0 13.0 66.5 47.1 4.5 12.5 26.3 26.8 26.8 3/ Total 6.0 51.9 6.0 56.9 62.9 20.3 28.3 40.1 36.3 36.3 V.Net Foreign Exchange Reserves 203.2 89.0 186.1 46.4 77.9 141.9 119.2 63.6 103.1 99.5 i Drawings on the IMF less paid-in gold subscription. / Consists of amounts payable to US Commercial banks and the Ex-Im Bank. Excludes forward contracts for the sale of foreign exchange. 3/ Estimated. / Forward contracts for the sale of foreign exchange to the Development Bank sf the Philippines and Philippine commercial banks amounted to about $19m. Source: Central Bank of the Philippines, Statistical Bulletin; IMF International Financial Statistic s; Lnformation provided to the mission. -eclt-red an rontribste abu one'&Ir of+-nlP1-4-- export earnings, earning around $210 million annually in the last three years, as compared with-_U & abou nn9 millio in 9-19 IAnd -A16I7 million in 1955-1957. The long-run trend of output indicates an average annual rate of growth around 3%/' a year, coming -frrom,ne p.laningshichout weigh the depressing effect on output of the Cadang-Cadang disease which Ust".1 has o been conquered. nowever, there are large annuaL variatUA around the trend, caused by changing weather conditions. Growth of output between 1y5"-97 and 199-1901 was below the trend, at les than 2% a year. In contrast, output expanded at an annual rate of 6% between 19)9-1901 and 1962-1964. it appears that favorable weather was tae m0St important factor behind this acceleration in growth, although the appli- cation of larger amounts of fertilizer and the coming into bearing of higher-yielding trees probably raised the trend line somewhat. Since !960, about 440,000 ha were newly planted to coconut trees, expanding the total area under this crop by roughly 40%. As these trees come into bearing, output should rise more quickly than the long-run average of 3% a year would indicate. Output in 1965 will be affected by the destruction of coconut groves through typhoons in late 1964, but over the 19b5-1970 period as a whole it is estimated that output will grow by about 4.5% a year, as compared with the average annual output in 1960-1964, 2. During the past three years, the behavior of export prices also deviated favorably from the traditional pattern. Since Philippine exports account for about two-thirds of world trade in coconut products, short-run variations in Philippine export volume have usually been accompanied by inverse fluctuations in price. As a result, total Philippine earnings from exports of coconut products have been generally much more stable than export volume. This was not the case in 1962 -1964, because there were reductions in supply from other sources - the coconut crops in Ceylon and Indonesia were below normal, the break of relations with Malaysia caused a lower portion of Indonesian output to reach the world market, and the United States bought more coconut products to compensate for the low supply of fish oil from Peru in 1963. For the most part, the impact of these factors is bound to be temporary. It is presently estimated that the price of coconut products in the world market will fall after 1965 and by 1970 reach a level more than 20% below the 1963-1964 level. Thus taking together the outlook for increases in volume and the prospect for orices. it annears that exort earnings in 1970 will be roughly the same as in 1963-1964. 3. The annual output of sugar, until recently the second largest source of axnort Rarnings- iid t b fairly -thlp Armin 1-t million mr;trin tons (commercial weight), disregarding shortfalls in years of bad crops. Tn nn;trnRt_ the lnAst three years hna qAp nsiealepn~ Stimulated by the higher exchange rate and strong demand abroad, sugar eas extended and, principally, yields were raised by the use of better strains, application of more iertilizer and extensaion of irrigatacr, T0tal ruLpTut reached 1.8 million tons in 1963-1964, Despite increases in output, export volume in 1962-196 hardly exceeded that of the preceding three-year period, because of two major reasons: total withdrawal of sugar during the earlier pericid had exceeded production so that stocks had been depleted; sugar shipments were being withheld in the early part of 1964 as a hedge against an increase in the exchange rate and it proved difficult later in the year to obtain sufficient shipping space. 