Philippines - Recent economic and financial developments

 No. E 52 ~ CONFIDENTIAL tOp}' This report is restricted to those members of the staff to whose work it directly relates, 66959 INTERNATIONAL BANK FOR RECONSTRUCT!ON AND DEVELOPMENT RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS IN THE PHILIPPINES July 6, 1949 Economic Department Economic Department. July 6, 1949. RECENT ECONOMI C AND FINANCIAL DEVELOPlvDllNTS . . IN' THE PHILIPPINES. 4 Discussions with the Philippine Economic Mission in the summer 1948 led to three main conclusionsl (i) The Philippines should use the next three years 1949-1952 "to increase the product! 'V'e capac1 ty of the economy to the point ",here it can currently earn the higher standard of l1'V'ing which the payments from America will temporarily support". This meant that deve~opment of both "dollar savers (rice) and dollar earners (copra, sugar. abaca)1t should be considered to be urgent and should recei'V'e priority o'V'er im- ports of consumers goods. Investment imports of $119 million in 1949 should replace an equivalent amount of non-investment imports. (ii) nIt is important that e'V'ery encouragement should be given to the adoption and implementation of all de'V'ices aiming at a reduction of imports". The IEED staff thought that a 20% reduction in imports by 1951 or 1952 should be aimed at. In 'V'iew of the psychological and administrative difficulties emphasized by the Philippine Mission, it was considered reasonable to expect import reductions of 10% in 1949 and 15% in 1950, 1951 and 1952_ (iii) A careful ~onetary policy pre'V'entlng inflationary tendencies should be pursued, limiting the use of some dollar reserves only for financing of soundly justified development projects. but excluding their use for current consumption purposes. Recant developments in thePhl1ippine economy show a failure to realize I.  II. any one of the three objectives. Development imports for 1949 are to be $17.5 million in the present Philippine's estimate instead of $119 million. This means that 85% of the development program has not been fulfilled and that the adjustments necessary to enable the Philippine economy to stand on its own feet within three or four years have not been forthcoming. Although investment goods have not been imported. other imports continued in a practical- ly undiminished flow which means that devices to limit imports have not been adopted even at the reduced scale envisaged in the common discussions in the summer 1948. The monetary policy has alsO 'failed to implement the objecU ves agreed upon last scrmmer and dollar reserves have been used for financing of consumption imports. A further important change must be recorded. The Philippine Central Bank has changed its statement of monetary reserves. A ffrevised estimate~ claims that these reserves were previously overstated by $60 million. There- fore, at the end of 1947, they amounted to $42799 million instead of $488 million as stated by the Pbllippine Delegation in the summer 1948. The Balance,of Payments shows clearly the above-mentioned developments. During 1948, export income covered only half the expend! ture on current imports. The result was a balance of payments deficit and a reduction in international reserves of about $18 million in spite of continued abnormal receipts from the U. S. Government of more than $;00 million. Earlier fore- casts were for a balance of payments surplus in 1948 of over $40 million. The outlook for 1949 appears even more serious. The Central Bank of the Philippines, in a recent tentative balance of ~ayments estimate, has fore- cast a decline in 1949 exports compared with 1948 by about $25 million (inste~ of a modest increase in exports of $;.4 million forecast in the summer of 1941).  l1a. is This/due primarily to an estimated 40% drop in the price of copra which with other coconut products has been the source of about 75% of export income during the past two years. A severe price fall of copra was anticipated in the discussions in the summer of 1948, bnt the Pbjli~pine Mission envisaged no fall in the supply of exports. Meanwhile, copra prices have already fallen by 55% from the 1948 average so that the drop in export income may be even greater.  