Philippines - Economic position and prospects

RETURN TO RESTRICTED REPOR .uN Report No. FE-3a rNNE WEEK This report was prepared for use within the Bank. In making it !2u!il! fhin nthore tha fnnl, acc ma nit rmi nnt-kIl;lk,la.. sf. f - the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT ECONOMIC POSITION AND PROSPECTS OF THE PHILIPPINES November 7, 1957 Department of Operations Far East CUKKENY EQUIVALENTS Unit: Peso U.S. $1.00 Pesos 2 Ppqn 1 TT-S. t0O50 Pesos 100 = U.S. $50.00 IABLE OF CON TENTS Chanter Page No. Basic Statistics .................* ..********* . Summarv and Conclusions ..............*... iii T- The Economic and Social Settinp People and Resources ..................... 1 Pritinnl Barkround ........................ 2 Government Organization and Administration .. 2 II. The Philippine Economy since the War 4 ro-MTh1 o%f P-rodiuc-tio rn ............. . .*. L The Balance between Aggregate Demand, P.-noucinY)an P-'irp-- - ------------------ Production Developments by Principal Sector . 6 Manufacturing ............................... 8 I-1.LI-.L.11 . . *.** **.*** *. .*. . . . . . . Use of Resocrces ................... ........ 9 III. The Balance of Payments 11 Inv-;Si ble and Capit+al "ansaction............ 12 Merchandise W'ade ........................... 13 Current PositiOn. ...........*.............*.** rV. Internal Finance16 Government Economic Policy ................ 16 Govenml~enit Finance... .............***...** * Effect of Public Sector Operations on the Money Supply ....*......................... 1 Credit Expansion in the Private Sector ...... 18 Overall Monetary Bxpanaion, Excnge Reserves, and Prices ................... 20 V. The Short-Run Outlook 21 Balance of Payments ...........* *- Internal Financial Prospects ............... 22 VI. Long-Term Prospects 24 manpower Resources .......................... 2% Private Savings ............................. 2L Government Savings: Current Expenditure and Revenue Prospects .................... 2 Foreign Resources .. .................. .20 The Balance Betw.een Savings and Investment 26 1he Allocation of Investment Resources 27 Export Prospects . ......... ....... 28 Net Invisible Receipts and Overall Balance .. 30 Prospects for Import Substitution ........... 30 Overall Growth Prospects .................... 31 Creditworthiness and Borrowing Possibilities. 31 Statistical Appendix 32 fTSee next page for list of tables) STP TS ICAL APPENDIX TPUPIBES Table No. Net National Product by Industrial Origin at Constant Prices ......................... 1 Net National Product By Industrial Oricin at Current Prices ............................ la Production of Principal Agricultural Products 190, l9)j8-1957 .............................. 2 Estimated Current Production Value of Principal Agricultural Products 1948-196 ...... .. 2a Livestock and Poultry Population ............. 3 Manufacturing: Gross Value of Output - Selected Sectors ...... .......... 4 Production of Minerals ........................ External Public Debt Outstanding, December 31, 1956 ....................................... 6 Estimated Annual Service on External Public Debt 7 Foreign Exchanre Transactions 1956-57 .......... International Reserves ............. 9 Value of Philippine Exports 19L9-197 .......... 10 Volume and Unit Value of Principal Philippine Exports ............ .... .In Composition of Imports ......................... 11 Direction of Foreign Trade ........... 19 Relation between Net Credit Outstanding and 4nnPv SnnnlV 19),-197- -- - - - 11 Domestic Price Indexes ......................... l (FY 1951-1958) .............................. 15 Nf+Annn rinrn-mmen+ T.o.h+ 14 The Five-Year Investment Plans ................. 17 - i - BASIC STSTISTICS 1. Area - 11>,000 square miles Arable land 46,000 square miles Forest 43,500 square miles Other 25,500 square miles 2. Population - 1948 (census) 1956 (estimate) 19.2 million 22.3 million 3. Gross National Product (1952 prices) 1952 1956 P 7.5 billion P 9.9 billion b. Trade Statistics 1952 1956 Imports 4420 Imports 506 Exports $352 Exports $451 Trade deficitT9 Trade deficitT T 5. U.S. Expenditures (excluding aid) 1952 - $127 1956 - 4115 6. International Reserves Dec. 31, 1951 - M306 'n. 11. 1946 - _222 July 17, 1957 - $192 Oct. , 1957 - $178 7. Pxternal Public Thbt .Tn 1 191 - Alin Jan. 1, 1957 $ 88 8. Government Finance - Estimated Cash Transactions (millions of pesos) Fiscal Year 1956 1957 Expenditures 999 1,158 Deficit 231 211 9. Money Supply 1952 1956 Dec. 31 P 1.2 billion P 1.5 billion Basic Statistics (cont'd) 10. Prices (1953 = 100) 1951 1952 1956 1957 Jan.-Sept. Wholesale prices 110 101 95 99 Cost of living 111 103 99 101 11. Production (1953 = 100) 1951 1956 ri miturm 90 116 Manufacturing 74 140 9inine An 120 - 11 - - iii - CTThiilh DV t. tlr (I 'VTX T TICTrATr- J. 1i ii-LL.-LJp- 9 I=~ 0 iIC n ull t: Vt-UL ZI 1 JLU .u L-,Ut 0U.L :LULIIJILU t L U J.; I 1 the post-war period. Aided by large U.S. war damage payments in the A _ JI _L U U~i LjI ,y ar a' ± ulik_ ; tJIULL VIL tL-dJJd I.AI JJ. Jy 1949. Thereafter, production has continued to grow at an annual rate of nearly 71, despite the uirupting ellects of the HuK movement, 1hich hampered economic activity until 1952. Today per capita output exceeds te prewar level oy about Iuo. unemployment has been reduced from 1.2 million in 1948 to about 850,000 in 1956. 2. During and immediately after the war, prices in the Philippines rose fivefold. vith the recovery of iroduction and the large import surplus financed b-y U.S. aid, prices settled down to three and a half times the prewar level by 1949. Prices abroad, however, had risen to less than twLce the prewar level, and import demand--actual or latent-- has remained high. When U.S. disbursements fell off in 1949, severe im- port restrictions were imposed in order to halt the drain on foreign re- serves, and by 1950 imports were cut to half the rate of the preceding three years. 3. A second major phase of the Philippines' post-war economic de- velopment began in 1950 with the adoption of a number of financial re- forms proposed by a U.S. economic mission (the Bell i1.ission). Together with the continued expansion in output, these measures succeeded in bringing about a decline in prices of about 8% between 1949 and early 1955. Although exports fell from the peak achieved in 1951, foreign ex- change reserves were maintained at about 6i300 million until the end of 1954 through continued administrative restrictions on imports. The de- flation during that period somewhat lessened the ;ressures on import controls. 4. From 1953 on, these deflationary policies were gradually reversed and replaced by measures to suport an expanding volume of private and public investment. This shift in policy was primarily the result of the Government's concern about the high level of unemoloyment and the steady decline in private investment which had taken place between 1949 and 1953. Thi nonern was rPinfcn'erP hv the liTrited nrosnrets for the ex- pansion of the traditional Philippine exports. 5. During the past two or three years, strict limitations on competi- tive imnrts. have been onmbined with an easing of import .estrictions on capital goods and raw materials, widespread tax-exemption, liberal credit and grouwing govenment ewnnd4+n,oe toeateacli eo panding.do- mestic demand and high profits. This, in turn, has stimulated a rapid ket, particularly in manufacturing, where production has increased by 50% taken plc 1loLng sound 6C. Ule there UiLd 'o tha the recet U 1teaV taken place along sound. lines, there is no doubt that the recent rate has LUen faste U t ha !-I bflt- U2ULAI'b' '. IUI'ULIJ L;ZAIi 1ZbLfUD UI1 Z)Uj)jULL. - 1v - Even thnoh eynnrt. P.rninc. have hpn a+. rord levels urinc the two years, net foreign exchange reserves fell by ,60 million in the last nine mnnthR- and in F)P.ntmrmchP- a nw lnv nf' 4l7 millir,nY) one-third of 1956 imports. In addition, domestic pDices have increased Another -important factor in t--e ' recen of OSS orei-45_± -I reserves has been flight of capital. This has been a problem in the but the introduction of barter arrangements in 1955, ostensibly to pro- mu expuo, nas CorUUduLy inLclreetu llu Uppur ui e _U± lur Cap-LuaL flight. The decline of the peso in the free markets outside the Philip- pline;s has intensified this prc-blern. 7. in recent Lionths, the Covernment has become increasingly a.vare of the dangers inherent in present trends, and has raised the re-discount rate from 2 to 4-1/27, budgeted for a lower level of imports in a sec- ond half of 1957, and taken steps to restrict "barter" transactions. In addition, substantial cuts have been made in the high rate of government development expenditures planned for the fiscal year 1958, and further re- ductions are under consideration. While there will continue to be a con- siderable strain on the foreign exchange position and the domestic price level until these measures make themselves fully felt, it seems likely that within a few months there will be a decided dampening of the domes- tic inflationary pressures. A halt to the decline in foreign exchange reserves may take place even sooner. 8. The Government is also in the process of revising its longer-term development plans to achieve a balance between investment plans and non- inflationar-7 financial resources. An increase in the Government's current surplus together with the expected growth in private savings and in re- sources available from abroad would provide financial resources sufficient to increase investment considerably above the present lovels over the next four or five years without inflationary consequences. 