Philippines - Second Port Project

TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1304-PH REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A SECOND PORTS PROJECT OCTOBER 3, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS US $1.00 Pesos 6.78 Pesos 1,000 US $147.49 Pesos 1 million US $147,493 FISCAL YEAR In the Philippines the Fiscal Year covers the period July 1 to June 30.  REPORT AND RECOM{ENDATION OF THE PRESIDENT TO THE EZECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A SECOND PORTS PROJECT 1. I submit the following report and recommnendation on a proposed loan to the Repuablic of the Philippines for the equivalent of US $6.1 million. Tne loan would be for a term of 25 years including a four-year grace period with interest at 7.25 percent per annum and would help finance a project for the improvement of two ports on the island of Mindanao. PART I - THE ECONOMY 2. A report entitled "Current Economic Position and Prospects of the Philippines" (78-PH dated April 20, 1973) was circulated to the Executive Directors on May 2, 1973 (R73-85). Since the previous economic report in May 1972, the Philippines has suffered one of the worst floods of the century in the Central Luzon area, President Marcos has imposed martial law, and a new constitution, establishing a parliamentary system of government, has been promulgated. The President has announced that martial law will continue under the new constitution and that elections for a national assembly will be postponed for six or seven years. The President is undertaking social and economic reforms and has announced that implementation of an agrarian reform program is a high priority in the Philippine development program for the immediate future. This would involve transferring title to abouit a million tenants in rice and corn areas over the next five years as well as improving supporting services for them. In addition to decrees on agrarian reform, the President has promulgated decrees on tax reform and on a number of bills which had been awaiting Congressional approval, including the customs and tariff bill and the government reorganization bill. 3. In the past three years the authorities have pursued policies of monetary and fiscal restraint and have succeeded in improving substantially the maturity structure of the external public debt. In spite of this, until recently the performance of the Philippine economy had been somewhat disappointing, with real GNP increasing by about 5 percent a year. Expansion of the economy has been hampered by a combination of factors. First, a series of disruptions to agricultural output since 1970 that was capped by the severe floods in July 1972, has seriously retarded the growth of food production, in particular rice. Second, there was a 30 percent deterioration in the external terms of trade during 1971 arid 1972. Because of this decline, real gross national income per capita has remained unchanged at about $200 during the last two years. Third, the economy has experienced a period of rapid inflation with consumer prices rising by more than 50 percent during the three years 1970-72 due to the combined effects of devalua-tion, imported inflation and shortfalls in domestic food production. These adverse trends have been especially serious for tne  wag_,,e ca-:mt-ng hy) gr oup Th.'nere 'h.as been a 20) e-orcent fall i'n real wages andi a funiner rise in unenyloyvent-. iowever. ir recent' months the rate of finflatiaon h;as been reduced substailly and there has been some recovery in the arc.:h of real. wages. urthernmore, there has been a marked imp9rovre,en-t i n expor-t- -prices and the terms of trade in the Phil'inoines since tee,n inn of 1'973 whiot, if susained, w-i' facl-itate st-rong Pco3o0licOl extransion. 1. -Thi-e 1 foods il JuI.y I 72(c wl-fo caui3eu dsL,erbt - agaa, e ade -&..e ecorjofifc s-rit-talJion in th- Philippines more difficu-lt. ubIlic lnr ta.cturc in art,icuI aroads . fl Ood, control2 dikes, irr-ig-ation Torks and hudvO were darare, .Lnc: lng production losses and damage to private property, the total cost of the flcod dramage was estimnated at abo'. $200 miEl on Because of the extensive dam7age t-o the rice cra"D 12 and the cnrr-nt world-wi-de rice shortage, the Phlihppine has niot bee . able to rnooru sufficient rice for itJS .eedis. JThere is cunrrantJy a rice snor`a-- and rationing has been introduced.. rie rice inrort recduiree.eo-s ior 1973-7li will denend on the mait c<o-p wh.ic n il.' be hnam'es st-u an tnhe: coming months, but t,he amount could exceed 6,00.000 tons. 5.,,., a- iyist-rat I,t fiscal a .d mi.-netariyreforms tha, - e adninistra- i_an has begun to imrcaple-ment ar,der i:,artiG..al law coa U lead to improvreci ec ,onolic porf xmancs in the years alhead. T,her r ca be little question that hJe Pais ip-il:aes lhas -the resources - both a nd" an. a -u.an,. to achieve broad>-. based' ecC-onomiC improvement,,s, given t-he 'i-,-lG i policies and adecquate su-oport for^ development w.Lithin the ccurtr-v -"d L