Report No. 525W8PH The Philippines: An Agenda for Adjustment and Growth November 30,1984 East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS January --, to June 22, 1983 - US$1.0 = P 9.4 - P 1.0 = US$0.11 June 23 to October 4, 1983 - US$1.0 = P 11.0 - P 1.0 = US$0.09 October 5. 1983 to June 5. 1984 - US$1.0 = P 14.0 - P 1.0 = US$0.07 June 6 to October 15, 1984 - US$1.0 = P 18.0 - P i.0 = US$0.06 October i5 to November 1.5. 1984 - USS1.0 = ? 20.0 (a-;eraae floacing rate) - P 1.0 = USSO.05 ACRONYMS DBP - Development Bank of the Philippines CDP - Gross Domestic Product GFI - Governmenc FinanciaL Institutions GNP - Gross National Product ha - hectare ICC - Investment Coordination Committee IBRD - International Bank for Reconstruction and Development IFPRI - International Food Policy Research Institute IMF - International Monetary Fund kcal - kilocalorie LBP - Land Bank of the Philippines LIBOR - London Inter-Bank Offering Rate XAF - Ministry of Agriculture and Food MBOE - Million of barrels of fuel oil equivalent MOE - Ministry of Energy MRR - Manila Reference Rate MYW - Megawatt NACIAD - National Council on Integrated Area Development NASUTRA - National Sugar Trading Agency NEA - National Electrification Administration NEDA - National Economic and Development Authority NPC - National Power Corporation OISF - Oil Industry Special Fund PCA - Philippine Coconut Authorit- PHILSUCOM - Philippine Sugar Commission PNB - Philippine National Bank PNOC - Philippine National Oil Company SDR - Special Drawing Rights UNICOM - United Coconut Oil Mills FOR OMCIAL USE ONLY PHILIPPINES COUNTRY ECONOMIC MEMORANDUM (An Agenda for Adjustment and Growth) Table of Contents Page No. WORLD BANK REPORTS ON THE PHILIPPINES, 1983-84 SUMMARY AND CONCLUSIONS . .. ..............*. i-viii I. OVERVIEW OF ADJUSTMENT ISSUES AND MEDIUM-TERM PROSPECTS 1 A. Introduction .1 B. The Current Economic Crisis and its Causes .2 C. The Short-Term Adjustment Process 5 D. A Strategy for Medium-Term Adjustment and Growth. 6 E. Medium-term OutLook . .......................... . ... 8 F. The Revised Development Plan .10 II. XACRO-ECONOMIC ADJUSTMENT ISSUES AND PROSPECTS .12 A. Balance of Payments .................. 12 (a) Recent Developments .... 12 vi) Current Account . .12 (ii) Patterns of External Financing and Debt 16 (iii) Policy Responses to the Crisis . .17 (b) Outlook and Options for the Future 19 Ci) Short-term Prospects . . i (ii) Medium-term Adjustment ....................... 19 B. Public Finance . . .23 (a) Past Performance and Policy Issues . 23 Ci) Overview of Expenditures . .25 Cii) Resource Mobilization . .26 (b) Stabilization PoLicies ............................,. 27 (c) Medium-term Prospects and Adjustment Needs . .28 (i) Expenditures . . 29 (ii) Resource Mobilization . .29 C. Financial Intermediation ..30 (a) Sectoral Reforms and Performance .30 (i) Financial Sector Reforms .30 (ii) Structure and Growth of the Financial System ............. ...... 31 (iii) Resource Mobilization and Allocation . .33 (iv) Recent Setbacks and Responses ..33 This report presents the findings of a mission which visited Manila in Karch/April 1984. The mission consisted of Regina Bendokat (leader), Rozany Deen, Madhusudan Joshi, Jeffrey Katz, Christian Moulin, and Bhanoji Rao. The report was updated and discussed with the Government in October 1984. LThis document has a restricted distribution and may be used by recipicnts only in the performance of their ofrGcial duties. Its contents may not otherwise be disclosed without World Bank authorizationL - ii Page No. 'LI. MACRO-ECONOMIC ADJUSTMENT ISSUES AND PROSPECTS (cont'd) (b) Impact of Stabilization Policies ..................... 34 (i) Monetary Policies .. *..... . ....e. ............ . . 34 (ii) Interest Rate Policies ....................... 35 (c) Development Prospects and PoLicy Issues . . 36 (i) Short-term PoLicies .36 (ii) Longer-term Policies . .37 III. SECTORAL ADJUSTMENT ISSUES AND MEDIUM-TERM PROSPECTS .39 A. Manufacturing Industry ....40 (a) Structural Issues and Past Performance. . 40 (b) Impact of Stabilization Policies . . .43 (c) 1edium-term Prospects and PoLicy Issues . . .45 (i) Policy Issues ..45 (ii) Growth Prospects ..46 B. Energy ....47 (a) Past Performance and Sectoral Adjustment .... 47 (b) Impact of Stabilization Policies . . . 50 (c) Development Prospects and PoLicy Issues... 50 (i) Energy Demand ..50 (ii) Energy Pricing............... 52 (iii) Energy Supply ..54 (iv) Balance of Payments Impact 56 (v) Energy Investment Program 1984-88 . .57 Cvi) Financing the Investment Program . .58 C. Agriculture ....59 (a) Past Performance and Structural Issues. 59 (i) Past Growth and Export Trends .59 (ii) Policy and Institutional Issues 61 (iii) Employment and Poverty Issues .63 (b) Growth Prospects and Policies ....... 64 (i) Medium-Term Development Strategy .64 (ii) Growth Scenarios ...........65 (iii) Prospects and Policies in Key Subsectors 67 (iv) Irrigation .................O*.71 STATISTICAL APPENDIX .72 MAP - L1L - Page No. TEXT TABLES Table No. I.1 Investment and Saving Ratios, 1978-84 .... ................ 3 I.2 Trends in Capital-Output Ratio, 1970-83 ... S..* .... 7 I.3 Growth Performance and Projected Growth Scenarios, 1975-90 ................................................ 10 II.1 Current Account Summary, 1972-83 ....... ..........so... 13 II.2 InternacionaL Comparison of Manufactured Exports and Terms of Trade, 1972-83 14 II.3 Selected Payment RequiremenEs in Relation to Exports of Goods and Services, 1972-83 .15 1I.4 External Liabilities in Relation to Export Earnings for Selected Countries, 1982 .16 II.5 Summary of Excernal Capital Requirements and Sources, (High Case), 1985-90 ................................... 22 II.6 Public Finance Overview, 1978-85 ......................... 24 II.7 Trends in Public Expenditures, 1978-82 ................... 25 II.8 Structure and Growth of the Financial System .... ......... 32 Il.9 Nominal and Real Interest Rates, 1982-84 ................. 36 _II.1 Manufacturing Industry: Selected Indicators of Structure and Performance ........................................ 42 III.2 Energy Consumption Indicators, .-973-83 ................... 48 III.3 CommerciaL Primary Energy Balance, 1983-90 .... ........... 51 II1.4 Sectoral Composition of Commercial Energy Consumption, 1983-90 .53 III.5 International Comparison of Prices for Selected Petroleum Products, June 1984 .................................. .. 54 III.6 Growth and Structure of the Agricultural Sector, 1972-83.. 60 1II.7 Growth Scenarios for Agriculture, 1983-90 ................ 66 III.8 Indicative Export Earning Projections in Two Growth Scenarios, 1983 and 1990 .68 WORLD BANK REPORTS ON THE PHILIPPINES, FY1983/84 /a A. Sector Reports and Special Economic Studies Irrigation Program Review, No. 3545-PH, December 1982 Agricultural Credit Sector Review, No. 4117-PH, May 1983 Population, Health and Nutrition, No. 4650-PH, January 1984 A Review of External Debt, No. 4912-PH, November 1984 B. Appraisal Reports Agriculture and Rural Development Central Visayas Regional Project, No. 4504-PH, October 1983 Agricultural Sector Inputs Project, No. P-3860-PH, July 1984 Structural Adjustment Second Structural Adjustment Loan, No. P-3389-PH, April 1983 Transportation Fifth Highway Project, No. 4535-PH, May 1984 Urban Regional Cities Development Project, No. 4094-PH, March 1983 Municipal Development Project, No. 5027-PH, May 1984 Energy Petroleum Exploration Promotion Project, No. P-3297-PH, September 1982 Geothermal Exploration Project, No. P-3360-PH, September 1982 Education Vocational Training Project, No. 3750-PH, August 1982 Water Supply First Rural Water Supply and Sanitation Project, No. 3866-PH, August 1982 /a The previous economic report "The Philippines: Selected Issues for the 1983-87 Plan Period," No. 3861-PH, June 1982, lists World Bank reports on the Philippines distributed in FY1980-82. SUMMARY AND CONCLUSIONS 1. The Philippine economy is in the midst of a severe economic and financial crisis. Falling prices for export goods, increased oil prices and interest rates, a drought, combiLied with structural weaknesses of the economy and a changed political situation have stopped the growth process, eroded investor confidence, and left the economy in a position of inability to pay its external debt. Serious questions now arise over the medium-term prospects of the economy and the set of policies required to restore growth and improve internationaL creditworthiness. This report examines the causes of the worsening economic situation, summarizes the stabilization program, and attempts to Lay out an agenda for medium-term adjustment and sustainable economic growth. The Causes of the Economic Crisis 2. The roots of the current crisis can be traced to changes in the international economy after 1979 and the Government's attempt to adapt to it. Under-estimating the severity and duration of the worLd recession, and its domestic impact, the Government embarked upon a major expansion of pubLic investment. This program was designed both to accelerate development of domestic substitutes for imported petroleum and to act as a countercyclical buffer to the international recession. Thus, the share of public investment in GNP expanded while private investment stagnated; public sector savings, however, did not increase in tandem with investment. The public sector investment-savings gap, which widened from 3X to 6% of GNP during 1979-82. was financed Largely through commercial bank credits which then were readily available. The expanded investment program produced some substantial benefits, in particular, oil imports were reduced as a result of energy investments and pricing policies. For the most part, however, the choice of projects left much to be desired. Investments in the public and private sector were often over-priced, poorly designed, or resulted in excess capacity or industries that could not compete in world markets. Many poorly planned private sector projects became a public sector burden since they were financed through government-owned financial institutions, or through government- guaranteed domestic and foreign borrowings. 3. The Government early on recognized that the economy's industrial structure was inefficient, highly capital- and import-intensive, and insuffi- cientLy geared toward export markets. Thus, starting in 1980, it began to liberalize the trade regime and the financial sector and to improve export and investment incentives. These reforms, whose full impact was expected to be longer-term, were swamped by the growing balance of payments problems in the short term. The continuation of the international recession through 1982 led to a deterioration of the Philippines' terms of trade by 18% in 1980-82. It also meant little growth in manufactured exports. Copper prices reached an all-time low, forcing several Philippine companies to stop production, further reducing export volumes. Sugar prices also remained low, and the volume of agricultural exports, which stilL accounted for one-third of Philippine export earnings, was adversely affected by a drought in 1982/83. At the same time, - ii - real international interest rates increased, and the interest burden on the rapidly expanding external debt of the Philippines grew from 1.4% of GNP in 1979 to 4.7% of GNP in 1983. Its growth was a major factor in the widening of the current account deficit from 5% of GNP in 1979 to 8% of GNP in 1983. 4. The results of deteriorating internal and external economic perform- ance were an increasing capital-output ratio and a deceleration of economic growth. GNP, which had grown at an average 6% during the 1970s, increased by only 1% in 1983 and is expected to decline by as much as 6X in 1984. With population growth of 2.5% and labor force growth of 3%, the economy failed to produce sufficient productive employment opportunities; under-employment increased, real wages declined steadily, and social tensions mounted. 5. Faced with continued poor economic performance, the Government's reaction was insufficient, both in timing and content. In particular, exchange rate policies necessary to complement the adjustment program lagged, and the real effective exchange rate appreciated by 10% between 1979 and end- 1983. While the national government budget was curtailed in 1983, public corporations continued their large investment programs, relying on both external and domestic financing. 6. With continued poor economic performance, a rising debt service ratio, and reserves dwindiling to support an unsustainable exchange rate, external creditors attempted to contain their exposure. Existing credits were rolled over on shorter terms, and new money was increasingly difficult to obtain. When the political situation changed in August 1983, externaL credit lines were terminated, capital flight accelerated, and reserves were not available to offset the ensuing massive balance of payments deficits. As a result, the government was forced to declare a moratorium on debt repayments and begin negotiations for a debt rescheduling. Stabilization Program 7. Since mid-1983, the Government has introduced several measures aimed at stabilizing the economy. The peso was devalued vis-a-vis the US-dollar by 43% between June 1983 and July 19S4, the public sector deficit was narrowed, and reserve requirements were increased to reduce liquidity of the banking system. The impact of these actions, however, was limited. The real effective exchange rate declined by only 14%. Budgetary stringency did noc extend to public corporations and was relaxed in early 1984 to accommodate additional financing requirements of financial institutions. Liquidity reduction was also hampered by the fact that many financial institutions were already undergoing a liquidity crisis due to weak performance of the real economy and a deteriorating portfolio. Thus, the stabilization process has been protracted, inflation has increased to an estimated 45-50% in 1984, and the positive impact of some measures has been eroded. 8. In the last quarter of 1984, the Government has expanded and strengthened the stabilization program to restore stability of the economy within the next 18 months. The program seeks to control inflation by reducing credit to the public and private sectors, restore external balance through a floating exchange rate, improve the level and structure of taxation, and - iii - eliminate the temporary foreign exchange controls. In public finance, the Government aims at reducing the public sector deficit to less than 2Z of GNP by 1985. Substantial revenue measures have been taken, including revisions of excise taxes, deletion of tax exemptions for major public corporations, and the introduction of a more broadly based sales tax, thus reducing the dependence on international trade taxation. A special effort will be undertaken to reduce investment by public corporations and increase their self-financing. The Government, which has made further cuts in its investment program, is committed to giving priority to ongoing projects which are close to completion and to projects which have a large ODA component, while ensuring adequate funding for operation and maintenance of existing investments. Financing of public investment is designed to prevent an increase in exposure of the domestic banking system to the public sector. On the monetary side, the Government aims at reducing reserve money through additional sale of government financial instruments to the public; this will require further increases in interest rates. A flexible exchange rate policy, the abolition of exchange controls, and increased incentives for export production, especially in the agricultural sector, are designed to contribute to export growth and restrain imports, thus reducing the current account deficit substantially. Import reductions, while necessary to reduce the external imbalance, will constrain investment and economic growth in 1984-85. The Government has requested an IMF standby arrangement to support the stabilization program. 9. Stabilization of the economy is the first and indispensable task facing the Philippine decision makers today. The heavy cost of stabilization effort in terms of lost growth opportunity can and should be reduced. The challenge for the management of Philippine economy is to design and implement the stabilization phase so as to provide a basis for the resumption of adequate long-term growth and for a durable resolution of the debt problem and the external imbalance. While a rigorous and timely implementation of the stabilization program may reduce its economic cost, a systematic concentration of public expenditures on maintaining the existing capital and completing the most viable projects may be beneficial by itself. Enhancing the competitive- ness of the Philippine industry, and the discipline in the financial manage- ment will serve simultaneously the short-term stabilization objectives and that of longer-term growth. But more fundamentally, the Government needs to transform the current crisis into an opportunity to carry out a long-term development strategy. This requires that the economic management should also have a longer-term perspective, in addition to short-term stabilization concerns. A Policy Agenda for Medium-Term Adjustment and Growth 10. The present crisis has obscured many of the real underlying potentials and capacities of the Philippine economy. The country is endowed with natural and human resources to be able to move into the league of East Asian exporters, such as Korea, Taiwan and Singapore. The question is how the Government can implement the stabilization measures in a way which is compatible with the structural reforms required to restore a viable economy. - iv - 11. The agenda proposed in this report for Government policy actions centers around a strategy based on four principles: - First, the improved utilization of existing capital stock and completion of those on-going investment projects that have high future returns; - Second, the careful selection of new public sector investments so as to focus on those having high returns, particularly in the short run, a high foreign exchange impact, or provide for the rehabilitation of existing infrastructure. - Third, the establishment of a policy environment for the private sector that emphasizes efficient import substitution, export production, and increased employment opportunities. - Fourth, a major expansion of domestic resource mobilization by the public sector through both a reform of the tax system and through better self-financing by the public corporations. Economic policy making would need to reflect these principLes already during the stabilization period to provide clear and consistent policy signals to the private sector and a framework for investment decisions. These principles have implications for all sectors of the economy, but in different degrees. Below, the policy agenda for specific sectors is spelled out in more detail. 12. Trade Policy. In this area, substantial policy changes which have been initiated in 1980, need to be maintained and expanded. They are required to achieve high export growth of 6% in volume between 1984 and 1990 and to ensure that economic growth is not unduly constrained by a low import growth of about 1% during the period. Most crucial for successful balance of payments adjustment will be the continuation of a flexible exchange rate policy and the elimination of remaining foreign exchange controls, initiated under the stabilization program. While the international competitiveness of Philippine exports essentially depends on the efficiency of production in the real economy, export promotion policies need to be maintained. In particular, the bias against export industries under the tariff regime should be reduced as scheduled in the 1981-85 trade reform program and the administrative procedures for exportation simplified. Since imports will be constrained by the availability of foreign exchange for a number of years, efficient import substitution will be essential; in addition to exchange rate policies, pricing policies in energy and agriculture will be important instruments in that respect. The scheduled reduction of import tariffs, realignment of related indirect taxes, as well as gradual reduction of quantitative import restrictions are needed policy measures. 13. Public Finance. While the stabilization program introduces steps in the right direction, further policy measures are required to improve the structure of public finance in the next few years. The objective is not only to reduce the public sector deficit to levels commensurate with continued balance of payments adjustment, but to establish an expenditure pattern that is based on the medium-term development objectives for the economy and to provide a revenue system that would support this program. On the expenditure side, this implies: - First, the National Government needs to restore recurrent expenditures to more adequate levels while improving their efficiency; e.g. while limiting public sector employment, operation and maintenance expenditures need to be augmented selectively to ensure efficient use of the substantial past investment. - Second, since public investment will remain severely constrained for the rest of the decade, improved investnient programming becomes a high priority, at the level of implementing agencies, line minis- tries, as well NEDA and the Budget Ministry, to ensure that the investment program focusses on projects with a high economic rate of return. - Third, priority should be given to completion of ongoing projects with high marginal rates of return. New projects would be primarily those which complement existing investments or have a short gestation period. All projects that have been planned before the financial crisis of 1983 need to be re-assessed in light of increased scarcity and cost of foreign funding. 14. The main issue in public finance, however, will be resource mobili- zation by the national government as well as public corporations. Public corporations need to increase their internal cash generation as the main source of future growth of their investments, consistent with efficiency and equity objectives. Beyond this, the principal area requiring reform is the national government tax system. While the stabilization program includes initial measures, a comprehensive reform of the tax system is required to provide the basis for sustained growth of public expenditures. The reform has to address four major and chronic problems: (a) increase the tax effort further through broader-based taxes; (b) improve the structure of the tax system by reducing the heavy and growing reliance on indirect, especially international trade, taxes; (c) improve the cost-effectiveness of the tax system by expanding the reform of tax incentives beyond manufacturing industry; and (d) improve the efficiency of tax collection and administration. 15. Financial Intermediation. As is the case in the public sector, the financial system of the Philippines will have to reduce its reliance on for- eign savings. First, this requires increased emphasis on financial sector policies designed to raise domestic savings and thus maintain an adequate size of the financial system. Second, the structure of the financial system needs to be rationalized further and the efficiency of its operations improved through better supervision by the Central Bank. Third, government financial institutions, which have grown rapidly, need to reduce their portfolios to a - vi - size commensurate with their resource mobilization from non-budgetary sources; this also requires restructuring of the largest institutions to make them more manageable. Fourth, the deteriorating portfolios of many financial institu- tions require systematic policies for the disposal of non-performing assets and strengthening the evaluation of new project proposals. Fifth, with the tightening availability of financial resources and monetary policy constraints, the role of the Central Bank as a source of funds and its rediscounting policies need to be reviewed to ensure that adequate credit is made available to priority sectors, as e.g. manufacturing exports and agriculture. Sixth, while the ongo4ng government study on public financiaL institutions is expected to provide specific recommendations in several of the policy areas mentioned above, the impact of the financial sector reforms initiated in 1980 should be reviewed in detail to provide specific directions for future financial policy, taking into account the substantially changed medium-term prospects. 16. Manufacturing Industry. This sector is most severely affected by the worsening economic conditions in the Philippines and will experience continued financing and import constraints. The most important policy principle for manufacturing industry, therefore, is a continuation of ongoing policy reforms which aim at increasing the efficiency of the sector through lowering of protection, and reforms of export and investment incentives. This policy thrust needs to be reaffirmed and the interim measures taken in the 1983 crisis to be phased out, in particular, the quantitative restrictions. Trade liberalization should go in tandem with realistic exchange rate movement. In addition, subsector studies have to be undertaken as a priority to establish the rationale and specific policies for restructuring of inefficient industries oriented toward the domestic market which still account for 86% of the value added in the sector. Subsector programs are also required to identify industries which diversify Philippine exports. With respect to the program of major industrial projects, the viability of the projects under implementation as well as those currently deferred should be reviewed, given the severe financing constraints and the change in economic outlook. 17. Energy. The energy sector has a large potential for further efficient import substitution, and the Covernment's reform program which aims at increased domestic energy production, energy conservation, and increased self-financing of investment by public corporations, would need to continue. Priorities of policy action within the sector are changing, however. With the large capacity expansion coming on stream in the next few years, the emphasis should be on efficient use of existing capacity. The energy investment program must give highest priority to the completion of major ongoing projects which would allow to reduce import dependence frcm 772 of commercial energy in 1983 to 56Z by 1990. Once the on-going investments are completed, the energy sector will no Longer be a priority sector for new investments for some years to come, since energy demand growth will be constrained by slow growth of the economy. These and the financing constraints must be taken into account in the current review of the least-cost investment program for the power sector to determine the optimum size and timing of new investments. Energy pricing policy will have to remain the principal tool for demand management and self- - vii - financing of key agencies. In the longer run, there is a need for formulating a policy on rural energy supply, to address the issue of diminishing wood resources. 18. Agriculture. In light of the current economic problems, the Govern- ment is giving increasing attention to agriculture for efficient import sub- stitution, diversification of exports, and increased earning- from traditional commodities. While agriculture will be the main sector to contribute to economic recovery in 1984-85, its medium-term growth prospects are less assured and require substantial policy reforms to realize the sector's produc- tion potential. The most important element in this respect is a comprehensive reform of the incentive framework for agricultural production. While the Government hac taken initial steps in liberalizing poultry prices and increasing the private sector role in rice marketing, further substantial reforms are required. They include: liberalizing pricing policies and marketing arrangements for foodcrops and traditional export crops; revisions in input pricing, in particular fertilizer and irrigation water charges; and review of investment incentives and the trade regime. In addition, the role of government institutions in the agricultural sector needs to be rationa- lized, overlapping functions and conflicting roles - especially in the sugar and coconut subsectors--require attention. More generally, government insti- tutions should concentrate on providing the appropriate policy framework rather than intervening directly in production and marketing. With respect to the irrigation system, the priorities are improved operation and maintenance, thus reducing the need for government subsidies and freeing scarce public resources for investment. Several large irrigation schemes will become operational in the next few years; the emphasis for public investment, therefore, should be on rehabilitation and cost-effecti-.,e communal irrigation schemes. Growth Scenarios 19. The report presents two growth scenarios to illustrate and to delineate the range of possibilities. Both scenarios assume a moderate growth of the international economy which would not constrain Philippine exports. The high case is based on the assumption that the stabilization program, ongoing adjustment measures, as well as other policy reforms described in the report are implemented in a timely fashion. Thus, under this scenario GDP could grow on average at 4% p.a. during 1985-90, reaching 6% by 1990. The attainment of this target is based on a number of critical assumptions, namely: - a more efficient utilization of capital and hence a decline in the incremental capital-output ratio; - resumption of a high 6X export volume growth, with manufactured exports growing by over 8% p.a.; - significant import substitution in energy, permitting a decline of the volume of energy imports by 12% in 1984-90; - viii - - a moderately high growth in agriculture of about 4.3% and a recovery of industry to an average 4.8% growth during the period. In the high case, personal consumption would grow at a rate slightly Lower than the 2.4% population growth rate; per capita consumption would still be 9% lower in 1990 than it was in 1983. Thus, even the high case would include a period of lower levels of living for the population and the possibility of increasing poverty. In the low case, GDP growth would average 1.1% in 1985-90 and reach only 3.0% by 1990. Per capita consumption would be 21% lower in 1990 compared to 1983. Thus, failure to attain a recovery similar to the high case implies the possibility of significant declines in living standards for the majority of the population, growing unemployment, declining real wages, and increasing proportions of peopLe living below the poverty line. The social implications of the low case, as well as its failure to provide an adequate solution to the balance of payments problem, make this a highly undesirable option. Financing Requirements 20. The adjustment outlined above would require considerabLe external financial support. New gross loan inflows would need to average about $2.2 billion annually to meet debt service, allow some rebuilding of reserves, and finance an adjustment of the current account deficit from about 4% of GNP in 1985 to 0.1X by the end of the decade. The debt service ratio on MLT would decline to 27% by the end of the 1980s, but would rise again during the early 1990s, reflecting the effect of the debt rescheduling, before falling off. However, the level of indebtedness would fall notably in relation to exports, which would be a precondition for a restoration of lending from private sources on a voluntary basis. The amount of private foreign capital that will materialize is highly uncertain at this time. Market borrowings will not be feasibLe until creditworthiness is strengthened, but special arrar- ments, including debt rescheduling, may need to be continued in the interim. A realistic recovery program, combined with substantial official support, can lead to the restoration of creditworthiness in the medium term. PHILIPPINES COUNTRY ECONOMIC MEMORANDUM I. OVERVIEW OF ADJUSTMENT ISSUES AND MEDIUM-TERM PROSPECTS A. Introduction 1.01 During the 1970s, the Philippines achieved substantial progress in economic development. ReaL growth of GNP averaged 6%, agriculture grew by almost 5%, and the country became self-sufficient in rice, its major food- crop. Spurred by government support through credit and investment incentives, the industrial sector expanded rapidly at 9Z p.a. Supported by export incentives, nontraditional manufactured exports, especially electronics and garments, grew dramatically and increased their share in exports from insig- nificant amounts to 47% in the early 1980s. Public investment was raised significantLy, expanding infrastructure and social services. 