9. In the public sector program, substantial cuts have already been made in investment plans in the chemical, cement and textile industries, largely because private enterprise has shown a strong interest in several of these projects. The Government is, however, proceeding with its plans for the develooment of an integrated iron and steel industry. The invest- ments planned in irrigation, transport, hydroelectric power and social services appear to be of high oriority and right well require an even higher level of government expenditures than now planned. In the private sector. the Pmohnsis continues to be on industrialization. stronalv suo- ported by tax exemptions and import restrictions on competing imports. 10. The prospects are that the Philippines will be able to adjust to United States' market which will begin to have a significant impact by - v - 1965. However, the quota limitations on sugar, and competition from substitute n-rn1ii-+.q in th s n-P i-nnrp qnd hpmn. mr rrn,q1t. in n rqt.hpr qlor rqt, nf increase in these traditional exports. While exports of minerals, forest -roduc-ts and minor exports shoulc, incra, "nn te then n +J grnni+lth of toni nl ni earnings may not exceed 2/ annually. Other foreign exchange resources are import substitution can be e;pected at least for the next few years, largely U1 vUl DCzu": v V_L U11 -ne- aoom n " a-lance useemeuep,-ece,,scom _Lj_ ~ ± L tW U1 LIJ n ese Ln etil11.c.k U L _LcURt L, . L PC iU1,JIU J U L likely that a satisfactory growth rate can be maintained in the Philippines for some ti.me toU ome, provded that mo_nJaXr and u_ pu_1_4nv1 -. ensuring an efficient use of productive resources. 12. At present, the Philippine external public debt is small -- amounting to only about j0million -- and less th1-an _3% of fLoreign exchang-1-V-e re-,CeiPts L%LL be required to meet the peak of the service charges, which fall due during the next three years. According to present repayment schedules, the o utstrand- ing and the annual service charges will be substantially reduced after 1961. 13. In view of this low level of debt, and of the prospects that external balance can be achieved along with a growing volume of foreign trade, there should be considerable leeway for the Philippines to increase its foreign borrowing, if sound financial policies are pursuca, . The Government has recently taken various steps to halt the drain on foreign exchange reserves, and further measures are likely to be taken soon. On this basis, it is considered that the proposed loan of $21 million would be within the countyr' s ability to service without imposing an undue strain on its financial resources. CHAPT,R I THE ECONOIC AN1D 3CCIAL SETTING PeoDle and Resources 1. By comparison with most underdeveloped countries the basic economic position of the Philippines is favorable. It has a generous endowment of arable land, forest resources, minerals and power potential. Through a comparatively high level of expenditure on education, transport, communi- cations and industrial plant over the past 50 years, the Philippines has achieved a position in the Far East second only to Japan, both in respect to its level of literacy, and to per capita productive capacity. Per capita national income is estimated at about 190. 2. The population of the Philippines wa3 officially estimated in 1956 at 22 million. About half the population lives in the plains and valleys of Luzon. Manila has a population of over a million. The dominant racial stock is 7alavan, -nd the religion of about 80% of the populatic. 9 Roman Catholic. The Filipinos have a national language, an adaptation of Tagalog, but. one-+hirr of the nonilAtion sneaks Enilish. which is also the language of instruction and commerce, and the most commonly used official language of rv.rnmnr. _ Of +he +.t.a1i nd anrA one-t.hird or LAOOO nmre mi le. -onsists of arable land. Less than two--thirds of arable land is oresently under c ultjIvTO +n. Th ecimatis oi cal ndr theg largest:+ island,ri T.iig.rhm- monsoon wet and dry seasons. There is considerable regional variation in annual rainfall, but al areas receive ample aounts for agricultural production. Rice, corn, coconuts, root crops, sugar cane, abaca and tropical fruits are tne principal crops now being raised. Tobacco and coffee are of growing importance, and there are fairly good prospects that rubber and cotton can be developed on a larger scale. Sixty per cent of the working population is engaged in agriculture. Forests cover one-half of the land area in the Philippines, and a large portion of these grow valuable hardwoods. Coastal fish resources are limited, but possibilities exist for increasing the local fish catch through expansion of the fishing fleet, and further development of fresh water fish ponds. 4. There are extensive proven reserves of ores in the Philippines, Copper, chromite and iron are presently being extracted in increasing quantities. Gold has declined in importance since a gold boom in the 1930's. Some low grade coal is being produced. Intensive geological studies indicate the likelihood that oil exists, although none has yet been found in commercial quantity. 5. The hydroelectric power potential of the country is large. Within 250 miles of anila, it is estimated that at least 600 meRawatts can be developed on an economical basis, in addition to the 110 megawatts of hydrocapacity now installed. Near Maria Cristina Falls on Mindanao. wherp only 50 M.W. is now installed, the ultimate potential is estimated at 700 M.W. of exceptionally chean Dower. Political Background 6. The Philippines received its independence on July 4, 1946, after 4U ~1 U . CA11 ~ dIU _))U C%0i a d PandLs11_LVV14t;U U _± I ± UU.J. During the war, the Philippines was occupied by the Japanese and suffered great U1VA.UCLU anu Lss OfvIiUOe nLL Witn5 ±iuxg pJror ul UnLuptU_U1 in 1942 and to its liberation in 1945. 7. The Huk movement which had its origin in the resistance to the japanese occupation constituted a major security problem in the Philippines from 1947 to 1952. Under Communist leadership, it successfully exploited the unrest resulting from the low level of production prevailing after the war and the unequal distribution of land. Military action and social reforms undertaken in the period 1951-1953 under Magsaysay first as Defense Minister, then as President, effectively eliminated this movement as a disruptive force by 1954. Government Oreanisation and Administration 8. The Philippine Government consists of legislative, executive and judicial branches patterned in general after the United States. The legislative branch consists of a House of Representatives and a Senate. The President and Vice President, elected every four years, are the only elected officials in the executive branch. The t1o main political groups are the Nacionalista Party and the Liberal Party. The former has been in power since 1953. The election of a President, Vice President, House of Representatives and one-third of the Senate will take place in November. 9. The principal agencies in the executive branch concerned with economic affairs are the National Economic Council, the Central Bank, the Department of Finance, the Budget Commission, the Department of Commerce and Industry, and the Office of Fconomic Coordination. The National Economic Council consists of reoresentatives of the legislative as well as the executive branch. It advises the President on economic policy matters. is responsible for economic planning and for administering and coordinating foreign assistance and reparations programs. Since 1954 the NEC has prepared a number of 5-year development programs. The most recent development plan was incorporated, in its broad outline, in the President's last budget messqae. The CentrAl Bank of the Philionines has wide powers in the field of domestic credit control, as fiscal adviser tr the Government, and as onlicy makp.r in-n n tministrat.nr of- Pexhang and import controls. It is headed by the Monetary Board made up of re-,-sentti-1 fro-m the- pri-va~te se-tn?-- n. we I I ns frn-Tn flio #zP-tAvP~ branch of the Government. The Department of Finance is primarily concerned with the ollection of revenues and the custody of government fundS. t+ also is responsible for the supervision of the finances of provincial and Tax Exemption Law for New and Necessary Industries. Other than preparing w1ic sL paeaLI ndu1 lr gelyk. Untrol led 1y th Bude Comisinn101 611V hae- which is prepared and largely controlled by the Budget Commission in the n 9.04. A_LU1 70jL~J 1t ~u~ I~1I1~CL L1±~-C~J~~~~1 improving the preparation and presentation of the budget and in general fiscal manacement during the last few years. The functions of the Department of Commerce and Industry include the administration of the sugar quotas for domestic production and export, and the barter foreign trade law and regulations. The Philippines attempts, through the sugar quota system, to keep production in line with limitations on eicorts, as set by the Philippine sugar quota in the U. S. market, and with exTorts to other countries under the International Sugar Agreement. 10. The Philippine Government ovns and controls some 12 non-financial enterprises, some of which, such as the National Power Corporation, the National Development Company and the National Steel and Shipyards Corporation, are engaged in rroduction and others, such as the National Rice and Corn Corporation and the National Marketing Corporation, are involved in marketing and price stabilization. Although the Philippine Government has since eorld 1ar I engaged in a substantial number . industrial, commercial and banking operations, its stated policy is to dispose of its industrial proerties to private interests when possible. It has recently thus disposed of one of its two cement plants. Vith some excepions the government industrial enternrises have not been profitable. 