4. Philippine sugar exports are shipped almost exclusively to the United States where shipments under the quota enjoy the domestic support price which generally has been about twice the world market price. Including the Philippines? share in the reallocation of Cuba's former quota, the basic quota of the Philippines in the U.S. market is now 925,000 metric tons (commercial weight), In addition, there have from year to year been supple- mentary quotas which gave the Philippines a total quota of roughly 1.1 million tons in 1963-1964. Because the Philippines have for long enjoyed a privileged position in the United States market, they did not benefit as much from the exceptionally high level of world market prices in 1963 and 1964 as they would have if they had normally sold in the world market. Also, for speculative reasons, a substantial quantity of export sugar was withheld in 1964 and only sold after the market had broken. Thus, average dollar receipts per unit of sugar exports in 1963 - 1964 were only 12% higher than in the Dreceding three-vear period. 5. The U.S. Sugar Act Amendments of 1962 for domestic suppliers and the Philippines will remain in force until the end of 1966. It is not possible now to anticinate what quota thn Philinnines will h Prqntpd under the new regulations covering the period after 1966. However, it is possible that the titnl niiu inclrling sNnlementary allocations will hp qmrnzThqt below the present one. At the same time, it is not likely that the Philippines will be able +n cell in +he TrlA market more +han the ananti.ty by which its sales in the United States may fall short of the present quota. This r.o-uld mean t1hat exp-orts of cont:rifuga-1 suga wol- rminAxmtel unchanged at 1.1 million tons over the next several years. Allowing for e-port.s of molasses -worth som$1 $l mli n A ndoassm-ingr the price of sugar to be 5.5 U.S. , per lb. in the U.S. market and h.0 U.S. , per lb. else-hre tota +-, __o+ 'p- ga are like'1- to b "-_ O'un lc million in the latter 1960rs, or roughly the same as in 1963 - 1964. It is .LILULO1 U ±1.LJ1IL Wu otsI - JLU~ tion of jJ. exp rt thatJ th r wI~L Wj-.L U OUI .L 1± expansion of output only to the extent that domestic consumption - now some ,uuU000 metric tons - grows. Taking into account the rulilppiies, rapid increase in population and the expectation of increasing per-capita consumption of sugar, output may have to grow by roughly e, a year in order to meet domestic and export requirements in the latter 1960rs. The outlook beyond 1969-1970 is uncertain because the present U.S.-Philippine Trade Agreement provides that, with its expiration in 1974, the Philippines will lose its privileged position in the United States market. It is, of course, possible that more favorable arrangements can be secured. Sugar planters are now making efforts to reduce their cost per unit so as to strengthen their competitive position. However, there are also those who believe sugar production is over-extended and some land now under sugarcane should be directed to other crops. Vul~lul C&.LuU.LtL"L.L UJ..0 I~ L,UUJ it~.111Y d. JdLa) t)LtUI1U c±u pineapples -- are of less importance, total earnings from them being around ,W)U uu iniW.UU o e largesu igong them is abaca wnicn enjoyed a strong markat in 1963-1964 because jute was in short supply. However, because of growing competition from synthetic fibers, tne outlook for abaca exports is not favorable. It is estimated that earnings will stabilize at the level of 1yo3-1you, around o30 - 3)> million, Exports of raw tobacco and cigars, now $12 million a year, are almost entirely to the United States where they have found good reception as a substitute for imports from Cuba, There appear to be good possibilities for expanding these exports, to perhaps olo-lpu million in rive years: time. Exports of pineapple products have risen to $12-$14 million a year, mainly because of higher prices. A foreign investor has now completed preparations for establishing another large pineapple plantation which in time may be expected to double present earnings. Investigations have shown the feasibility of growing bananas commercially, mainly for export to Japan. Negotations were held with a foreign company but broken off because of unfavorable political reper- cussions. It is uncertain now whether or when bananas will become a export produ.ct of the Philippines. 