1.02 There were, however, weaknesses in the structure of the economy. The import-substitution strategy in manufacturing industry, which provided high protection, resuLted in inefficient production and high dependence on imported inputs and capital goods. Export industries, while growing rapidly, remained an enclave and highly import-intensive. Thus, manufacturing industry was not the leading sector and had only a limited impact on employment. In agriculture, government marketing and price controls as well as the institu- cional framework had a depressing effect on the output of major export crops, and productivity in many subsectors remained low. As a result, a large part of the popuLation did not benefit significantly from the high economic growth. The country remained vulnerable to balance of payments shocks, since volatile commodity prices affected about half of its merchandise export earnings, and it was heavily dependent on imported fuel. In addition, while public expenditures grew rapidly, long-standing issues of 'ow domestic resource mobilization persisted, and the Philippines relied heavily on exter- nal borrowings to finance the gap. By the late 1970s, however, the Government began to recognize the need to address these underlying structural problems and embarked on a program of reforms in the trade, industrial, financial, energy and resource mobilization areas. Thus, the growth prospects of the economy appeared good for the 1980s, with sufficient external resources available to finance adjustment and growth. 1.03 By 1984, in contrast, a different picture has emerged with the country in the midst of a severe economic and financial crisis. Economic growth has decelerated in the last fo:ur years and is expected to be -6% in 1984. The agricultural sector is suffering from the impact of a drought in 1982/83 and adverse movements in the terms of trade. Industries producing for the domestic market are operating far below capacity and have difficulties meeting their debt service obligations. Due to the proLonged recession, many financial institutions are in a liquidity crisis, and several of them are approaching insolvency. The already high under- and unempLoyment increased further. Private investment has slowed, reducing the generation of new employment opportunities. Inflation has accelerated to 45-50Z p.a., and real wages have been reduced. Export volumes for primary commodities and manu- factures have stagnated, and export earnings have fallen as a result of a serious deterioration in the terms of trade. In October 1983, the Government declared a moratorium on payment of most maturing external debt obligations, and additional capital inflows from commercial banks are currently not available. 1.04 The baLance of this chapter explores the reasons for this rapid reversal of economic conditions and the prospects of the economy for the rest of the decade. It provides an overview of the current economic crisis and its causes, describes briefly the short-term stabilization process, develops a strategy for medium-term viable growth, with particular emphasis on government policy changes required, and presents the medium-term prospects of the eco- nomy. The balance of the report elaborates on the theme of a medium-term adjustment and growth strategy. Part II reviews the situation in crucial macro-economic policy areas, i.e. balance of payments, public finance, and financial intermediation. Part III addresses the same questions at the sectoral level for industry, energy, and agriculture. B. The Current Economic Crisis and its Causes 1.05 The deterioration of the Philippines' economic performance followed the second oil crisis in 1979 and reflected the impact of the subsequent international recession, in addition to structural problems of the economy. The oil import bill increased by 1.8% of GNP from 1978 to 1980. The interna- tional recession led to weak demand and Lower prices for most exports. Thus, export earnings from the traditional primary commodities copper, sugar, and coconut were sharply reduced. Agricultural exports in 1983-84 were also affected by adverse weather. Earnings from non-traditional manufactured exports stagnated; services, thus, were the main element to stabilize export earnings. Despite the deterioration in export performance ar-d the increased foreign exchange requirements for fuel imports, the country continued with large imports of intermediate goods for industrial production, spurred by an exchange rate that did not reflect the true scarcity of foreign exchange. During 1980-82, the Philippines was able to finance its increasing current account deficits from foreign commercial bank credits, although borrowing was increasingly at short maturities and real interest rates on existing and new debt increased. The current account deficit as a consequence rose from an already high 5% of GNP in 1979 to 8% by 1983. 1.06 The growth of the external deficit is mirrored by an increasing investment-saving gap (Table I.1). Gross domestic investment in the Philippines was high by international comparison, while the relatively low national saving effort deteriorated further in 1982-83. The Philippine investment-saving gap which was negligible in the early 1970s, expanded to 5% of GNP by the end of the decade and took a further leap to 8% of GNP in 1982-83. During the same period, the external debt increased rapidly, reflecting the growing inflow of external resources which financed one-third of fixed investment in 1983. A disaggregation of the investment-saving gap shows that the public sector gap was high through most of the period 1978-82. -3- Table 1.1: INVESTMENT AND SAVING RATIOS, 1978-1984 (percentage of GNP) Est. 1978 1979 1980 1981 1982 1983 1984 Gross Domestic Investment 27.0 29.0 28.7 28.7 28.1 27.5 22.0 Fixed Investment 23.9 25.8 25.7 26.1 25.6 25.1 21.3 Private 16.9 18.9 17.2 16.2 16.1 17.3 16.9 Public 7.0 6.9 8.5 9.9 9.5 7.8 4.4 Increase in stock /a 3.1 3.2 3.0 2.6 2.5 2.4 0.7 Gross National Savings 22.4 24.0 23.3 23.3 20.2 19.4 16.8 Private 18.5 18.5 17.8 18.5 16.5 15.3 16.0 Public 3.9 5.5 5.5 4.8 3.7 4.1 0.8 Foreign Savings /b 4.6 5.0 5.4 5.4 7.9 8.1 5.2 Public Investment- Saving Gap 3.1 1.4 3.0 5.1 5.8 3.7 3.6 /a Adjusted downwards for 1978-82. 7T Current account deficit in the balance of payments. Source: NEDA and mission estimates. This corroborates findings -1 that the share of the public sector as an end- user of foreign resources increased during che same period. During 1980-83, public investment, especially in energy, transportation, industry, and housing, kept overall investment at high Levels. The expansion of the public investment program reflected several factors. The effort to substitute indi- genous energy sources for imported oil was in line with the adjustment needs of the economy. The Government also made an attempt to reduce the effects of the deepening world recession through countercyclical public spending. As a result, public investment went up from 7% of GNP at the end of the 1970s to over 9% in 1981-82 and helped to offset a decline in private investment. At the same time, public sector resource mobilization declined, which was a sig- nificant factor in bringing about the current crisis. National government revenue declined steadily from 13.62 of GNP in 1978 to 11.4% in 1982; and public corporations, which accounted for over 60% of public investment during that time, financed only about 15% of their capital expenditures from internal cash generation. The Government, therefore, continued its strategy of relying 1/ cf.: The Philippines: A Review of External Debt, Report No. 4912-PH. November 2, 1984, p. 20. -4- heavily on external borrowings to finance the public investment program at a time when the real cost of external debt was increasing. 1.07 In 1980, the Philippines initiated a five-year program to improve the structure of the economy and, thus, the balance of payments. Besides a large energy investment program, the Government took steps to liberalize the trade regime, decontrol interest rates, and improve industrial incentives. These reforms aimed at reducing the biases favoring capital-intensive import- substituting industries and gave greater incentives for investments in export- oriented industries that foilowed the country's comparative advantage. The impact of these reforms was expected to be felt fully only after several years. 1.08 The strategy of structuraL adjustment combined with accelerated public investment might have been more successful if a number of additional conditions had been met. First, government policy measures to complement the program lagged, in particular with respect to domestic resource mobilization and exchange rate policy. Second, the long gestation period of public invest- ment and the delays in realizing their impact on the economy were not suffi- ciently appreciaced in anticipating the debt servicing burden. Third, as men- tioned above, the international recession aggravated the foreign exchange problem unexpectedly by reducing export earnings while real interest rates increased. Fourth, the legacy of past inefficient industrial investment was aggravated by the worsened economic condition of the Philippines. Past investment incentives, financial policies, and heavy protection had resulted in import-substitution industries which were not efficient. These firms needed to adjust to the new policy environment, but the economic situation and mixed policy signals were not conducive for rehabilitation investment. Fifth, the Government took over a substantial number of private sector companies which were in financial difficulties and needed rehabilitation, thus adding to the public finance difficulties. In addition, the Government came under increasing pressure--because of company closures and rising unemployment--to maintain or increase protection of domestic industries, i.e. to reduce the pace of implementation of the structural adjustment program. 1.09 The economic difficulties of the Philippines have also seriously affected the financial sector. Deteriorating performance of industrial enter- prises was reflected in the worsening portfolio and increasing liquidity prob- lems of financial institutions. Again, the public sector was particularly affected. Although most industrial projects were implemented by the private sector, they were often financed through public financial institutions, such as the Development Bank of the Philippines or the Philippine National Bank, or obtained public guarantees for private financing. Thus, as the industriaL situation worsened, these public financial institutions began to experience difficulties and turned to the Central Bank and the Government for support. 1.10 As the economic performance deteriorated and the creditworthiness of the country decreased, external private creditors attempted to contain their exposure by shifting to short-term credits, beginning in 1980. A large share of these Loans escaped the regular Central Bank debt monitoring procedures and, thus, the magnitude of increased external debt was understated. While some adjustments were made to the exchange rate, these were less than required -5- to maintain the current account deficit at manageable levels; short-term capital and reserves were used to balance the external accounts. The movement to short-term debt and variable interest rates increased the volatility of the external situation, through a higher impact of increasing interest rates on an already precarious current account and through the country's dependence on the external financial institutions to roll over these loans. Thus, when the political situation changed in August 1983, the reduction in credit lines and the capital flight accelerated, resulting in a massive balance of payments deficit which could not be offset by a drawing-down of international reserves. The Government was forced to seek a moratorium on debt payments and to begin negotiations for a debt rescheduling. C. The Short-Term Adjustment Process 1.11 Stabilizing the economv has been a major concern of che Government and several measures have been taken since mid-1983 to reduce monetary growth, restore fiscal baiance, and maintain a flexible exchange rate. From June 1983 to June 1984, the peso has been devalued by 43% vis-a-vis the US-doLlar; spending cuts and tax increases reduced the national government budget deficit to 2% of GNP in 1983; and reserve requirements were increased to reduce liquidity to the banking system. The impact of these actions, however, has been limited. The real effective exchange rate declined by only 14%. Budgetary stringency did not extend to public corporations and was reLaxed in early i984 to accommodate additional financing requirements of three public financial institutions. Liquidity reduction was also hampered by the fact that many financial institutions were already undergoing a liquidity crisis due to weak performance of the real economy and a deteriorating portfolio. Thus, the stabilization process has been protracted, and the positive impact of some measures has been eroding over time. 1.12 In the last quarter of 1984, the Government has expanded and strengthened the stabilization program which aims at restoring stability of the economy within the next 18 months. The program aims to control inflation by reducing credit to the public and private sectors, restore externaL balance through a floating exchange rate, improve the level and structure of taxation, and eliminate the temporary foreign exchange controls. The Government aims at reducing the public sector deficit to less than 2% of GNP by 1985. Substan- tial revenue measures have been taken, including revisions of excise taxes, deletion of tax exemptions for major public corporations, and a more broadly based sales tax, reducing the dependence on international trade taxation. A particular effort will be undertaken to reduce investment by public corpor- ations and increase their self-financing. The Government, which has made further cuts in its investment program, is committed to giving priority to ongoing projects which are close to completion and to projects which have a large ODA component, while ensuring adequate funding for operation and mainte- nance of existing investments. The Government is reviewing the 1985-86 public investment program with World Bank assistance. Financing of public investment is designed to prevent an increase in the exposure of the domestic banking system to the public sector. Measures to address the severe funding problems of public financial institutions, which result from rapid expansion and deterioration of their loan portfolio as well as large guarantee obligations -6- for private investment projects, include restrictions of new lending and guarantees. To reduce inflation, the Government aims at reducing reserve money through additional sale of government financial instruments to the public; this will require further increases in interest rates. A flexible exchange rate policy, the abolition of exchange controls, and increased incen- tives for export production, especially in the agricultural sector, will con- tribute to export growth and restrain imports, thus reducing the current account deficit substantially. Import reductions, while necessary to realize the externaL imbaLance, will constrain investment and economic growth in 1984- 85. The Government has requested an IMF standby arrangement to support the stabilization program. 1.13 Stabilization of the economy is the first and indispensable task facing the PhiLippine decision makers today. The heavy cost of stabilization effort in terms of lost growth opportunity can and should be reduced. The challenge for the management of the PhiLippine economy is to design and imple- ment the stabilization phase so as to provide a basis for the resumption of adequate long-term growth and for a durable resolution of the debt problem and the external imbalance. While a rigorous and timeLy implementation of the stabilization program may reduce its economic cost, a systematic concentration of public expenditures on maintaining the existing capital and completing the most viaole projects may be beneficial by itself. Enhancing the competitive- ness of the Philippine industry, and the discipline in the financial manage- ment will, serve simultaneously the short-term stabilization objectives and that of longer-term growth. But more fundamentally, the Government needs to transform the current crisis into an opportunity to carry out a long-term development strategy. This requires that the economic management should also have a longer-term perspective, in addition to short-term stabilization concerns. D. A Strategy for Medium-Term Adjustment and Growth 1.14 The improvement of international creditworthiness will depend, aside from the implementation of a comprehensive stabilization program, on increas- ing growth of output and an improved balance of payments. These, in turn, will depend on higher domestic resource mobilization and enhanced efficiency of resource use. Although the present crisis has obscured the underlying development capacity of the Philippine economy, it is endowed with natural and human resources which would allow it to become one of the leading East Asian exporters. The past record attests to the Government's ability to adjust economic policy as a basis for future growth. The challenge now for the Government is to implement the measures under the stabilization program in a way which is compatible with the ongoing reforms which aim at improving the structure of the economy. In addition, the Government would need to expand the adjustment program to other sectors, in particular agriculture, and to address structural issues in public finance. 1.15 A possible strategy for resumption of longer-term growth, in a period in which funding for new investment is constrained severeLy, could be based on the following four principles: -7- (a) improved utilization of the existing capital stock and completion of those on-going investment projects which have high future rates of return; (b) careful selection of new public investments so as to focus on those having high returns, particularly in the short run, a high foreign exchange impact, or provide for the rehabilitation of existing infrastructure; (c) establishing a policy environment for the private sector that emphasizes efficient import substitution, export production, and increased employment opportunities; (d) a major expansion of domestic resource mobilization by the public sector through both a reform of the tax system and through better self-financing by public corporations. 1.16 The recent period of high investment and low growth has left an endowment of an unutilized capital stock which can play an important role in the future recovery. Rough estimates of the aggregate capital stock indicate that the ratio of capital to output increased from about 1.9 during the 1970s to 2.4 for the period 1980-83. The incremental capital-output ratio more than doubled, from 3.9 to 10.6 during the same period (TabLe I.2). The rise in the capital-output ratio reflects a number of factors, including past investment incentives and interest rate policies which favored capital-intensive private investment, as well as--more recently--the shift of public investment towards heavily capital-intensive, long-gestation projects, the choice of marginal projects which will add little to output, and poor management. External factors, ranging from adverse weather to a deterioration of the terms of trade, also contributed to reducing output, leaving a large portion of the productive capital stock unutilized. At the present time, it is not clear how much of the existing capitaL stock is unutilized because of poor investment planning, and how much could be usefully re-employed given a restoration of a favorable international environment and appropriate domestic management. It seems possible, however, to increase total output by as much as 20% with little or no additional investment, if capital productivity is restored to the level of the 1970s. Table I.2: TRENDS IN CAPITAL-OUTPUT RATIOS, 1970-83 1970-79 1980-83 Average capital-output ratio 1.9 2.4 Incremental capital-output ratio 3.9 10.6 Source: Mission estimates. -8- 1.17 Increasing capital productivity will entail not only a better use of existing capital, but also priority given to the completion of ongoing proj- ects with high future returns. A judicious use of new investments is likely to result in a choice of projects which will mainly complement existing investments or rehabilitate existing capital stock. For the public sector, this means better project analysis and inveJtment programming as well as tighter control over the investment programs of public corporations. For the private sector, the Government needs to strengthen its policies which aim at increasing investment in export industries; it also needs to provide incen- tives for investment toward developing primary inputs for export industries. 1.18 The strategy of blending some new investments with better use of existing capital and policy changes which affect incentives will take differ- ent forms in different productive sectors. In manufacturing industry, many of the sectoral policy measures are already being implemented. In parcicuLar, reduced protection through reform of the tariff regime and a revision of export and investment incentives aim at improving the efficiencv and inter- national competitiveness of the sector. Continued government adherence to these reforms needs to be affirmed while the stabilization program is being implemented. In addition, exchange rate policies in line with the industrial policy principles of increasing efficiency of home-oriented industries and promoting export industries need to be maintained. Direct government inter- vention thus can be limited to resolving the issue of rehabilitating/livesting firms which have been taken over by the public sector due to financial difficuLties. In energy, large public investments, which have been made to reduce oil imports, are now coming on stream and will have a significant impact if they can be used efficiently. To ensure this, emphasis on operation and maintenance as well as limited rehabilitation investment are needed. New investments are no longer a priority for a period of time, given the expected reduction in dcmestic demand growth and international energy prices. In agriculture, a significant amount of investment has gone into expanding the irrigation system. Increased output can also be realized from the more efficient use of the existing system, as well as through investment in small- scale communal irrigation systems. Recent moves to liberalize agricultural marketing arrangements and to limit price controls, if continued, could provide the necessary incentive framework that would make possible increased output of such crops as rice, corn, and coconuts, as well as non-traditional agricultural exports. The analysis of these themes in the productive sectors is developed more fully in Part III. E. Medium-Term Outlook 1.19 The medium-term outlook for the Philippine economy, at this junc- ture, is highly uncertain. This uncertainty results from the unclear future of the international trade and financing environment, volatile commodity prices, the prospect for the implementation of stabilization measures and con- tinuation of structural reforms domestically, as well as private sector responses to government policies and political developments. 1.20 There is a wide range of possible growth scenarios that could be constructed for the Philippine economy, based on various combinations of - 9 - assumptions. This report presents only two cases for the period 1985-90 (Table 1.3) to delineate the range of possibilities; i.e., any growth and adjustment path between these scenarios is conceivable as well. The premise for both cases is that future external financing is severely constrained and that the growth path of the Philippine economy will depend essentially on efficiency improvements and investment levels determined largely by domestic resource mobilization. Both scenarios assume a moderate growth of the international economy which would not constrain demand for Philippine exports. In particular, CNP growth in the industrial countries is assumed to average 3% p.a.; however, the impact of e.g., a 22 GNP growth in the indus- trial countries could reduce Philippine export earnings by 2-3% per year. 1.21 While it is impossible to quantify precisely the impact of a suc- cessful recovery program, the high case illustrates the opportunities of a growth path which could result from a strategy of prudent investment, effi- cient utilization of existing capital, and policy changes in che incentive structure. The high-case scenario is based on the assumption that the stabilization program is fully implemented in a timely fashion and that the ongoing adjustment measures as well as other policy reforms described in sub- sequent chapters are implemented. Thus, under this scenario, it should be possible to have an average GDP growth rate of 4.0% during the 1985-90 period, with growth reaching 6% by 1990. The high case is based on the following assumptions which are built into the projections: (a) better utilization of the capital stock and judicious new invest- ment, which will permit a decline Ln the incremental capital-output ratio to 3.7 bv 1990, compared to a level of 7.0 in the Low case; (b) resumption of high export volume growth, with total exports growing at close to 6%, and manufactured exports by over 8%; (c) significant import substitution in energy, permitting a decline in the volume of oil imports by 12% in 1984-90; (d) a moderately high growth in agriculture of about 4.3%, permitting significant import substitution for food and primary products, but only moderate growth of agricultural exports; and (e) a recovery of the industrial sector to an average growth rate of 4.8% during the period. Personal consumption expenditures would grow at a rate slightly lower than the 2.4% population growth rate; per capita consumption in the high case, thus, would be 9% lower in 1990 than it was in 1983. The growth of the labor force is expected to be about 3.1% per year, reflecting high population growth. Thus a GDP growth of 4.0% as in the high case may be insufficient to create enough productive jobs for all of the labor force entrants. - 10 - Table I.3: GROWTH PERFORMANCE AND PROJECTED GROWTH SCENARIOS, 1975-90 (percent per year, period averages) 1975-79 1979-83 1984 1985-90 Estimate High Low GDP 7.1 3.4 -6.0 4.0 1.1 Industry 9.3 3.1 -10.3 4.8 1.0 Agricul:ure 5.9 2.4 1.5 4.3 2.4 Services 6.0 4.4 -6.2 2.8 -0.1 Personal consumption 5.5 3.8 -4.4 2.0 -0.1 Fixed investmer.t 10.5 2.0 -22.0 4.1 0.8 Merchandise Imports (volume) 10.3 -1.4 -26.0 0.9 -1.2 Merchandise Exports (volume) 13.5 4.8 0 5.5 3.5 Source: NEDA for historical data, mission estimates and projections. 1.22 The low-case scenario places more emphasis on the downward risks and presents a development path that wouLd result from less successful and timely domestic adjustment. Thus, in the low case, GNP growth would average 1.1% in 1985-90 and reach only 3.0% by 1990. Per-capita consumption in 1990 would be 21% below the 1983 level. A low-case growth of about 1% would mean growing under- and unemployment in the economy. Thus, failure to attain a recovery simiLar to the high case implies the possibility of significant declines in living standards for the majority of the population, growing unemployment, declining real wages, and increasing proportions of people living below the poverty line. The social implications of the low case, as well as its failure to provide an adequate solution to the structural problems of the economy, make this a highly undesirable option. F. The Revised Development Plan 1.23 The Government has begun to tackle the difficult recovery problem, and has laid out a revised development strategy in its updated Five-Year Plan for the period 1984-87. While reiterating the basic goals of the original 1983-87 Development Plan and the commitment to its various economic and social programs, the revised Plan is based on a five point recovery program which includes: (a) An economic stabilization program which aims at improving the balance of payments position, reducing the budget deficit, and bringing down inflation through appropriate demand management measures, some of which had already been taken at the time the Updated Plan was proclaimed in August 1984. (b) An external financing program which includes rescheduling of external debt maturities falling due from October 17, 1983 to the end of 1985, new loans, and extension of trade credit lines. - 11 - (c) Economic priorities will be refocused in line with the stabilization program. In the public sector, this includes a reduction in the public investment program, increased emphasis on completion of ongoing projects, and rehabilitation of existing infrastructure. For the productive sectors, a balanced agro-industrial development strategy will be pursued with particular emphasis on productivity increases. (d) The ongoing structural adjustment program will be continued to achieve sustainable economic growth in the medium term through improved resource allocation and increased efficiency in factor utilization. Reforms in trade liberalization, industrial development/restructuring programs, and in the investment incentive regime will be strengthened further. Energy policy measures will continue in the areas of investment and pricing policy, to reduce the import dependence of the Philippines. The structural adjustment program will be expanded to include agriculture, with emphasis on productivity improvement, reforms in pricing and marketing as well as in sectoral planning and management. (e) Programs to achieve social equity, including improvements in health care, education, and housing, will continue. The overall thrust of the Plan is similar to the approach outLined above in that it pLaces increased emphasis on efficient export production and import substitution, increased reliance on domestic resource mobilization as opposed to external borrowing and reliance on the private sector. Given the impact of the stabiLization program on industry, the Plan places particular emphasis on raising the growth rate in agriculture through better private sector partici- pation, and through restructuring incentives in pricing and marketing. 