11. The -overnment-owned Phili--ine National Bank, is the lar-est commercial bank in the country, and the only one with branches or agencies throughout the islands. It has participated more extensively than other commercial banks in industrial financinpr mnd assisted in the et.ablish- ment of Rural Banks (private) for a-ricultural credit. The Rehabilitation Einanne Cororat.ion is the Government's medium and long-term financing institution, investing its capital, the -roceeds of the sale of its deberntures-, and vrious rus fuindsqle :or t. itsq diqT-.-%,z1 I-)ir nth- goveTPrn- ment entities. The RFC provides credit to promote pri7ate industrial ro e ct s The -~i'i ldtAdCort~eF ni AAm- ii cr+Alv has become an important source of credit to farmers. Its credit function ofnferdinted wi cooperatieve rrketing of f roducts and the sale of fertilizer and other products to the farmer. - L. - HAPTTER TT TPR T PITT,TPPTMFEnIThP gTNCTE TIF ARp has been rapid, averaging almost 7% annually since 1947. The war had about one half, but recovery to prewar levels was achieved in most sectors and rehabilitation assistance and other disbursements, amounting to some 1;14Juu m_L_LLUL1 anlnu±lzy, or )I o U Ulu li.nLulla-L prouUUt, for tne unree years 1946-48. In spite of the financial crisis which accompanied the sharp reduction i: united States payments U.uring 194,, and the internal security problems created by the Huk movement through 1952, output continued to grow strongly, particularly in agriculture, manufacturing and mining. 13. The growth in output was accompanied by a rise in employmen v2 about 18%, or 2.5%. annually between 1948 and 1956. This expansion not only absorbed the estimated increa3e in the labor force of aLout b5U,UUU workers during the eioht year period, but also lowered unemployment, which stood at 1.2- million in 1948, to an estimated 850,000 workers in 1956. The Balance Between ipreaate emaand ;rod.uction and Frices 1/. Although real output had barely recovered to its prewar levels by 1949, aggregate monetary demand had risen by more than two and a half times since 1940, reflecting the large expansion in the money supply which took place in that period. A si,nificant part of the differential between out- put and monetary demand was absorbed by the growth in the foreign deficit to about PO.6 billion ($300 million) in 1949, but by far the largest part was absorbed by price rises which amounted to nearly 230% between 1940 and 1949. 15. Between 1949 and 1954, output rose at a faster rate than monetary demand. Prices declined by 6% and the foreign deficit was cut by PO.4 billion. The reduced rate of expansion in domestic demand that occurred during the 1949- 1954 period was largely the result of increases in taxation and restrictions on credit which were put into effect in 1950 at the recommendation of the Bell 1ission. The speeding up in the growth rate of production may be attri- buted in part to the progressive decline in the disruptive effects of the Huk movement. - 5 - Table 1 Changes in Demand, Output, the Foreign Deficit and Prices 1940 - 1954 Billions of pesos: 1940 to 1949 1949 to 1954 Changes in: Aggregate monetary demand a/ 4.8 1.6 Real output - 2.4 Difference between demand and output A7. - 0.T Offset by: Changes in the foreign deficit / 0.6 - 0.4 Price changes /4.2 - 0.4 Percentage changes in: agg.egite monetary uemand 7- cuu pc Real output -L 39 Fric es7 r- cu- U a/ Corresponds to national expenditure at current prices; excludes net imports. 16. The neriod since 19)j has been characterized on the whole by an increasing differential between the growth rates of domestic demand and nreduction. During 1955- this difference was more than met by an increase in the foreign deficit resulting from a deliberate relaxation of import rpstrintions: in 19 6. nrodatinon and dfemancd grew almost exaet.lv in sten. but the reduction in the foreign deficit resulted in a smaller growth in availihle resornes qndansuennt. increase in nrices of Ahont VX, To date in 1957, the increase in prices has been moderate, but there has been a large incease in the froricn deficit Since +.he rate of increas in production has apparently maintained at about 7% into 1957, it appears tha+. mon+nry demand has been growing by atn a+e sf aohnut 9 r, 1,. 4 A .,4- 4- 4 -~h V- -- n-' I13I : -LI-- JJt'IIICUIU., LULLIPLU, U1.1t- V %JL t J-8 1 J U cit an Prices 19 5~ 41- - 1 957 Changes in: Aggregate monetary demand 0.6o u V-V.BL) Real output 0.58 0.53 (/0.60) Difference between demand and output ;4u.1 7u.u 0v.2h Offset by: Changes in foreign deficit 7u.Lo -u.-0 UpU.-4 Price Changes -0.06 40.20 (/0.10) Percentage changes in: Affrezate monetary demand $ 9 $ 8 (/ 9) Real output /8 /7 (4 7) Prices -1 /3 (, 1) aj-L7.)(15 I esiates~ basedU on dt. LL .L-L r0t IldLL" -6- P roduction Developments bir PrinCial Sector 17. The following table indicates the development and structural chang.ies in the chief sectors of economic activity since 1949. Table 3 Net National Product at 1952 Factor Cost Prices Parrentnam. Billions of 1952 Pesos_ Distribution 19&9 1951 19 195r 1q4A lJ Q)I l o5 14 A-,riculture 2.13 2 70 ni 2 3.5n in r 3. P n I ilanufacturing 0.L3 0.61 0.83 1.00 1.15 8.1 9.8 13.4 Ai n n n n nq n in n 01i n0.o 1. 3a -1. Total 2.61 3.41 3.94 4.43 4.77 49.5 54.5 55.3 All nt.hpr sectors 2 80 2.85 . 15 3.66 3.86 60.5 /&5.5 LLA.7 Npt n~Aional product 5.Z1 6.26 7.09 8.09 8.63 100 100 100 -Index 1951 100 86 100 113 129 138 Source: See Appendix Table 1 18. The contribution by agriculture to the real national rroduct has .no between q4u, and 4, touugout the poswar period. ilanufacturing and mining, on the other hand, with a rate of growth much greater than in oer sectors, have increased their combined snare irom 9% in 1913 to about 15% in 1956. Between 1949 and 1951, output of these three sectors combined ew by 0ve, unale aL oTher sectors expanded only 2;. In the ner,od 1951-56 these other sectors showed sustained rates of growth amounting to /_1 or only slightly less than the m33 increase in total output. i rIculture 19. The urincipal export conmoditles in the a rcultural sector - coconut products, su-'ar, abaca (manila hemp) and forest products - account J.or only one-fourth of the value of agricuitural output, but are of central importance to the economy since they comprise its major source of foreign exchange earnings. In the domestic econom,, rice is the most important single agricultural crop, and the major item in the budget and diet of the great part of the Philippine population. Livestock production and fishing also contribute very significantly to the agricultural product. Appendix Tables 2 and 2a show the development of agricultural production since 1940. 4U. The trend of i.roduction in the principal export crops is, of course, lar:ely a function of the variations in foreign demand. A-)art from this influence, the chief factor affecting the suoply of coconuts is local weather conditions. The spread of the kadang- kadang disease has been a problem for dohx- time; attacks of beetl-s and weeavils also have significantly arfected production in some areas, but these factors nave been more than offset by unusually favorable weather in the last three years. In the case of s -ar, the moderate decline of output since 1953 has been partly attributed to the increasing profitability of alternative crops, such as corn and rice, and of domestic manufacturing enterprises. The declining level of abaca output between 1951 and 1955 is due to the fact that the ilantations which ran down during the war have still not been rehabilitatcd. 22. Philippine forest nroducts have found a major export market in Japan durin recent years, and this has greatly stimulated production, particularly of logs. Lumber output declined steadily between 19L9 and 1955, before picking up again somewhat in 1956. Production of logs, on the other hand, doubled between 1949 and 1956, with virtuall,- the entire increase of over a00 million board feet Yond 80% of this ~~~~0C~~ai 8ilio boar fethoist xn to JaDan. 23. Rice accounts for about one-fourth of the value of a,iricultural production in the Philippines. Corn is a good deal less important (5% of total), but is preferred to rice in some regions. Both crops had about regained their prewar level by 1948 or 1949, and since then output has expanded at a rate of 3.5% .er year. On a per capita basis, output of food crops reached the 1940 level by 1953. Marginal amounts of both rice and corn are still imnorted to satisfy domestic demand when shortages occur or seem likely. In 1956, 37,000 tons of rice were brought in, and for 1957 over 40,000 tons are scheduled. 