Statement by Matthias Meyer at the meeting of May 4, 1999

- International Bank for Reconstruction and Development 87502 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICL\L USE ONLY CONFIDENTIAL EDS99-111 May 3, 1999 - St::ltement hv - M::~tthi::~-. Mever Date of Meeting: May 4, 1999 . Philippines: Country Assistance Strategy We strongly welcome the opportunity to discuss the Country Assistance Strategy (CAS) for the Philippines. We would like to commend the staff for the high quality of the document, which clearly describes the role of the IBRD, IFC, and MIGA in the Philippines for the next three years. We also appreciate that the conclusions of the recent CAR were incorporated into the design of the CAS document. The Philippine Government's Development Agenda The Government adopted the ambitious long-term plan with the aim of creating a modern society. We especially welcome the attention given to strengthening governance and fighting corruption, as well as promoting human resource development. Improvements in the social sector require robust growth and resources targeted for basic education, health and development of rural areas, where the number of poor is still increasing. However, the growth targets presented in Box 1 may prove to be over-optimistic. External vulnerability still remains a problem. The recent export growth will be rather difficult to sustain having in mind weakening markets in Europe and Japan. Key issues for achieving the agenda's goals are to restore investor confidence and to safeguard prudent fiscal policy and efficient public spending. It is also crucial for the country to build up foreign reserves well above short-term debt levels (including private short-term debt) in order to safeguard the current account balance and exchange rate stability. This again may only be achieved by absorbing FDis and long-term private capital at least at pre-crisis levels. Bank Group Strategy We support the integrated approach the CAS is taking to economic, structural and social issues. The document takes lessons from the Bank's experience in the Philippines (slow, sometimes extremely slow project preparation and implementation, delayed achievement of :This do~ument has a restricted distribution and may be used by recipients only in the. · ;:>;rf,xmmce of their official duties. Its contents may not othcr.vise ce dis~~losed \Vithour: v; ;~~j B 1n..\:. authorizJ.tion. ----- project goals, etc.). Therefore, the strategy concentrates on capacity building at all levels of government. This is a broader problem, concerning other international financial institutions in the Philippines. Does Management have any knowledge about the Asian Development Bank's experience in this field? Management plans to provide resources to a large extent in the form of Adaptable Program Loans (APLs). APLs are a recent instrument and not much experience has been accumulated to confirm the conditions for their effectiveness. Is Management sure that in the case of the Philippines, a relatively poor country with a high level of poverty, still weak government efficiency and an emerging civil society, the APLs will be the best response? We would like to be sure that APLs are used, when (i) goals and outcomes are well defined, (ii) meaningful and measurable triggers for the second stage can be defined, (iii) monitoring capacities are adequate, and (iv) ownership is based upon strong local institutions. APLs should not be a substitute for thorough project preparation and institutional strengthening. It should not diminish accountability by Bank staff for project success. Is it wise to mainstream an instrument before we have tangible evidence on its success and before we have a positive record of project implementation in a specific country? We generally support the main CAS activities in the Philippines over the medium-term period. In our opinion only inadequate attention has been paid to the financial sector. In this regard, we would like to request Management to provide some clarifications. The proposed IBRD lending program (Annex B3, page 1) shows a Financial and Corporate Sector Reform Loan of US$100 million. Will this operation be introduced under the high case scenario? We see from the document that the situation in the banking system remains very fragile. Non-performing loans continue to increase, bankers remain reluctant to extend new credits. Can Management inform us about the effects of the Banking System Reform Loan approved by the Board last December? We support the proposed Bank Group lending levels with the triggers leading to the high case. We understand that adjustment lending stipulated in the high case would strongly benefit the economy and result in a better standard of living of the society. Therefore, we encourage the staff to work closely with the Philippine authorities to accelerate and deepen structural reforms and meet the higher lending level. We regret that the document does not fully outline a partnership agenda between the World Bank Group and other international organizations (primarily the ADB and the IMP) in the Philippines. The only exception is the short table in Annex B9. Such a summary would have given us a better understanding of the role of each institution in the Government's development agenda.