1.24 Since the Plan provides only a broad outline of the strategy, it would be necessary to make it operational through a detailed investment and financing plan. The Plan provides indications of aggregate capital expendi- tures per year for the national government, local governments, and public corporations, but does not indicate the planned amounts for individual projects and programs. Total capital expenditures are planned to reach 5.1% of GNP in 1987, i.e., they will remain severely constrained for the balance of the Plan period. The constraints on capiLal expenditures indicate that annual investment programs and financing plans by the national Governmen" and public corporations would be useful tools to establish investment priorities. The review of the public investment program which the Government is undertaking with World Bank assistance is an important step in that direction. - 12 - II. MACRO-ECONOMIC ADJUSTMENT ISSUES AND PROSPECTS A. Balance of Payments (a) Recent Developments (i) Current Account 2.01 Structural deficits in the Philippine balance of payments emerged following the first oil price shock in the 1970s (Table II.1). Whereas in the early years of the decade the current account was roughly in balance, it showed a deficit averaging 5% of GNP in 1975-79. The rise in fuel import pay- ments from 1.8% of GNP in 1972 to 4.62 in 1979 was an important factor contri- buting to the widening of the deficit, even though efforts were begun to encourage conservation and to develop domestic energy sources. At the same time, the non-oil trade balance also deteriorated, despite the extraordinary growth of non-traditional exports. Growth of manufactured exports was concen- trated in industries heavily dependent on imported inputs, i.e., electronics and garments, so that their net contribution to the balance of payments was limited. High and uneven levels of protection fostered investment in import- substitution industries that were inefficient and highly dependent on imported inputs. While the volume growth of exports consistently exceeded that of imports it was insufficient to offset the effect of a deterioration of the terms of trade by 18% from 1972-79. 2.02 When these structural problems became more severe after the second oil shock, the government began a medium-term adjustment program in 1980. This program was designed to improve resource use in industry so as to encour- age the growth of nontraditional manufactured exports, reduce reliance on imported inputs, and limit dependence on external borrowing. A major element of the program was trade liberalization, including: (a) a five-year tariff reduction program, which was expected to reduce the average effective protec- tion rate from 52% in 1980 to 28% by 1985; (b) the gradual reduction of import restrictions on consumer and capital goods; and (c) measures to encourage exports further. 2.03 While the impact of these measures was expected to be felt in the medium term, the international recession worsened, and policy actions designed to have ai immediate impact were inadequate to contain the current account deficit, which widened from 5.4% of GNP in 1980-81 to 8% in 1982-83. The terms of trade fell further by 18% in 1980-82, largely due to the impact of lower world demand on the prices of traditional exports which still provided about 50% of the Philippines' export earnings. Though this trend was reversed in 1983, terms of trade losses were equivalent to more than half of the deterioration in the current account between 1980 and 1983. To finance the growing current account deficit, external borrowings were expanded, at increasingly shorter maturities and at variable interest rates. This, together with the increase in interest rates, raised net Philippine interest payments from 1.8% to 4.7% of GNP during 1980-83. - 13 - Table 11.1: CURRENT ACCOUNT SUMMARY, 1972-83 (Percentage of GNP) Average annual _growthrate (X)/a 1972 1979 1980 1981 1982 1983 1972-80 1980-83 Exports 13.3 15.4 16.4 14.9 12.8 14.7 22.2 -4.5 Traditional 11.8 8.6 R.7 7.3 5.5 6.; 14.3 -10.3 Nontraditional 1.5 6.8 7.7 7.6 7.3 8.6 46.0 6.3 Imports -14.8 -20.5 -21.9 -20.7 -19.5 -22.0 25.2 -1.0 Oil /b -1.8 -4.6 -6.4 -6.4 -5.4 -6.3 47.2 -1.9 Inputs for export production/c - -1.6 -2.0 -2.1 -2.1 -2.7 n.a 7.4 Other -13.0 -14.3 -13.5 -12.2 -12.0 -13.0 20.7 -1.2 Trade Balance -1.5 -5.1 -5.5 -5.8 -6.7 -7.3 (Non-oil trade balance) (0.3) (-0.5) (0.9) (0.6) (-1.3) (-1.0) Interest payments, net -1.2 -1.4 -1.8 -2.2 -3.9 -4.7 Other services and transfers 2.8 1.5 1.9 2.6 2.7 3.9 Current Account Balance 0.1 -5.0 -5.4 -5.4 -7.9 -8.1 Memorandum items: Annual % change: - Export volume 6.9/d 9.3 20.7 1.1 5.7 -5.0 - Import volume 5.47Td 9.2 1.2 -8.0 14.1 -4.0 - Terms of trade -2.7/d 4.3 -15.9 -12.0 -2.8 4.4 /a Based on values in current USS. /b Includes other mineral fuels and lubricants. ic Electronics and garments. /d 1972-78 Source: Mission calculations based on Statistical Appendix Table 3.1, 3.5, and 3.7. - 14 - 2.04 Net changes in trade volume accounted for about 10% of the widening current account deficit in 1980-83. Real export growth, which had averaged 14% per year in 1975-80, slowed to 3% in 1981-82 and turned negative to -5Z in 1983. While this mainly reflected weakened external demand, supply factors, notably the 1982-83 drought which affected agricultural exports, also played a role. In addition, the real appreciation of the peso gradually eroded the competitive edge of Philippine manufactured exports. Real import growth did not fully adjust to the reduction in foreign exchange availabilities. Although the purchasing power of exports fell by 20% between 1980 and 1983, imports continued to rise in 1980-81 before falling back to their 1980 level in 1983. In particular, strong growth in public investment appears to have been a major factor underlying the demand for imports, together with an exchange rate that was appreciating in real terms. 2.05 The negative effect of the above factors was mitigated by a continuing rise in non-interest service and transfer receipts. These receipts, which include earnings of Philippine contractors and workers abroad, have become an increasingly important source of foreign exchange. However, due to the large interest payments, the overall services account has shown a large deficit in 1982-83. 2.06 The effects of the worLd economic slowdown in 1980-83 experienced by the Philippines were also felt by other middle income oil importing countries (Table II.2). However, in comparison with these countries as a group, two distinctions stand out regarding trade performance: (1) the deceleration of Philippine manufactured exports was sharper than average; (2) the loss in terms of trade appears to have been greater in the Philippines, suggesting a less favorable mix of commodity trade and greater exposure to price swings than average, as well as a lower ability to respond to changing international conditions. Table I1.2: INTERNATIONAL COMPARISON OF MANUFACTURED EXPORTS AND TERMS OF TRADE, 1972-83 (Average annual X change) 1973-80 1981 1982 1983 Manufactured Exports /a Philippines 26.7/b 27.8 -2.3 6.2 Middle-income oil importers 10.9 16.8 -1.6 6.3 Terms of Trade Philippines -6.3 -12.1 -2.8 4.4 Middle-income oil importers -2.8 -4.3 -1.8 3.0 /a Deflated by World Bank Manufactured Unit Value Index. 7s 1975-80. Source: Statistical Appendix Table 3.5 and World Bank estimates. - 15 - 2.07 Reflecting the increased balance of payments pressures, the sum of payments for oil, debt service, and imported materials for electronics and garments rose from 48% of exports of goods and services in 1979 to 71% in 1982 despite the rapid growth and diversification of exports (Table II.3). During 1979-83, fuel imports slightLy decreased in volume, but doubled their value; as a consequence, their absorption of export earnings rose from an already high 22Z in 1979 to 26Z in 1983. The high import conEent of manufactured exports increased further relative to exports. The growing indebtedness is indicated not only by the rise of amortization and interest payments from 20% of exports of goods and services in 1979 to 37% in 1982, but aLso by the increase in short-term debt from 852 of exports in 1979 to 142% in 1982. Table II.3: SELECTED PAYMENT REQUIREMENTS IN RELATION TO EXPORTS OF GOODS AND SERVICES, 1972-83 (z) 1972 1979 1980 1981 1982 1983 Fuel imports 10 22 28 29 26 26 Imports of manufactured goods for export production /a - 6 7 7 8 9 Interest payments, net 8 10 12 16 25 24 MLT debt amortization /b 19 10 7 9 12 10 Total 37 48 54 61 71 69 Memorandum item Short-term external liabilities /c 53 85 94 109 142 139 /a Material for production of exports of garments and electronics. 7i Adjusted to exclude prepayments. 7h Includes short-term non-monetary debt and liabilities of the banking system. Source: Mission calculations. - 16 - (ii) Patterns of External Financing and Debt 2/ 2.08 While the current account deficits in the second half of the 1970s were fully matched by inflow of long-term capital, it covered only about one- half of the further widening deficits in 1980-82. The ability of the Philippines to attract substantial amounts of loan capital in the 1970s reflected the relatively favorable conditions for borrowers which existed in financial markets during these years, the positive effect of rapid export growth on expected debt servicing capacity, and the continued support of offi- cial lenders. Ample availability of finance permitted an ultimately unsus- tainable current account deficit to persist for a number of years. In the 1980s, however, sharply higher use was made of short-term borrowing by both the monetary and non-monetary sectors. The increase in short-term borrowing reflected not only the rise in the deficits but also less favorable conditions in financial markets. Consequently, short-term debt rose markedly in relation to total external debt, and total debt continued to expand rapidly, even as the country's capacity to service debt was eroding. Between 1978 and 1982, the total external liabilities of the Philippines rose from the equivalent of 2.2 times exports of goods and services to 3.1, and the share of short-term debt of the totaL debt rose from 35% to 47%. As shown in Table II.4, by 1982 these ratios had reached or exceeded the levels of oth r countries which were already experiencing difficulties in servicing their debt. Table I1.4: EXTERNAL LIABILITIES IN RELATION TO EXPORT EARNINGS FOR SELECTED COUNTRIES, 1982 Total debt/ Total debt/ exports of Total merchandise goods and Short-term/ debt exports services total debt (USS billion) Philippines 4.9 3.1 46.7 24.4 Argentina 4.8 3.8 21.3 36.7 Chile 4.5 3.1 19.2 17.2 Brazil 4.2 3.5 16.4 83.2 Mexico 3.9 2.7 27.2 82.5 Source: World Bank estimates. 2.09 The buildup of external debt was largely and increasingly used to finance public sector activities. The public resource gap expanded sharply as public investment accelerated while domestic resource mobilization faltered in 2/ A detailed discussion of the external debt of the Philippines through 1982 is given in The Philippines: A Review of External Debt, op. cit. - 17 - the late 1970s (cf. Chapter II.B). The proportion of medium- and long-term debt owed by the public sector rose from 48% in 1972 to 77% by the end of 1983, including onlending to the private sector. 2.10 Reflecting both the buildup of debt and its higher average cost, the growth of debt service payments by the Philippines increased in the late 1970s. Total debt service payments, excluding rollover of short-term debt, rose by 451 between 1978 and 1980, and by 80Z between 1980 and 1982. Measured against exports of goods and services, the debt service ratio (defined here as interest on all maturities and amortization of MLT debt) rose from 19X in 1980 to 36.5% in 1982. 2.11 In 1983, there was a marked and progressive deterioration of the financial position that reached crisis proportions during the latter part of the year. Although long-term capital inflows on a net basis were little changed from the previous year, commercial lenders became increasingly unwill- ing to further increase their exposure. Reserve assets of the banking system were drawn down by $2.6 bilLion for the year as a whole, but already by the end of the third quarter, the foreign exchange resources were nearly exhausted. (iii) Policy Responses to the Crisis 2.12 Since October 1983, a series of measures have been introduced to deal with the deterioration in the balance of payments and liquidity position. The peso was devalued in October 1983 and June 1984 by a total of 39% vis-a-vis the US dollar. A moratorium was declared, initially for 90 days, on principal repayments on (non-trade) maturing debt obligations to foreign banks and financial institutions, in anticipation of formal debt rescheduling. This moratorium has been extended for four additional 90 day periods. Capital controls were imposed through centralized foreign exchange collection in the Central Bank and establishment of procedures for the allocation of the pooled receipts by rationing to priority needs. Allowance was made for importers with their own access to resources through various channels, such as equity contributions from foreign affiliates, imports on a no-dollar (largely consignment) basis, deduction from export receipts of funds required for imported inputs for export production, and prepayment of import letters of credit from own resources. In addition, a 3% surcharge on import value, which had been introduced in January 1983 for revenue purposes, was raised to 5% in October 1983 and subsequently to 8X and then 10% in 1984. 2.13 These measures remained in effect longer than anticipated, as the liquidity crisis and the preparation of a financial stabilization plan became protracted. As a result, new problems arose. The benefits of the devaluation were eroded as inflation accelerated from 10% in 1983 to an estimated 45-50% in 1984. The debt moratorium relieved some pressure on the foreign exchange position, but its extension has held up new inflows of private finance and contributed to the disruption of normal trade financing. The provisions for use of funds outside of the foreign exchange pool for imports contributed significantly to the continued availability of essential imports, particularly those related to export production, in very difficult circumstances, but the amounts available to the pool have been insufficient to meet the needs, and - 18 - imports appear to have fallen sharply. Thus, by August 1984, foreign exchange receipts of the Central Bank were equivalent to only about 52X of recorded export shipments. Of the payments into the pool between November 1983 and March 1984, only 9% became available to commercial banks for import finance after other priority allocations were made. 2.14 In these circumstances, foreign exchange arrearages continued to mount, even on obligations accorded high priority. Total payment arrears of the banking system (including the Central Bank) and the nonbank sector rose from $0.7 billion on October 17, 1983, when the freeze was announced, to $1.6 billion by the end of 1983 and to $2.4 billion as of October 1984. 2.15 The foreign exchange crisis which unfolded during 1983 forced the pace of external adjustment, while creating obstacles to its achievement. Although incentives to export have been heightened by the preferred access to foreign exchange accorded to exporters, and the devaLuation of the peso, switching into export production has been made more difficult by the uncertainty about the future availability of finance and by the restriction of some foreign exchange privileges to existing exporters. The foreign exchange controls have insulated some essential items from the import reductions required by the absence of finance. Price signals became muddied under the rationing scheme. More broadly, adjustment by crisis has entailed an erosion of private sector confidence that seems to inhibit investment. (b) Outlook and Options for the Future (i) Short-term Prospects 2.16 Recent economic developments have thus left a legacy of problems that are being addressed under the stabilization program. In October 1984, a return to a freer foreign exchange regime was begun; the exchange rate is determined on a market where the commercial banks are required to sell their foreign exchange receipts. The foreign exchange surrender requirement and the allocation system consequently have been discontinued. The new system still is evolving; initial trading at the floating exchange rate was low in voLume and, after a decline of 10% in the peso exchange rate, showed only small oscillations around the rate. Projections indicate that the current account deficit could be brought down from 8.1% of GNP in 1983 to 5.22 in 1984 and about 4% in 1985. With a continued recovery in export markets, projected export growth of an average 8% in current dollars in 1984 and 1985 appears feasible. Nonetheless, imports, which are already being reduced by 23% in 1984, would need to decrease further by 2% in 1985 to achieve these current account targets. 2.17 To finance the current account deficits and meet other priority needs, such as clearing away arrears, substantial additional external financ- ing is needed. A financing package that would meet these needs is being finalized. It would include a rescheduling of medium- and long-term debt falling due in 1984 and 1985, owed to financial institutions and to creditors eligible for Paris Club arrangements, together amounting to about $4.7 billion. Even with a debt rescheduling of this magnitude, there would be an unfinanced gap of $3.1 billion in 1984-85. This wouLd be met from disburse- - 19 - ments of new official lending of about $2.2 billion and the balance in new loans from private financial institutions. In addition, arrangements are being made to restructure about $3.9 billion of non-trade related debt falling due in this period and to create a revolving short-term trade facility of about $3.0 billion. (ii) Medium-Term Adjustment 2.18 In addition to the corrections envisaged for 1984 and 1985, the extent of the deterioration of the external position over the past several years means that a vigorous program of adjustment will have to be pursued for the rest of the decade if creditworthiness is to be improved and satisfactory growth resumed. First, the level of indebtedness itself is clearly in excess of the countryts current debt-carrying capacity. This underscores the need to strengthen policies to expand the export base and improve che efficiency of industry; it also means that new borrowing must be closely tied to efforts that will expand debt servicing capacity. Growth prospects then will be cru- cially dependenc on the rate of export growth achieved and on the degree to which import growth can be kept below export growth to bring about steady improvements in the current balance. This will require greater efficiency in the use of imports. Second, the vulnerability created by the growth of short- term debt must be reduced through appropriate arrangements with creditors. Some non-monetary short-term debt has cLearly been used for non-trade pur- poses, including the long-term investments of public corporations. Banking system Liabilities have not been used to support liquid foreign currency assets only, and access to the international interbank market would seem to be impaired for a considerable period. Third, the initernational reserve position needs to be restored over time to a positive balance. The excess of Central Bank and comnercial bank foreign exchange liabilities (inclusive of arrears) Over assets exceeded merchandise exports in 1983. Finally, instititutional arrangements for debt management need to be improved. These issues are explored below with the use of a set of iLlustrative projections. 2.19 Conditions in the world economy will continue to be important to Philippine prospects. In some contrast to recent years, the projections assume relatively favorable developments, based on global projections assuming conditions in between the "High" and "Low" cases in the World Development Report, 1984. In particular, it is assumed that GNP growth in the industrial countries will be sustained 3t an average of about 3% per year, inflation will average about 6% per year, - and LIBOR will fall to 9%. Energy prices, on the other hand, are projected to reverse their decline of recent years and begin to increase in real terms, reaching their 1981 real level by the end of the decade. In conjunction with the projected recovery of the relative prices of other commodities, this would imply for the Philippines that there would be little change in the overall terms of trade from the 1983 position. 3/ Due to an assumed depreciation of the US dollar against currencies of other industrial countries, international inflation expressed in terms of US dollars would be closer to 9% per year in the second half of the 1980s. - 20 - 2.20 Exports. For the high case, volume growth of merchandise exports is assumed to average 6% p.a. between 1984 and 1990. The share of agriculture in merchandise exports is projected to decline slightly from 32% in 1983 to 30% in 1990, due to a combination of moderate volume growth and depressed prices for the traditional products coconut, sugar and timber. The projection of mineral exports is slightly above projected growth of world exports of these products, but increases in market share seem to be feasible. 2.21 The assumption regarding an average 7% p.a. real growth of manufactured exports is in Line with the global estimate that these may increase 2-3 times the GDP growth of the industrial countries. To achieve chis growth, however, competitiveness must be restored, and a flexible exchange rate policy must be pursued. While electronics and garments have provided che strongesc impetus to manufactured export growth in the past, diversification would have to be accelerated. Quota and other trade barriers are already cutting into the growth potential in exiscing areas. Agroprocess- ing and wood manufacturing industries, on the other hand, appear to offer excellent prospects. They have strong export markets, high income elasticity of demand, and high value added even in initial stages and offer the prospect of dampening the volatility of export earnings derived from local commodities. 2.22 Another important source of foreign exchange has been remittances from Philippine workers abroad and related service receipts, although data in this area are deficient. Philippine seamen have established themselves in international maritime trade, and their remittances should remain as strong as this industry. Remittances from foreign contract and other workers, mostly in the Middle East, grew rapidly in the 1970s and early 1980s. The demand for foreign workers in this area has fallen off dramatically, however, since the softening of oil prices. Nonetheless, Philippine workers are reported to have established excellent reputations in this area; these flows have held up and are assumed to remain constant in real terms. 2.23 Imports. Import voLume growth in the high case is projected to resume in 1987 and to average 5% p.a. for the rest of the decade. The feasibility of this path, which implies very tight availabilities, depends not only on the realization of the relatively favorable export growth rates discussed above and on the availability of sufficient capital inflows, but also on improvements in the structure of imports that would reflect efficient import substitution. A significant reduction is expected in the dependence on imported oil as a result of the ongoing program to develop of domestic energy sources as well as recent energy pricing reforms. These policies and invest- ments are expected to bear fruit in the next few years; energy imports are projected to remain below their 1983 volume through 1990 and to require the equivalent of 28% of merchandise export earnings by 1990. Much further adjustment is possible and necessary in reducing the import content of exports, particularly electronics and garments, and in lowering the import intensity of goods produced for the domestic market. This can be achieved most appropriately through continuous reduction of effective protection and a flexible exchange rate policy. 2.24 Capital Requirements, Debt, and Debt Service. The adjustment out- lined above for the high case would still require considerable external - 21 - financial support. Even with a possible extension of the external debt rescheduling to cover $1.4 billion falling due in 1986, new gross loan inflows would need to average about $2.2 billion annually to meet debt service, alLow some rebuilding of reserves and finance an adjustment of the current account from about 4Z of GNP in 1985 to 0.1% by the end of the decade (Table II.5). Net foreign investment, which fluctuated in the last few years, is expected to have only a small impact on external financing. The debt service ratio on MLT would decline to 27% by the end of the 1980s, but would rise again during the early 1990s, reflecting the effect of the debt rescheduling, before falling off. However, the level of indebtedness would fall notably in relation to exports, which would be a precondition for a restoration of lending from private sources on a voluntary basis. 2.25 The amounts required in the high case are within the range of official lenders' project loans in the past. The amount of private foreign capital that will materialize beyond 1985 is highly uncertain at this time. The projections are conservative and assume that private gross loan disbursements would be in the order of $700 million annually until the end of the 1980s. Market borrowings will not be feasible until creditworthiness is strengthened, but special arrangements, including debt rescheduling, may need to be continued in the interim. - 22 - Table 1I.5: SUMMARY OF EXTERNAL CAPITAL REQUIREMENTS AND SOURCES (HIGH CASE), 1985-90 (in US$ billion) - 1985 1986 1987 1988 1989 1990 Requirements -2.7 -1.4 -2.3 -2.3 -2.4 -2.6 Current account -1.1 -0.5 -0.5 -0.2 -0.2 -0.1 Amortization/a -0.2 -0.3 -1.7 -1.7 -1.9 -2.5 Change in net reserves/b -1.4 -0.6 -0.1 -0.4 -0.3 - Sources 2.7 1.4 2.3 2.3 2.4 2.6 Direct investment, net - 0.1. 0.1 0.1 0.1 0.1 Short-term and other capital - - 0.1 0.1 0.1 0.1 MLT (gross) 2.9 1.3 2.1 2.1 2.2 2.4 Official 1.8 1.3 1.4 1.4 1.5 1.5 (Existing pipeline)/c 0.7 0.7 0.7 0.5 0.4 0.3 (New loans) 1.1 0.6 0.7 0.9 1.1 1.2 Private 0.9 - 0.7 0.7 0.7 0.9 Memorandum items MLT debt/exports of goods and services 208 199 179 160 146 123 Total debt/exports of goods and services 320 300 268 240 217 195 Debt service on MLT/exports of goods and services 21 20 31 28 27 28 Total debt service/exports of goods and services 32 31 41 36 34 35 Current account deficit as Z of GNP 4.1 2.3 2.0 0.3 0.3 0.1 /a Assumes rescheduling of 1985 and 1986 maturities in private and official MLT debt (other than that owed to multilateral institutions) of $3.7 bilLion. /b Includes elimination of arrears of $2.4 billion in 1985. T7 Loans signed as of October 17, 1983. Source: Central Bank and mission estimates. 2.26 Following serious debt problems at the end of the 1960s, the Philippines established one of the most comprehensive systems of debt regis- tration and approval among developing countries. However, the scope and focus of this effort has been shown to have been too narrow. The use of the statu- torily-defined debt service ratio, by incorporating the previous year's capi- tal inflows in the denominator and omitting interest payments on most short- term debt in the numerator, clearly failed to point to the deterioration that was evident by more conventional indicators. Monitoring of short-term liabil- - 23 - ities, which is divided in the Central Bank, needs to be systematically incorporated into debt m7nagement. More broadly, as noted in the Bank's review of these issues,4 debt management needs to be more clearly integrated into overall macroeconomic policy. 2.27 Risks of a Low Case. A far more difficult outcome is a possibility and has been explored with a set of "Low Case" projections. This scenario assumes the same international conditions as the adjustment scenario outlined above, but posits a less effective pursuit of adjustment policies by the Government. As a result, real export growth is only 3X. With similar capital inflows, which could be more difficult to obtain, real imports would decline by 5%, so that the level of imports in 1990 would be only two-thirds of that obtained in 1983. The debt service ratio, however, would be higher, pushing the period of fragile creditworthiness into the 1990s. 2.28 A far less benign international environment is also possible. Based on 1983 debt, a one percentage point rise in LIBOR would translate into an increased net interest pavment requirement of about $100 million, or 2% of exports. Similarly, a $1/barrel increase in oil prices would cost about $50-60 million on an annual basis. The impact of a 12 reduction in the GNP growth of the industrial countries is more difficult to estimate, but could easily translate into a reduction of export earnings of 2-3Z per year from what it otherwise would be expected to be. These possibilities indicate that the pursuit of adjustment in the medium term is no guarantee of the high case outcome. At the same time, they underscore that the best strategy to cope with such an eventuality is to more vigorously pursue adjustment policies. B. PUBLIC FINANCE (a) Past Performance and Policy Issues 2.29 The sharp increase in the public sector deficit from an average of 2.5Z of GNP in 1978-80 to 5.5% of CNP in 1981-82 reflected structural problems of the Philippines' public finances as well as the impact of the recession (Table 11.6). The public sector, especially public corporations, continued to grow rapidly, due to a large investment program and the acquisition of dis- tressed private companies. At the same time, the revenue effort deteriorated, and the public sector increasingly resorted to external borrowings to finance the gap, thus contributing to the external debt problem of the country at a time when real international interest rates were rising. 