24. Coffee and cacao are still relatively minor -rons hut. outnut has. been .ncreasing rapidly in the past few years (about 30/S since 1953), and it is nrobable that the country will h p. f-suffcient. in tJp neyt. fpi years, with an export surplus developin thereafter. Tobacco production exnqn]ed only modp1rnt.o1ly hptL=n 1/ P n 1n EQ bt 1 nthe nnt.irnr hA risen substantially - from 30 to 38 thousand tons. This is the result of in a sis-nificant disclacement of the black tobaccos that used to be the only tvnps grnn in the Philin--inpe The imnin fqo+Nr-, nan-hlo fPan the sharp increase in Virginia has been the Gov-rnment's decision to support t.11 n , ir- P thi+.M +.nhnon n+. n-Ao . MLA7K +- :1 4 b w+h nb eT the -- _c of - thstbcoatpie t o 50%/ higher tlh_a_ U.S. :rades. Production has, however, now substantially exceeded. consumption, -; Th ~~14-- T.e t-oa- supu reach '20 00 tons in 1957. Output of rubber has been only about 2,000 tons in the -ast two ~ -' ~ - e_w_eC1 UU V thatJ it, will gre-t] exnpand~u ove thR nte3--'t LIJ. or 15 years. The Goodyear Tire Co., which is required under the terms of of crude rubber locally within 15 years, and a Filipino company are livestock during the postwar period (see Apendix Talle 3). The volume of puo.U-un u livesuu produts ha rou,-uly paraieizeu uLnt5 increae. - 8 - In recent years, prices of livestock products have been high, but as the quantity of livestock increases. price declines may be expected. Fish consumption has been more important than consumption of meat and poultry products. mainly because fish is cheaoer than animal Drotein products. A government program for stocking inland ponds with fish has been a factor in maintaining fairlv ndpnuatp sunnlies of fish. Minuifnnturi ncr 26 Afs shown in Table 3 the real vaine of manufacringn ou+tpu+ ia been increasing since 1949 at an average rate of about 15% annually, or mam +hn twi-n thcr gowth rate for the natinal pr odu+ a a-whole The major factor responsible for this rapid expansion has been the very since 1950. High profits have, in turn, been made possible mainly by . u J v 'V -V i ut LLUL'_LV1 U1 _L_LLJPV bL U V1 L.L1JLO1RU iJLUUtAU u0e* %~ uiz.UU U-LU output for a particular commodity increases, it is the Central Bank's many cases, to ban the item entirely. 27. Government policy has encouraged the growth of manufacturing in other wayo us well. Early in the postwar period, legislation was passed to provide tax exemption for "new and necessary industries". Up until Oune 1953, when this legislation was revised and liberalized, 16 firms had qualified for exemption. By the end of 1955, a total of 505 firms had qualified; the current estimate is 700. The law provides for complete exemption from tax payments (income tax, import duties, business taxes, etc.) until 1958, with the tax liability increasing through 1962, to a complete non-exempt basis thereafter. The tax exemption privilege has been awarded to almost all new or expandee industries in recent years. The U.S. foreign aid program has also been directed to a significant degree toward assisting industrial development, both through the earmarking of dollar funds for financing capital goods imports and providing loans from counterpart funds for private industrial projects. The Central Bank has also given priority in its import licensing policy to industrial equipment and raw material imports for newly established or expanding industries judged to be of benefit to the economy. Details of the value of increases in manufacturing activity between 1953 and 1956 by major sector are shown in Appendix Table 4. .Mining 28. Although small in relation to total production, the output of mineral products is of considerable economic importance, since it is nearly alteprted. The value of non-precious mineral exports amounted to over $50 million in 1956, or about 12% of the total. Copper concentrates constitute the largest share of non-precious mineral output in terms of value (around 40), while iron ore and chromite each account for nearly 30% of the total. Gold production has also been of importance as a source of foreign exchange, but most of the mines are fairly high cost and have been ooerated on a subsidized basis. Outnut of all the three -9- major non-precious minerals has aporoximately tripled since 1949 klAppendix Table 5). Use of Resources 29. The sharp reduction in the foreign deficit between 1949 and 1951 absorbed about one-third of the increase in the national product. During that period, the proportion of the national expenditure devoted to pri- vate consumption increased from 83% to 86% but investment fell from 10/ to 7.5%. Government consumption was about 7$ of the total in both years. The decline in investment was the result of the tapering off in U.S. expenditure on rehabilitation, restrictions on the imports of capital goods, and the deflationary policy adopted during this period in an effort to restore financial equilibrium. Since the 1951-52 period, however, invest- ment has risen by about one half (or more, when price changes are taken into account), reaching a level of about 9)o of the national product in 1956. At the same time, the proportion of national expenditure going to qon- sumption declined again to 83;. Table I Gross National Product and Expenditure at Market Prices (Billions of Pesos) 199 1951 1953 1954 1955 1956 Current Prices: Privatep consqumtion 5.59 6.37 6.A 6.96 7 Ifn) 7 o-3 Government consumption 0.45 0.50 0.63 0.64 0.72 0.77 P,ro.q rInrn-,.i, r o - zT+.Tnn+. n A7? o CA n nA 0."b .7n ~ r National expenditure 1/ 6.71 7.47 8.10 8.33 9.01 9.56 Net exports -0.57 -0.10 -0.10 -0.16 -0.32 -0.14 Gross national iroduct 6.1h 7.A7 R.10 8.17 8A6Q .2 GNP at 19q2 pricp.q 6.20 7.-15 8.1 A.6 9.2 9.A860 oP 1/ Corresponds to "aggregate monetary demand" as used in Tables 1 and 2. 30. As may be seen from Table 5 below, the recovery in investment since 1951 has taken place almost entirely in investments of durable equipment and in livestock. Both elements increased by about 2 1/2 times in the period, while construction activity remained auite stable until 194. vh=n it ro.qp by 15%7. Virtually all major sectors have shared in the increase of durable equipment. - 10 - Table 5 Gross Domestic Investment by iajor Categories, 1949-56 (Millions of Pesos) Current Prices: 1949 1951 1953 1955 1956 Gross fixed investment 599 491 559 624 725 .L' 14. L,4. 'LC p u. -."'4 -4C L..4. _..41. Construction 405 349 348 338 383 Change in inventories 67 68 100 165 126 Other inventories 12 118 15 73 3 Gross domestic investment 666 559 659 789 851 Gross domestic investment at 1952 prices 780 570 680 880 900 30. A comparison of the estimates of gross domestic investment at 1952 prices with the constant price GNP figures (Table 4) indicates that a high rate of growth of total output has been associated with a relatively low level of investment during the post-war period. Since 1950, investment has remained below 10/ of GNP, while the average growth rate was close to 7% per year. This unusually favorable capital-output ratio was largely a reflection of the bringing back into production of unused or under-utilized existing capacity, particularly of agricultural and grazing land, and the absorption in industries and services of about 30% of the unemployed. 31. At the end of 1956, the level of unemployment and underemployment was still rather high and the productive capacity installed during 1955 and 1956 had not yet been fully utilized. The extent of unused resources was, however, much lower than at the beginnin: of the post-war neriod. Thus, it seems unlikely that a high rate of Erowth can be maintained in the future without sipnificantly increasing the TroPortion of total resources devoted to investment. - 11 - CH7TER III THE BALiCE OF TYA- NTS 32. Prior to orld War II, the foreign exchange transactions of the Phili- -pines were carrleu ouT under a doller exchan Te stanuarU l A100 uollar backing for the peso and with a stable exchange rate at two pesos to the dollar. There were no exchange or import controls. Trade with the United States was free, except for United States quota restrictions on sugar. Under the circum-- stances and because of substantial U.S. investments in export industries and in the import trade, the great bulk of Philippine trade was with the United States. 33. Simultaneously with the Philippine independence on July 4, 1946, the Philippines and the United States agreed to contimue for a period of ten years the basic trade arrangements that had -revailed before the War and, at the expiration of that period, to adjust gradually the application of their respective tariffs and other regulations so that all special arrangements would terminate by 1974. This agreement also established quota limi t-.ions on a number of Philippine products entering the U.S. market, most important of which was the continuance of the sugar quota. It provided that the Philippine exchange rate should not be changed or exchange restrictions imposed by the Philippines without the consent of the President of the United States.1/ U.S. investment and business activities in the Philippines were given a preferred position more or less equivalent to national treatment. 