III. The Central Bank also estimates a $25 million decline in imports in 1949, leaving the expected. trade deficit at about the SaIne figure as in 1948. The total balance of payments deficit is estimated at $73 million. t1hile this is somewhat smaller than the 1949 deficit estimated at $86.8 mill~on during the discussions of the IBRD with the Philippine Mission last Year, it should be borne in mind that development imports have been reduced to $17.5 million in the present Philippine estimates. The defici t",ould amount to $178.5 million if the foreseen development imports of $119 million had been realised. Taking into account "the revised estimate" of monetary reserves, the 1949 balance of payments deficit, as now forecast, would reduce Philippine foreign exchange reserves to $336.6 million at th~ end of 1949. To hold the foreign balances at $300 million during 1950-1952, in t~e absence of a sub- stantial rise in exports above the predicted 1949 level, would req~ire a dra~ tic curtailment in imports.. Exports of some items, such as sugar, minerals, and lumber, may increase but there is a definite possibility that this may be offset by lagging i:p.centives for copra production due to the fall in price. Assuming, therefore, that 1950-1952 exports remain at about this year's level, imports during 1950-1952 ,.,ould. have to fall by an annual average of about 25'% below the 1949 estimate to protect the currency reserve Position.lJ After 1952. when U. S. Government receipts Will continue only at the low level necessary for payment of pensions, the balance of payments problem "nIl be even more serious. The situation calls for a most vigorous and effective import control 1J This also assumes that invisible items duting 1950-1952 will remain as forecast in the balance of payments estimates of last year.  IV. policy of which there iS t as yet. little evidence. Non-essentials have con- tinued to weigh heavily in the import totals. The import control regulations instituted at the beginning of 1949 may be of some effectiveness although it is doubtful if they will prove adequate to the Inagni tude of the task in view . of the serious resistance which can be expected to a drastic curtailment of , commercial imports. Import saving development projects, especially in rice, offer some possibilities but as yet the progress of such programs has not been encouraging. There is a danger that development imports will be among the first to be sacrificed and that abnormal receipts from the U. S. will be spent without lasting benefits to the economy of the country. Prospects for Interna.lfinancial stability and for non-inflationary financing of substantial peso requirements for development are also a matter of some concern. Budgetary operations ~nfiscal1947-1948 showed only a slight deficit. More recently, however,there appears to have been a trend toward increasing budgetary imbalance despite a substantial rise in Government revenues and despite the lack of the foreseen developmen~al investment. This may 1I,ell continue into fiscal 1949--:-1950 under thEl presm':re of existing election- yeu political tensions. Opportuni ties for open mal'ke'~ borr~.rwing by the Government continue to be extremely limited and there is a de±'jnite prospect that at least part of proposed loans from the Central Ba11k will be used to cover current budgetary deficits. Additions to indivi~ual and business saving have been small; probably even less than in 1947~ Since mid-1948 there has. been a s~bstantial ri:::oe in net currency in cl:rculation. At the same time~ however, deposit money has fallen and the trend of the price level has been slightly downward o I t ,,,auld appear that t as yet. 8n1 inflationary pressures which may have been generated have been held in abeyance, partly through some improvement in domestic production, but ex- pecially as a result of the heavy import surplus "rhich has been maintained at the expense of a rapid reduction in Philippine foreign assets. J(> -' ' It must be said in concluding that the Philippines A:Mte, SO far, not made the best use of the abnormal income from the U. S. to carrY out the ad.- justments which would enable them to protect ~ standard of living: w'hen this assistance comes to an end.  1. EXTERNAL ECONOMIC MID FIN.A1:WIAL SITUATION. A. Ba1anoe of Payments in 1948. Contrary to the earlier expectations of the Philippine Government, the Central Bank of the Philippines has reported a net decrease in the inter- national ~eserves~ from January 1 to Decem~er 31, 1948, of ~36.6 million (from $427.9 million to $409.6 million) instead of an expected increase of i83.S million. The balance of p~ments estimate for 1948, also prepared by the Central Bank, shOt-IS a deficit of .237.9 million instead o'f the surplus of ~83.5 million which was shown in the ~stimates submitted to the IBRD by the Philippine Delegation on September 20, 1948. Both estimates are summarized in the following tablet Table 1. Estl,mate§ 9f' PhiUpnine :§a.lance of ,P$Wmenh f'or1948. (in millions of pesos) RECEIPTS Ph1lipnine Estimates Delegation Sept.20/48 Central Eank Mar. 8/49 Exports, including gold 650 InVisible Receipts 70 