4/ Report 4912-PHL op.cit. - 24 - Table II.6: PUBLIC FINANCE OVERVIEW, 1978-85 (in Percenr of CNP) Actual Est. Proj. 1978 1979 1980 1981 1982 1983 1984 1985 NATIONAL GOVERNMENT Revenues 13.6 13.5 13.1 11.8 11.4 12.0 11.2 12.1 Expenditures and net lending 14.8 13.7 14.4 15.8 15.7 14.0 13.3 13.1 Interest payments 0.6 O. 0.9 0.8 1.1 1.3 2.0 2.0 Other current expenditures 10.2 8.6 8.4 7.9 8.1 7.7 6.9 6.7 Capital outlays 2.5 2.3 3.2 4.2 3.0 2.8 1.9 1.8 Equity and net lending to 13 NPrCs 1.2 1.4 1.6 2.6 3.1 2.1 0.9 0.7 Other equity and net lending 0.3 0.5 0.4 0.4 0.2 0.1 1.6 1.q Deficit -1.2 -0.1 -1.3 -4.0 -4.3 -2.0 -2.1 -1.n THIRTEEN NONFINANCIAL GOVT. CORPORATIONS Internal cash generation 0.6 n.6 n.8 0.9 0.7 1.2 -0.1 n.q Capital expenditures /d 4.4 4.4 5.1 5.5 6.3 4.8 2.4 2.4 Investment-saving gap -3.R -3.6 -4.3 -4.6 -5.6 -3.6 -2.5 -1.5 LOCAL COVERNMENTS Revenues 1.R 1.8 1.8 1.8 1.8 1.R 1.7 1.7 Current expenditures 1.6 1.5 1.4 1.5 1.5 1.5 1.2 1.1 Capital expenditures 0.2 0.2 0.2 0.2 n.2 0.2 n.2 0.3 Surplus - n.1 0.2 0.1 0.1 n.1 0.3 n.3 SOCIAL SECURITY INSTITUTIONS Revenues 1.9 1.8 1.7 1.9 2.3 1.8 1.8 2.n Benefit payments and other expenditure 1.3 1.0 0.9 1.1 1.6 1.0 1.2 1.2 Surplus 0.6 0.8 0.8 n.8 0.7 n.8 0.7 0.8 CONSOLIDATED PUBLIC SECTOR DEFICIT /a -3.1 -1.4 -3.0 -5.1 -5.8 -3.7 -3.6 -1.4 Memorandum items: Government current expenditures /b 11.3 9.5 9.4 8.9 9.1 9.0 7.7 8.0 Public fixed investment /c 7.0 6.9 8.5 9.9 9.5 7.8 4.4 4.5 Note: Totals may not add up due to rounding. /a Sum of the four fiscal balances (national government, government corporations, local government, and social security institutions) less nartional government equity contributions and net lending to the thirteen government corporations. /b National government current expenditures (net of Interest payments and allotments to local governments) plus local government current expenditures. Allotments to local governments are abont 0.5% of GNP. /c Includes capital expenditures of the national government, 13 nonfinancial public corporations, and local governments. /d Excludes interest during construction for 1983-85. Sources: Statistical Appendix Tables 5.1, 5.6, 5.7, 5.8 and 5.9. - 25 - (i) Overview of Expenditures 2.30 Public expenditures,51 which accounted for about 18% of GNP in 1978-82, were adjusted with a considerable lag to the deceleration of economic growth and deteriorating resource mobilization in the recession. During 1978-81, public expenditures increased by an average 5.6% p.a. in real cerms, slightly faster than the 5.32 GNP growth. The NationaL Government which accounted for about two-thirds of public expenditures, introduced budgetary cuts in 1982, thus beginning a reduction of overall public expenditures. Public corporations, however, expanded their investmenc by over 12% p.a. in real terms during 1978-82 and increased their share in public expenditures by 6%. Local government expenditures grew moderately and accounted for only 10% of total expenditures (Table II.7). Table II.7: TRENDS IN PUBLIC EXPENDITURES, 1978-82 Real growth Percentage average p.a. shares 1978-81 1982 1978 1982 Total public expenditures 5.6 -0.3 100.0 100.0 National government 3.7 -4.1 68.7 63.0 Public corporations (capital expenditures) 12.8 7.5 21.6 27.5 Local governments 2.6 4.8 9.7 9.5 Source: Mission calculations based on tables 5.1, 5.6, and 5.7 in the Statistical Appendix. 2.31 The most important factor in the growth of public expenditures was investment. It had grown rapidly from 1.5% of GNP in 1970 to 7% of GNP in 1979 and peaked at almost 10% of GNP during 1981-82. The latter reflected a countercyclical reaction to the recession as well as large ongoing projects. In the last few years, the Philippines' share of public investment in GNP and in total investment was among the highest for middle-income, oil-importing countries. The sectoral allocation of public fixed investment during the plan period 1978-82 remained dominated by infrastructure, especially transportation and a large energy investment program to reduce import dependence. Infra- structure accounted for 70% of public investment, while the productive sectors received 16%, and the social sectors 7Z. The expansion of public investment 5/ The public sector here includes total expenditures of the national and local governments and capital outlays of 13 major public corporations. This understates 'he size of the public sector, since government financial institutions and about 20% of investment by public corporations are not included. - 26 - was accompanied by a strong regional bias favoring Luzon, and Metro-Manila in particular. Although the data base is incomplete, it appears that about 46% of public investment took pLace on Luzon; this translates into twice the per capita level of investment in the Visayas and Mindanao. In recent years, the Government has taken several steps to reduce regional disparities of public investment, e.g., through a regional focus of investment planning and development programs, but their impact on regional allocation of public investment so far has been small. 2.32 The rapid expansion of public investment has exacerbated weaknesses in the planning, programming, and budgeting of public investment. The agen- cies to perform these functions could not adequately handle the rapid increase in public expenditures. Although technical assistance funded by external sources quadrupled in real terms during the last plan period and amounted to $230 million--equal to 7% of public investment--in 1982, the planning and implementation capacity proved to be inadequate. As a result, projects were undertaken without careful analysis of their economic viability, their long- term financing needs or their debt servicing impact on the balance of pay- ments. The current crisis in particuLar emphasizes the need for increased central government control over the investment programs of public corporations. 2.33 The growth of investment was achieved at the expense of recurrent expenditures. Interest payments by the National Government rose from 0.6% to 1.3% of GNP between 1978 and 1983, refleccing increases in external borrowing and incernational interest rates. Domestic transfer payments, mainly to local governments, also increased their share. Recurrent expenditures by the National Government on personnel, operations, and maintenance, however, declined by 13% in real terms during the last plan period. Operation and maintenance expenditures have therefore been underfunded, resulting in inefficient use and premature deterioration of the public sector capital stock. (ii) Resource Mobilization 2.34 The national government revenue effort which declined from 13.6% of GNP in 1978 to 11.4% of GNP in 1982 has been a major element of the Philippines' public finance problem. Although increasing revenues, especially from taxation, has been a longstanding objective of Philippine development .Aans, progress has been slow. The Government has taken steps to improve the efficiency of taxation through the 1980-85 tariff reform, a reLated rerl.ign- ment of indirect taxes, the revision of fiscal incentives for investment and exports, and restructuring of taxes on petroleum products. Their combined impact on the revenue level has been neutral. Major structural problems in the tax system persist, however, including a small tax base, low elasticities and buoyancy, high dependence on international trade taxation, and poor tax administration. The buoyancy of the tax system of 0.7 in 1978-82 required substantial discretionary tax measures every year to maintain the revenue effort. In 1981-82, the impact of the recession aggravated the revenue problem. The structure of the revenue system did not change markedly in 1978-82; taxes on international trade and domestic indirect taxes each contributed about one-third of revenues, while a low 222 came from direct - 27 - taxes. Internationai comparison of tax ratios, elasticities, and buoyancies also indicates that the Philippines is a Low-performing economy in taxation matters. Internal cash generation of pubLic corporations deteriorated as well and contributed only about 15% of the resources required to finance their investments in 1978-82. While power and water supply corporations improved their internal cash generation, cost recovery in other sectors, such as housing and transportation, remained low. 2.35 Over 70% of the public sector deficit in the last plan period was financed from foreign borrowings, contributing to the rapid growth of external debt and an unfavorable debt structure, both resulting in high debt service requirements. While the national Government financed 24% of its capital expenditures from external borrowings, public corporations relied on foreign borrowings for about 60% of their investment outlays. A growing share of pubLic corporations' external borrowings was short-term, which increased the share of the public sector in official non-oil short-term debt from 22Z to 36% between 1978 and 1982. The impact of the large public sector deficit on domestic credit is less clear; while domestic and foreign financing had simiLar shares in financing the deficit in 1980-81, about 85% of the national government deficit in 1982 was financed domestically, resulting in a rapid expansion of net bank credit to the public sector. Total domestic credit did not expand significantly since private sector demand was weak. (b) Stabilization Policies 2.36 Budgetary measures have played an important role in the Govern- ment's stabilization policies, beginning in 1983. Steps to reduce the national government budget deficit in support of the balance of payments adjustment were sucessful; the deficit was reduced to 2% of GNP in 1983 and 1984, compared to 4.3% of GNP in the previous year. The Government achieved this through expenditure cuts; most significant was the reducticn in equity contributions and net lending to non-financial public corporations from 3.3% of GNP in 1982 to 2.1% of GNP in 1983. In 1984, the Government introduced further cuts in recurrent and capital expenditures; both are expected to be reduced to shares in GNP comparable to those of the early 1970s. The continuation of the stabilization program in 1985 will require to maintain current and capital expenditures at the 1984 share in GNP. This constraint on expenditures emphasizes the importance of the comprehensive review of the public investment program which the Government is undertaking with World Bank assistance. 2.37 Revenue measures contributed much less to reducing the national government budget deficit in 1983-84; revenues increased slightly to 12% of GNP in 1983 but are estimated to fall back to 11.2% of GNP in 1984. Given the depressed domestic economy and the need for quick results, the Government initially relied on increased international trade taxation which contributed 36% of revenues in 1983, compared to an average 32% in 1978-82. A temporary import duty surcharge of 3% was introduced in January 1983 and, in several steps, increased to 10% in June 1984. In view of the Government's continued commitment to trade liberalization, the surcharge will be reduced to 5% on January 1, 1985 and maintained on a contingency basis through 1985. In the second half of 1984, a substantial tax package was implemented; it is - 28 - estimated to contribute 0.5% of GNP to revenues in 1984 and 2.5Z of GNP in 1985. This would allow to reduce the budget deficit further in 1985. The tax package combines measures to increase revenues quickly with a first step to structural improvements in the tax system. The measures include increases in taxes on petroleum products, a shift to an ad-valorem base for specific taxes, and a more broadly based sales tax, resulting in a reduced reliance on international trade taxation. However, the underlying structural problems of the revenue system still remain to be addressed. 2.38 Despite the national government austerity program, the consolidated public sector deficit still was 3.7% of GNP in 1983, because public corpora- tions continued with a large investment program due to insufficient government control. Although some corporations reduced their 1983 investment programs and improved their internal cash generation, total investment of public corporations was not brought into line with financing constraints. Adjust- ments in 1984 focus on steep cuts in government corporations' fixed invest- ment. This also reflects the financing constraints: equity contributions from the National Government are being cut further, external financing is limited due to the debt moratorium, and domestic credit is constrained by monetary policy. There are indications, however, that some corporations have used the pesos accumulated to service their external debt as bridge-financing for capital expenditures. From the vantage point of the individual corpora- tion, this practice has avoided disruptions in the investment program, but it also has postponed the necessary reduction of public investment and made the financing problem more acute in the future. Adjustments in 1985 will concentrate on improving the internal cash generation of public corporations and thus contribute to further reducing the public sector deficit. Tariffs for public goods and services have been increased to reflect the exchange rate depreciation and the deletion of various tax exemptions. This policy will need to continue in order to improve the pubLic corporations internal cash generation over the anticipated deficit in 1984. 2.39 These developments highlight the need for greater national govern- ment control over the total public investment program, and the Government has taken steps in that direction. In the second half of 1983, the role of the Investment Coordination Committee (ICC) has been strengthened and investment priorities have been reviewed. Greater attention is being given to the regional allocation, budgetary requirements, and external financing needs of public investment. However, the ICC-system is still in the initial stages of operation and not fully integrated with the budgetary process, although prepa- ratory work is underway to introduce medium-term financial planning. The Government has also taken steps to monitor the investment program and financ- ing of public corporations more closeLy; a cabinet subcommittee has been established for this purpose in 1984. The success of these steps to strengthen the institutional framework for public investment decisions will depend on continued careful implementation. (c) Medium-term Prospects and Adjustment Needs 2.40 In the next few years, the Government would need to address the structural issues of public finance which have become more pronounced in the current crisis. It is unlikely that past expenditure and financing trends can - 29 - continue. The issue is not only to reduce the public sector deficit to levels commensurate with continued baiance of payments adjustment, but to establish an expenditure pattern that is based or. the medium-term development objectives for the economy and to institute a revenue zystem that would support this program. The challenge to achieve this becomes even greater if emerging issues are taken into account. Several government financial institutions (cf. Chapter II.C.) are in a severe liquidity crisis, due to a deteriorating loan portfolio, and the national government budget has to provide financing for their debt service over several years. In addition, monetary policy will constrain domestic credit, in particular to the public sector. To adjust to these new parameters, substantial changes in expenditures and revenues are required for the National Government and public corporations. (i) Expenditures 2.41 The structure of public expenditures would need to be changed subscantially in the next few years and more atcention given to investment programming. Restoring government recurrent expenditures for operation and maintenance to a more adequate share in GNP would need to oe given the highest priority but, due to financing constraints, levels which existed at the end of the 1970s are likely to be achieved only towards the end of the projection period. Restoration of recurrent expenditures to more adequate levels would, thus, need to be combined with improving their efficiency, e.g., while limiting public sector employment, operation and maintenance expenditures need to be augmented selectively to ensure efficient use of the substantial pan (SEC) at present cannot refuse their registration. To improve the Longer-term viability of non-bank financial intermediaries, their supervision needs to be strengthened and their operation rationalized. SEC is planning to amend the Corporation Code to that effect. 2.69 In light of future zonstraints in financial resources, credit policies and the rediscounting policy of the Central Bank need to be reviewed to ensure that access to credit is provided for priority sectors like manufac- tured exports and agricultural processing. In the past, mechanisms to channel funds into agriculture have not worked well, as the share of agricultural credit has not increased, partly because of reguLations that offered various choices of substitutes. Similarly, che allocative mechanism related to export credits does not seem to have worked satisfactorily. There are increasing concerns in the private sector about slowdown or closing of rediscount facili- ties and increase in rediscount rates. The rediscounting priorities of the Central Bank thus need to be reviewed as well as incentives for borrowers to mobilize more resources on their own. 2.70 The financial system, which appears to have an adequate basic struc- ture to support future development thrust, will continue to evolve, taking advantage of the opportunities that open up within the new policy environ- ment. The financial policies are well poised and initial steps in the right direction have been taken. It will clearly take some time to achieve the main objective of the financial sector reforms, namely the development of longer- term finance facilities, given the history of the financial system in the Philippines and the worldwide shortening of maturities in the face of volatile interest rates. However, at this stage, it would be desirable to review in detail the impact of the financial sector reforms initiated in 1980 to provide specific directions for future financial policy taking into account the sub- stantially changed medium-term prospects. Further reforms may be necessary to reinforce government objectives in other fields, such as export financing, term credit to the agriculture sector, and hotsing finance. III. SECTORAL ADJUSTMENT ISSUES AND MEDIUM-TERM PROSPECTS 3.01 A resumption of viable growth in the key sectors manufacturing industry, energy, and agriculture -requires a strategy which combines the following elements. First, the efficiency in the use of the existing capital stock would need to be increased. This would have to be the principal source of economic growth for the Philippines in the medium term, given the severe domestic and external financing constraints. Increasing the efficiency of capital use would apply to the private and public sector. Second, a review of the Government's sectoral investment programs is required to ensure that their size and composition reflects the substantial revisions in economic pros- pects. Priority would need to be given to completing expeditiously ongoing investments with high marginal rates of return and making only those new - 40 - investments which have high re-evaluated economic rates of return. These would include rehabilitation investments and investments with a short gesta- tion period. Third, the policy environment for private sector investment and production needs to be strengthened to emphasize efficient import substitution and export production which has a high domestic value added. The effective- ness of sectoral policies will also depend on the macro-economic policy frame- work, in particular, the trade regime, exchange rate policies, tax policies, and financial policies, as discussed above. This chapter reviews sectoral performance and develops the sector-specific policy requirements for medium- term adjustment and growth in manufacturing industry, energy, and agriculture. A. Manufacturing Industry 3.02 In response to increasing inefficiency of manufacturing industry in the 1970s, the Covernment introduced major industrial policy changes, begin- ning in 1980, with respect to export promotion, improving the efficiency of home industries, and reforms in the investment incentive system. Thus, most of the industrial policies providing a framework for private sector activities in line with the adjustment and growth strategy are already being imple- mented. Their impact, however, is diluted by the effects of the recession which were felt particularly strongly in manufacturing, and subsequently by several short-term stabilization measures. Continued government adherence to the principles of efficiency and export orientation needs to be affirmed while the stabilization program ia being implemented, and macro-economic policies need to support the sectoral policy orientation more strongly in the future. Planned public investment in manufacturing industry through large-scale, capital intensive projects has been reduced, and government intervention could be limited to resolving the issue of rehabilitation/divesture of distressed firms. (a) Structural Issues and Past Performance 3.03 Manufacturing industry grew at a satisfactory 7% p.a. during the 1970s and accounts for 25% of CDP, equal to the average of middle-income oil importers. The structure and performance of the sector have been influenced by trade and industrial policies which until well into the 1970s were geared towards import-substitution of consumer goods. In 1983, about 86% of gross value added in manufacturing still was produced by industries oriented towards the domestic market. They are affected by severe inefficiencies and high import dependence of production mainLy as a result of a protective trade regime in the past. Furthermore, past financial and incentive policies had skewed investment toward capital-intensity. This 'had led to a relatively low labor absorption by the sector, and its share in total employment had stagnated at 10-12% since the early 1950s. Non-traditional manufactured exports have been growing rapidly since the early 1970s and increased their share in merchandise export value from a negligible level to 48% in 1983. However, in 1983 export production still accounted for only 141 of manufacturing value added and a mere 4% of GDP, because the products are still derived largely from assembly and consignment activities which have few backward linkages. - 4! - 3.04 In 1980, the Government initiated a medium-term program of indus- trial policy changes. The program aims at achieving an industrial structure which is based on the country's comparative advantage in labor and raw material availability and which is efficient and competitive by international standards. The most important element of the program is a five-year tariff reform and trade liberalization program which is reducing protection of domes- tic industries (cf. para. 2.02). Average nominal tariff rates have been lowered from 43% in 1980 to 29% in January 1983. However, initial measures taken to stabilize the economy in 1983-84 have increa.sed tariff protection and quantitative import restrictions (see para. 3.09). Thus, it is still too early to gauge in any concLusive way the impact of the trade liberaLization measures undertaken to this point in time. Several important phases of the tariff reform and import liberalization program remain to be completed. In addition, the protective element of indirect taxes will be phased out only in 1985, and reductions in import licensing still remain to be acted upon. The full impact of the trade liberalization will be felt only after several years, when the investment and production decisions of the manufacturing sector reflect these new parameters. The recent recession and the financial crisis are ectending the implementation period further and also delay investment decisions by the private sector. While the correlation between reductions in effective protection and output growth for individual industries has been weak so far, due to all these mitigating factors, output data indicate that export- oriented industries have been growing at a high 12X p.a. in 1979-83, while domestic-market oriented industries, which grew at only 2% p.a., were far more affected by the recession (Table III.1). 3.05 Another major improvement in industrial policies was the intro- duction of a new industriaL incentive system in line with the above objectives in 1983. Under the new system, a small number of incentives aim at compensa- ting investors directly and more fully for distortions and imperfections in the market. The incentives are performance-oriented and neutral with respect to factor choice. Economic evaluation of projects by the Board of Investment (BOI) has been strengthened. Since the industrial sector is largely private, BOI has instituted an active dialogue with industrial interest groups which has aided the effective implementation of the policy reforms. Early indica- tions show that the new incentive scheme is attracting potential investments mainly in export manufacturing. However, it is expected that the full impact of this scheme will be felt slowly due to the prolonged depressed investment climate in the Philippines. 3.06 The reforms also include the formulation of subsector programs to translate the broad industrial development objectives into a consistent policy framework at the industry level. The subsector programs are designed to for- mulate approaches to rehabilitation/restructuring and development of indus- tries. They would thus provide the basis for further industrial policy reform at the subsector level. Rehabilitation programs are being implemented for the textile and cement industries. Programs have been formulated for electronics and several food-processing industries. A development program is under prepa- ration for the metal working sector which would have the potential of deepen- ing the Philippines' industrial structure. Other programs are being developed for the leather, footwear, and furniture industry, i.e., areas of high poten- tial for efficient import substitution as well as exports. The Government is - 42 - also providing assistance to export industries through identifying promising products and revising related policies and regulations. Institutiona'. prob- lems, however, have delayed the systematic use of subsector programs :or a review of policies and the preparation of further reforms at the industry level. The paucity of industrial statistics in the Philippines and the delays in strengthening the statistical system compound the problem of monitoring the impact of the current reforms at the subsector level and preparing future industrial policy decisions. Table lII.1: MANUFACTURING INDUSTRY: SELECTED INDICATORS OF STRUCTURE AND PERFORMANCE Z share in Average X share of manufacturing annual imports in raw Industry gross value X change in material added output requirements 1983 1979-83 /a Export-oriented Industries 14.0 12.3 Garments 5.9 9.5 80 Electronics 3.4 49.1 100 Wood processing 3.5 0.7 3-15 Furniture 0.5 5.8 15-25 Other 0.7 15.1 n.a. Domestic-market oriented Industries 86.0 2.0 Food/beverage/tobacco 39.3 3.7 n.a. Petroleum and coal 14.7 -0.8 n.a. Metal 2.8 1.3 n.a. rextile 5.4 -1.6 n.a. Chemicals 5.5 -0.2 50-60 Automotive 3.0 -3.6 85 Pulp and paper 2.2 2.9 70 Cement 2.1 2.7 4 Drugs 1.8 -0.2 95 Appliances 1.5 4.4 60 Other 7.7 3.0 n.a. /a Estimates are based on 1978-83 data. n.a. = not available Source: NEDA and mission estimates. 3.07 Finally, in order to deepen the country's industrial structure and accelerate the emergence of intermediate goods industries, the Government initiated a program of major industrial projects in 1979. These projects are - 43 - large and capital-intensive and have long gestation periods. The contemplated aluminum smelter, pulp and paper mill, and petrochemical complex which together amount to about US$2.0 billion have been deferred due to current economic conditions. The Government has also decided to delay implementation of the US$1.8 billion integrated steel mill due to resource constraints. Of the remaining projects, amounting to US$1.0 billion investment cost, the copper smelter and the diesel engine manufacturing have started operation in 1983, and the coal conversion of the cement industry has been completed. The phosphatic fertilizer plant, the heavy engineering project, and the coco- chemical plant are in various stages of implementation. Given the future severe financing constraints and the change in economic outlook, the viability of the projects under implementation as well as those currently deferred should be re-assessed. (b) Impact of Stabilization Policies 3.08 Manufacturing industry has been the sector which felt most of the impact of the domestic recession and the recent stabilization measures. Industries producing for the domestic market were already experiencing low output growth in the early 1980s due to the slower growth in domestic demand. The impact of the foreign exchange shortage by the end of 1983 com- bined with worsened domestic demand prospects resulted in short-term cuts in output. Export industries which had been growing at respectable rates despite dampened prices and demand on international markets, experienced increased demand in the first half of 1983, when the international economy improved. Subsequent balance of payments problems and stabilization measures, however, led to a stagnation of nontraditional manufactured exports in 1983. 