34. In 1946, with domestic production at only about half the prewar level, prices were nearly five times higher. From 1946 to the end of 1949, there were no controls on foreign exchange or imports, and imports rose to two and a half times their -)rewar value. Exports, however, did not recover their nrewar levels until after 19-49. As a result. the trade deficit averaged over 300 million annually, and there were, in addition, large transfers of capital funds abroad. Thes6 deficits were largely financed by U. S. aid and other disbursements totalling about $1.3 billion in the three year period 1946-1948, permittina foreign exchange reserves to be held at about 4Z50 million until 19L9. With the recovery of production and the high level of imports, domestic prices fell, but by 1949 they were still three and a half times the ure-war level, while prices abroad had less than doubled. As a result, import demand remained high. 35. During 19L9 U.S. aid disbursements fell nff cnsiderhlv whil Pt. the same time further internal inflationary pres,ures were being generated by ex-enditures on the cainaian a.7ainst the Hiuks. In qAdition exp ts fell nff by 20%, partly as the result of the U.S. recession in that year. These events caused a severe financial crisis. and led to a nrecinitnii. all nf fnrpian exchange reserves during the year, from $463 million to $283 million. To stop the loss of foreign exhan-je a system of imnor+ and echan cntrols us adopted in late 1949 and imports were cut during 1950 to nearly half the 1949 level- Thp vtp of, n' ~Ill-rP.qP gains<th n oteiz+ ksue, Y)w !i repae andA tAhe CentrEl Bank of the Phili -ines was established with wide powers to control nrpit. rs in wsrnrn. mnrald in19 1/ This provision was repealed in'1955. -12- 36. Since 1950, only about 80; of Philippine imports have been covered by mlie-rdise exports, with the reminder being financed by a surplus on invisible account, net capital inflows-chiefly private, and United States aid. Table 6 Philippine Balance of Payments 11,.9-1956 (iions o-~ f dolla1 ~rs) 19h9 1950 1951 1952 1953 1954 1955 1956 Exports f.o.b. 256 322 blo 352 3b6 388 392 64 Imports f.o.b. -586 -342 -)j81 -431 -48h -487 -552 -507 Trade balance -330 - 20 - 71 - 79 - 98 - 99 -160 - 43 US Government expenditures 155 105 106 127 139 127 127 115 Other net invisibles -106 - 67 - 81 - 70 - 90 - 98 -117 -114 Balance on invisibles ý9 38 25 57 49 29 10 1 Current account balance -271 8 - - - - 70 -50U - 42 Financed by: US economic aid 203 155 3 22 23 18 21 32 Long tenn capital (net): Private 5 5 2 26 51 h 59 56 Official - 3 - 11 - 4 5 - 2 -23 - - 7 Short term capital (net) - 19 - 58 - 5 h 2 5 5 - 16 Reduction in reserves (- indicates increase) 180 - 96 50 - 10 24 63 - 15 Errors and omissions -95 -13 4 2 5 2 2 - 8 Invisible and Capital TransactiJon, 37.. Th -os imoran singl ite i41n th- ivisible acoutIs U.S. Govern- ment expenditures, consisting mainly of pension payments to Philippine veterans and purchases of goodS and services by U.. forces stationed on the Jilands. The main r-ative elements in the invisible account are disbursements for freigiI dii LUI CarLligz Lurg i ±Livesbliltmnt. -Incoie 'f oreign in-VefU2stment has grown substantially since 1951, but an important part - around hO million annually L.1Sinc- C"I) 1 - ias been rinvested ite P A-iipines t-ese re4ivs t--4 e earnings are included above under private long-term capital inflows. Net investiIent reIbittances hlave been running<at aoUt $22iC II-LLUI LII tI Z past tw years. A significant item included among Iother" net invisibles is non- monetary gold exports whiuch hava held stead.y throughut the period atabu $15 million. 38. Net long-term private capital has been entering the country from abroad at the rate of about Pu UU toL) II$5iLl anually in rueeit years. het official long-term capital has on balance been negative since 1950, reflecting repayments of debts incurred earlier in the post-war period in the amount of 10 - $25 million annually, as against use of new loans of I5 to $10 million. The only new loan of importance since 1950 has been a $20 million Eximbank -13- loan for tne AmouK12o hyro-electric projecb in 1y 5. As 01 -ue Vu, _y t total external public foreign exchange debt amounted to about 880 million. 1/ The short term capital movements shown abore consist principally of changes in letters of credit outstanding. During 1955 and 1956, they also include drawings on the mF of alu million and e> millon respectively, whlch togeter represent the full Philippine quota. 39. The errors and omissions item in the balance of payments shows a net outflow of about $76 million over the period since 19>5, a good part of whIch probably represents capital flights. In addition to these, others have been accomplished through under-invoicing of exports and over-invoicing of imports. The latter have been of growing significance in connection with the so-called "barter" transactions introduced in 1955. Merchandise Trade 40. Although Philippine-United States trade remains of great importance, it has declined from 7L% of total trade in 1950 to 65% in 1956. B^th Japan and Western Europe have gained as compared with the United States in the Philippine market. (See Appendix Table 12). It is expected that the share of the United States in Philippine exports and imports will continue to decline. Under the trade agreement between the two countries which became effective on January 1, 1956, 25% of Philippine duties became immediately applicable to American products; the percentage is scheduled to increase to 90% by January 1, 1965. U.S. duties become applicable to Philippine products at a much slower rate but all preferences are to be eliminated both ways by 1973. Since the Philippines will retain a substantial margin of preference until nearly 1970, the absolute value of exports to the United States will be only moderately affected during the next decade or so, particularly since the new agreement retains the Philippines' sugar quota and since the U.S. processing tax on coconut oil has recently been eliminated. 41. Between 1953 and 1955, the value of Philippine exports remained virtually stable. This stability was the combined result of a steady growth in volume of about 10% a year and a corresponding decline in prices. Copro and abaca have accounted entirely for the price drop. During 1956, the down- ward trend in export prices was reversed and a 2% price rise, together with a continued strong exoansion in volume, produced a 13% increase in export value. The most important commodity group in the volume growth since 1953 has been coconut products, which has risen by 15-20% annually largely as the result of exceptionally good growing weather. Exports of forest and mineral products also have risen by about that rate. 1/ Excluding the unused portion of the Eximbank line of credit, and a loan from the U.S. Government repayable in pesos. See Appendix Table 6. (millions of dollars) s+. half 1949 1950 1951 1952 1953 1954 1955 1956 1957 Coconut products 127 187 209 122 157 164 150 174 84 ugar ),I 53l 75f 101 10 110 I 111 10n1 62 Abaca 29 42 67 42 39 26 28 35 20 T__ --A U ~ lu be 7L '1 17 1A~ ko )'o oCgf Minerals ( 13 27 35 35 35 41 55 ( 51 VJU11 .[ _.IUJJ ~ ~)-L 44~J '+'- J 4 2[7 k - Total 1 261 337 435 352 404 405 401 51 242 Indices 191497100 Volume 100 134 151 168 157 17h 190 211 215 Frice 100 93 99 78 95 85 T 79 81 1/ These totals differ somewhat from those shown in Table 6 because they are taken from different sources. L2. Philippine import control policy has been directed towards (a) conserv- ing wte foreign exchange reserves, () fuUerug umustiu iuusUry througu curtailing, and in many cases banning, the importation of goods produced locally, (c) providing allocations to producers for raw materials and capital equipment on a favored basis, and (d) adjusting imports of consumer goods from time to time to offset domestic inflationary pressures. Supplementary measures such as controls over credit facilities for importers and margin deposit requirements against letters of credit have also been employed. LL. As a result of the often conflicting nature of these objectives, the volume and value of imports have exhibited substantially greater year-to-year variations than exports. Significant increases above the export level have been evident in 1951, 1955 and again in 1957. In 1951 the high level of imports permitted to enter the economy was due to the need for curbing inflationary pressures. In 1955 and 1957, import restrictions were liberalized as an encouragement to industrial development. The shifts in the composition of Philippine imports resulting from these policy changes are indicated in fppendix Table 11. Current Position 4t. From September 1956 to early October 1957, the international reserves declined by $60 million or 25%, even after the Central Bank had deposited in its reserves the proceeds of a short-term $10 million loan obtained from a U.S. bank in July 1957. (See Appendix Table 9). Thus the loss of foreign exchange from normal operations was about $70 million. As of October 3, 1957, reserves amounted to $178 million or 35% of Philippine imports during 1956. The rate of decline of the last twelve months has been considerably greater than for any period since the exchange crisis of 1949. It has taken place in spite of exchange controls and after reserves had already declined considerably in the preceding year. b). The principal element in the recent loss of reserves has been a sharp rise in the trade deficit during the first eight months of 1957. During this period, the rate of exports rose by U, above the 1956 level, but imports jumped by 20:. This increase in imports was largely unplanned. It exceeded the foreign exchange budget prepared by the Central Bank at the end of 1058 by some 4'7 million (see Appendix Table 8), and reflected the sharply growing demands for raw materials and capital goods from manufacturing enterprises. Imports had been cut moderately during 1956 but the rate of industrial output and investment remained high, and stocks were drawn down. Thus, during 1957, the Central Bank was faced with the dilemma of letting a part of new industrial capacity stand idle or of drawing down exchange reserves to permit the use of this capacity and thereby assuring a continued expansion of manufacturing output; it chose the latter course.. In addition, imports of cereals and other food products were permitted to rise to prevent an increase in domestic agricultural prices. A substantial expansion in private credit and deficit financing by the Government played an important role in stimulating consumer and investment demand in general, and demand for imported goods in particular. (See Chapter IV, belo-T). 