U. S. Payments 612 TOTAL RECEIPTS 13.59 PAYMENTS Philipnine ERtimR,tes Delegation Sept.20/48 Central ::Sank Mar. 8/49 Imnorts (landed cost) 1284 In~isible J?ayments Jll TOTAL PAYMENTS 1397 Surplus (Deficit) .J.J.a) Exports covered only one half of the total import costs. The balance of import costs were covered mainly, as in 1947, by ~Q39 million i~ abnormal reoeipts from the United States Government for war damage payments, hospltal- ization and pensions of war veterans, military expenditures and a few minor items. Philippine exports continued to consist to a large extent of copra and coconut products which accounted for almost 75% of export values in both 1947 and 1948. The volume of copra exports fell by over 40% in 1948 but this was offset by rising prices until the latter part of the year and by a shift to processing of coconut products, the export value of which was ~23 million larger than in 1947. The value of princi:pal Philippine exports (excluding reexports) in 1947 and 1948 was as follows: Table 2. Prinoipal Ph~liRPine Exports. 1947 and 1948. VA,lue in Millions of Pesos. 15:47 1948 Coconut products Oopra 354 309 Dessioated coconut 19 58 Coconut 011 14 41 Copra meal and cake -1L J TOTAL 391 415 Abaca 63 60 Rope 3 4 Sugar 4 42 Others TOTAL ..m l22. 650 531 Souroe: Bure~ of Census and Statistics, Manila. Philippine imports in 1948 were above the 1947 level by ~136 million and showed substantial increases in most categories, including non-essentials. Imports of ~tomobiles and accessories rose from ~51.4 million in 1947 to ~63.9 million in 1948; tobacco imports ,.,ere up from ~44 million in 1947 to ~9.4 million in 1948; and petroleum products jmroped from ~36.8 million to ~68.5 million. Import expenditure on soap and toilet preparations amounted to ~14.1 million; on beverages, wines and liquors, ~13t5 million; on eoffee, cocoa  3. and tea. ~17.9 million and on fruits and preparations, ~26.3 million. Imports of capital goods were relatively small. Imports of iron and steel, metals and manufactures,and machinery and parts amounted to ~187.3 million. Imports of iron and steel and manufactures, and machinery other than agricultural and electrical, increased only from ~83 million in 1947 to .il99 million in 1948 •. This would indicate that the progress made on various development and rehabili- tation projects in 1948 was small. B, Bala.nce of Paymentll Estim@.tel1 for 1249. Recent Philippine estimates for 1949, submitted informally by the Depart- ment of Economic Research of the Central :Bank, sho'" a decline of about 14% in exports and only about 956 in imports. Table 3. ~ry of Phl1innin~ Estimates of Balance pf Payments for 194~ (in millions of pesos) PCEIPTS Philippine Delegation Central Bank Sent. 1948 March12S9 Exports (including gold) 698 599 Invisibles 57 60 U. S. Payments ~ ~ 1340 1244 PAYMEl!TS Philippine Delegation Central Bank Sept, 1948 March 1949 Imports (landed cost) 1354 1230 Invisibles 160 160 1514 1390 (Deficit) (174) (146) The substantial reducUon in estimated exports in 1949 is mainly the result of an anticipated heavy drop in receipts from copra. The volume of oopra exports is forecast at only slightly above the 1948 level (which was 40%  4. below 1947), while the average 1949 copra price is estimated at about 40% below the 1948 average (a drop from $263 per ton to $155). This involves a re- duction of ~12304 million ~n the estimated value of copra exports in 1949 com- pared with 1948. However. even this forecast may be too high unless the vol- ume surpasses the estimate since copra prices have now fallen to $118 Q 70 per ton (as of June 18) and, therefore, the average price for the year will pro baD- ly be well below the estimate. ef <the other major exports, abaca is expected to remain at about the 1948 level. Substantial increases are expected in sugar (by about ~5 million) and in gold (by about ~O million). These gains. however, are far short of the expected losses on copra income and it is probable that the estimated increase in gold exports is somewhat higho Actual Philippine exports during the first four months of 1949 amounted to ~189 million which was ~64 million below the same period a year ago and represented an annual export rate of ~567 million, which is lower than the March 1949 Central ~ank forecast by ~2 million. The total 1949 import estimate of ~1127.4 million (or ~1230.0 million including :freight and insurance) l'laS arr! ved at in the Central :Bank:l S oalcu1a,.