3.09 The stabilization measures which the Government adopted during 1983 have had a direct impact on the manufacturing sector's performance. Several of the measures, in particular the devaluations, tighter monetary policy which resulted in high cost of capital, and scarcity of foreign exchange support the basic thrust of industrial policies and contribute to reduce structural weak- nesses which existed in the sector, i.e., high capital intensity and import content. However, the impact of these policy measures has been mitigated by two countervailing factors. First, the rapid increase in domestic inflation quickly eroded the benefits export industries gained from the devaluation. Second, some of the policy signals became less clear by the approach taken to their implementation e.g., by granting exceptions, lack of enforcement or cumbersome administrative procedures. Other stabilization measures are in conflict with the thrust of the industrial reform program. An import duty surcharge on all imports which was introduced in January 1983 for revenue pur- poses and gradually increased to 10Z, had the effect of increasing relative protection of industries producing for the domestic market; it was thus biased against export industries. :a view of the government's continued commitment to trade liberalization, the import duty surcharge will be reduced to 5% for 1985 and maintained on a contingency basis, to cover a potential revenue shortfall. The reduction of quantitative import restrictions under the structural adjustment program was suspended and additional quantitative restrictions were introduced, further increasing protection of home indus- tries. Although these measures are temporary, the policy signals given to the - 44 - protected industries have become confusing, and adjustment of inefficient industries might be delayed. 3.10 WhiLe the structural impact of these measures can only be felt over a longer period of time, their impact on manufacturing industry's performance in 1983 and early 1984 was a cut-back in production. The 1983 growth of manu- facturing industry is estimated to have fallen to 2.32 compared to an average of about 6% per year during 1972-82. Industry observers in the Philippines have estimated that during 1984 some 300,000 persons, i.e. 12-15% of those employed in manufacturing, may become unempLoyed and 25-30Z of the domestic- market oriented firms will face temporary or permanent closure. The sector may contract by more than 10% during 1984, mainly as a result of faltering domestic-market oriented firms. These firms have experienced a fast escala- tion of prices for their imported inputs, which range from about 50% in industrial chemicaLs to 95X for drugs. Due to the weak domestic markets, the increased costs have not been passed fully to consumers; production has been reduced, and losses have been incurred. For export industries, the impact of the devaluations in 1983 was initiaLly beneficial as export receipts in domestic currency increased much faster than the costs of production. How- ever, the steadily increasing wage pressure and a high import content of pro- duction have quickly eroded the initial benefits and foreign exchange constraints hampered production. 3.11 The shortage of foreign exchange for trade financing since the last quarter of 1983 has hampered industrial production and increased costs. In response to the foreign exchange shortage, the Government introduced a pooling system to allocate foreign exchange to importers (cf. Part I.B.). Since only limited amounts of foreign exchange entered the pool, it did not prove an effective measure to deal with the shortage in the short run. With the introduction of a floating exchange rate in October 1984, the Central Bank allocation system of foreign exchange has been abolished; it is, however, too early to assess the impact of these changes in the exchange regime on manufac- turing industries. In 1983-84, many exporters have resorted to the processing of goods on a consignment basis as a way of avoiding the need for a foreign exchange outlay for imports, but this often resulted in higher prices being paid for raw materials, and reduced net foreign exchange earnings. Since early 1984, however, exporters have benefitted from a newly implemented Export Deduction Scheme, which allows them to retain a certain fixed proportion of their export earnings to meet maturing letters of credit on imports. This is not an entirely satisfactory arrangement, since it depends on a timing match between the export earnings and import payments which may not always be possible. It has, however, been useful in easing the import problem for many exporters. 3.12 During the last year, domestic-oriented firms had to rely on other methods than the official pool to finance their imports. The Government allowed firms to import essential producer goods (about 40X of total imports) on a prepaid letter of credit or "no-dollar" basis. Under these arrangements, importers furnished their own foreign exchange for payment, either from past savings or from purchases on the unofficial foreign exchange market. This implied raw material costs that were 30-40% higher than those that would have prevailed using official exchange rates. The resulting higher prices for - 45 - final products, combined with decreased domestic demand, often meant that firms had to reduce production. As a temporary relief, essential imports could also be obtained from foreign suppliers or parent companies against pay- ment in the form of equity in the importing company. Firms requiring goods classified as "semi-essential", have generally not been able to obtain foreign exchange except from the official pool, even if the semi-essential goods are only a small proportion of total needs. Requests from manufacturers to allow the importation of semi-essential goods on a "no-dollar" basis have not been approved by the Government. 3.13 Another short-term negative impact of stabilization policies, in combination with lack of confidence in the economic policies and prospects of the Philippines voiced by the private sector, has been a severe reduction in industrial investment. Private sector investment decisions are being post- poned due to low prospective domestic demand and unclear longer-term policy signals. In addition, restrictive monetary policy reduced the amount of credit available and increased its cost. Access to credit is also limited to mainly large firms. Controls on capital goods imports and the lack of foreign financing further reduce investment opportunities. Reflecting all these factors, it is estimated that total investment will decrease by as much as 25% in 1984; a sectoraL breakdown of investment data, however, is not available. (c) Medium-Term Policy Issues and Prospects 3.14 The medium-term growth prospects in manufacturing will depend to a large extent on a successful stabilization program, efficient utilization of the existing capital stock, and restoration of confidence in the private sector. However, the longer-term viability of the manufacturing sector and its contribution to future economic growth are crucially dependent on the continuation of the Government's structural reform program and private sector reactions to these new parameters. Ci) Policy Issues 3.15 Reflecting the constraints which the Philippine economy faces for the next few years, manufacturing industry will have to reduce its import dependence and increase the efficiency of existing investment, in addition to channeling new investment into areas that provide high net foreign exchange earnings. Since, in the next few years, the investment climate may remain depressed in Philippine manufacturing, a high priority needs to be given to restructuring the domestic manufacturing industries into viable, competitive industries. Removal of the temporary import controls, continued trade liberalization, and a flexible exchange rate policy are important policy measures to that effect. Maintaining protection of manufacturing industry would reduce the pace of sectoral adjustment and decrease its growth potential in the long run. Current investment constraints put a premium on policy deci- sions which promote efficiency of investment and employment creation. Contin- uation of major industrial projects will need re-evaluation to ensure their compatibility with economic policies and rapidly changing conditions. This is especially important for big capital-intensive projects, since the downward risks are large and might not be affordable in the current economic difficul- ties. Investment policy wilL need to be supported by financial policies which - 46 - will draw private domestic resources to the sector. The Government is also reviewing its policies towards foreign investment which might help alleviate the external funding constraints. 3.16 Adjustment policies for existing export industries are also neces- sary to ensure their continued international competitiveness and increase their net foreign exchange earnings. Key industries which will need to adjust are garments and electronics which, together, accounted for about 60% of earn- ings from non-traditional manufactured exports in the last 5 years. For the garment industry, policies which improve the performance of the textile indus- try and thus allow an increase of domestic raw material utilization are essen- tial. Continued support of the ongoing textile sector restructuring is, therefore, an important eLement. The garment industry, however, is facing increasingly difficult export markets and has problems receiving higher quota for items which have the potential of a higher value added. The industry also needs to diversify export markets and reduce growth constraints resulting from increasing protectionism in its major markets. The electronics industry can increase domestic value added by introducing additional production steps such as testing and by moving towards production of higher level integrated products. It is, however, facing increased competition from highly automated production methods in industrialized countries for the manufacturing of the same products. A highly efficient and reliable work force needs to be maintained in this industry and "red tape" eliminated from customs, BOI, etc., for continued export success. 3.17 Given these possible constraints to continued high growth in the existing export industries, diversification becomes increasingly important. The greatest potential seems to lie in development of domestic resource based processing with high export potential. Industries which are especially pro- mising in this category are agriculture-based, such as food processing and wood based industries. The sector development programs proposed by the Covernment for fruit and fish/seafood processing industries, which assess the growth potential of these industries and the policies required to support them, indicate that these have excellent economic and financial 7iability as well as dynamic markets. Similar good prospects exist for the furniture industry. The gestation period for investment in these industries is expected to be relatively short which makes them attractive for both domestic and for- eign investment. An important policy tool is already in place in the invest- ment incentives system which favors industries with high domestic value added and export production. Successful diversification into these industries will aLso depend on government policy to streamline the multitude of agencies in agriculture and industry so that they assume a consistent and supportive role, minimizing the regulatory functions and keeping policias transparent to give clear signals to the private sector. (ii) Growth Prospects 3.18 The high-case scenario assumes continued implementation of the industrial adjustment program with eaphasis on the policy areas detailed above, as well as a recovery of the financial sector to support industrial development. Even under this scenario, manufacturing industry is seen as averaging -1% growth during 1984-86, reflecting the completion of the stabili- - 47 - zation process in the economy, the balance of payments constraints, and the anticipated gestation period of new and lower investment. While growth of domestic-oriented industries would be negative during that period, it is likely that export-oriented industries would compensate for most of that loss. Non-traditional exports could be expected to grow at an average of 4% p.a. and net exporc earnings would become increasingly larger as import dependence is lessened. Beginning in 1987, the structural improvements in the sector might allow a growth rate of 6% per year, reflecting successful restructuring of the domestic-oriented industries and high growth of non- traditional export industries of close to 9% p.a. 3.19 If the implementation of industrial policies is less successful, inefficient production and high import-dependence would increasingly constrain the growth of the sector. In the low-case scenario, the structural problems would keep manufacturing as a net burden on the balance of payments and limit the sectoral contribution to employment. Growth during 1984-86 would be nega- tive; exports of manufactures might still grow at about 5% p.a. but would require a larger counterflow of imported inputs which would diminish their net foreign exchange earnings. Sectoral growth thereafter would be limited to 3X per year, a rate which would depress overall economic growth. B. Energy 3.20 The energy sector in the Philippines is of critical importance to the structural adjustment effort since it has the largest potential for efficient import substitution. In response to the 1979-80 oil price increase, the Government drew up an energy reform program aimed at increasing domestic energy production, improvements in energy conservation, and increased genera- tion of investible funds within the sector. The m-jor policy reforms initi- ated under the program have been implemented successfully. The main direction for the medium-term is the continuation of the structural adjustment program and the consoLidation of the gains already achieved, including more attention to efficient use of existing capacity. The investment program should give highest priority to the completion of major on-going projects to realize the target of reduced import dependence and foreign exchange savings. The least cost investment program for the power sector requires review to determine the optimum size and timing of new investments given reduced demand, financing constraints, and other sectoral priorities. Energy pricing policies would need to continue to support demand management, self-financing of key agencies, and domestic resource mobilization. There is a need for the formulation of a policy on rural energy, given that higher prices for commercial energy will result in an increased demand for diminishing wood resources. (a) Past Performance and Sectoral Adjustment 3.21 The oil import bill for the Philippines increased more than ten-fold between 1973-83 from $188 million to $2.1 billion and from 12% to 28% of total imports. This heavy dependence on imported oil contributed to the deteriora- tion in the terms of trade, and adversely affected both the balance of pay- ments and economic growth. - 48 - 3.22 The Government responded to the situation quickly and effectively. By increasing domestic energy prices it helped reduce the elasticity of com- mercial energy consumption with regyect to GDP from 2.0 in the pre-1973 period to less than unity during 1973-83 - (Table II1.2). This was complemented by accelerated efforts to explore and develop the country's considerable domestic energy resources: geothermal steam, hydro power, coal, oil, and biomass materiaLs. In particular, a large public investment program leading to the progressive substitution of domestic energy resources for imported oil was initiated for the power sector. Fiscal incentives were introduced for energy conservation, and the cement industry, traditionally the country's largest user of industrial fuel oil, was mandated to convert to coal. Energy audits were also initiated. In order to improve the formulation and implementation of energy policies and programs, the Ministry of Energy was established in 1977; major implementing institutions in the sector have been strengthened: the National Power Corporation (NPC), responsible for power generation and transmission; the Philippine National Oil Company (PNOC), responsible for energy resource development and petroleum refining and marketing; and the National Electrification Administration (NEA), responsible for rural electri- fication. The Government was also committed to undertake pricing/financing reform measures to improve resource mobilization in the sector following the 1979-80 oil price increases. Table III.2: ENERGY CONSUMPTION INDICATORS, 1973-83/a 1973-76 1977-80 1981-83 Growth of commercial primary energy consumption (Zp.a.)/b 2.0 2.7 1.8 Elasticity of energy consumption with respect to GDP 0.3 0.5 0.9 Share of imports in total commercial energy (Z of energy equivalent) 94.0 89.0 80.0 Share of energy imports in total imports (Z) 19.8 24.7 29.0 Memo item: Energy imports ($ million) 647.0 1,414.0 2,229.0 /a Averages for the periods shown. Th Excluding bagasse and agriwaste. Source: Ministry of Energy, Central Bank of the Philippines. 8/ The much lower elasticity during the late 1970s and early 1980s was partly due to recessionary conditions and sluggish growth of energy- intensive sectors such as industry. These figures exclude bagasse and agriwastes as sources of commercial energy to maintain consistency with data prior to 1981. - 49 - 3.23 The structural9adjustment program in the energy sector has been pro- gressing satisfactorily.- One of the major effects has been the rapid development of domestic energy sources. Although the country still imports large volumes of oil, indigenous energy resources, including bagasse and agri- wastes, constituted 35Z of total energy supply in 1983 as against 21Z in 1979. 3.24 Measures to increase domestic resource mobilization are also beginning to show progress, particularly in the power subsector, which in the past had been largely dependent on Government equity contributions for its investment program. Wholesale power tariffs have been significantly increased and automatic adjustments introduced to reflect exchange rate changes and fuel cost increases. As a result, between June 1982 and June 1984, the nominal tariffs increased by 116% and real tariffs by 63%. This improved NPC's finan- cial position, reducing its need for Government equity contributions. NPC's rate of recurn increased from 6% or less in earlier years to 8.2% in 1983. The Government also restructured retail electricity rates in the Metro Manila area to reduce cross subsidies and geographical inequities. 3.25 The Government initiated a two-phase study of the price structure of petroleum products for formulating a long-term pricing and refining policy. The first phase of the study was completed in 1982 and suggested short-term price measures. The second stage is being finalized. In the meantime, reflecting changes in international oil prices and the depreciation of the peso, the Government increased the average domestic prices of petroleum pro- ducts by 100% between July 1982 and June 1984, i.e. about 47% in real terms. Simultaneously, the price differentials among various products, which had been inducing inefficient substitution and uneconomic investments, were reduced. For example, the dfferential between the diesel and gasoline prices dropped from 40Z to 212.1U/ 3.26 The Government also accelerated energy conservation and conversion through the provision of incentives. The Bureau of Energy Utilization esti- mates that during 1978-82 energy savings equal to P 488 million were made with an investment of P 349 million. The investments include the government- mandated conversion of cement plants from fuel oil to coal, which is now completed. 9/ Details of the reform measures are found in the President's Report for the Second Structural Adjustment Loan (Report No. P-3387-PH of April 1, 1983). 10/ The price of diesel was 15% below that of gasoline in 1973 but the difference had increased to 402 by 1981. This had induced substitution of dieseL for gasoline and encouraged diesel consumption. Because of the limited flexibility in refining coefficients, this resulted in diesel imports and gasoline exports. - 50 - (b) Impact of Stabilization Policies 3.27 The major effect of the short term stabilization measures on the energy sector has been cuts in budgetary contributions to the energy invest- ment program and a shortage of foreign exchange due to the debt moratorium. These have slowed down the implementation of on-going energy projects and led to the deferral of new projects. Measures to overcome these financial constraints and complete on-going projects have included short-term bridge financing arrangements. For example, due to the cancellation/suspension of unutilized and committed foreign loans as a result of the debt moratorium, NPC financed part of the shortfall in its capital budget by utilizing P 1.6 bil- lion of oil supply credits due to PNOC and the retention of pesos correspond- ing to the debt service covered by the moratorium. PNOC, on the other hand, used short-term trade credits to partially finance its exploration program due to the non-availability of Government resources from the Oil Industry Special Fund (OISF).m These measures prevented a further slow-down in the implementation of projects, but will compound the problem of future debt servicing. 3.28 The devaluation of the peso has led to increases in power tariffs and petroleum prices. The former has contributed to reducing the burden on the government budget and the latter to increasing government revenues. Revenues from taxes and custom duties on petroleum products have increased their share in total tax revenues from 18% in 1978 to 20Z in 1983. (c) Medium Term Development Prospects and Policy Issues 3.29 The medium-term prospects for the energy sector will be affected by the general economic outlook as well as public finance and balance of payments constraints. These factors have resulted in downward revisions in energy demand and supply projections, reductions in the investment program, and recognition of the need for an even higher degree of self-financing for energy investments. The major policy recommendation for the medium term is to continue the structural adjustmenc program and consolidate the gains already achieved. (i) Energy Demand 3.30 Reflecting lower GDP projections, the Ministry of Energy has revised its energy consumption projections significantLy downwards and currently assumes an average growth rate of 4.2X p.a. for 1985-89, foLlowing a decline 1l/ The OISF was established in 1974. Its revenues came from a levy on petroleum products over tnd above specific taxes and was Largely used for energy-related projects. The OISF was abolished in October 1984. At the same time, a Special Account, called the Oil Price Stabilization Fund, was created in the national government budget. The purpose of the new fund is to minimize the frequency of energy price changes due to exchange rate adjustments and increases in world market prices of crude oil and petroleum products. - 51 - of 4.2% in 1984. These projections include both commercial and non-commercial energy sources. In 1984, non-commercial energy, mainly bagasse and agri- wastes, is estimated to constitute 15% of energy consumption, and the projec- tions largely maintain this ratio. The analysis in the following paragraphs concentrates on commercial energy sources due to their importance for macro- economic and balance of payments problems, and the lack of detailed informa- tion on non-commercial energy sources. 3.31 As seen in Table III.2, the growth of commercial energy consumption has shown a fluctuating trend since 1973. The elasticity of commercial energy consumption initially fell sharply due to higher energy prices. Since 1980 it has increased, although it is still less than unity. This may indicate that the major adjustments in energy intensity have occurred in the 1970s and that future CDP growth will be associated with a higher elasticity ratio. Conse- quently, for the medium term an elasticity of unity has been assumed for the low and high growth scenarios (Table III.3). Table III.3: COMMERCIAL PRIMARY ENERGY BALANCE, 1983-90 (Millions of barrels of fuel oil equivalent) Low Growth High Growth Average Average annual annual growth growth 1983 1984 1990 1985-90 (Z) 1990 1985-90 (X) Demand 83.9 81.3 86.2 1.0 100.8 4.0 Oil 68.3 58.3 47.8 -3.0 60.1 0.5 Coal 3.5 6.3 8.2 9.9 Hydro 5.1 9.3 13.7 13.7 Geothermal 7.0 7.4 10.9 11.5 Nuclear - - 5.6 5.6 Domestic Production 19.4 24.1 42.3 12.6 44.1 13.8 Oil 4.7 2.7 5.0 5.0 Coal 2.6 4.7 7.1 8.3 Hydro 5.1 9.3 13.7 13.7 Geothermal 7.0 7.4 10.9 11.5 Nuclear - 5.6 5.6 Net Imports 64.5 57.2 43.9 -3.9 56.7 0.1 Oil 63.6 55.6 42.8 -3.8 55.1 -0.1 Coal 0.9 1.6 1.1 1.6 Source: MOE/NPC data and mission estimates. 3.32 The industrial sector is the major consumer of commercial energy (56% in 1983). It is the largest consumer of electricity and also consumes a - 52 - significant portion of petroleum products (diesel and fuel oil). Electricity consumption is expected to decrease in the short term due to the recessionary conditions. Fuel oil consumption will decrease as a result of energy conser- vation measures and the coal conversion program in both the cement and mining industries. rhe cement conversion program alone will result in the substitu- tion of about 3 million barrels of fuel oil a year. Currently, the coal quality required in the cement plants does not fully match the domestic supply and some imports are still required. However, as prices for coal are lower than for oil, foreign exchange savings are still substantial. Financial assistance and technical support are required to fully realize the significant potential for energy conservation in this sector. Although non-commercial energy is not considered in this analysis, energy conservation and substitu- tion potential exist to the extent these forms of energy are used in certain industries, for example bagasse in the sugar industry. 3.33 The transport sector accounted for about 27% of commercial energy consumption in 1983. Consumption of transport fuels has stagnated at about 30 million barrels between 1974-83 as a result of higher fuel costs. The trend has been for a reduction in gasoline consumption at an average annual rate of 5% between 1974 and 1983 and a corresponding 5% increase in diesel consumption. The interfuel substitution is a reflection of Government's past pricing policy. The realignment of taxes on these products in 1983, however, has helped reduce the growth of diesel consumption. For the medium term, it has been projected that, while diesel and premium gasoline consumption will grow with GDP, the demand for other transport fuels will reflect historical growth rates. It is also assumed that further interfuel substitution, parti- cularly between diesel and gasoline, would be limited. The ongoing programs for non-conventional energy for the transport sector - cocodiesel and alcogas - have been scaled down due to technical, economic, and financial problems and lack of consumer acceptance. These fuels will provide little substitution for gasoline and diesel in the medium-term. In the commercial/residential sectors the demand for both electricity and petroleum products in the medium term will be largely determined by the growth of CDP. 3.34 Projections of the sectoral composition of commercial energy con- sumption through 1990 are shown in Table III.4. Projections are broad orders of magnitude and indicative only; for example, the rate of commercial energy consumption growth will depend on future energy pricing policies adopted by the Government and the extent to which future energy conservation measures are successful. (ii) Energy Pricing 3.35 As indicated previously, the Government has relied primarily on the price system to encourage energy conservation and changes in energy use. Fur- ther adjustment in pricing policies are envisaged to assist Government's resource mobilization efforts, and correct remaining distortions in the pric- ing of energy products. The Government is undertaking a comprehensive study of the structure of both wholesale and retail power tariffs of public and private utility agencies. The objective of the study is to provide recommen- dations for restructuring wholesale and retail tariffs to eliminate existing inefficiencies and inequities. In many cases, tariffs vary considerably among - 53 - Table III.4: SECTORAL COMPOSITION OF COMMERCIAL ENERGY CONSUMPTION, 1983-90 (MBOE) Low growth High growth Av. annual Av. annual growth growth Sector 1983 1984 1990 1985-90 1990 1985-90 (Z) (Z) Industry /a 46.8 45.3 48.4 1.1 56.7 4.2 Transport 22.8 22.0 23.4 1.1 27.6 4.2 Commercial/residential 13.3 12.9 13.4 0.6 15.5 3.4 Other 1.0 1.0 1.0 - 1.0 - Total (MBOE) 83.9 81.3 86.2 1.0 100.8 4.0 /a Includes small quantities for the agricultural sector, but excludes bagasse and agriwaste. Source: Mission estimates based on data from MOE/NPC/PNOC. consumer classes, regions and even districts without necessarily reflecting marginal cost differences, and the study would devise tariff structures which reflect as closely as possible the efficiency costs to the economy of meeting the demand for electricity. At the moment, the Government's policy on petroleum product pricing is to adjust prices to reflect OPEC crude oil prices, exchange rate movements and refining margins. Thus petroleum prices are being continuously changed, with relative price distortions being gradu- ally decreased. A longer term pricing strategy will be formuLated on the basis of the second phase petroleum product pricing study, which analyzes longer term issues related to retail and ex-refinery prices, domestic demand and supply projections and the appropriate refinery mix for the Philippines. Petroleum prices, at the moment, are significantly higher than border prices. A comparison with other countries in the region is seen in Table III.5 and indicates that, while diesel, kerosene and fuel oil prices compare favorably with other countries in the region, gasoline prices are lower than prices in Thailand and Korea. 