7. Forest products have now become the Philippinest second largest source of export earnings. Since the middle of the 1950ts, there has been an uninterrupted and steep rib- in output. Between 19'9-l961 and 1962-1964, produ:tion of logs increased aanually by almost 101. More than four-fifths of this increase has gone into exports for which Japan is the largest mar- ket. Export earnings from logs and lumber have gone up annually by 16% between 1959-1961 and 1962-1964 and now stand at $150 million. However, concern, long voiced by forestry experts, is now growing in the Government that the steep increase in logging and the non-selective methods employed are in conflict with prudent use of the countryts forestry and land resources. It remains to be seen what action the Government will take but it is unlikely that a drastic reduction in logging will result. Over the longer run, of course, the supply of logs will be run down and will compel a cut-back in output, but this problem is not likely to arise over the next few years. Assuming some Government action, the increase in log output may slow down perhaps to 5% a year. At the same time, it should be possible to compensate for this reduction in growth by increased sales abroad of domestically produced plywood and veneer. Consideration is now being given to various schemes, including abolition of a sales tax of 7% on domestic sales of logs to independent domestic producers of plywood and veneer which would boost output in these fields. 8. Altogether, earnings from the export of agricultural commodities may be projected as follows (in million U.S. $): Average 1963-1964 1970 Coconu.t products 235 225 - 240 Sugar, centrifugal and other 150 145 Logs and lumber 152 180 Abaca 37 35 Tobacco, cigars 12 20 Fruits and vegetables 14 25- 30 Tota 6i0 3 - ___'i , it- is hnvvevn expected thar~t eanngs fromn ncn-agnnrcu,21tural roduics minerals and manufactured goods, particularly plywood and veneer -- w11 ann Cm,n, 4±h . 10OATf o10I. 1n.rrn1 .'. TT C 0) fl.11A 4 ..4- . nk .s TT C '4tOfiT rise.1. fro their VJ.LVL± JL7'4. leve ofJ U).S1*.0 YAJ..1J mil"'L±U ion t abokutu U.S $20104.J million in 1970. As a consequence, total export earnings are expected to iUraoe bY4 rougAly o au[ually, while earuuigs from agriculural commodities are projected to go up by only 1% - 1.5% a year. Domestic Agriculture 9. In irrigation, the shortage of Government funds and lagging technical preparation kept spending to small amounts, Howevery some progress is now being made in rehabilitating existing irrigation systems and completing schemes left unimnished in the past. A new agency has been created for the construction and management of irrigation schemes Which promises to Ue mUre e11ectiveome small scheme are now unter preparation and it is expected that large schemes will follow as the results of a river-basin study by the U.S. Dureau 01 Reulavation become available, 10. Under the Land Reform Act of 1963, share-tenancy will be avlUsJ.±0Ld by oUverting i t,o a fstv stp i v eashol atva SaxOCmiu rent of one-quarter of crop value. It is intended that all leaseholds will eventuallyCI1 become,.. freeholds. asn aeas are decred lnnst.rnfnrm distaricts, the land acquired by the newly created Land Bank, and title transferred to the present tenant Progres in4 carr4in ot the land reform has heen very slow and the area where preparatory investigations are being conducted amounts only to a few thousand hectareso The nroblems of organizing land reform on a large scale are still far from being solved, In addition, the shortage of Government funds has made it impnssible so far to provide more than minimum starting funds to the Land Bank, while the Agricultural Credit Ainistration (the reorganized ACnFA) has lingered on without an infusion of new funds. 11. In conjunction with land reform, a major reorganization of the G .oe ..nm. - n utnwl saw. caes hae taken nlacn. nroviding for a degree of coordination hitherto unknown. This was a major step forward. Houwvar is effectiveness in practice is tied to the pace of land reform. As this has proved to be much slower than originally expected and probably ll ontisnue to be fairlyslow- it may take a long time before the re- organization of agricultural service will benefit a sizeable area, The Gov.nent recognized this and in 1964 created the Rice and Corn Authority, with coordinating powers similar to those of the Land Reform Council, wiich would be rasnnsihl for anelerating the growth of output on staple foods in areas not covered by land reform proceedings. Legislation giving broad powers to this new agency was held un in the Congress for some time, but passage of the bill is now expected before the end of the current session. This new agency coulA well become an effective instrument to promoting the growth of domestic agriculture, provided that it exercises determined leadership in annrinating the various branches of the government agri-- cultural services and sufficient funds are made available to support its activnities, part narly by investments in irrigation and roads. 