- tions by adding to the 1948 total (exclusive of rice) 2% for increase in popu- lation; rice imports of ~67 million (compared to ~4S.8 million for 1948); and ~4.9 million for capital requirements of the rehabilitation program and public works (compared to the ~230 million included in the earlier Philippine estimate); and deducting 5% for price reductions and 6% (after price reductions) for sav- ings through import control (~6S million). It would be logical to expect a reduction in imports as a result of de- clining money inoome, due especially to the rapid drop in the export values of  5. coconut products. Therefore a total reduction of imports. by 10% - the target used by the Bank last year - ~ well be reached this year, although not necessarily as a direct result of the new import controls. It is In1o~m that large orders were prepared in some lines during the Bummer and fall of 1948 in anticipation of the import control deadline at the end of the year. Im~orts for the last months of 1948 may have been somewhat larger than they. ",ould have been without the prospect of the controls, and, for the same reason, imports during the remainder of 1949 may be somewhat less. A partial check on these estimates may be found in the reported import figures for the first four months of 1949 ,,,hieh amounted to ;J.:ll50 million com- pared to ~14 million in the same period of 1948. Projecting these figures on a yearly basis, the estimate of lmports for 1949 would amount to ~1050 million compared to ~1171.7 in 1948 and the recent Philippine estimate of ~1127.4 million. This would represent a saving of about 6% of the 1948 im- ports. The rapid deterioration in Philippine external finance may be shown in the following summary table: Table 4. SummarY of Philippine ~elgnce of Paxments. 1940, 1947. 1948. end 19~ (in millions of pesos) 1940 1947 1948 1949 Actual Actual Trade Actual Trade Estimates St.<l.t,ieti2s Stati§tic~ Imports (landed cost) 303* 1148 1284 1230 Exports (incl.gold) ...2ll. TRADE SURPIDS (DEFICIT) J2!i 25 (617) .,MQ, (634) ~g5i) U.S.Payments (for war damage, military, etc.) ..... 658 639 .585 U.S.Loan (due 19S3) SURPIDS (DEFICIT) - 120 161 - ---... 5 - (46) after abnormal U.S.p~ents Deficit on invisibles SURPWS (DEFICIT) - ill) 106 ~) :37) l.ruL (146) $ '3 ($18 •.5) ($73) * Ave:r:age 1938-1940.  6. The present estimate of the deficit in 1949 is $14 million (~28 million) smaller than that in the previous estimates but any inference this might g! va of a more optimistic outlook is misleading. The fact that the prospective d~ ficit is less, despite a downward revision in export estimates by ~100 million, is due to a reduction in the estimated value of development imports by more than l?200 million. If development imports are subtracted from both forecasts the value of expected non.-development imports in 1949 is even greater in the present estimate than in the previous estimate by about .1180 million. In other words, since last yearts discussion with the Philippine Delegation, there appeare to have been a deterioration in the balance of payments outlook for 1949 to the extent that present estimates now arrive at a deficit of almost the same order only through a reduction in prospective imports for development purposes from I l?238 million ($119 million) to ~5 million (~.5 million)~ Monetarx Resgrves. As seen from the following table,the foreign exchange assets of the Philippines at the end of 1948 were reported by the Central Bank at $409 9 6 million, or $120 million less than was forecast for that date during last yearts discussions with the Bank. Previous' Statement Present Statement ($000,000) ($000,000) Reservebosition as of Decs'll. 1(':';7. Government Balances 424 38905 Banking System Balances ~ 38.4 Total 488 427.9 Balance of Payments Surplus (Deficit) Reserve Position as of Dec.'ll, 19lf§. II Including private balances. iI Forecast.  7. Of the total difference in the two statements, only part (about $60 million) is accounted for by the development of a balance of payments deficit in 1948 rather than the surplus which was previously forecast. The remaining $60 million difference was explained by Central Bank officials as due to an over-statement of reserves in the earlier esttmates. They state that Phili- ppine coins and various securities held in the U. S. and certain other items were included in the Government balances which should not properly have been classified as monetary reserves. Non-Government balances have also been re- vised downward apparently due, at least in part, to the exclusion in the most recent statement of private non-bank balances. The revised foreign reserve statement of the Philippines is an important event since the previous statements were made not only to the IBRD but also to the IMF and thereby to all governments. It therefore calls for further e~ amination by the Bank to determine what items were included in the former statement which