3.36 The geothermal steam pricing issue is largely bridging the gap between the suppliers' price based on a targeted rate of return on investment in geothermal steam (18% for the private sector and 15X for PNOC) under the Government's royalty and tax structure and NPC's affordable prices given the power tariff structure. The Government has an uneven tax structure with geo- thermal bearing a higher tax relative to alternative fuels such as coal, hydro and even fuel oil (for NPC); this can lead to distortions in fuel utiliza- tion. Recent measures that may reduce this differential include higher taxes - 54 - Table III.5: INTERNATIONAL COMPARISON OF PRICES FOR SELECTED PETROLEUM PRODUCTS, JUNE 1984 Comparative prices Domestic price Thailand Indonesia Korea Singapore Philippines postings /a US$/gaL. - (US$/gal) Gasoline regular 1.69 1.83 1.35 3.12 0.88 premium 1.74 2.07 1.54 4.20 0.90 Diesel 1.30 1.15 .77 1.34 0.81 Kerosene 1.30 1.00 .58 1.41 0.88 Fuel oil 0.98 0.68 .77 0.97 0.67 la Approximate border prices. Source: MOE/PNOC/IBRD. on coal and the removaL of NPC's exemptions from the specific tax on fuel oil. The difficulty in agreeing on a steam price with NPC aLso continues to be a constraint to encouraging private sector participation. Various propo- sals to address the issue have been raised, and one of the objectives of the proposed geothermal poLicy studies is to analyze the issue of steam pricing and contract bases. Domestic coal prices are about 30Z above border prices, due to import restrictions and negotiated prices between consumers and producers. (iii) Energy Supply 3.37 The medium-term projections for the supply of energy are largely based on the commissioning of non-oil power plants in 1984-90. These include in Luzon, the nuclear power plant (620 MW), Calaca coal fired plant (300 KW), and Makban geothermal plant (110 MW), as well as hydro plants in Mindanao (540 Mi). The new plants are expected to increase NPC's generating capacity by 44Z by 1990. Domestic petroleum production will continue to make a small contribution to supply in the medium term. 3.38 There are a number of policy and technical issues on the supply side. The key one is the need for NPC to review its least cost expansion - 55 - program given the changed demand situation and financing constraints.12/ A review started in November 1984 and is now under discussion. The least-cost program will assist in form Nating a policy on the future use of the existing oil-fired pLants in Luzon - and the longer-term development of the grid, including the location of future generation plants. 3.39 Another important technical issue relates to NPC's inefficient utilization of existing capital stock. For example, despite a high reserve margin, NPC has at times been unable to meet peak demand and consequently lost sales revenues. The power system also suffers from load shedding and frequent brownouts. The problems in part are related to the lack of maintenance and rehabilitation of the oil fired plants, which accounted for 62% of the total generation in 1983. To utilize its investments efficiently, NPC is now maing decisions on the appropriate use of the oil-fired plants. These include the identification of units for which rehabilitation would be most cost-effective, alternatives to rehabilitation for spinning reserve duties, and the possibili- ties for reducing the minimum load oil consumption. These decisions vould have implications on the timing of new investment and future oil imports. For example, given NPC's projected low growth of demand in Luzon (2.9% p.a. from 1983 to 1990) investments in the medium term will be for fuel substicution purposes only in the initial period, and the economic justification of new plants thus dependent on the extent to which they will be utilized. A study to improve the efficiency of transmission Lines and substations, particularly through maintenance and rehabilitation, is also underway. In addition, with the substantial increase in new capacity in the medium term, a high priority should be to ensure the efficient operation of the new plants to achieve the target of reduced import dependence and foreign exchange savings. Distri- bution losses of the other power utilities are also high, and need to be reduced. 3.40 Another issue relates to the operating efficiency of the new non-oil power plants. NPC has estimated plant utilization factors for coal and for the nuclear plant at 70Z. Although desirable targets, these utilization factors do not apy2jr realistic given industry experience as well as NPC's past performance._ The optimistic utilization factors have also led to 12/ The Power Expansion Program (June 1984) on which the above comments are based, lists a number of proposed projects, but does not provide any information on the least cost analysis regarding various options. 13/ In 1983, Luzon had 78% of the installed generating capacity in the country. 14/ Industry experience on reactors of the type built in the Philippines is that they have been utilized on average between 55-60%. However, Westinghouse has built only 3 reactors in the Philippines' size range in the last 10 years. Two have had considerable difficulty in starting up (Brazil, Yugoslavia) and the one in Korea has averaged 60% in its five years of operation. The average utilization factor for coal plants in developing countries is aiso 55-60%. - 56 - projections that the supply of fuel oil for electricity generation would decline from 19.1 MBOE, about 23% of the country's commercial energy consump- tion in 1983, to 6.0 MBOE or 7X in 1988. This may be realizea provided a program is implemented for the rehabilitation/maintenance o. the oil-fired plants and the transmission system which would result in further oil savings. Estimates of domestic energy supply in Table III.3 are based on more conservative assumptions on operating efficiency for the coal and nuclear plants. 3.41 A second issue on the supply side is the over-optimistic coal output projections. MOE currently estimates that domestic supply wili expand from about 1.3 million metric tons in 1984 to about 3.8 miLlion metric tons in 1990. Bank estimates indicate that between 2.0-2.4 million metric tons will actually be available by this date, implying a continuing neti for imports valued at about $40 million a year. The coal supply projections in Table II.3 reflect the lower estimates. 3.42 A final issue on the supply side is that with the higher cost of power and petroleum products, the; demand for fuelwood and charcoal will increase further. Already the forests have been depleted, although not pri- marily due to rural energy r-eeds, resulting in deforestation and soil ero- sion. Although the Ministry of Energy and other organizations have undertaken studies on rural energy problems, ti.Bre is a need for a comprehensive national policy to anticipate the problem of rural energy supply. Further expansion of the mini-hydro and dendro-thermal program should depend on a review of its financial viability. Other non-conventional sources, such as biogas, biomrss, and solar energy, will not make much of a contribution for the medium-term, but the ongoing research and the involvement of the private sector in their development should be encouraged. (iv) Balance of Payments Impact 3.43 In 1980-83, the Philippines has imported on averare 67 MBOE per year. The country has incurred substantial expenditures in trying to limit this oil dependence. The net foreign exchange savings, which are currently difficult to estimate given that many power plants are still under execution, would have to include the considerable debt service on foreign borrowings. Projections in Table III.3 indicate that the volume of oil imports will decrease at an annual rate of 3.8% in the low case and 0.1% in the high-growth scenario. Oil consumption would, thus, be in the range of 48-60 MBOE by 1990, compared to 68 MBOE in 1983, largely as a result of fuel savings in the power sector. This effect, however, introduces a major element of uncertainty, a situation that may be further exacerbated if there are delays in commissioning the proposed non-oil plants or technical problems in their use. Using the high estimate for oil consumption, the result will be an annual fuel import bill (including coal and nuclear fuel) of about $3.1 billion by 1990. Imported energy would consume 27% of projected merchandise export earnings in 1990, compared to an average of 41% in 1980-83. In the low-growth icenario, the fuel import bill would require 24% of export earnings by 1990, as demand for oil would be suppressed due to the continuing economic constraints. - 57 - 3.44 In both scenarios, despite the reduction in oil consumption as a result of the development of indigenous resources, oil imports would stilL require a significant amount of foreign exchange due to the projected oil prices. Energy imports would thus still constitute a burden on the balance of payments, and future movements in international oil prices remain a crucial element for the projections. (v) Energy Investment Program 1984-1988 3.45 The key conclusion for the medium-term is that priority should continue to be given to completion of on-going projects, new investments for the energy sector should be for rehabilitation/maintenance of selected oil- fired plants and strengthening the transmission system, and that increased emphasis should be put on efficiency improvement. While the rapid development of energy sources was of overriding importance in the latter half of the 1970s, a careful assessment needs to be made of new investments for the 1980s. Key considerations should be the increased cost of borrowing, scarcity of public resources and oth competing sectoral priorities. The revised energy investment program -5 indicates that total programmed capital outlays for the period 1984-88 are P 64.7 billion in constant 1984 prices; this repre- sents a reduction of 35% in real terms from the previous program. Of the P 53.6 billion public investment programmed, NPC accounts for 73%, while NEA and PNOC account for 15% and 12%, respectively. It is unclear where the private resources, which would contribute 17% to the total investment program, are to be obtained. Although the Covernment has maintained a cooperative partnership with the private sector in energy resource development, the limi- ted success of past exploration efforts in petroleum and the lack of agreement on a mutually acceptable geothermal steam price have constrained private sector participation in recent years. 3.46 A comparison of the previous and current investment program reveals two main points. First, in several iterations, the energy investment program has been scaled down significantly for 1984-88, reducing its share in GNP to 2.2% in the high-case scenario. This is significantly lower than the 2.7% averagel1are of energy capital expenditures in GNP during the 1978-83 period._ However, given the public finance constraints, the composition of the program needs to be reviewed, and there might be scope for further reductions in all the agency programs. Second, due to the cuts, a number of projects have been dropped and the start of new project;; has been postponed. NPC started no new projects in 1983 and 1984; PNOC has reduced its investment expenditures planned for 1984 by half. NEA has also significantly scaled back its rural electrification program. 15/ The information was provided in October 1984. 16/ NPC's expenditures accounted for 82% of the 1978-83 energy investment program. One-third of NPC's expenditures during this period were for the nuclear power plant. - 58 - (vi) Financing the Investment Program 3.47 The Government recognizes the increasing need for the energy program to be financed by internal cash generation as a result of constraints on the national budget and external borrowings. Consequently, it has targeted that internal cash generation be raised to contribute about 50% to capital expendi- tures by 1987. Although the program's local cost financing will benefit significantly from the stabilization measures adopted, particularly the power tariff increases for NPC and petroleum price adjustments for PNOC, this target may not be attainable. NPC's financial projections show only a 22% self- financing ratio in 1984-88. This would allow NPC to require no further government equity contributions after 1985 and to achieve a rate of return of 8Z by 1988. However, NPC has both short- and longer-term financing prob- lems. It had a deficit in its capital budget in 1983 and is projecting one for 1984. These have been and are expected to be partially financed by the retention of pesos corresponding to the debt service covered by the mora- torium. NPC's foreign byr7owings wiLl be substantial over 1984-88, amounting to about US$1.4 billion - in constant 1984 prices. The ability of NPC to obtain foreign commercial loans and supplier credits has been seriously impaired following the debt moratorium and may not be fully restored even after completion of the ongoing rescheduling exercise. Thus NPC needs to resolve: (a) whether it should continue with a fuel substitution program in the medium term given the financing constraints and shortfall on its capital budget; and (b) if it continues to do so, and for the completion of ongoing projects, it may have to rely heavily on loans from official sources rather than export credits and commercial loans as in the past. By utilizing longer- term external financing, it would also reduce the debt service burden on the economy. 3.48 NEA's internal cash generation contributed less than 1% to its capital expenditures during 1980-83. The gap has been largely met by govern- ment contributions and foreign borrowings. However, both these sources of financing are uncertain in the future. Government's contributions are doubt- ful given the budgetary constraints. It is also questionable whether foreign loans should continue to be incurred for this program. If for social and poverty alleviation considerations the program is to be continued, the focus should be on improving the financial viability of the rural electric coopera- tives, which collectively have been experiencing losses since the inception of the program. As a result of the financial performance of the cooperatives, NEA has been collecting only 40% of the debt service due to it. An action program for the improvement of the financial viability of the cooperatives should be a precondition for the continuation of the program. 3.49 Overall, PNOC has been in a better financial situation than NPC and is expected to finance its development expenditures largely from its own resources and foreign borrowings. Following the abolition of the Oil Industry Special Fund, PNOC may have to rely increasingly on internally generated funds to finance its exploration program. The extent to which PNOC's investment 17/ These estimates reflect the June 1984 expansion ,rogram. - 59 - program can be further scaled back will depend on decisions to continue with the geothermal developments in Luzon and the coal projects in Mindanao as they constitute the largest portion of PNOC's capital expenditures. The former is dependent on an analysis of NPC's least cost program and the latter on decisions regarding future industrial and power projects. It is essential that PNOC and NPC closely coordinate their planning for future investments in geothermal and coal projects. C. Agriculture 3.50 Substantial agricultural growth in the past decade was largely the result of investments aimed at achieving self-sufficiency in food crops, in particular rice, and of crop diversification. A recent slowing in the agri- cultural growth rate is related to both short-term factors and more funda- mental problems, including the loss of momentum in the pace of technological change, institutional rigidities, and government policies that dampened pro- duction and investment incentives. In light of current problems, the Govern- ment's attention has increasingly focussed on the sector as a potential for developing efficient import substitutes, new export products, and increased earnings from traditional commodities. Investment priorities include the rehabilitation of irrigation systems and tree crops as well as selected new investments that augment the existing productive system. Most important, how- ever, is a continuation of recent moves to liberalize agricultural marketing arrangements and prices. (a) Past Performance and Structural Issues Ui) Past Growth and Export Trends 3.51 The agricultural sector accounted for 23% of GDP, about one-third of merchandise export earnings, and over half of total employment in the early 1980s. In the 1970s, the agricultural sector grew by an average of 4.9% per year (Table III.6). The high rate was largely the result of Government poli- cies aimed at food self-sufficiency. Objectives of export diversification, import substitution in non-rice agriculture, and productivity advances did not especially guide the sector's growth strategy. It is noteworthy that value added per worker increased only by 1.62 per annum during 1970-80. In the early 1980s, agricultural growth gradually declined and actually turned nega- tive in 1983. The main factors causing the decline in output growth, which was shared by the four principal crops, included the impact of a drought in 1982/83, the growing shortage of foreign exchange and associated policy measures restricting imports, and the gradual contraction of credit to the sector. Low commodity prices on international markets also contributed to constraining production. - 60 - Table 11I.6: GROWTH AND STRUCTURE OF THE AGRICULTURAL SECTOR, 1972-83 Subsector Trend/Annual Growth (Z p.a.) Percentage Shares 1972-80 1981 1982 1983 1972 1980 1983 Paddy 5.3 2.4 4.7 -13.3 16.9 17.7 15.7 Corn 5.4 7.1 0 -6.7 6.2 5.9 5.6 Coconut 3.3 7.7 -7.1 0 7.5 5.5 5.2 Sugarcane 2.9 /a 0 15.4 -26.6 6.9 5.5 4.4 Banana 17.8 0 14.2 4.3 3.7 10.1 9.7 Other Crops 8.8 2.3 6.8 6.4 14.4 18.1 20.2 Livestock 1.8 /a 5.5 5.3 10.0 10.6 7.6 8.9 Poultry 10.3 25.0 10.0 13.6 4.4 6.8 10.1 Fishery 4.7 5.1 4.9 2.3 16.9 16.5 17.7 Forestry -6.9 -14.3 -16.7 -20.0 12.5 5.9 3.2 Total Sector 4.9 3.8 3.2 -2.4 100.0 100.0 100.0 /a Average of annual growth rates is used here since data on value added for this subsector have not portrayed a good exponential trend. Source: Table 7.9 of Statistical Appendix. 3.52 The principal contributors to agricultural growth were the food crops rice and corn. A large irrigation investment program, adoption of high yielding varieties, and increased fertilizer application together helped to achieve a trend growth rate of 5.3% in rice production in 1972-80 and rice self-sufficiency in 1978. During the 1970s, the area under irrigation increased by 100,000 ha, i.e., from less than 40Z to 50% of rice land. Over- all rire yields increased from 1.6 tons/ha in the early 1970s to 2.4 tons/ha in 1982/83. Corn production grew at about the same rate, but largely due to an expansion in the planted area, rather than yield improvements. Although food production grew rapidly, this was only sufficient to keep up with popula- tion growth. Data available indicate that the level of average caloric in- take, which had increased significantly in the earlier years of the decade, stagnated at about 1,800 kcal per day in 1978-1982. 3.53 While agricultural export earnings increased by 5% p.a. in the 1970s, which is significantly below the 12X p.a. growth of total merchandise export earnings, they declined in the early 1980s, reflecting a combination of adverse weather, price developments, and institutional issues. The share of agricultural exports declined from. 68% of merchandise export earnings in 1972 to 32% in 1983. This decline was distributed unevenly among the traditional products coconut, sugar, and forest products which continue to dominate agri- cultural exports. From almost equal shares of 30% in 1972, coconut products increased to 40% of agricultural exports in 1983, reflecting substitution of coconut oil for copra; sugar products declined to 17% reflecting higher growth - 61 - of domestic consumption; and forestry products declined to 201, largely due to supply constraints. Exports of nontraditional agricultural products, in par- ticular fruits and fish, doubled their share to 20Z during that time. (ii) Policy and Institutional Issues 3.54 Progress in effecting policy and institutional changes was slow in the past decade, and indeed the lack of appropriate policy and institutional reforms, in addition to the drought and other natural causes, hindered the continued progress of the sector in the last few years. 3.55 Policy Framework. In the Philippines, the price of no major crop is wholly determined by the market. Rice and corn have both support and ceiling prices. Although copra and coconut oil prices reflect international market conditions, domestic prices and marketing are controlled. Until recently, copra was subject to a levy, recovered by mills and paid into a special fund used for various purposes including price stabilization. Sugar exports, the share of the domestic market, and the price received by the miller and, in turn, by the farmer are determined by the National Sugar Trading Agency (NASUTRA) and the Philippine Sugar Commission (PHILSUCOM). Retail prices for household sugar are controlled to keep them below industrial and export prices. 3.56 Prices of three major agricultural inputs are also determined by the Government in varying degrees. Charges for irrigation water are below its long-run marginal cost, are largely uncollected, and are, therefore, subsi- dized through the budget. Similarly, fertilizer prices have been control- led. Labor is guaranteed a minimum wage which has been adjusted upwards to reflect cost of living increases. This may have given an upward push to rural wages especially in the plantation sector. There is little evidence, however, that minimum wages have been strictly observed in the rural sector. 3.57 The results of government interventions have been complex. Growing intervention in the rice market and government pricing policies did not pro- vide adequate incentives to rice farmers. From 1960 to 1977, the real value of rice yield per hectare increased by 114%, and dropped by 18% by 1982, due to the deterioration of the internal terms of trade to rice farmers. A recent study suggests that coconut has becn taxed up to 20% at times, the levy fall- ing on the farmers who belong to a recognized poverty group. Due to lack of price incentives to the farmer, there has been hardly any replanting of coco- nut trees; as a result, trees are over-aged and have Low yields. Similarly, sugar has been taxed heavily, probably adversely affecting sugar production and sugar workers' income, while holding retail prices below export prices has resulted in an income transfer to consumers. Overall, the national pricing and marketing system appears to have favored industry over agriculture. - 62 - 3.58 Institutional Framework. The institutional framework in agriculture is rather weak. There is a costly overlap of responsibilities and duplication of functions. For example, in area development programs, the National Econo- mic and Development Authority (NEDA) and the National Council on Integrated Area Development (NACIAD) are involved in regional planning. Furthermore, the Ministry of Agriculture and Food (MAF) has authority for coordinating delivery of inputs and services in area development projects. Similar problems also characterize other critical aspects of agricultural development, most notably research and extension, irrigation services, land use, and forest resources. There is therefore an urgeni need for institutional reforms to reduce the duplication of functions an6 the overlapping of responsibilities. 3.59 Some important and powerful bodies have had a level of autonomy which made it difficult for the concerned Ministries to influence policies and programs with regard to key development activities. The most important among these are the Philippine Coconut Authority (PCA), which recently has been given representation in the Cabinet, the Philippine Sugar Commission and the PhiLippine Crop Insurance Corporation which both report directly to the Office of the President and have independent budge.s. In mid-1984, the role of the Ministry of AgricuLture was strengthened; it is now represented on the boards of these three agencies and obtained the food policy function of the National Food Authority. The incr2asing influence of MAF is a step in the right direction, and the ministry would now have to exert this leadership. 3.60 The complex organizational and management structure has also hinderea government efforts to develop an effective sectoral planning mecha- nism. Planring has focussed on individual crops rather than farm units, thus .iistorting the conclusions for optimal allocation of resources; the commodity approach to planning thus has been fragmented and not internally consistent. Although NEDA is responsible for sectoral plans, responsibility for planning and setting investmenc priorities is divided among several institutions which focus narrowly on their specific subsectoral or commodity problems. To formu- late sectoral investment plans which have well defined priorities, the agri- cultural ministries Wo2ld need to clearly define their strategies and improve coordination among the concerned agencies. 3.61 AgricuLtural Credit. Formal agricultural credit expanded rapidly in the 1970s, supporting the. growth of the sector. About three-quarters of institutional rural credit is provided by 1,000 rural banks, owned and opera- ted by close family groups. Rural banks have access to Central Bank redis- counting facilities, but many have not been able to take advantage of these facilities because of arrears in excess of the 25X limit for rediscounting, caused particularly by their involvement in Government's Masagana 99 rice pro- duction program in the 1970s. Commercial banks have been required to set aside 25% of their loanable funds for agricuLtural finance but, except for the government-owned Philippine National Bank, they have few rural branches, and the quota system has been thwarted in its objective as banks invested in Central Bank securities rather than directly in agricultural lending. The Development Bank of the Philippines provides 20% of its medium- and long-term credit to agricuLture. But, with only 50 branches, its coverage is limited. Thus, small farmers have limited access to formal credit facilities which are concentrated in relatively prosperous areas. It is therefore not surprising - 63 - that, although institutional credit expanded significantly in the 1970s, it constituted onLy about one-third of rural lending. (iii) Employment and Poverty Issues 3.62 Over half of the total employed persons in the country are engaged in agriculture, livestock, forestry and fishery. Of those engaged in the sector, landless laborers constitute about 16%. The degree of underemployment is also high, at about 60% (compared to 25% in the non-agricultural sector). While real wages in agriculture increased by about 402 between 1972 and 1977, they declined 50% between 1977 and 1981. With stagnant output and increasing inflation in recent years, further declines have probably occurred since 1981. 3.63 Farm size is the most important variable explaining differcnces in income level, ard the distribution of cultivated land among Filipino house- holds is highly skewed: 61% of farmers have Less than 3 ha and own only 242 of all farmland, while 5% of farmers have more than 10 ha in production and together account for 34X of farmland. Other important factors explaining income variations are qualities of land and the availability of non-farm jobs. Rural poverty is particularly associated with farmers growing rice and corn because rice and corn are the dominant stapLes in the Philippines and little more than subsistence amounts are being produced on many of the small holdings, especially in the rainfed areas. Not surprisingly, extensive poverty is found in inaccessible, resource-poor areas. Poverty is associated with shifting agriculture in mountain areas, "municipal" fisherman, and landless laborers. The regional incidence of poverty varies markedly. The highest incidence is found in Central and Eastern Visayas, Northern Mindanao, Ricol, and the Cagayan Valley; the lowest in Southern Tagalog, Central Luzon, and CentraL Mindanao. 3.64 Since 1972 the Government has pursued a program of agrarian reform aimed at the transfer of land ownership to tenant farmers on rice and corn lands. The reform is being implemented in two ways: under "Operation Land Transfer,11 applicable to all landowners with over 7 ha, tenants become owner- cultivators, paying for the land over 15 years; and under the Leasehold Enforcement Program, for farms up to 7 ha, tenants receive security of tenure on land being cultivated. Some 730,000 ha and 400,000 tenants were targeted for the land transfer program, and about 1,460,000 ha and over 1 million tenant families under the leasehold program. Land Reform has moved fastest in Central Luzon and areas near Manila and slowest in Mindanao and other regions with security problems. Certificates of Land Transfer have been issued to about 80X of the tenants involved in Operation Land Transfer and leasehold contracts have been issued to nearly 70% of potential beneficiaries in the leasehold program. - 64 - (b) Growth Prospects and Policies (i) i-edium-term Development Strategy 3.65 The Government's medium-term strategy for agricultural development is described in an "Agenda for Action in Agriculture: 1984-88".- The program aims at achieving self-sufficiency in all basic food items and at increasing agriculture's contribution to the balance of payments by expanding exports and import substitutes. This implies a shift in emphasis from self- sufficiency to export development. The Agenda provides for policy actions and institutional reforms to improve production and investment incentives, strengthen the institutional framework for sector management, mobilize finan- cial resources, and improve the allocation of scarce public resources. The success of the strategy will also depend upon increased efficiency in the use of the existing investment in the sector. 3.66 Price and trade regimes. Pricing policies for agricultural inputs and outputs as well as domestic marketing arrangements would need to be con- tinually reviewed to ensure adequate production incentives. The Government has recognized the need for reforms in this policy area and is undertaking studies to that effect. Initial measures have already been taken to phase out the monopoly of the National Food Authority with respect to imports of feed grains, when imports of soya beans and yellow corn were opened to the private sector in 1984. Steps to decontrol prices have also been taken with the lifting of price controls on poultry and pork. The mandatory price ceiling on yellow corn has recently been lifted, and measures for rice pricing are being reviewed. In the area of trade regulations, the under- or negative protection of the agricultural sector is being reduced under the structural adjustment program. 3.67 Government-Sponsored Institutions. The number of government agencies in the agricultural subsectors need to be reviewed further, and the role of those in the sugar and coconut industries examined. Conflicts of interest, including overlapping representation on the managing boards of regulatory and executing agencies, and lack of public accountability are the key issues; The Government would need to ensure that the institutional set- ting will not remain an impediment to private initiative and growth in the agricultural sector. The private sector voices complaints that the presence of Government quasi-monopolies with their powerful interventions in production and marketing does not leave much room for agribusiness investments. The role of government-sponsored institutions should be promotional and facilitating, rather than in the form of direct intervention in production, marketing, and distribution. In particular, the role of NFA needs to be made commensurate with the functioning of an open market as well as with government budgetary constraints. 