46. Another important factor in the recent loss of -oreign exchange reserves has been increased capital flight, arising in considerable measure from the opportunities created by so-called "barter" arrancements introduced in 1955. These arrangements permit the use of a portion of the foreign exchange earned on certain tves of commodities to finannP irnort. of non- essentials from the purchasing country. The intention was to limit barter operations to items which in the nast had nrovpn diffinilt. to Prnort._ Thse arrangements were responsible for some exports which would not otherwise have taken nlacp! but a rathpr siih.tantial nar. of th PYnort it.hori,.rA under them probably would have taken place in any event. From the end of 1955 to mid-1947_ total exPorts under barter arranements mre invoiced at .n value of ;50 million, while imports against barter permits were valued at only 22 million. This differnce is partly a refletion rf a normal lan in imports, but is mainly due to capital remaining abroad. The failure to barter exports, resulted in a loss of foreign exchange estimated at $30 or .L0 million. A doline in th nne rate in .bp frpp rnrets outside th Philippines over the past year from about 2.7 pesos to the dollar to 3.4 or more 1--s~ acce'ntulated. tis -11-n,-lble-m. 7 T Jili nf' +Iiic xi rm - -~-- -i -+- -'~ - -- c' -~~4b 4--' broaden the scope of the barter transactions but was vetoed by the President. In ~ ~ ~ ~ ~ -,-- Auutrgltos^eeaatd4 4-4-1,+e- 4-1- 1-4--4~ ~~ar~~~-- It is expected they will significantly reduce capital flight. 48. In July 1957, the Monetary Board approved a foreign exchange budget fort scod al o 17)5 1, MLI.U1, if realizedu, wou'ud± pLut ani enIU L. .o el exchange losses. However, by mid-September, reserves had fallen by ..14 Million below the mid-July level. During September, in an effort to reduce the underlying inflationary pressure from the private sector, the Central Bank raised the rediscount rate from 2;O to 41po, imposed a 100,% prepayment requirement on letters of credit for nonessential consumer goods imports, and stopped the issue of import licenses for new capital goods. - 16 - CHAPTER IV INTERNAL FINNCE Government Economic Policy 49. After the foreign exchange crisis of 1949, the main preoccupation of the Government was the severe fiscal crisis whirhn onurre9 in 1950C As the result of tax measures , important improvements took place in the over- all financial situation durinr, 19r1- Until 1)8A iimpvir anvrnmPnt .r-tio-nn with respect to longer-term economic development was of secondary importance. 50. By 1953, a great measure of success had been achieved in the cam- lished. Production was rising and prices were declining. How ev -- the "a ~ C -Y fr r 714'_ U11 _1 - L7 )r l'A%.A LIUI -L ment had risen. Concern over this situation, and about the continued pres- sureUC for immports ofU conume goo-usIIt leA the GOvernment 4 policies in support of the development of production. Government investment private credit were made riore liberal. In addition, the land reform program . g.wUVVLi 0 Inve6tment and proauction since ':J, wnicn was aes- cribed in Chapter II, shows clearly enough that these policies have been met with a large measure of success. They have, however, also procuced considerable financial strain, particularly in the past few years. Government Finance 52. As a result of tax reforms enacted in 1950 and 1951, the 1952 tax revenues of the National Government were nearly 50% above 1951 and pro- duced a sizeable surplus. Revenues fell in the fiscal year 1953 largely because of a lower level of imports, and a small deficit was sustained. From 1954 through 1956, modest yearly revenue increases were obtained, but expenditure grew much more ra:pidly. The entire increase took place in outlays on economic and social development. As a result, the budget deficit reached 212 million pesos in 1956. In the fiscal year 1957, in spite of another 10% increase in expenditures, the deficit dropped to 110 million pesos. This was due to larger receipts from import duties and income tax collections. There was a substantial lag in actual dis- bursements behind obligations for the period from fiscal 1951 through fiscal 1956, and as a result the Government's cash deficit was consider- ably smaller than the budget deficit throughout this period. In the fiscal year 1957, however, there was a small net reduction in unliquidated obligations. Details of these developments are shown in Appendix Table 15 and are summarized in Table 8 below. - 17 - Table 8 National Government Transacticns;'/ Fiscal Years 1953 - 1957 (il.lions of pesos) Year ending June 30: 1951 1952 9f3 12f/ 1955 1956 19527 Obligations 531 n-0A gin 9Z7 o5in inr7 Revenues 489 709 63 671 740 768 947 D~jj .~_upls-9 5 -23 -139 .107 I1 -D 1 Change in outstanding Cash deficit (-) or n1 I- I*C 17, ' - Irnj ~ ~ -L. Financed by: Direct credit from Central Bank - - - - 60 93 10 Security issues 113 - - - 62 121 44 Change in balances n.a. /78 /50 -30 /59 ;5 -62 r p)v~ ajut 10 n S,J teXCe ot I or ut-u 5t: ,1fV_L~UeIuaUIUM5~. 53. In addition to the borrowing of the national government for financing its own operations, securities are issued by or on behalf of the government- owned corporations and local governments. These issues are virtually identical in nature to the other borrowings of the government since they must be author- ized by the Congress and disbursements are subject to the control of the Budget Commission. The largest part of these borrowings since 1953 has been to provide capital to the Government's two main lending institutions - the Rehabilitation Finance Corporation and the Agricultural Credit and Cooperative Financing Admin- istration. The most important of the remaining securities in this group have been those issued by the National Power Corporation. The latter includes the $20 million (P40 million) loan from the Eximbank in 1953. Bond issues for local government are of minor importance. The following table shows the annual security issues for semi-government entities since 1952. Table 9 uc y L zur auve~rnmenu-o,wner Corporaions and. Local Governments Fiscal Years 1952 - 1957 liaillions of pesos) Year ending June 30: 1952 1953 1954 1955 1956 1957 RFC and ACCFA - 52 63 31 80 731/ Other corporations and local government 1 AD 9 30 22 22 Total 1 92 72 61 102 95 1/ Includes P30 million direct loan by Central Bank to ACCFA. 54. The major portion of government security sales in the post-war period nas been absorbed by the banking system. a1-Le the Central Bank CaiUU Pur- chase securities directly from the Government for its own account, the under- standing that it will purchase such securities in the open market is the main factor in supporting the market for such securities. As of June 30, 1957, out of the total domestic government debt of P 106 million (exclusive of back-pay certificates) the Central Bank held P 511 million and the commercial banks,P 317 million. Effect of Public ector Uperations on ionev Sup.ly 55. The overali offfect on the money supply of government financial opera- tions, including those of government corporations, may be measured by the net credit extended to the public sector by the banking system, less changes in government balances. Table 10 Pulic Suctor., iniections into ivioney Supol "A:L±ilons of pesos" 1Q01rM, loVQr' PYPV F1Qrr, FY1QrO PVI10r, Net credit extEnded by banking system 62 32 135 263 62 Less: Increase in national government ( balances ( -30 59 85 -62 Increase in .other government accounts ( 10 -1 15 38 Net impact on money su-ply -40 52 87 163 106 1/ See Appendix Table 13 for further detail. 2/ Ifcludes covernment txnPnit.uri abroa qnd Pe.ludes Pffr.t. nf ILF drawings of $10 million in FY 1955 and $5 million in FY 1956. It may be seen that the net impact of government operations was negative for the period from January 1951 through mid-1953. During the fiscal year 1954, the inflationary effect of government transactions began to grow in importance, and by fiscal 1956 it had become very large, amounting to P 163 million, or more than the total of the two preceding years combined. For fiscal 1957 as a whole, the net injections by the Government into the money supply declined to P 106 million. The main reason for the lessening of the inflationary impact of government operations in this year was the absorption of P 87 million in grvernment securities outside the banking system, as compared to minus P 5 million in fiscal 1956. The great part of these purchases was apparently made by government financial institutions, principally the Government Services Insurance System. Creuit Expanion in ne riVate E,CtoUr 56. As in the case of the Dublic sector, monetary expansion generated by the private sector has shown a pronounced increase during the last two years, after hnvinig hn ntlioihl t htnin1nd 95 1 nd 9)4 Thp PYfnsiOn nf rmmercia1 bank (Miilions of pesos) 1st half Changes in: 1951 1952 1953 1954 1955 1956 1957 Commercial bank loans 189 2 84 89 165 142 133 Less changes in: Savings and time deposits ( -10 51 63 54 53 45 /(78 Lo, 9 Net effect 111 -37 13 32 80 69 64 a/ Includes errors and omissions. From 1955 on, the increase in bank credit was substantially in excess of the increase in savings and time deposits and other non-money balances of the banking system. The three years which have shown the highest rates of private credit expansion - 1951, 1955 and 1957 - have also been those ii. im- ports have increaied most. This correlation reflects both an increased demand for imports resulting from the high overall level of demand in those periods, and also an increased demand for credit resulting directly from the relaxation of import restrictions. The latter factor tends to operate even in periods of relative monetary stability because of the high latent demand for imports. 