have now been excluded and to decide if these shou14 or should not be considered as aVailable foreign assets. If the Central Bank1s latest statement of reserves is accepted it w~d mean that, as a result of the estimated balance of payments deficit in 1949, foreign exchange balances would be reduced by the end of this year to $336.6 million rather than to the last year forecast of $443 million. During the first four months of 1949 reported Government and Bank reserves had already fallen from $410 million to $370 million. o. Progpects for 1250-1952. The unfavourable developments in the export picture confront the Phili- ppines with an extremely serious balance of payments problem if the heaVY drain on international reserves is to be checked. If the expected value of exports  8. in 1949 is assumed to continue through 1952 and if this le,,"e1 is substituted for the export item in the balance of payments e~timates submitted in last year's discussions, with other items remaining the same, the annual deficit during 1950-1952 would be increased from $,58.4 million to $116 million in 1950, from $82 million to $138 million in 1951, and from $103 million to $140 million in 1952. This would completely exhaust the exchange reserves of the ~hilippines before the end of 1952. In order to maintain the reserves at, say, a level of $300 million, assuming invisible payments at the previously estimated figures, imports would have to be less than in the former estimates for 1950-1952 by an annual average of $120 million. This ~NYUld mean a reduction from the esti- mated 1949 import 1~e1 during the years 1950-19.52 by an annual average o'f over 25%. This ,,,ould require a very strict import control. As has been noted, non-essentials continued to make up a substantial part of imports in 1948 ~ while a small reduction is forecast in imports in 1949 as compared l'r1 th 1948, it has been seen that the 1949 import estimate is SUbstantially below the fore- casts of last year only because imports for development purposes have been cut to a fraction of previously stated requirements. While it is recognized that import control regulations have been in effect only since th~ beginning of 1949 and that it is still too early to assess their effectiveness, the fact remains that serious ~esistance can be eXP9cted to the drastic import curtailment which now appears necessary to protect the Philippine foreign exchange position. Some import reduction may be realised through import saving development ~rojects. Increased rice production offers perhaps the most important possibility for such saving within the next few years. However. little has been accomplished in this respect and rice imports are forecast at ~67 million in 1949 as compared with B45 million in 1948. The above discussion of the Philippine balance of payments outlook was premised on a maintenance of export values at about the level foreseen for 1949. Actually, the course of exports is highly uncertain. Some increases are foreseen in the value of sugar, minerals, and lumber by possibly $40 to $50 million in 195~1952 as compared ~dth 1949 estimates. Abaca exports m~ decline somewhat. the extent of which will depend on the development of com- petition from ~o~eo and other producing areas. The big question mark is in coconut products, especially copra. Members of the Philippine Mission estimated an increase in the volume of copra exports over the period 1949-1952 by about 35% which was expected to partially compensate for a price drop during the period by about 60~. Copra prices have already fallen during the latter part of 1948 and the first half of 1949 by about 55~ from the average 1948 level and therefore the assumption of a 60% drop ~ be too conservative. The course of copra volume exports is much more difficult to foresee. The big drop in volume during 1948 was due mainly to typhoon damage from whi~h the trees sho~d now have substantially recovered. It 1s unlikely, however, that exports will return to the 1947 level since that was a record production year stimulated by high prices. The abrupt price decline in recent months can be expected to reduce the incentives for the harvesting of coconuts and therefore tend to offset recovery from the typhoon damage. The extent to which harvests in interior regions and other marginal areas will be curtailed as a result of the price decline is problematical. Some of the larger pro- ducers in Manila have stated that they would restrict operations if the price fell below $125 a ton. Output from the smaller farmers may also be reduced  10. for the same reason although the possibilities for this may be limited by the absence of alternative means of livelihood. Until ther~ is more tangible evidence of the effects of the decline in copra p1;"ices upon export volume it may be reasonable to assume that future losses in copra export value will be at least as great as gains in income from other export items. This \'Tould leave the value of total exports in 1949-1952 at or below the level which the Central ~ has estimated for 1949. The conclusion remains, therefore, that the balanae of payments outlook is extremely serious and that if international reserves are to be maintained at a minimum which may be considered necessary as a currency reserve, imports will have to be curbed even m01;"e drastically than was foreseen in the earlier discussions of the !ank with the Philippine Delegation and certainly much more than appears to be contemplated at present in Philippine import control policy. Provision of' the foreign exchange necessary for development purposes "'ill add. to the difficulties of the problem; it will necessitate a cut in non-develop- ment imports by an even greater proportion than has been indicated. as necessary for imports as a whole. Under the e:.x:isting situation there is a danger that the requirements ot the development program may be sacrificed in the face of resistance to severe reutrictions on commercial imports.  11. II. pOENT TRENDS IN THE INTERNAL EOONOMIO A11D FINANOIAL SITtJATIOli, A. Public Finance. Budgetary o~erations of the Philippine Government during the fiscal year ended June 30, 1948, showed only a small deficit. Total expenditures of the General Fund amounted to ~07.4 million of which ~26302 million \;TaS met from receiptslJ and the remaining deficit of ~44.2 million was covered by a reduction in the cash balances of the Government which stood at ~64.S million on June 30, 1947, and were reduced to ~2003 million by June 30, 1948. There was, however, a surplus of ~2 million in the operations of the special fundS,~ which are excluded from General Fund accounts. In the budget estimate for 1948-49. as presented by the President in February 1949, total expenditures were forecast at ~434.8 million and r~venue at ~392.3 million leaving a deficit of ~2.5 million. It ''1ould appear, how- ever, that on a cash basis the budget estimate would involve an even larger deficit because of substantial revenue items which seem to be only booy~eeplng receipts, and also because of deficits forecast in the operation of the special funds. Furthermore, an additional deficiency appropriation was recently authorised for education which, apparently, has been met through a bank over- draft during 1948-49 and will not be covered from revenues until fiscal 1949-50~ Therefore, if actual expenditures in 1948-49 'VTere to correspond to the budget estimates plus subsequent deficiency appropriations, the resulting cash 1/ Revenue from taxation amounted to ~223.8 million which was 8556 of total re- ceipts and ~72 million greater than tax receipts in fiscal 1947. 2J The most important of these are the Fund for the Motor Vehicle Office and the Highway Special Fund, income of which includ~s motor vehicle fees and specific gasolene and oil taxes and expenses of which are largely for road construction and maintenance. deficit would appear to be more than ~lOO million. iIo"rever, in vielll' of the limitation of funds it is probable that additional executive suspension of authorised expenditures has been necessary and that the final 1948-49 deficit "'ill be well below illOO million but still substantially in excess of that for fiscal 1948. A defin~te appraisal of the budgetary operations during the current fiscal year will not be possible until a final accounting of Gover~ ment receipts and expend! tures is available t probably in late 1949 or early 19.50~ The fiscal prospects for 1949~.50 have been confused by the recent ad- journment of the Philippine Congress before taking action on the budget. This action was the outgrowth of dissension within the majority party and is a reflection of the stormy political atmosphere prevailing in the Philipplnes~ It appears now that the President, . under his emergency powers, will assume full . ; authority over fiscal operations, pending the next regular session of Oongress in January. In view of the political situation and the pres~es against econo~ and increased taxation in an election ye~ it seems probable ~hat 1949-50 will again show a substantial budget deficit. The budget bill, as approved by the lower house of Congress. involved a deficit of ~.51 . ' before million . inclusiOn ..,. of various anticipated outlays such as expend! tures on public works. education, and the Philippine Oonstabulary. Furthermore, it is the intention of the Government to bor~ow up ~o ~11.5 million from the Oentral :Bank during fiscal 1950. Of this amount they are con:- sidering the allocation of ~5 million to the Philippine Rehabilitation Finance Oorporation and iGO million for various development programs. While Central Eenk officials have proposed that the remainder be used for partial repayment of l! General"elections are scheduled for November 1949-! the outstanding obligation to the U. S. Reconstruction Finance Oorporation it is knOtro, that considerable support exi ste wi thin the Government for allo- cation of th~·~~.