18/ The program is supported by an Agricultural Sector/Inputs Project described in Report No. P-3860-PH, dated July 17, 1984. - 65 - 3.68 Agricultural Credit. Credit institutions and programs have to play a supportive role for agricuLtural growth. Areas that require attention are: promotion of greater deposit mobilization in ruraL areas and use of deposit resources for agricultural lending; rationalization and gradual elimination of subsidies on credit; increasing the efficiency of the ruraL financial market through functional despecialization and financial rehabilitation of the Development Bank of the Philippines and the rural banks; increasing partici- pation of commercial banks in agricultural lending, and introduqtion of an institutional mechanism for agricultural credit coordination. 91 In the matter of providing rural credit, the key issue is the type of institutional arrangement that is most appropriate to mobilize savings, provide credit on a rational basis and minimize arrearages. A question that arises is whether financial institutions owned and operated by the large majority of rural producers rather than continued heavy reliance on informal money Lenders are more suitable to achieving these objectives. The Government shouLd evaluate the alternative institutional approaches and identify the relatively more efficient. 3.69 Investment Incentives. In the past, various investment incentives, e.g. tax concessions and foreign exchange releases on a priority basis, have been provided for agriculture and agro-processing. Currently, agricultural investment incentives are being reviewed to ensure that they support the policy thrust of the ongoing structural adjustment program. 3.70 Rural Employment. AgricuLtural development would help to provide productive employment and alleviate poverty in rural areas, although addi- tional measures focussing on poverty groups are required. For the rest of the 1980s, agriculture will need to continue absorbing about 330,000 persons per year, i.e. about half of the 3.1% annual increase in the labor force. Provid- ing productive empLoyment thus remains an important objective of agricultural development. Productivity gains would help increase rural purchasing power which is needed to improve the nutritional status of the rural population. Rural employment would need to be developed not only through direct agricul- tural employment, but also through forward and backward linkages to off-farm employment. (ii) Growth Scenarios 3.71 For the period 1984-90, two growth scenarios are presented in Table III.7. Both scenarios reflect the recovery from the 1982/83 drought and the impact of recent macro-economic policy measures, in particular the peso devaluations, on the 1984 performance. Table III.8 presents the corresponding export scenarios. They indicate that even moderately high output increases, as in the high case, have little impact on export earning performance. Commodity prices, which the World Bank projects to remain depressed for most 19/ cf. Philippines: Agricultural Credit Sector Review, Report No. 4117-PH, May 12, 1983. - 66 - products, are a far more significant factor in determining agriculture's con- tribution to prospective export earnings in the Philippines over the medium term. Table III.7: GROWTH SCENARIOS FOR AGRICULTURE. 1983-90 Subsector Value added in 1983 prices (Billion pesos) Annual Growth Rates (%) Low Case High Case Low Case High Case 1983 1984 1990 1990 1984 Ave. 1985-90 Ave. 1985-90 Crops 47.8 48.9 56.0 61.5 2.3 2.4 4.3 Paddy 12.2 12.8 14.7 15.9 5.0 2.4 4.0 Corn 4.3 4.4 4.9 5.5 3.5 1.7 3.8 Coconut 5.2 4.6 5.4 5.7 -12.0 3.1 4.0 Sugarcane 3.3 3.1 3.3 3.5 -7.0 1.1 2.3 Banana 7.3 7.6 8.4 9.1 4.0 1.7 3.3 Other Crops 15.5 16.4 19.4 21.8 6.0 3.0 5.5 Livestock 5.3 5.1 5.6 6.1 -5.0 2.0 3.6 Poultry 7.1 7.4 8.9 10.2 4.5 3.3 6.3 Fishery 16.8 17.4 20.0 22.0 3.5 2.5 4.4 Forestry 7.5 7.0 7.6 8.1 -7.0 1.5 2.8 Total 84.5 85.8 95.8 107.9 1.5 2.4 4.3 Source: Statistical Appendix, Table 7.8 for 1983 data; 1984-90 data are mission estimates. 3.72 In the low case, the sector is expected to grow at an average annual rate of 2.42, in line with population growth. The rice, livestock, and fish- ery subsectors would broadly match that growth rate. Coconut would grow at 3.1% by recovering from past weather-induced low levels of production. Sugar- cane output is expected to suffer from rising costs and relatively low export prices and hence would register only a 1.1% growth rate. Banana exports, if they continue to be tied to one principal market, also would experience slow growth. The growth of poultry would be constrained by insufficient growth in feed industries. The forestry sector would recover slowly from past decline. Real growth of agricultural export earnings would be an average 1.3% p.a., mainly on account of non-traditional agricultural products which would grow by about 4% p.a., while traditional agricultural exports would stagnate or decline. 3.73 In the high case, the sector's average growth is projected to be 4.3% per annum. This is composed of a trend lower than the growth achieved in the 1970s and the recovery from the drought. The scenario implies substantial growth of rural purchasing power, export diversification as well as import - 67 - substitution without Loss of efficiency. The high-case scenario is based on the assumptions that the private sector reacts positively to reduced govern- ment intervention, and that efficiency in the sector increases as a response to policy changes. Here as well, the main source of growth for exports would be nontraditional agricuLtural products which would grow by an average of 7Z p.a. in real terms, while overall agricultural export growth would be 2.7% p.a. (iii) Prospects and Policies in Key Subsectors 3.74 Food Crops. The target for food crops would be to achieve a growth trend in line with the still relatively high population growth and allow a moderate increase in per capita caloric intake. This would require improving yields in rice and corn which - by international comparison - seems to be feasible without significant expansion of investment; the productivity increases can be 3chieved Lhrough a more effective use of inputs, adequate maintenance, and limited invcsLmenL tor rehabilitation. Pricing policy, marketing arrangements, as well as cos0 recovery to ensure maintenanc funding appear to be the main issues in this context. 3.75 (a) Rire. The strategy For rice wouLd emphasize improvements in yields which are still. low by international comparison. While, in the past, expansion of irrigated areas was a major factor in increasing *ieLds, for the medium-term future only minor investments seem to be needed, .i particular for rehabilitation. Yields could bit incre;ised through better input mix and opera- tion of existing investment. IPricing incentives and reduced government inter- vention in marketing appear to be the most important policy instruments at this time. Given the public finance constraints, cost recovery in irrigation schemes would need to be improved. The high case projection is based on a modest increase in per capita consumption from 90 kg in the early 1980s to 92 kg by 1990, rather than significant export growth. The world market for rice is not growing relative to production, since countries continue to give very high priority to food security and are willing to pay a relatively high price to achieve self-sufficiency. From 1950 to 1980, world rice output doubled from 120 to 248 million tons, but the share of exports stagnated at 4%, and the world rice market has failed to reallocate production from high- to low-cost producers.20 In such a market, it is not clear how the Philip- pine rice will perform, even if the current quality problems are overcome. 3.76 (b) Corn.In regard to corn, the low-case growth rate of 1.7% would eliminate imports (which in recent years have made up 10% ot total supply) by 1990, but not allow any increase in total domestic usage. In the high case, overall use could increase at an annual rate of 2% which would assist the g:owth of livestock and poultry. No major prospects for corn exports are 20/ For a discussion of these trends and the causes behind them, see Ammar Siamwalla and Stephen Haykin, The World Rice Market: Structure, Conduct and Performance, IFPRI Research Report 39, June 1983. - 68 - anticipated during the 1980s. If the Philippines can produce corn at competi- tive prices, its location vis-a-vis the three major East Asian imporLing countries Japan, Taiwan, and Korea can stand in its favor. However, the Philippines hiscorically was a high cost producer; its corn to rice price ratio was 0.67 in the last decade, compared to a world average ratio of 0.32. Yield levels in the Philippines during 1979-82 averaged 0.97 tons/ha., significantly lower than in other countries in the region; this indicates chat there is scope for yield improvements via modern inputs. 3.77 Other Import Substitution. In 1982, agriculture, livestock, and fishery imports amounted to $720 million or 37% of the sectoral exports. Over 80X of these imports is constituted by eight commodities, almost all of which could be replaced by domestic production. Fisheries, tobacco, cocoa beans, and cotton are probably more easily substitutable by domestic production than dairy products. The scope for producing others, animal feeds in particular, is being investigated by the Government. Agricultural imports would be equal to one third of the sector's exports at the end of the decade in both growth scenarios, slightly lower than recent shares. It is possible that import substitution can lead to substantial future foreign exchange savings; however, careful case-by-case evaluation is required. 3.78 Traditional Exports. The approach for the traditional export products coconut and sugar would aim at improving thoir yields to ensure international competitiveness in the longer term. Investments, mainly in the private sector, are required to support this strategy; however, the gestation period is too long to affect production significantly in the 1980s. Institutional, pricing, and financing issues also will have to be addressed in these subsectors. Table III.8: INDICATIVE EXPORT EARNING PROJECTIONS IN TWO GROWTH SCENARIOS, 1983 AND 1990 Export Earnings Commodity 1983 1990 1990 Low Case High Case ($ m) CZ) (S m) (%) ($) (Z) Coconut products 639 (40) 990 (34) 1,030 (30) Sugar 282 (18) 650 (22) 740 (22) Forest products 327 (20) 540 (18) 710 (21) Other products 364 (22) 770 (26) 900 (27) Total 1,612 (100) 2,950 (100) 3,380 (100) Source: Mission estimates. - 69 - 3.79 (a) Coconut. The coconut industry is one of the largest users of agricultural land in the country and z_counts for about 20% of total exports. In the medium term, output is constrained by the absence of a comprehensive replanting program in the past and measures to enhance the Philippines' compe- titiveness. It is believed that yields can improve by 0.5 to 1.0 tons/ha from the existing "talls" through rehabilitation and intercropping. More importantly, replanting with hybrid planting material could produce yields as high as 6 tons/ha., as against the less than one ton obtained currently. Due tA long gestation periods, however, the impact of a replanting program which the Government is preparing now would only be felt in the 1990s. Output growth in the medium term will thus reflect recovery of production from the adverse effects of the drought in 1982-83 and the responsiveness of farmers to policy and institutional reforms. Over the last decade, government inter- vention in the industry has taken a variety of forms, including export taxes, levies, a coconut replanting scheme, and a vertical integration of the processing industry. The latter was undertaken under private auspices, through the United Coconut Oil Mills (UNICOM), the largest buyer of copra in the country and virtually the only exporter of coconut oil. At present, one of the main issues facing the industry is the growers' perception that the Government's program and policies have not adequately safeguarded their interests. For instance, while the Philippine Coconut Authority is intended to be the Government's vehicle for regulating and promoting the coconuit industry, its Board consists mainly of large scale producers and millers. Attention needs to be directed at the most effective means of reducing costs and margins in domestic marketing and processing of copra, and measures to ensure that farmers get a fair share of the proceeds of exports and domestic sales. 3.80 (b) Sugar. The national average yield has stagnated during the past decade at around 50 tons of cane per ha. Only 29,600 ha out of over 400,000 were irrigated, thus virtually all farming was on unirrigatee lands. It is expected that irrigation can add at least 22 tons/ha to yield and this can be an important argument in favor of covering a large area by modern irrigation systems. This, however, cannot affect growth in the near term. The growth projections do not go beyond a modest 2.3% even in the high case reflecting mostly domestic demand growth, and recovery of output from the drought. However, if export prices continue to be as low as 6C per pound as in early 1984, than the low case of 1.1% annual growth is expected. A key question is the outlook for export demand growth, which depends on the Philippines' competitiveness. A survey in 1979 found that among the 40 countries studied, the Philippines ranked 10th in terms of cost of production which was $245/ton. Subsequently, performance deteriorated as labor costs increased and total cost was estimated to have risen to $336/ton in 1982. This pushed the Philippines down to 19th in the cost ranking. There is a danger that the country can lose export markets unless urgent steps are taken to improve efficiency of the sugar subsector. 3.81 In the past, the Government has controlLed sugar marketing to protect producers and consumers from excessive price fluctuations. For 1974-84, the National Sugar Trading Corporation (NASUTRA) acted as the soLe buyer of sugar from the mills and the sole exporter, under the principle that a single trading entity has greater marketing power in the global arena. - 70 - Also, domestic distribution was allocated by NASUTRA to a limited number of selected traders. Recently, the Covernment has allowed free trading on the domestic market, but, after an early move to hand exporting over to the private sector, has decided to retain NASUTRA as the sola exporter. NASUTRA's practice of selling sugar under forward contract has enabled the Philippines co export sugar at an average price of about 14.5c in 1983, compared to a prevailing world market price of 8.5C. This has meant substantially higher incomes for sugar farmers than would have ordinarily prevailed under spot price sales. 3.82 The policy-making and regulatory body is the Philippine Sugar Commission (PHTLSUCOM), which aLlocates sugar production for export and domes- tic consumption. xt also fixes the raw sugar buying price on the basis of the average of liquidation price on the domestic and export markets. As in the case of coconuts, there is a conflict between the regulatory interest of PHILSUCOM and the trading interests of NASUTRA: their Boards comprise largely the same individuals. Attention needs to be directed at improving the efficiency of the current system ind the examination of alternative approaches. rn particular, there is a need to review and analyze the impact of the current price setting, market alLozation and revenue liquidation arrangements, the cost of PHILEV'COM's and NASUTRA's operations, t.e possibil- ity of separating the reguLatory from the trading functions, and the estab- lishment of pubLic financial accountability. 3.83 Export Diversification. To er'.a-ce rhe future growth potential of agricultural exports, diversification would be an important element of the strategy. In addition to diversification of export markets, the country would have to export a range of new preducts. This applies to export of agricultural products as well as agricultural inputs to manufacturing industries. Studies are needed to systematically explore the potential of growing non-traditional crops and assessing their future markets. The emphasis should be on short-gestation c-ops and new crops, such as fruits and vegetables, which could also be inputs into domestic processing industries. The policy issues in these new areas are government assistance in identifying crops and markets and providing appropriate investment incentivtis. 3.84 Fishery. Fishing exports as a proportion of total Philippine supply were less than 2% in 1979 and did not increase significantly. Export value was $94 million in 1979 and $119 million in 1982. Japan is the most important market and next comes U.S.A. Both markets can absorb more imports, especially shrimp. The Philippines is endowed with almost ideal physical conditions for shrimp farming, including climate, water quality, soil characteristics, and number of indigenous species that could be developed on a commercial scale. The high growth projection assumes that a large part of the 4.4Z annual growth will come from export development. 3.85 Forestry. Forestrv is a sector which seems to require particular attention in the future. First, the sector needs to be rehabilitated from overlogging in the past which Led to a continuous decline of log production from a record level of 10 million cu m in 1973 to 4 million cu m in 1983. Seccnd, there is additional pressure on forests due to increased prices of imported energy and possible substitution by wood or charcoal. Third, wood is - 71 - an important input into the export industries and has been constraining its growth. In addition to the economic reasons above, reforestation has consid- erable indirect benefits in terms of ecology and climate. All of these and the long gestation period, argue for government support in terms of investment incentives. Improved performance of the sector would also require improving the governmer.t planning and regulatory functions. In the medium-term, how- ever, growth p'rospects are modest and do not go beyond 2.82 p.a. in the high case. (iv) Irrigation 3.86 The agricultural strategy, as the strategy for other sectors, emphasizes efficiency improvement and incentives for private sector produc- tion. Future government investment appears to be required mainly in rehabilitation and selective expansion of irrigation schemes. It is estimated that over half of che irrigated area needs rehabilitation, which would vield cheaper and faster returns than new projects. Studies indicate that convert- ing from rainfed to irrigated rice production costs 50-80% more per incre- mental ton of paddy than rehabilitation; rehabilitated areas are producing yield increases of as much as 70%. The rehabilitation needs at present reflect the inadequate funds allocated for operation and maintenance, which in turn reflects poor collection of water charges in irrigation schemes. Appro- priate measures will need to be taken to ensure that new investmencs do not deteriorate prematurely due to insufficient maintenance. At present, invest- ment plans in irrigation are being scaled back due to a shortage of government budgetary resources. However, the area expansion through the completion of ongoing schemes and a moderate increase in yields and cropping intensity would ensure that the Philippines maintains self-sufficiency in rice into the 1990s. STATISTICAL APPENDIX Table of Contents Table No. Page No. 1. POPULATION AND EMPLOYMENT 1.1 Population Estimates of Census Years and Population Projections ................ .......................... 76 1.2 Labor Force, Employment, and Unemployment .......................... 77 1.3 Employment by Sector ............. 78 2. NATIONAL ACCOUNTS 2.1 Expenditure on GNP at Current Prices ................... ............ 79 2.2 Expenditure on GNP at Current Prices: Percent Distribution ........ 80 2.3 Expenditure on GNP at Constant 197 2 Prices ....................... 81 2.4 Expenditure of GNP at Constant 1972 Prices: Growth Rates .......... 82 2.5 Expenditure on GNP: Implicit Price Indices ........................ 83 2.6 Industrial Origin of GDP at Current Prices .. 84 2.7 Industrial Origin of GDP at Current Prices: Percent Distribution ................................................................ 85 2.8 Industrial Origin of GDP at Constant 1972 Prices .................... 86 2.9 Industrial Origin of GDP at Constant 1972 Prices: Growth Rates .... 87 2.10 Industrial Origin of GDP: Implicit Price Indices .................. 88 3. BALANCE OF PAYMENTS 3.1 Balance of Payments Summary ....................................... . 89 3.2 Current Account: Services and Transfers ................ ........ 90 3.3 Foreign Exchange Reserves .......................................... 91 3.4 Trade Indices ............................................. ... 92 3.5 Exports by Commodity Groups ............................. ............ 93 3.6 Volume and Unit Value of Principal Commodity Expo rts ............... 94 3.7 Principal Export Markets ....... ...... ..................... 95 3.8 Imports by Commodity Groups ....................... 96 3.9 Imp orts of Capital soods by SectorCt ...ao.o.. sb.y..o et.... 97 3.10 Imports of Petroleum and Coal ........................... 98 3.11 Principal Sources of Imports-.. . ... ..o.... .................. . 99 - 73 - Table No. Page No. 4. EXTERNAL DEBT 4.1 External Debt Outstanding and Disbursed at End-Year, by Maturity and Borrower . ................................ . 100 4.2 External Medium- and Long-Term Debt Transactions, by Type of Borrower . ... 101 4.3 External Medium- and Long-Term Borrowings: Commitments, by Type of Borrower........................... . 102 5. PUBLIC FINANCE 5.1 Cash Operations of the National Government ................ 103 5.2 Distribution of National Government Cash Balances at Year-End ............... 104 5.3 National Government Expenditures by Sector...9..*................. 105 5.3a National Government Contributions and Transfers to Other Public Sector Units, by Sector .................................. 106 5.3b National Government Current Expenditures on it own Account, by Sector ....................................................... 107 5.3c National Government Capital Expenditures on its own Account, by Sector .*........................... e...........6-6................ 108 5.4 National Government Equity Contributions by Recipient (Cash Basis) .............. ................... o............... 109 5.5 Major Revenue Legislation, 1982-84 ..... ........ 110 5.6 Consolidated Revenues and Expenditures of Local Governments, - 8. Domestic retail price (P/50 kg of palay) 53.77 52.34 63.95 62.75 55.48 61.61 70.79 73.98 82.38 110.54/c 9. Domestic retail price (P|50 kg of rice) 97.00 102.00 106.00 104.50 114.50 122.50 136.00 148.00 159.50 209.83/c Corn 10. Price received by farmer (P/50 kg of white shelled corn) 46.96 48.42 50.54 48.42 48.06 53.41 58.84 62.26 67.36 11. Domestic retail price (P/50 kg of white milled corn) 73.00 76.00 79.50 79.00 81.50 92.00 106.00 112.50 117.50 /a Retail prices for Manila. T7 Augsut 1984. 7TW January to June 1984 average. Sources: Central Bank for 1, 3 and 5; NCSO for 2 and 6; United Coconut Association for 4; BAEcon for 7-11. - 137 - Table 7.12: SUPPORT PRICES FOR PALAY AND CORN GRAINS (P/kilo) Price support Effective date Palay 1.00 November 28, 1974 1.10 May 29, 1976 1.30 April 1, 1979 1.40 July 1, 1980 1.45 October 21, 1980 1.55 June 17, 1981 1.70 May 22, 1982 1.80 October 1, 1983 2.10 December 1, 1983 2.35 May 25, 1983 2.65 June 9, 1984 Corn grains 0.80 October 15, 1974 0.90 May 29, 1976 1.00 September 29, 1979 1.10 July 30, 1980 1.20 December 29, 1980 1.30 June 17, 1981 1.40 September 1, 1983 1.65 December 1, 1983 2.00 May 26, 1984 2.30 June 9, 1984 Source: NFA. - 138 - Table 7.13: SELLING PRICES OF RICE AND CORN AT NFA OUTLETS (P/kilo) Year Rice Corn 1974 1.80 - 1975 A..80 1.05 1976 2.00 1.16 1977 2.00 1.16 1978 2.00 1.16 1979 2.10 1.23 1980 2.45 1.63 1981 2.85 2.15 1982 2.85 2.15 1983 2.95 2.23 1984/a 4.00 3.10 /a Preliminary report as of October 17, 1984. Source: NFA. - 139- Table 7.14: PROCUREMENT AND DISTRIBUTION OF PALAY AND CORN BY NFA Procurement Distribution Year Palay WGN WCT YGN Rice WGN WCT YGN 1975 223,209 42,365 16,135 617 227,209 - 13,209 129,413 1976 274,461 30,358 7,896 156 255,012 8,971 37,449 53,990 1977 649,803 72,039 6,660 1,648 201,750 326 34,290 28,878 1978 518,521 146,263 2,231 4,629 123,020 7,539 30,943 167,777 1979 757,696 53,212 - 2,835 60,938 52,920 22,997 48,293 1980 551,089 12,274 - 379 279,739 4,285 40,870 188,985 1981 580,641 57,653 - 4,492 304,251 136 21,000 276,740 1982 649,193 44,929 - 23,130 244,052 7,511 30,784 328,951 1983 533,952 86,420 1,000 34,409 798,785 37 32,219 515,542 1984/a 169,424 5,187 - 2,168 181,214 12 41,296 122,875 hGN = White corn grain WCT = White corn grits YGN = Yellow corn grain /a January-June 1984. Source: NFA. - 140 - Table 7.15: AVERAGE IMPORT PRICE OF SELECTED FERTILIZERS ($/MT C & F) Grade: Urea 21-0-0 18-46-0 14-14-14 1973 105.53 57.87 153.60 147.30 1974 277.98 168.03 149.22 282.38 1975 371.37 219.34 - - 1976 122.36 67.87 1977 130.14 90.02 - - 1978 158.18 103.41 172.60 170.50 1979 175.22 111.57 203.75 176.75 1980 250.53 136.83 317.48 263.19 1981 275.08 153.14 300.50 235.97 1982 195.07 99.76 258.98 179.42 1983 146.67 88.73 222.94 169.16 1984 202.23 98.50 290.30 188.96 Note: 1973-77 - weighted average; 1978-80 - straight average. Source: Fertilizer and Pesticide Authority. - 141 - Table 7.16: AUTHORIZED EX-WAREHOUSE PRICES OF SELECTED FERTILIZERS (e'/MT) Date of effectiveness Urea 21-0-0 18-46-0 14-14-14 November 25, 1974 2,234 1,034 1 3,814 1,374 3,348 2,016 1 { 2,516 May 20, 1975 1,654 904 - 1 1,204 {{ rrr 1,914 September 27, 1976 1,507 936 2,667 1,204 April 8, 1979 1,769 1,263 2,674 1,534 August 24, 1980 2,006 1,480 3,320 1,724 July 23, 1981 2,367 1,746 3,638 2,048 Mmay 21, 1982 2,307 1,666 3,632 2,248 July 12, 1983 2,438 1,782 3,950 2,414 October 1, 1983 2,647 1,782 4,303 2,601 October 22, 1983 3,145 2,117 5,250 3,090 Mmay 27, 1984 3,868 2,11/ 5,894 3,770 Junne 9, 1984 5,030 2,624 7,188 4,841 August 3, 1984 4,745 2,514 6,422 4,417 Note: Prices shown are for areas around Metro Manila. Prices authorized for other areas in the country were somewhat higher, allowing for addi- tional costs. Source: Fertilizer and Pesticide Authority. Table 7.17: FERTILIZER CONSUMPTION, 1972-83 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 MT ('000) 492.5 676.9 738.3 577.6 643.9 685.6 791.6 84B.9 819.6 785.4 845.9 878.3 Urea 132.7 153.0 212.2 143.8 174.8 229.3 287.1 320.0 329.2 307.3 342.2 371.5 Ammosul / CAN Amchlor 134.6 210.0 200.5 167.5 185.4 177.7 171.2 175.4 143.6 126.5 140.3 137.7 NP & P 89.2 129.4 130.7 105.5 116.0 106.1 125.3 124.2 131.8 124.2 143.1 145.2 NPK 88.6 116.3 126.9 102.1 108.0 124.1 147.2 159.5 158.2 163.7 161.6 150.5 Potash 47.4 68.2 68.') 