12 . in the short run, improvements will nrobably be most difficult to accomplish in the production of rice, the most important crop which covers half the area under domestic crops and contributes roughly 10% area is irrigated and sufficient water for double cropping is available fo-r only 6%of the land. The fact tha ric p_ ouciu - ~ -~ ---y depende-nt _ _ I-- ___A on natural rainfall and that a considerable part of the land now under paddy co-itof uplan areas which are auie unproauctive, is reflected in yields which, on the average, are almost the lowest in the Far East It would apear tat the key t inceasing rice productlon les in improving the productivity of land well suited to paddy cultivation. Realization of the poential thatu G vo w.l±± ±qu.u- large invetmenus in irrigatlOn dBL ancillary facilities. Moreover, new strains would have to be developed that are responsive to Lertililzer These basic improvements will take Lime. However, it should be possible over the next few years to achieve some acceleration of growth above the recent rate of less than 2/ a year Wibh some improvements in existing irrigation facilities, wider distribution of improvU seUs and Xertlizer ana Detter use of extenslon services. 13, hances appear to be much better in the medium term for increas- ing at a faster pace the output of corn, the second largest food crop. In the second half of the 19501s, this had been the most dynamic crop, its production expanding by 7% a yearo More recently, growth of output slowed down. to 5% as marketing difficulties developed and the growth in demand for feed corn declined when the rapid expansion of poultry and pig pro- duction ceased. Here, too, are basic problems to be overcome, especially the development of suitable hybrid seeds and of effective remedies to insect and pest infestation which is particularly dangerous in Mindanao where most of the land suitable for growing corn commercially is located. However, even without this solution fairly rapid expansion of output seems possible provided the demand exists to justify it. This is largely a matter, of developments in the field of poultry and livestock production where the prospects are favorable as will be seen below. 14. Apart from the staple foods there is a larger variety of vegetables and fruits that are grown in the Philippines now and whose production could be expanded significantly, Among them are soybeans 1hose cultivation was begun only recently with promising results. Production of beans and peas could be increased substantially by growing them in rotation with rice and corn. More extensive cultivation of arabicacoffee could make the Philippines self-sufficient in coffee. There are good possibilities for expanding the production of fruits both for domestic consumption and for export, including citrus fruits, mangoes etc. In practically all these fields successful initial efforts were made in the past. All too often they ran into difficulties because inadequate provision had been made for marketing and processing. If these shortcomings could be corrected, subsidiary crops could make a substantial contribution to total agricultural output for the domestic market. 15. This is also true of livestock for which climatic conditions are very favorable in parts of Luzon and Mindanao. Yet the cattle pop-- ulation at present is still only a fraction of the size it had been before the war and is totally insufficient for meeting the country's requirements of dairy products and meat, The Government is now actively investigating schemes through which it could help expana the dairy and livestcck industry. Interest in the private sector is also growing and the Economic Development Foundation, a new consultant organization sponsored jointly by the Government and U.S.A.I.D., is working on proposals for an integrated feed-cattle-meat-packing industryo Sugar planters are also beginning to acquire cattle, using sugar-cane tops as basic feed. A large-scale meat-packing company has recently been established in Manila which will generate considerable demand for hogs and cattle.