~ ~ii5 million to current expenditure. In summary, while the 1947-48 budget showed only a small deficit, there appears to have been a trend toward increasing imbalance in fiscal operations during 1948-49 which, on the basis of recent budgetary proposals and the un- settled political situation, are likely to continue during the 1949-50 budget year" B. I~9ney Volume. Prices and Oam,tal }l.1!l,rkets. During the first seven months of 1948 the total money supply rose by more than ~150 million. This was due entirely to an increase in demand de- posits since the net currency in circulation fell by about ~?O million between January and July. Since July 1948 the total money supply has remained fairly stable. However. the trends of net currency in circulation and deposit money have been reversed as compared with the first part of 1948. The former in- creased by ~133 million (from ~7l million to ~604 million) between July 1948 and April 1949 '-1hile the latter fell by Jn45 million (from ~6LrO million to l1495 million) during the same peri ode The course of prices has been some,.,hat erratic since the end of 1947 al- though the general trend, judging by the cost of living index for Manila, has been downward. The index fell during the first half of 1948, then rose to a peak of 420 in October (1937 =100). dropped again to 385 in February, 1949t and rose slightly thereafter through April. There appears to have been little change over the past year in the generally unfavourable capital market situation in the Phi:l~?lnes. According to officials of the Oentral EatU~ plans are in preparation to establish an aI'S-  14. anisation and launch a campa~gn to mobilize and channel savings into productive investment.ll They believe. however, that, becanse of the serious problems and obstacles involved in such a program, it will be at least a decade before substantial results will be forthcoming. Meanwhile. limited data indicate that the annual increase in savings remains at a low level. Savings and time deposits of all Philippine banks rose by only ~14 million in 1948, which was f~ below the net increase in the two preceding years. Figures on additions to Postal Savings deposits are not available although the budget message of February 1949 forecast an increase by about 25% in interest paymen~B on Postal Savings during fiscal 1949 as compared with fiscal 1948. H01i1eVer, since the volume of such savings is small this forecast, if correctly indicating the in- crease in postal deposlts t would mean an addition of only ~3 to ~4 million. Limited data also suggest a reduction in the rate of private capital formation during 1948 as compared with 1947. Newly paid in capital of prewar corporations was about ~5 million less in 1948 than in the previous year (~68.2 million in 1947 and ~63.S million in 1948) while the decline in com- parable figures for corporations licensed since the war was almost ~6 million (~25.4 million, 1947; B19.6 million, 1948). Some test of the availability of capital was prOvided during 1948 by a flotation of ~ll million in bonds of the Rehabilitation Finance Corporation which found very l1ttle private investor in'cerest and ,,,rere taken up for the most part by the Phili~ine National Bank. In general. it is the consensus of Government officials and other ob- .. b ' t 6. .... -1. *" ": " ";' .~: ... :. • '.: 1/ Chiefly throuGh nation"liio propa.,..·onda for savinr~a depoei ts ann the :rmrchase "', ·:·of,.small a.e%loJniuat1on,..seeur1t1es'··aJld~the establishment of deposit fac111.- • tins throughout local administrative levels.  15.. servers in the Philippines that the opportunities for market financing by the Government or private borrm~ers is extremely limited and they report little improvement in the capital market situation in recent months. Some imFrove- ment in the market for Government securities maY result from the establishment of the Central :Bank which is authorised to accept such securities as a portion of private bank reserves and as security for advances to banks. There is as yet, however, no experience to indicate the extent to which this will influence the establishment of an active capital market.