57. As foreign exchange reserves began to fall early in 1957, the Central Bank became aoprehensive about the expansion of private credit, and suspended for a brief period the extension of Central Bank credit to commercial banks. Late in March this suspension was lifted, but paper eligible for rediscount was limited by not granting Central Bank credit for real estate, consumption and other "non-productive or sreculative" loans, and by fixing a ceiling on the portfolio of banks for commercial loans. Priorities were established favoring agricultural and industrial loans. At the same time the rediscount rate was raised from 1-1/2% to 2%. As already noted, the rate was raised fur- ther during September to L-1/2%. and a 100% preDayment requirement established for letters of credit on imports on non-essential consumer goods. 58. A major limitation to the Central Bankts control over commercial banks credit is its sunoort of the Government bond market. which makes it nossible for the commercial banks to readily convert their holdingsto cash. Sales of bonds to the Central Bank took olace on a larve scale during the first half of 1957 in response to the Central Bank's tightening of its rediscount facil- ities. Reserve reqnirements in the Philinnines have remained at 8% on time and savings deposits and 15% on demand deposits ever since the Central Bank was Pt.blqi.qhPH hqniertion ha been iiven to inrrPasina these requirements (the legal limit is 100%), during the recent period, but so far no action has ben takeno The Philinnine moneatry anthritien have been of +.ho niin on thqt moderate increases in reserve requirements would not be very effective in hold ngs +)n 1fo reig ITn hng+en hel -I th+ in a +.ban f rs.nf ocnurrrmnn+. r holdings and foreign exchange held by the commercial banks. ff n r 1- -1- -1 ___ 4- -P A - 50 - foreign exchange reserves on the money supply since 1950 is showm in the .L -L-UVV-L1I U CL~ iau-Le -Le Change of Money Supply in Hands 01 PubiLc 1/ (Millions of pesos) 1st half Calendar years 1950 1951-54 1995 1956 1957 Public sector origin 2/ 24 46 176 73 71 Private+ secnt o-igin -22 110 A Ao A Total change of domestic origin 2 165 256 12 135 Change in international reserves 2/ 192 -167 -147 21 -68 Nto+ chanc j n m --ow - 10w )O 100 1' A7 -rnn,s,,~- . end of pr;-. od 10)O 100 )7 '1 -110 1 A4 Percentage change during period. 19 - 9 12 4 1/ See Appendix Table 13 for further detail. 2/ EKcludes effect of IdF drawing. The 19% increase in the money supply which occurred in 1950 was entirely the result of an increment to foreign exchange reserves following the drastic cut in imDorts imiosed at the end of 1949. DurinL the next four years moderate increases of domestic origin (corresponding to 30% of the 1950 money supply) were almost, exactly offset by a drawing down in foreign exchange reserves to nearly the end 1949 level. Thus, net monetary expansion in this period was nil. In 19 5. however, total domestic monetary ex-ansion e-reri. the total of the previous five years. In 1956, the rate of domestic expansion was reduced sub- stantially ht_. in the firFt hnlf of 197 hoth the government definit and the expansion of private credit were running at a rate nearly twice that of 1956. About one third of the domestic expansion since early 19 5. has been absorbed by the fall in foreign exchange reserves. The remaining two thirds led to a rise in the monev snnnly. From mid-19 q to mid-19q7 the increase amounted to 27%. If the increase in demand deposits of local government, nvrnmnt±. - 'ridrations na U-S Provenrn-nment int.itip iqvrna +.hs inrq amounts to about 22%. 60. During this period, production rose by about 15%. The difference between the growth of th -s nennx s=I --1 n-f' r,,nA, .-h krr s.4n between mid-1955 and mid-1957 of 5% at the retail level and 7% at the whole- nitude over a two year period are not in themselves cause for serious concern - par L'±S~ U4.~±e conlexl - U11t 2iU:2b 0± U1 UI)YVVJLU U.LLu £1l VVU-LU UI Ia - down in foreign exchange reserves, which prevented much larger price increases from occurring, clearly camzot be continued without serious consequences for the economy. - 21 - CHi FTER V THE SHORT-RUN OUTLOOK 61. The Philippine authorities take the view that foreign exchange reserves should not be drawn down further. The action they have taken recently is designed largely to halt and reverse the recent downward movement. It seems orobable, however, that action to reduce further the planned rate of govern- ment expenditure will also be required if this objective is to be achieved while at the same time avoiding major increases in the domestic price level. Balance of Payments 62. For the year ending in mid-1958, Philippine export sales will probably maintain the record level of the preceding twelve months, but they are not likely to show any substantial increase. In the case of copra, there appears to be a levelling off in external demand, and sugar exports wilL )a limited by the cuota arrangements. 2ecause of normal seasonal variations, sugar exports are expected to drop in the second half of 1957 and to return in the first half of 1958 to the level achieved in the corresponding period of 1957. Abaca exports are being limited by production capacity. Mineral ex;orts will be affected by the fall in copper prices, but this may be offset by a rise in volume. The prospects for log and lu-iber exports are somewhat uncertain. A temporary drop in exports occurred in the third quarter of 1957, but recent reoorts indicate that Japan plans to resume purchases on a large scale. 63. A significant increase in foreign exchange receipts may well take place during the coming year as the result of the new regulations affecting barter transactions. These should considerably reduce the recent rate of capital flights. Additional receipts of $10 million to $15 million might be expected from this source by the end of June 1958. Another increase is likely to be provided by larger reparations receipts from Japan. The first receipts under the reparations nrogram took place during the first half of 1957. Under the agreement, grants are to increase to $25 million annually, and it is possible that they may reach 15 to $20 million during fiscal 1958. Other net foreign exchange receipts will probably be maintained at about their 1956 levels during the comin year. No significant change is expected in the rate of U. S. Government exnenditures or in other net invisibles. There will be a drawing on the Eximbank line of credit to the extent of $5 or U1O million for financing past imports on a reimbursement basis, but an expected increase in debt repayments during the year will about offset these receipts. (). On balance. additional foreign exchange available for finaninc imnortR during fiscal 1958 may exceed those of the rreceiing twelve months by some i2 5 to A35 million Bnt the,e manntr vill nrrt. zi nfieApnt toir qnn-P A flow of imports at the rate prevailing in the last nine months. A reduction th ilponrts ef and woldg be wrrive to nain mexch reserve aeto -the present level; and larger cuts will have to be made if reserves are to - 22 - 65. In their foreign exchange allocations for the coming year, the Phil- ippine authorities intend to eliminate altogether the issue of licenses for new capital equipment for orivate enterrorises. and to further reduce licen- ses for imports of finished consumer goods. On the other hand, imports of food oroducts - oarticularly rice and wheat flour - are not likely to be re- duced. Thus, cuts in other items would have to be more severe in order to achieve a halanced cosition. This would involve a significant reduction in the level of private investment and. in the rate of expansion in manufacturing frnm the record levls rn'ied eArlv in l17. Tnternal Financial Prosnects M_ The recent increase in the Central Bank's rediscount rate, the 100% prepayment requirement on letters of credit for non-essential imports, and the anolication of selective credit controls should have a damenine effect on private monetary exoansion during the coming year. Cuts in import licen- ses for annital onds shni sl-n hpln to discourage the demand for private credit. Thus, it seems reasonable to expect that the rate of monetary ex- ornsion b7 the nrivimt.s qpra.r mny bhe rpiiirpl from Polt million durinr the first six months of 1957 to an annual total of P50 - P70 millic. '>r the 4..f 1-J,--ovr, Jf44 prent,o , gorverrn-ient -- r dA4,iur- <il a arcn n-i anr c substantial increase in monetary expansion from the public sector is bound to duced, further cuts are required if financial stability is to be maintained. Iable 13 cum-pares ti-ne Guveriuientis uperatlous in fscal -r Wi Ule LVie U estimate presented to the Congress for fiscal 1958, and the most recent of- C101al estimate. Table1 Budpet for National Government & Government Corporations Fiscal Years 1957 and 1958 (Millions of pesos) 1957 195 Estimated Budget Revised Actual Request Estimate Revenue 947 1,025 989 Current expenditures 833 886 886 Current surnlus 11AL 139 103 Capital outlays 325r 427 356 of whieh fort Government financial institutions 73 23 23 Fixedq pnbihc invesqtment. 2r_;11_zn/ ITI Overall deficit 211 288 253 Reparations for government account --_2/ 24 24 Government borroig I4 26719 Use of national government balances 62 --- 36 1/ Based on estimates provided by Central Bank and National Economic Council of fixed investment by Government and government corporations. 2/ Not included in government accounts. t3. G-enmn reven-eJseeced to in,r reas rinlu mryjP.r!;t.r1v in fisc,,21 1958. Internal revenue collections have increased significantly in recent peius lulur,1 income , tax - rae decJr in lQr,' irjha~n +b 0,r)gn- in.