Philippines - Second Structural Adjustment Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-33 89-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$302.3 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR A SECOND STRUCTURAL ADJUSTMENT LOAN April 1, 1983 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 Currency Unit = Peso (P) (100 centavos) P 1.00 = US$0.10 US$1.00 = eP 9.6 FISCAL YEAR January 1 to December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BED - Bureau of Energy Development BEU - Bureau of Energy Utilization BOI - Board of Investments EPZA - Export Processing Zone Authority LPG - Liquefied Petroleum Gas MOE - Ministry of Energy MTI - Ministry of Trade and Industry NACIDA - National Cottage Industry Development Authority NCSO - National Census and Statistics Office NPC - National Power Corporation NTRC - National Tax Research Center PNOC - Philippine National Oil Company SAL - Structural Adjustment Loan SBAC - Small Business Advisory Center  FOR OFFICIAL USE ONLY PHILIPPINES SECOND STRUCTURAL ADJUSTMENT LOAN Table of Contents Page Loan and Program Summary . . . . . . . . . . . . . . . . . . . . .i PART I - THE ECONOMY .1... . . . . . . . . . . . . . . . . . . . A. The Philippines' Economic Performance in the 1970s . . . . . 1 B. Recent Economic Developments ... . . . . . . . . . . . . . 4 C. Short-Term Adjustment Measures . . . . . . . . . . . . . . . 5 PART II - THE GOVERNMENT-S STRUCTURAL ADJUSTMENT PROGRAM . . . . . 7 A. Need for Structural Change . . . . . . . . . . . . . . . . . 7 B. Medium-Term Structural Adjustment Program . . . . . . . . . 8 C. Progress under First Phase of Structural Adjustment Program 10 PART III - THE SAL II PROGRAM .... . . . . . . . . . . . . . . . 12 A. Industrial Incentives and Promotion Policies . . . . . . . . 13 B. Trade Policy.. ....... . . 23 C. Energy Policy and Public Resource Management . . . . . . . . 26 D. Program Development in Other Areas . . . . . . . . . . . . . 32 PART IV - THE PROPOSED LOAN .... . . . . . . . . . . . . . . . . 34 A. Loan History .34 B. Relationship between the Proposed Loan and Policy Reforms . . 35 C. Effects of Adjustment Program . . . . . . . . . . . . . . . . 35 D. Benefits and Risks . . . . . . . . . . . . . . . . . . . . . 40 E. Loan Amount .41 F. Disbursement and Procurement . . . . . . . . . . . . . . . . 41 C. Monitoring of Actions .42 H. Cooperation with the IMF .43 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. - _~~~~~~K  Page PART V - OTHER BANK GROUP OPERATIONS IN THE PHILIPPINES . . . . . . 43 PART VI -LEGAL INSTRUMENTS AND AUTHORITY . . . . . . . . . . . . . 45 PART VII - RECOMMENDATION . . . . . . . . . . . . .. . . . . 46 ANNEXES I. Country Data II. Status of Bank Group Operations in the Philippines III. Supplementary Data Sheet IV. Letter of Development Policy V. Use of IMF Resources VI. Summary Table of the New BOI Fiscal Incentives VII. Selected Documents Available in the Loan File MAP - IBRD 13915  PHIILIPPINES SECOND STRUCTURAL ADJUSTMENT LOAN Loan and Program Summary Borrower: Republic of the Philippines Amount: $302.3 million equivalent (including capitalized front-end fee). Terms: 20 years, including 5 years of grace, at the standard variable interest rate. Program Description: The proposed loan would support the second phase of the Government s structural adjustment program which aims at improving the allocation and efficiency of invest- ment over the medium term. The second phase of the program includes (i) a fundamental reform of the Philippines- industrial incentives and promotion policy, (ii) an extension of the ongoing trade policy reform through measures in indirect taxation, import liberali- zation, and tariffs, and (iii) reforms in the area of energy policy and public resource management. The program is described in the Government's Letter of Development Policy to the Bank. The loan would finance essential imports. The main benefits of the program would be improvements in the allocation and efficiency of industrial investment as well as in a major part of public investment; the program would also improve the structure of the balance of payments by limiting the country's reliance on foreign savings and reducing the current account deficit to more sustainable levels. The risks of the program relate to assessing the length and difficulty of the adjustment process, uncertainties regarding international economic conditions, and internal resistance to a timely and continued implemen- tation of the adjustment program. Estimated Disbursements: The loan would be disbursed in two tranches. The first tranche of US$202.3 million would be available for dis- bursement at the time of loan effectiveness. The second tranche of US$100 million would be released after a  - ii - progress review six months later. Disbursements for the entire loan are expected to be canpleted within 12 months of loan effectiveness. Appraisal Report: This is a combined President's and Staff Appraisal Report. Map: IBRD 13915  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SECOND STRUCTURAL ADJUSTMENT LOAN TO THE REPUBLIC OF THE PHILIPPINES 1. I submit the following report and recommendation on a proposed Second Structural Adjustment Loan of $302.3 million to the Republic of the Philippines. The loan would have terms of 20 years, including 5 years of grace, at the standard variable interest rate. PART I - THE ECONOMY 2. An economic report, entitled "The Philippines: Selected Issues for the 1983-87 Plan Period" (No. 3861-PH), was issued on June 1, 1982. An industrial sector report, entitled "Industrial Development Strategy and Policy in the Philippines" (No. 2513-PH), was distributed on November 16, 1979. A related financial sector report, entitled "The Philippines: Aspects of the Financial Sector" (No. 2546-PH), prepared by a joint IMF/Bank mission, was circulated on October 12, 1979. A joint Bank/ADB mission prepared a report, entitled "Philippines: Energy Sector Survey" (No. 3199a-PH), which was issued on February 12, 1982. Country data are given in Annex I. A. The Philippines' Economic Performance in the 1970s Pattern of Growth 3. During the 1970s, the Philippines followed a much more dynamic, growth-oriented development strategy than in the past. The growth rate of GNP was raised from 5% in the 1960s to almost 7% at the end of the 1970s. Expansion of the agricultural sector was quite rapid at 5% per annum, and rice deficits were eliminated in the second half of the decade. However, manufacturing industry grew only at about the same rate as GNP and did not play a leading role in the Philippines' economic development. The greater part of the sector was oriented to the domestic market and affected by severe inefficiencies. Manufactured exports, on the other hand, grew dramatically during the decade. In response to various export promotion measures introduced in the early 1970s, industries producing such nontraditional exports as garments, electronics, handicrafts, and footwear expanded at a rate of 25% per annum. These exports accounted for more than a third of the country's total merchandise exports at the end of the decade. Efficiency and Allocation of Investment 4. The increase in GNP growth during the 1970s was achieved at a high investment cost. The expansion in the economy