58.7 59.7 48.4 60.8 69.8 56.8 63.7 58.7 73.4 Nutrient MT (C 'OO) 216.0 258.5 285.2 221.1 245.8 260.5 311.8 342.3 334.0 321.7 346.6 363.7 N 132.8 151.9 177.5 132.8 152.4 174.2 205.4 226.7 224.8 209.9 232.8 244.3 P 35.0 51.0 47.7 38.6 38.3 40.4 49. E8 51.9 53.4 51.2 56.4 54.6 K 48.2 55.6 60.0 49.7 55.1 45.9 56.6 63.7 55.8 60.6 57.4 64.6 Note: Data are based on sales to dealers. Source. Fertilizer and Pesticide ALuthority. - 143 - Table 7.18: TERMS OF TRADE OF THE AGRICULTURAL AND FOOD SECTORS (1972 = 100) Agricultural terms of trade Food terms of trade Agricultural Nonagricultural Terms of Food Nonfood Terms of Year prices /a prices /b trade prices /c prices /d trade 1960 37.0 49.6 0.746 37.0 61.2 0.605 1961 37.8 51.3 0.737 39.7 62.0 0.640 1962 40.7 54.5 0.747 39.2 63.5 0.617 1963 45.4 58.6 0.775 43.7 64.9 0.673 1964 47.5 61.2 0.776 48.1 66.3 0.725 1965 49.5 63.8 0.776 49.3 67.9 0.726 1966 52.5 67.5 0.778 54.7 70.1 0.780 1967 57.6 70.5 0.817 55.8 72.3 0.772 1968 64.0 72.4 0.884 55.8 74.1 0.753 1969 69.8 75.2 0.928 56.4 75.3 0.749 1970 79.8 85.1 0.938 68.1 84.3 0.808 1971 95.7 92.7 1.032 86.6 93.0 0.931 1972 100.0 100.0 1.000 100.0 100.0 1.000 1973 124.4 115.1 1.081 105.2 125.9 0.836 1974 170.2 150.1 1.134 148.6 166.0 0.895 1975 181.3 159.7 1.135 163.1 182.0 0.896 1976 187.3 180.6 1.048 172.4 198.9 0.867 1977 207.2 196.3 1.056 203.6 220.6 0.923 1978 218.9 214.6 1.020 221.7 240.1 0.923 1979 245.7 251.1 0.978 256.9 280.5 0.916 1980 260.0 296.6 0.877 291.0 339.9 0.856 1981 - - - - - - 1982 - - 1983 - - 1984 - - - = No available data /a The agricultural price index is the implicit price deflator for net domes- tic product of agriculture, fishery and forestry. /b Index of nonagricultural prices is a value-weighted average of the impli- cit price deflator for r-et domestic product of the industiral and services sector. /c The food price index is the wholesale price index of locally produced food for home consumption in Metro Manila. /d The nonfood price index is the weighted average of consumer price indexes for areas outside Metro Manila for clothing, housing and miscellaneous items. Source: "Impact of Economic Policies on Agricultural Development," a PIDS research project underway at the University of the Philippines at Los Banos. Data sources used are as follows: Agricultural and nonagricultural price indexes: NEDA, 1980 Philippine Statistical Yearbook (Manila: NEDA, 1980) and NEDA, The National Income Accounts CY 1978-80, Preliminary Estimates as of June 1, 1981 (Manila: NEDA, 1981). Food and nontoodp price indexes: Central Bank, Statistical Bulletin: 1974, 1976 and 1979 (Manila: CB-DER, 1974, 1976 and 1979); for 198U figures: CB mimeo sheets (undated). - 144 - Table 7.19: COPRA: AVERAGE ANNUAL PRICES Average Average Average Average Average export export export Domestic export export price for coco- price for price for Farmgate wholesale price for price for nut oil in copra desiccated price /a price copra coconut oil copra equiv. /b meal cake coconuts Year ---- (P/kg) ----- -------------- - (f.o.b. Manila Pfkg) ---- 1972 0.45 0.65 0.80 1.21 0.74 0.33 1.54 1973 1.12 1.69 1.51 2.43 1.55 0.61 2.91 1974 2.07 2.71 3.63 6.25 3.94 0.68 3.06 1975 0.80 1.07 1.70 2.68 1.67 0.80 3.12 1976 0.89 1.28 1.46 2.60 1.64 0.82 3.20 1977 1.32 1.89 2.55 3.77 2.37 0.96 6.14 1978 1.65 2.32 2.75 4.50 2.80 0.96 6.63 1979 2.50 3.29 4.55 7.75 4.87 1.13 9.15 1980 1.20 1.70 2.92 5.33 3.38 1.11 9.91 1981 1.13 1.78 2.45 4.50 2.84 1.03/c 9.31 1982 1.07 1.76 2.34 4.10 2.56 1.04/c 6.51 1983 3.51 3.12 5.76 3.63 1.45 10.96 la The farmgate price for chopped copra is higher by about 8-15% than for regular copra. lb Based on the conversion factor of 1.587 from coconut oil to copra equivalent. /c Philippine coconut authority (PCA) placed 'ban' on copra exports in 1981. Sources: Bureau of Agricultural Economics, Prices Received and Paid by Farmers, 1981/82. Philippine Council for Agriculture and Resources Research: Data Series on Coconut Statistics in the Philippines, 1980. UCAP Coconut Statistics for average export price for copra. _ 145 - Table 7.20: SUGAR: AVERAGE ANNTAL PRICES OF SUGARCANE AND RAW SUGAR (p/M) Price Sugar price received by farmers Domestic Export Composite World Year Sugar /a Sugarcane /b price price price price 1972173 561 53 490 961 880 1,074 1973/74 570 58 490 1,068 895 1,401 1974/75 928 88 808 1,804 1,456 4,500 1975/76 1,102 109 1,1.3 2,016 1,729 3,281 1976/77 1,095 108 9L9 1,976 1,719 1,898 1977/78 802 80 949 1,423 1,259 1,419 1978/79 907 95 1,423 1,423 1,423 1,270 1979/80 976 101 1,660 1,423 1,532 1,567 1980/81 1,244 127 1,739 2,134 1,953 4,808 1981/82 1,460 152 1,739 2,727 2,292 2,950 1982/83 1,458 144 1,739 2,656 2,289 1,588 1983/84 1,680 177 2,609 2,656 2,637 2,101 1984 2,323 207 3,162 3,969 3,646 2,460/c /a Based on the following sharing of proceeds from sugar: Planters' share: 63.71% Mill share: 35.55% Association dues: 0.74% The above figures are the national average for September 1982. However, because of lack of information on the sharing for other years, the same sharing distribution was assumed for the entire period. /b Price calculation is based on the quality ratio corresponding to annual value (see Table 7.2). /c As of June 1984. Source: PHILSUCOM Table 8.1: MINING PRODUCTION, VOLUME OF MAJOR PRODUCTS 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983/a 198o /b Gold metal 18.9 17.6 16.7 15.6 15.6 17.4 18.2 16.6 20 23.6 26 24.9 25.5 (thousand mt) Silver metal 57.5 58.8 53.9 50.4 46.1 50.4 51 57.2 60.7 62.9 61.7 62.2 49 (thousand mt) Copper metal 213.7 221.2 225.5 225.8 237.6 272.8 263.6 298.3 304.5 302.3 292.1 308.8 226.3 (thousand mt' Chromite ore 349.6 580.3 529.5 520 431.1 538.5 539.9 556.1 496.1 439.2 321.1 284.4 235.9 . (thousand dmt) Iron ore 2205 2255 1608.1 1351.4 571 1.8 6.3 5.7 5.6 2.4 (thousand dmt) Nickel metal 0.4 0.4 0.3 9.5 15.2 36.8 29.5 33.3 47.1 29.2 11.2 18.8 11.4 (thousand mt) Coal 38.9 39 50.7 105.1 120.B 254.6 255 263.1 325 318.2 556.8 1140 1499 (thousand mt) /a Estimates. /b Projections. Sources Bureau of mines and Geo-Sciences, Ministry of Natural Resources (MNR). Table 6.2i MAJOR MINING PRODUCTION, VALUE IN CURRENT PRICES (In million pesos) 1972 1973 1974 1975 1976 1977 1975 1979 1980 1951 1952 1983/b 19B4/c Precious Metals 243 388 606 625 490 636 B57 1313 3053 2794 2773 3724 4454.6 Gold 225 360 554 575 446 587 799 1180 2795 2642 2651 3495 4262.6 Silver 15 25 52 50 44 49 59 133 269 152 122 226 192 Nonmetallcs 467 639 902 1166 1349 1516 1910 2246 3043 3542 4160 5694 4980.2 Cement 311 473 720 900 977 1071 1192 1370 2002 2107 2387 3620 3299.2 Sand and gravel 38 40 43 103 1S7 230 432 491 613 691 959 1039 1005.8 salt 30 30 44 69 87 77 e1 161 204 213 219 318 334 Silica sand 7 7 11 10 9 9 14 11 18 21 28 43 41.2 Coal 2 2 8 13 19 46 42 47 58 64 189 439 n.a. Other nonmetallics 79 87 76 72 99 83 149 166 149 446 479 235 300 Base Metals 1532 2503 2990 2158 2586 3252 3303 5548 6724 5541 4369 6730 5035.7 Chromite 48 i5 s0 117 148 240 251 291 277 271 229 241 304.7 Copper 1360 2296 2794 1640 1942 1927 2164 3690 4409 3782 3446 5539 4457.8 Iron are/conc. 105 It 82 91 39 0.3 1 1 0.9 0.4 Nickel 4 5 7 263 484 927 635 922 1437 1109 577 871 Others/a 15 16 27 47 73 159 252.7 644 601 378 116.1 78.6 273.2 Total 2242 3530 4498 3949 4424 5404 6070 9107 12820 11877 11302 16146 14471 /a Zinc, lead, manganese, cobalt, pyrite and others. /b Estimates. /c Projections. n.a. - not yet available Sources Bureau of Mines and Geo-Sciences, MNR. Table 8.3: GROSS VALUE ADDED IN MANUFACTURING BY INDUSTRY GROUP AT CURRENT PRICES (In millions of pesos) Industry Group 1972 1973 1974 1975 1976 1977 1976 1979 1980 1981 1982 1983/a …------------------------._--------------------------------------__----------__-------------------------------------- Food manufactures 3623 4787 6626 7231 8241 11257 13211 16530 20026 23694 27189 31387 Beverage industries 724 796 1111 1264 1429 1574 1850 2268 2684 2818 3083 3522 Tobacco manufactures 950 1434 1723 1975 2084 1408 1741 2362 2544 2806 2973 3277 Textile manufactures 798 1047 1470 1687 2154 3204 3735 4277 4622 5161 5261 5794 Footwear, wearing apparel 431 541 723 834 982 1961 2375 3013 3657 4567 4983 5852 Wood and cork products 582 776 1076 871 1148 1379 1517 2080 2426 2882 3042 3431 Furniture and fixtures 86 99 140 131 156 213 225 254 327 375 404 465 Paper and paper products 345 442 729 826 1009 594 661 780 919 967 920 1115 Publishing and printing 265 355 473 557 608 386 450 541 632 747 827 936 Leather and leather products 22 26 36 42 50 78 90 111 172 191 201 208 Rubber products 220 267 369 400 398 516 558 712 780 900 1029 1125 Chemical and chemical products 1812 2223 3054 3530 4254 3825 4617 5142 5918 5983 6105 7227 Products of petroleum and coal 1048 1713 2723 3526 3625 4482 4697 6051 9535 10651 11617 13000 Nonmetallic mineral products 445 632 762 954 1027 991 1159 1421 1929 1978 2285 2506 Basic metal industries 409 649 883 1373 1629 1456 1708 2079 2237 2217 2612 3245 Metal products 401 476 656 678 729 1002 1305 1666 1919 1945 2283 2639 Machinery except electrical 164 219 279 303 336 766 920 1134 '1377 1610 1824 2043 Electrical machinery 355 431 653 751 727 770 1161 1529 2006 2844 3383 4471 Transport equipment 516 595 864 1447 1586 991 1280 1381 1530 1757 1841 1666 Miscellaneous manufactures 172 207 256 264 313 367 481 644 854 1058 1264 1460 Gross Value Added in ____________________ Manufacturing 13388 17715 24608 28544 32545 37220 43941 53995 65993 75151 83126 95369 /a Estimates as of December 23,1983. Sources NEDA. Table 8.43 GROSS VALUE ADDED IN MANUFACTURING BY INDLUSTRY GROUP AT CONSTANT 1972 PRICES (In millions of pesos) Industry Group 1972 1973 1974 1975 1976 1977 1976 1979 1980 1981 1982 1983 Food manufactures 3623 3871 4129 4245 4558 7189 7498 7865 8419 8803 9099 9246 Beverage industries 724 758 787 808 859 661 685 707 732 730 747 763 Tobacco manLufactures 950 1291 1457 1542 1556 979 990 1032 1039 1100 1114 1117 Textile manufactures 798 852 899 923 1097 940 1022 1071 1049 1095 1053 1050 Footwear, wearing apparel 431 533 544 591 628 785 857 932 1019 1189 1224 1247 Wood and cork products 582 627 638 471 558 629 660 686 665 707 704 716 FurnitLire and fiRtures 86 90 88 74 79 104 107 114 132 139 140 142 Paper and p.iper products 345 420 480 466 538 186 193 202 191 186 172 196 Publishing and printing 265 339 430 447 455 262 283 301 324 344 359 368 Leather and leather products 22 25 26 30 31 43 45 49 68 70 71 66 Rubber products 220 238 257 263 232 274 293 312 302 311 324 316 Chemical and chemical products 1812 1994 2075 2165 2462 203 3 2163 2321 2365 2317 2273 2315 Products of petroleLum and coal 1042 1358 1219 1230 1134 12C4 1325 1398 1373 1287 1313 1351 Nonmetallic mineral products 445 597 541 597 613 478 520 535 574 540 569 587 Basic metal industries 409 526 505 587 631 756 819 865 653 791 856 947 Metal products 401 414 424 398 389 807 952 1040 1041 977 1052 1091 Machinery except electrical 184 206 193 190 195 54B 618 670 726 764 787 797 Electrical machinery 355 376 408 443 394 591 814 1005 1153 1401 1475 1717 Transport equipment 516 561 688 842 854 760 875 898 885 910 883 742 Miscellaneous manufactures 172 176 193 205 218 168 198 230 265 296 320 334 Gross Value Added in ____________________ ManuLfacturing 13388 15252 15981 16537 17481 19492 20917 22239 23175 23959 24535 25108 Sourceg NEDA. Table 8.5: MAJOR INDUSTRIAL PROJECTS SCHEDULES, COSTS, FINANCING PLANS (In Million US S) Financing (5 mm) Project Start of Start of Project Government Private Equity Foreign Project Proponent Construction Operations Cost /a Equity Domestic Foreign Loans Copper Smelter PASAR (NDC) 1980 1983 344 63 60 37 244 Diesel Engine Manufacturing low HP engines 1980 1983 9 4 5 Cement ldustry Private Coal Conversion Cement 1981 1983 37 37 Expansion Companies Deferred (DBP) Phosphatic Fertilizer Philphos 1981 1984 513 60 40 413 (NDC) Coconut-based Chemicals Unichem 1982 1984 116 60 4 52 (Cocobank) Heavy Engineering NHEC 1982 23 23 Integrated steel /b NSC(NDC) 1983 1402 53 114 1235 Total 2444 176 234 85 2009 /a Project cast includes fined asspti and interest during construction. /b Implementation affected by 4oreign debt rescheduling. Source: NDC - 151 - Table 9.1: PRIMARY ENERGY BY SOURCE (In million of barrels of fuel oil equivalent) Est. 1978 1979 1980 1981 1982 1983 1984 Indigenous Energy 11 19.2 18.8 26.2 30.5 35.3 38.4 Conventional 5.5 13.9 13.9 13.4 17 19.4 24.1 Oil 7.2 3.5 1.4 3 4.7 2.7 Coal 0.9 0.8 1 0.9 1.1 2.6 4.7 Hydro 4.6 4.8 5.9 6.4 6.7 5.1 9.3 Geothermal 1.1 3.5 4.7 6.2 7.0 7.4 Nonconventional 5.5 5.3 4.9 6.2 7.4 15.8 14.3 Bagasse 5.5 5.3 4.9 6.2 7.4 5.5 5.5 Agri-Industrial Wastes 6.3 6.1 9.1 8.7 Other 0.3 0.1 1.3 0.1 imported Energy 75.3 70.5 69.5 67.2 65.5 64.5 57.2 Oil 75.3 70.5 69.5 67.2 65.5 63.5 55.6 Coal 0.9 1.6 Total Energy 86.4 89.7 88.2 93.4 96 99.6 95.5 'Source: Ministry of Energy. - 152 - Table 9:2 ENERGY UTILIZATION BY SECTOR 1978 1979 1980 1981 1982 1983 Energy Use by Sector, MMBOE /a 66.4 89.7 88.2 93.4 96.0 99.7 Industry 45.2 48.5 48.5 54.6 55.2 59.0 Transportation 25.9 26.4 24.3 23.5 24.'. 22.9 Commercial 7.2 6.2 6.6 6.6 7.1 7.2 Residential 8.3 8.5 8.9 8.8 9.2 9.5 Energy Use by Sector (.) 100.0 100.0 100.0 10.0 100.0 100.0 Industry 52.1 54.1 55.0 58.5 57.5 59.2 Transportation 30.0 29.4 27.6 25.2 25.1 22.9 Commercial 8.3 6.9 7.5 7.1 7.4 7.2 Residential 9.6 9.5 10.1 9.4 9.6 9.5 /a Totals may not add up due to rouiiding. Source: Ministry of Energy. Table 9:3: PETP.OLEUN PRODUCT CONSaHPTION (Thousand Barrels) Product 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 Avgas 158 172 185 176 151 140 112 62 59 59 51 Avturbo 2,035 1,992 2,165 2,145 2,320 2,597 2,668 2,605 2,588 3,436 2,658 Premium gasoline 4,171 4,177 5,124 5,530 6,102 6,832 6,652 5,866 5,700 5,941 6,206 Regular gasoline 12,290 10,436 10,132 9,268 8,791 8,395 7,805 5,299 3,942 3,270 2,971 Diesel 12,753 12,216 13,227 14,027 14,836 15,582 16,952 17,428 17,787 18,568 18,879 Fuel oil 28,257 26,987 29,829 31,418 35,784 36,838 36,659 37,129 34,385 32,875 33,690 Kerosene 3,320 2,878 3,154 3,236 3.393 3,683 3,463 3,179 2,860 2,803 2,569 LPG 1,842 1,839 2,086 2,177 2,407 2,593 2,734 2,411 2,437 2,478 2,374 Propylene - - - - - - 10 3 1 0 0 Asphalts 435 295 425 458 377 397 418 343 359 462 538 Refinery pticess gas 212 240 262 204 18i 211 236 233 210 105 185 Solvents 221 221 244 237 214 230 371 311 312 297 170 Naphtha 145 W82 748 676 866 709 792 813 805 476 349 LAbes 1,102 907 912 900 905 999 1,064 965 903 914 1,038 Grease 33 31 30 29 28 30 33 28 24 25 29 Waxes and petrolatum 16 55 69 105 128 137 2 1 2 2 1 Total Producta 66,990 62,728 68,592 70,586 76,485 79,373 81,971 76,676 72,374 71,712 71,808 Adds Refinery fuel and loss 4,036 3,759 3,533 3,314 3,639 3,608 3,569 3,283 2,847 2,993 2,853 Total Petroleum Consumption 71,026 66,487 72,125 73,900 80,124 82,981 85,540 79,959 75,221 74.705 74,661 Source: tinistry of Energy. - ;54 - Table 9.4: ENERGY INVESTMENT PROGRAM (In millions of pesos) Actual Estimate 1978 1979 1980 198. 1982 1983 1984 National Power Corporation 4,761 5,859 4,959 6,623 6,304 8,005 9,703 Luzon Grid 3,281 4,990 2,971 4,068 4,420 5,605 6,307 Oil-fired 855/a - - - - - - Coal-fired - - 2 238 284 1,631 709 Hydroelectric 160 532 756 686 425 308 149 Geothermal 737 1,386 800 726 502 577 332 Nuclear 1,194 1,969 1,290 1,798 2,716 2,419 4,037 Transmission 90 248 123 ;E20 492 644 1,081 Vissyas Grid 286 208 689 650 975 395 730 Oil-fired 154 33 313 119 - 177 Coal-fired 84 137 252 132 lo: 153 426 Geothermal 3 3 98 335 716 37 2 Transmission ,5 35 26 64 66 205 125 Kindanao Grid 128 258 875 705 830 992 1,407 oil-fired 23 36 277 21 - - 13 Coal-fired - - - _ _ _ _ Hydroelectric 55 199 450 612 602 714 1,173 Transmission 50 23 148 72 228 278 234 Other capital outlay /b 1066 403 424 1.200 79 -146R 1,259 National Electrification Admin. 483 387 511 595 946 803 1,447 Rural electrification /c 483 387 511 553 384 452 843 Dendro-thermal - - 28 350 100 358 Mini-hydro - - - 14 212 251 246 Philippine National Oil Company 262 852 1.044 1,209 1.250 1839 1,272 PNOC Coal Corporation 23 19 55 101 127 451 356 PNOC Energy Development Corp. 73 125 256 408 687 1,170 212 PNOC Exploration Corp. 29 36 57 35 52 161 185 Other subsidiaries /f 137 672/d 676/dI 665/d 384 288 519 Total 5.506 7,098 6,516 8,427 8,500 10,647 12,422 (4,406)/e (6,243)/e Memorandum items (Z) Share of public investment 46.8 50.1 30.4 30.2 30.8 35.3 '37.5)/e (44.1)/e Share of GNP 3.1 3.Z 2.5 i.8 2.5 2.8 (2.5)/e (2.8)/e /a Purchase of generating plants of the Manila Electric Company. 7T; Includes surveys and investigations, engineering adminisrration, and improvement to plants. T7e Includes small amounts for NEA in-house capital expenditures. 7-d Principally expenditures on tankers and refineries. 7Te Excluding purchase of generating plants of Manila Electric Company. T Includes interest during construction for all PNOC subsidiaries in 1984-87. Source: Ministry of Energy. - 155 - Table 9.5: NATIONAL POWER CORPORATION EXPANSION PROGRAM Installed Capacity at Year's End (in megawatts) Actual Est. 1978 1979 1980 1981 1982 1983 1984 Luzon Grid 1,902 2,994 3,226 3,156 3,511 3,906 4,100 Oil-fired 1,375 2,230/a 2,230 2,105 2,105 2,230 1,925 Coal-fired - - - - - - 300 Geothermal - 220 440 495 550 550 660 Hydroelectric 527 544 556 556 856 1,126 1,215 Visayas Grid 73 93 103 224 263 478 506 Oil-fired 68 88 95 166 202 192 220 Coal-fired - - - 50 50 50 50 Geothermal 3 3 6 6 9 234 234 Hydroelectric 2 2 2 2 2 2 2 Mindanao Grid 213 429 487 523 550 617 682 Oil-fired 11 47 105 141 141 181 141 Hydroelectric 202 382 382 382 409 436 541 Philippines 2,188 3,516 3,816 3,903 4324 5001 5j288 Oil-fired 1,454 2,365 2,430 2,412 2,448 2,603 2,286 Coal-fired - - - 50 50 50 350 Geothermal 3 223 446 501 559 784 894 Hydroelectric 731 928 940 940 1,267 1,564 1,758 Memorandum item: Net capacity increase during year /a n.a. 1,328 300 87 421 677 227 /a Includes purchase of generating plants of Manila Electric Company. Source: National Power Corporation. - 156 - Table 9.6: NATIONAL ELECTRIFICATION ADMINISTRATION: LOAN RECOVERY FROM MEMBER COOPERATIVES (millions of pesos) Actual Est. 1978 1979 1980 1981 1982 1983 1984 Total collections 2 15 20 27 71 124 163 Total amount due 5 36 69 132 213 283 340 Current year 5 33 48 83 108 141 181 Overdue from pre- vious years - 3 49 105 142 159 Collection ratio (Z) la 40 42 29 20 33 44 48 /a Ratio of collections to total amount due. Note: The difference between collections in a year and the total amount due in a year is carried forward to the next year as "overdue." Source: NEA. - 157 - Table 9.7: STATUS OF RURAL ELECTRIFICATION Potential Actual Est. coverage 1978 1979 1980 1981 1982 1983 1984 Municipalities 1,340 651 829 934 1,060 1,149 1,195 1,270 Barangays 32,900 6,995 8,818 10,955 13,694 15,799 17,140 18,600 Households ('000) 5,700 845 1,118 1,441 1,770 2,034 2,284 2,605 Source: National Electrification Administration. - 158 - Table 9.8: PNOC AND SUBSIDIARIES - SCHEDULE OF CAPITAL EXPENDITURES (in million pesos) Est. 1978 1979 1980 1981 1982 1983 1984 PNOC-Own 76.0 81.0 142.0 384.0 97.0 92.9 5.2 Petrophil Corporation 25.0 51.0 39.0 35.0 39.0 46.0 35.0 Bataan Refining Corporation 36.0 180.0 114.0 42.0 17.0 60.9 60.0 Tanker Companies - 1.0 253.0 54.0 60.0 9.0 1.5 PNOC Shipping & Transport Corp. - 149.0 29.0 19.0 45.0 7.7 5.7 PNOC Marine Corporation - 192.0 58.0 14.0 22.0 10.6 3.4 PNOC Coal Corporation 23.0 19.0 55.0 101.0 127.0 450.8 356.3 Malangas Coal Corporation - 18.0 34.0 92.0 70.0 51.1 3.2 PNOC Energy Drilling Inc. - - 7.0 25.0 34.0 8.9 0.8 PNOC Energy Dev. Corp. 73.0 125.0 256.0 408.0 687.0 1,170.2 212.1 PNOC Exploration Corp. 29.0 36.0 57.0 35.0 52.0 160.5 185.0 Others - - - - - 0.9 0.2 Capitalized interest - - - - - - 398.0 during construction Total 262.0 852.0 1,044.0 1,209.0 1,250.0 1,839.0 1,272.4 Source: PNOC. Table 10.1: TOlJRISM: TRAVEL RECEIPTS AND VISITORS BY COUNTRY OF ORIGIN Year Travel NUMBER OF VISITORS ('000) receipts -------------------------------------------------------------------- (US$ mln)/a Other United UK & West Total Japan Asia States Europe Australia Other 1972 122 166 26 24 49 16 13 38 1973 77 243 50 3}0 63 22 14 64 1974 58 410 151 46 57 23 18 115 1975 110 502 158 67 75 30 29 14.3 1976 93 615 138 97 68 43 ;33 216 1977 145 730 185 151 106 56 39 193 1978 210 859 222 198 159 75 52 15.3 1979 238 967 254 202 179 100 53 179 1980. 3210 1003 260 217 177 114 69 171 1981 344 939 193 220 174 116 64 172 1982 450 891 160 203 178 110 64 176 1963 465 861 179 178 185 109 54 156 /a Travel receipts in balance of payments (Table 3.2 ). Source: Ministry of Tourism, Central Bank. Table 11.1 CONSUMER PRICE INDEX FOR THE PHILIPPINES <1978 = 100) Weigh 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 t/.) Indices Food, Beverage:;, Tobacco 58..06 48.1 55.4 4.5 78.5 86 94 100 115.6 132.9 149.8 162.5 176.5 Clothing 7.92 42.4 48.6 72.5 79.5 83 91.3 100 117.9 144.2 162 178.2 194.5 Housing anj Repairs 10.49 44.4 57 68.2 71 60.5 90.9 100 118.3: 137.4 154.7 180.5 200.3 Fuel,Light. and Water 5.23 43.4 47.4 68.8 75.4 83.6 29.4 100 127.6 173.8 211.5 240 281.6 Services 10.66 46.7 53.8 68.5 76.6 83.1 91.9 100 121.1 152.1 171.2 192.9 216.8 Miscellaneous 7.64 42 48.4 70.9 80 89 93.8 100 119.1 139.8 153.3 165.9 180.6 All Items 100 46.4 53.91 72.47 77.54 84.96 92.99 10 117.55 138.98 157.06 173.19 190.53 Annual Change (X) /a / Food, Beverages, robacco 15.2 34.5 5.4 9.6 9.3 6.4 15.6 15.0 12.7 8.5 5.6 Clothing 14.6 49.2 9.7 4.4 10.0 9.5 17.9 22.3 12.3 10.0 9.1 Housing and Repairs 28.4 19.6 4.1 13.4 12.9 10.0 18.3 16.1 12.6 16.7 11.0 Fuel, Light and Water 9.2 45.1 9.6 10.9 6.9 11.9 27.6 36.2 21.7 13.5 17.3 Services 1;7.2 27.3 11.8 8.5 10.6 8.8 21.1 25.6 12.6 12.7 12.4 Miscellanenuz 15.2 46.5 12.8 11.3 5.4 6.6 19.1 17.4 9.7 8.2 8.9 All Items 16.2 34.4 7.0 9.6 9.4 7.6 17.6 18.2 13.0 10.3 10.0 /a Percentage change from previous year. Sources National Census an TABLE 11.2: WHOLESALE PRICE INDICES FOR METRO MANILA (1978 = 100) 1976 1979 1980 1981 1982 198.3 Indices Food 100 116.2 133.2 156.5 178.4 207.2 Beverages and tobacco 100 115 134.6 147.2 160.2 178.2 Crude materials, inedible except fuel 100 125.3 137.9 139.6 164.9 217.7 Mineral fuels 100 128.4 203 255.1 260.9 331 Chemicals 100 t21.1 135.4 137.7 147.5 183.2 Manufactured goods 100 121 146.1 162.8 170.3 184.3 Machinery and transport equipment 100 110.7 123.9 136.9 155.2 173.3 Miscellaneous manufactured articles 100 115.3 140 157.7 173.6 169.8 All Items 100 119 140.6 159.2 176.3 208 Annual Change % /a Food 16.2 14.6 17.5 14.') 16.1 Beverages and tobacco 15 17.0 9.4 8.8 11.2 CrLude materials, inedible except fuel 25.3 10.1 1.2 18.1 32.0 Mineral fuels 28.4 58.1 25.7 2.3 26.9 Chemicals 21.1 11.6 1.7 7.1 24.2 Manufactured goods 21 20.7 11.4 4.6 8.2 Machinery and transport equipment 10.7 11.9 10.5 13.4 11.7 Miscellaneous manufactured articles 15.3 21.4 12.6 10.1 9.3 All Items 19 18.3 13.1 10.7 18.0 /a Percentage change from previous year. Source: National Census and Statistics Office. Table 11.3: RETAIL PRICES OF SELECTED COMMODITIES IN METRO MANILA (P per kg) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984/a Rice 1.28 1.72 2.02 1.90 2.03 2.10 2.10 2.36 2.51 2.73 2.98 3.20 6.29 Corn (Milled) White 0.94 1.08 1.45 1.47 1.55 1.60 1.60 1.70 1.96 2.31 2.34 2.44 3.85 Yellow 0.82 0.91 1.39 1.53 1.46 1.60 1.60 1.67 2.00 2.23 2.35 2.49 4.44 Sugar (refined) 1.35 1.34 1.58 1.69 1.73 2.17 2.30 2.68 3.08 3.40 4.10 4.63 8.19 Meat (beef) 8.94 9.62 12.89 16.26 16.62 1R.32 21.36 25.75 31.24 33.39 35.71 38.18 54.16 Chicken Live 7.24 8.10 11.33 12.53 13.28 15.39 14.89 17.88 20.58 21.20 22.12 20.88 28.81 Dressed 5.78 6.98 8.89 9.98 9.59 12.16 13.23 14.57 15.70 17.65 17.93 18.93 32.68 Pork 7.61 8.12 12.01 12.92 12.51 14.02 14.66 16.78 18.08 19.66 21.01 22.53 41.62 Pineapple (P/piece) - - - 2.32 2.16 2.33 2.71 3.45 3.00 4.17 3.94 4.69 7.48 Mango (P/dozen) 8.99 8.20 14.26 16.83 15.29 16.02 18.88 26.33 24.59 n.a. 30.30 35.38 58.81 Tomatoes 1.96 1.94 2.59 2.80 2.97 2.94 3.41 3.50 4.54 4.74 4.63 5.75 10.36 Potatoes Irish 1.40 1.42 2.48 2.72 2.30 3.01 3.42 4.01 3.99 5.71 4.99 5.46 7.55 Sweet 0.71 0.75 1.02 1.02 1.29 1.37 1.46 1.82 1.56 2.10 2.13 2.71 4.70 Coconut oil (P/1 pt) 1.21 1.46 2.21 2.27 2.05 2.05 2.47 3.60 3.48 3.33 3.32 4.20 13.45 Source: NCSO and Central Bank. - 163 - Table 11.4: WAGE RATES INDEX OF LABORERS IN INDUSTRIAL ESTABLISHMENTS IN METRO MANILA (1972 - 100) Daily money wage rates Daily real wage rates /a Skilled Unskilled Skilled Unskilled Period laborers laborers laborers laborers 1972 100.0/b 100.0/c 100.0 i00.0 1973 105.3 102.6 92.4 00.0 1974 115.1 110.8 75.6 72.8 1975 119.7 120.1 72.7 72.9 1976 124.4 126.2 71.2 72.3 1977 137.5 132.9 72.9 70.4 1978 154.4 138.4 76.1 68.3 1979 170.1 145.8 70.8 60.7 1980 180.9 151.5 63.7 53.4 1981/d 1982/d 1983/e /a Money wage rate index deflated by the consumer price index (1972 = 100) in Manila. /b Money wage in 1972 = P 12.47. /c Money wage in 1972 = P 10.42. /d No surveys conducted for these years. /e Results of 1983 survey not yet available. Source: Cential Bank of the Philippines. - 164 - Table 11.5: LEGISLATED EFFECTIVE MINIMUM MONEY AND REAL DAILY WAGE RATES /a Metro Manila: highest minimum /b Agriculture: lowest minimum /c Period Money wage Real wage Id Money wage Real wage /d 1972 8.00 16.26 4.75 10.34 1973 8.00 14.04 4.75 8.91 1974 9.98 13.11 5.34 7.45 1975 10.65 12.94 5.74 7.49 1976 12.81 14.78 7.09 8.37 1977 15.18 16.24 9.47 10.15 1978 16.27 16.27 10.55 10.55 1979 23.19 19.24 13.51 11.53 1980/e 27.66 19.55 15.83 12.20 1981/e 31.49 19.84 18.36 11.71 1982 31.82 18.06 19.65 11.98 1983/e 42.07 17.54 25.90 11.05 1984 (June) 51.92 18.17 32.00 11.71 /a Minimum wage rates are set for 12 different categories - by location, type of activity and size of firm. This table presents only the highest- and lowest- paying categories. /b Minimum wage payable by a large firm (capitalization of over 1 million pesos) in Metro Manila. /c Minimum wage payable by a small-scale employer in nonplantation agriculture. /d Money wage deflated by the Consumer Price Index (1978 = 100). /e Weighted average, by duration, of the minimum wage rates legislated during the year. Source: (Money Wages) National Wages Council. (Real Wages) Economic Planning and Research Staff, NEDA. - 165 - Table 11.6: RETAIL PRICE CEILING FOR SELECTED COMMODITIES IN METRO MANILA (P/kilo) Price ceiling Effective date Rice 1.90 Jan 18, 1974 2.10 May 29, 1976 2.45 Apr 01, 1979 2.60 Aug 19, 1980 2.60 Aug 21, 1980 2.85 Jun 20, 1981 3.10 Jun 17, 1982 3.30 Oct 01, 1983 3.80 Dec 01, 1983 4.25 May 26, 1984 4.85 Jun 09, 1984 Corn grits 1.45 Feb 20, 1974 1.60 May 29, 1976 1.75 Feb 04, 1980 1.90 Aug 21, 1980 2.15 Jun 20, 1981 2.30 Oct 01, 1983 2.70 Dec 01, 1983 3.25 May 26, 1984 3.85 Jun 099 1984 Refined sugar 2.90 Feb 04, 1980 3.25 Aug 21, 1982 3.30 Jun 22, 1983 4.15 Mar 15, 1982 5.26 Oct 22, 1983 6.60 Jun 12, 1984 8.15 Jul 07, 1984 Brown sugar 2.10 Feb 14, 1980 2.30 Aug 21, 1980 2.35 Jun 22, 1981 3.10 Mar 15, 1982 3.73 Oct 22, 1983 4.70 Jun 12, 1984 5.70 Jul 09, 1984 Coconut edible oil (per qt) /a 6.68 Feb 14, 1980 6.95 Aug 21, 1980 8.01 Jul 1983 9.12 Aug 1983 9.28 Sep 1983 9.57 Oct 1983 11.75 Nov 1983 12.81 Dec 1983 16.71 Jan 1984 /a Delisted as of April 29, 1983. Sources: Price Stabilization Council and National Food Authority. Table 12.1: POPULATION BY REGION (In thousands) 1970 1975 1980/a 1981 /a 1982 /a 1983 /a 1984 Ia National Capital Region 3,967 4,970 5,970 6,155 6,345 6,540 6,740 I (Ilocos) 2,991 3,269 3,543 3,612 3,682 3,754 3,828 II (Cagayan Valley) 1,691 1,933 2,227 2,283 2,340 2,399 2,460 III (Central Luzon) 3,615 4,210 4,827 4,947 5,070 5,196 5,325 IV (Southern Tagalog) 4,457 5,214 6,155 6,333 6,516 6,703 6,895 V (Bicol) 2,967 3,194 3,489 3,572 3,658 3,744 3,832 VI (Western Visayas) 3,618 4,146 4,538 4,646 4,755 4,866 4,979 VII (Central Visayas) 3,033 3,387 3,796 3,873 3,952 4,032 4,113 VIII (Eastern Visayas) 2,381 2,600 2,805 2,857 2,910 2,963 3,018 IX (Westerr, .1indanao) 1,869 2,048 2,547 2, 08 2,671. 2,734 2,798 X (Northern Mindanao) 1,953 2,314 2,773 2,851 2,931 3,012 3,094 XI (Southern Mindanao) 2,201 2,715 3,368 3,459 3,551 3,645 3,740 XII Central Mindanao) 1,941 2,070 2,278 2,340 2,403 2,467 2,532 Total 36,6R4 42,071 48,3!6 49,536 50,783 52,055 53,351 /a Projections based on moderate fertility and moderate mortality decline assumption, Projections; Series 2. Source: National Census and Statistics Office. Table 12:2 : CROSS DOMESTIC PRODUCT BY REGION (REVISED) 1972-198S3 AT CURRENT PRICES (MILLION PESOS) Region 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 TOTAL 56464 72322 99533 114587 137273 154225 177669 217523 263692 304490 340610 384916 NCR Metro Manila 16690 21342 28252 33116 39586 45435 52573 63536 79698 93826 105682 121445 I. Ilocos Region 2392 3330 4363 4540 5017 5732 6540 8394 10712 11844 13021 14615 1I. Cagayan Valley 1805 2408 3104 .3028 363G2 4297 5103 6310 7665 S800 9582 10786 a 111. Central Luzon 4824 6094 S80S 10202 11950 13391 15324 19098 24563 29803 33177 37019 w IV. Southern lagalos 7666 958Z 13542 16159 19341 22442 27031 32491 39652 44063 49807 57282 - V. Bicol Region 2040 2552 3608 4073 4972 5860 6171 7373 9080 10422 10546 11813 1 VI. Western Visayas 5552 6920 9796 11151 12349 13246 14423 17231 20266 23383 26408 29206 VII. Central Visayas 4013 5394 7616 8154 9516 10693 12029 15358 18471 20797 22654 25630 VIII. Eastern Visayas 1687 2248 2999 3463 3753 3984 4498 5500 5227 7019 7695 8377 IX. Western Mindanao 1437 1849 2594 3098 3925 4677 6039 7501 9099 10798 11718 13105 X. Northern Mindanao 2583 3265 4881 5372 8472 7869 'd900 11410 12789 14307 16823 17590 XI. Southern Mindanao 3T817 4999 7031 2529 10410 118ss .32e4 16257 18438 20397 22019 253J4 Xil. Central Mindanao 1958 2339 3042 3702 4150 4705 57¶j4 7064 8032 9031 11478 12734 Sources NEDA National Accounts Staff. Table i2:3: GROSS DOMESTIC PRODUCT BY REGION (REVISED) 1972-1983, AT CONSTANT PRICES (MILLION PESOS) Region I 972 1973 1974 1975 1976 1977 1978 1979 1980 1981 19982 1983 TOTAL 56664 6123E8 64339 68492 75013 78486 '2791 P7959 92297 95963 99015 100134 NCR Pietro Manila 16690 18071 18262 19794 21632 2S122 24498 25692 :7896 29570 30722 31593 I. Ilocos Region 2392 2220 2820 2714 2742 2920 3048 3394 3749 3733 3785 3802 II. Cagayan Valley 1805 2039 2032 1810 20.94 2157 2378 2552 2683 2773 2785 2806 III. Central Luzon 4824 5160 ' 56C01 6098 657fl 68'5 7.41 7723 8597 9393 9644 9630 1 IV. Southern Tagalos 7866 8113 8754 9659 10569 114 1 12596 1313B 13879 13887 14479 14902 V. Bicol Region 2040 2161 2332 2435 2717 29d2 2876 2981 3178 328F 3066 3073 c VI. Western Visayas 5552 5859 6332 6665 6748 6741 6721 6968 7'093 7369 7677 7598 VII. Central Visayas 4013 4567 4923 4874 5200 5442 5605 6210 6465 6554 6585 6666 VIII. Eastern Visayas 1687 1903 1939 2070 2051 2027 2096 2224 1830 2212 2237 2179 IX. Western Mindanao 1437 1566 1677 1852 2145 2380 2814 3033. 3135 3403 3406 3409 X. Northern Mindanao 2583 2765 3155 3211 4630 4005 4147 4614 4476 4509 4890 4576 XI. Southern Mindanao 3817 42.33 4545 5098 5689 6050 6190 6574 6454 6428 6401 6585 XIl. Central Mindanao 1958 1981 1966 2213 2268 2394 2681 2856 2811 2846 333/ 3:31:3 …---------- --- ----------- ---- ------ - ------------- -- ----------------- ---- _ _ _ _ _ _ _ _ _ _ _ __ ___________-- --------------- ------- Source: NEDA National Accounts Staff. - 169 - Table 12.4: REGIONAL DISTRIBIUTION OF INFRASTRUCTURE INVESTMENT REQUIREMENT, 1983-87 /a (in million pesos) Actual Requirements 1983 1984 1985 1986 1987 National Capital 1,123 3,263 2,767 2,233 3,805 I. Ilocos 36 439 496 229 296 II. Cagayan Valley 54 592 532 404 219 III. Central Luzon 60 264 401 400 338 IV. Southern Tagalog 104 592 955 915 589 V. Bisco 52 359 493 331 289 VI. Western Visayas 46 350 695 262 157 VII. Central Visayas 24 318 281 315 310 VIII. Eastern Visayas 28 457 619 640 570 IX. Western Mindanao 36 264 249 111 93 K. Northern Mindanao 64 230 556 335 206 XI. Southern Mindanao 50 437 476 368 242 XII. Central Mindanao 32 149 120 143 106 Total Regional 1,709 7,714 8,650 6,686 7,220 Non Regional/Nationwide 4,551/b 3,776 2,209 3,605 5,195 Power and Electrification /c 9*932 7,962 8,193 6,121 8,11-4 Total 162192 19.452 19,052 16,412 20,529 /a 1983 figures are actual using the average exchange rate of P 8.50: $1; 1984 figures are based on the average exchange rate of P 16: $1 and 1985-87 figures are at mid-1984 prices assuming a constant exchange rate of P 18: $1. /b Includes the actual expenditures of PPA, PNR, Bureau of Air Transportation (MOTC), NIA, FSDC, LWUA Bureau of Telec.o'mmunications and Bureau of Posts (MOTC), NTC, and the Highway portion of ?hPWH for which regional breakdown are not available. /c Regional breakdown not available. IBRD 17234 116 CLASSIFIATION OF PROVINCES 20l4- JldlE 19 13 BYGEOGRAPHIICAL REGIONS NCR NATIONAL CAPITAL REGION I ILOCrS VI WESTERIN VISAYAS I lloomNorte 3BAkIanr PHILIPPINES 2 Abln 39CIPiz . 3 llocosSur 40Antique 20' 20 A4 ourntain 411bilo S La Union 42N1V0r Occidental 6 equet VI( CENTRAL VISAYAS Airport 7 Peqmnan 44Nqoros Oriantal tCAGAYAN VALLEY 45BrhlO 8 Batie 44Siquqor Roilwys 9 C"WO n VilI LASTF RNVISAYAS … Prrrniol Boundors :0 KCalinga.Apasacr 47NarthariwiSmtr Pc.ca onas 1 liiteerS 4B5 M nsr p- R.giool Boundories 12 Itugro 49lEaatern 5SrnirW Aporri 13Nunl Venyc Sle 1 - - - - InN VolyonolaBoundarie L 14 Ouwino 51 Soathern L.Vte Loocg 9 - nentin odre (flCITNrRAL LUZON 01 WEI;TLRN MINDANAO 15NueaEcilm 52Zan bowingadelNorte l; ' -' Ii Tarlac 53Znmboengadel Sur 2 17 Zambales 54Bailan I is Pumpna 55Sukb I; 19 Bulacmn 56 Taviteni iio;o| 20 Batlen X NJRTIIEKNNMINDANAO 3!gn IV SOYIILN TAALOG 57Sung,aodaINorle Son 1 IV souA-aRN 1At;ALOt; 5BCnigurn Fernando 6 : v 23 Airol 68Mgnis Orien t l N0 50 00 ISO 2100 2gr 300 33 OunSOfi ~~6$ Mnnmis Orcidental ~ 4KILOMETERS 18, 24 Caiete 621u Mitrion OMIiLnta 25 Laqun 61 Aukrdn de1u5fl 10 li 26 asugan 3AunuSr son 2' o :0 s 27 Merinduque Xi I ASIRIN INI1)NA(i Jo. 1 28 Min.dor Oriental 64 Suniqao del Sur TA :.C 29Mindoro Occidental 65DaDraoOr.entai I1 1 3C Ronmblon 660mao AngeleA i 19 r- 31 Palasn 6 7 0.w,o del S., 17'> V BICOL 68 South Cotabato 32Carmurines Nortn. XI t} 4rRAL%INI)ANAt) NCRAlA)LA M3 Cainaines Sur 69 Lan.so dcl Nor le 34 DC__sSuam 70 L a.o del Sur 32 35 ACav dae 71 North Cotoa. iato 36 Aolgay 72 Amaqu.Inm 33a 7~ ~~~~~~~~Sr sX)a _ctarn 7r 35\ n 48 - j_7 12 ^ ~ ~~~~~~~~~~~~~~~ o3 Ro ss - ii I '' Vlf L( 0 Puerto Cuynt ; s) < v Son ~ ~ [6{ /~ Blo V LcNA ^ 054s s s ~~~~PHI LIPPINE S :B_ i_ _ Jose 3 6 7 -s wz~~i'sJfrs 0 55/ Ge atdMNN~ Sontos -.\ M;PJ4N.7 .O ^ sx~~~~~~~~~~~~~~~~~~~~~~~Oo 12 , '156 aaurl,,_#f C nn s,_ * w r o.. _d _ l.S, to in niorciar _c__ ii,o . d9 b - V-.a,I -.1ra,a..eea.r ua.u.. , ND O h E Si A L lat~~~~~~~~~2' 12,4 12