- crease in rates passed in 1951 was allowed to lapse. Revenues from import ,Z~~~~~~v -____-___ 4, A 4- likely to be offset by the expected decline in the volume of imports. The ---se- in curen _~I-,e eS+ so that the expected current surplus is only slightly less than that achieved last year. 69. During the past tnree monnls, tse uOvernment s reduce 1tpulanne capital outlays for fiscal 1958 from P427 to P356 million. But even this reduction entails a deficit of r)3 million. After deducLUg the expected reparations receipts, the estimated deficit amounts to P229 million, or sligntly more than in fiscal 1957. However, a neutralization of government borrowin,- through bond sales to government financial institutions cannot be repeated this year on anything like the scale achieved in fiscal 195t because those institutions no longer have large liquid resource .t their .9 a nenzs o n backc disposal. i-oreover, they have already started maxing repam s a pay certificates which are expected to reach P30 million by June 1958. Liquid funds will have to be provided for this purpose since the assets of the sinking funds for the back pay certificates have been invested in real estate mortgages and bonds. 70. Thus, the government financial institutions are likely to absorb at best no more than P10 to P20 million of government bonds. Indeed, it will take a considerable measure of restraint to prevent an expansion of their loan portfolio which would have to be financed by decreasing their security holdings. Private investors (mainly insurance companies) may purchase an amount of the same order of magnitude. But, even if all these sources of financing are taken into account, an inflationary deficit of the order of' P150 million remains, to which must be added. a credit expansion for the private sector of some P50 to P70 million. 71. Since, as indicated above, this expansion can no longer be offset by a drawing down of exchange reserves. it would lead to an increase in the money supply of l3o to 14%. An expansion of these proportions would be substantially in excess of the growth of the real national product, which is not likely to reach the 7% attained in recent years. The production of coconut products and hemp has levelled off in early 1957; and some decline in the rate of increase of manufacturing output seems likely because of the cuts in the licensing of imports that will be required in order to achieve balance on external account. 72. The Philippine authorities have become increasingly aware of the need to make further cuts in government exenditures. It is probable that sub- stantial further cuts will be made in planned disbursements by a postpone- ment of new Drojects and by slowing down works already in progress. MYleasures along these lines would go a long way toward keeping the government deficit within the limits of the nroduction potential of the economy and avoiding an upsurge of inflationary pressures. - 2L - CHAPTER VI LONG-T li PROS PECTS 73.. The prospects of the Philippine economy for sustained long-term growth are good. The first chapter of this report mentioned the Philippinesf generous endowment of natural resources and its hich level of literacy. Other favorable factors are the growth of the labor force, the availability of managerial and tp.hninal skills th hich level of q-ivinmq And invest- ment, rather good prospects for most of the Philippine exports, and consi- derahlp nos.ihilitpi fn-r imnrn-r. enhati+inn- 7)1 Tn 16 the National nnm o rncnl ised a r ve-Yer Pln for Economic and Social Development which contained a detailed program for invstmntin hepubic ecor nda gee ina- 'tion the 1.v - ~a direction envisaged for private investment. This Plan was not adopted 'y hv Ai c ~ e'n i j n -j + a nnr+ - ,-+-r 1 + - -. -,,,,- - - - in a Five-Year Fiscal Plan presented to the Congress in the President's 1 ~ ~ ~ ~ - -1 ~ tMssg.Anmero motn change " in the Fiscal Plan in the light of recent developments, and furtt .--odi- fications maWY be Made bDefore it -is presented to- the- Conres agan_i revised form next year. The main lines of the Fiscal Plan and the princi- Pa!00 chage mad. to dat are 1 descibe ueLkitly ±L1UJi1 iI2.Ls U!1 LZ3U cussion of government savings prospects, and investment in the public sector. Manpower Resources 75. The population is expected to grow by 2.5% annually over the next Uecaude, with Ute labor Lorce increasing aT a sigt-Ly higher rate. Thus the supply of labor should not be a significant factor limiting growth. Dy 1962, the annual additions to the labor force should reacn juu,uou workers, or 3% of the labor force, compared with an average increase in employment of about 2.5o annually during the 198-56 period. 76. As in other underdeveloped countries, managerial and technical skills are scarce in the Philippines; but the scarcity is much less pro- nounced than in most other Asian countries. This is due in large part to the operation, for many years, of foreign-owned enterprises, which not only have brought in foreign personnel, but also have provided business training for many Filipinos. The close cultural ties with the United States, the extensive knowledge of tEnglish and the emulation of American attitudes has also greatly facilitated the growth of entrepreneurship and skills among Filipinos. Private Savings 77. In recent years, private savirgs have been high and rising at a fairly steady rate. In 1956, they amounted to about P670 million. The major part of the increase since 1952 has consisted of savings by indivi- duals and unincorporated enterprises, and it seems reasonable to assume this trend will continue. The growth of both private and government insurance reserves, which have been quite important in the past, may be expected to increase oy anotner r 7u-ou million after scai ±Y7)u, P - result of the anticipated accumulation of reserves by the recently established social security system. Ahile reinvested corpurae lcarn fairly stable since 1954, it seems reasonable to assume that they will also show an upward trend in the future. in total, the prospects are that private savings over the next four or five years might grow by about one-fourth. Government Savings: Current Exoenditure and Revenue Prospects 78* Government savings, consisting of the difference between current revenues and current expenditures, amounted on the average to only P 90 million between 1954 and 1956, or less than 15% of total savings. in the fiscal year 1957, however, they rose to P 114 million. The possibilities of increasing this component of the savings flow further are directly related to expenditure requirements as well as to revenue prospects. In the Government's Five-Year Fiscal Plan current revenues are projected as increasing faster than expenditures, and thus to result in a substantial rise in public savings. Table 14 Current Revenue and Excpenditure: 1957 - 1961 (Millions of pesos) AUUK.L nzvDou Estimate Fiscal Plan Year ending June 30: 1957 1958 1959 1960 1961 arirrnt m~n(tura A77 886 910 981 1.031 Total revenu,e 947 989 1,107 1,205 1,261 of which- frnm! Revenue at present tax rates Q)l7 9P9 Q87 _1007 1.090 Additional taxes - - 120 158 171 -U 17 I 79. Current expenditures are projected as increasing at an average annual rate of about 5%. A part of tIsL rise Li at ibutable to defense expendi- tures, which the Philippine authorities consider necessary because of the danger of a resurgence of the Huk movement. A more Jiur-unoi _m 4-%,- program, however, is the increase of about 6% annually planned in current outlays on education, health, community developmenU an Land reform. 80. The increase in the current surplus shown in Table 14q presupposes the imposition of additional taxes. The projected increase in total revenues would raise the ratio of government revenue to national product from 9.5% in fiscal 1957 to about 10.5% in fiscal 1961, assuming a growth rate in the national product of 5%. Given the present per capita income level of the Philippines, an increase in tax revenues appears well justified by the - 26 - . UJ IU-LJL e UU - ULU J - I UOVUl Ut- -LU J1 11V1ii± U -L;LIl * lines of the proposed tax reform were indicated in this year's budget message, but only a fLew specific tax measures wvere requested. Aun increaseMo -n tarff was enacted, but bills for a tax census and tax amnesty were not. The most important atuLUlnal measure now unuer cuudUerUaton are an increase in lanU taxes which are presently very low, an in income tax rates, which recently were reduceu. These iax increases aupear aLply Julbstieu. ijbUU -.Ui t revenue aspects, an increase in land taxes would be highly desirable because it would encourage better use of land. A reduction in income tax exeion for corporate enterprises, also under consideratiun, should also contribute to a better use of investment resources, although its yield would be small. The fiscal authorities believe there is a good chance of obtaining legis- lation along these lines during the next year or two. Foreign Resources 8.i. The availability of financial resources from abroad over the next four or five years is not likely to differ greatly from the prospects already indicated for fiscal 1958. The increase in reparations proceeds -11ich should reach an annual rate of $25 million by fiscal 1959, might be offset by a decline in United States' economic aid. Direct new foreign investment in the range of $10-315 million annually is likely to continue, but no major increase is to be expected. Up through 1962, repayments of official loans will come to about the same amount, so that the net total from all these sources would be about $40 million, or P 80 million, annually. If reserves are built up beyond the present level, foreign exchange resources available for domestic investment would be correspondingly reduced. The Balance Between Savings and Investment 82. Private savings, government savings and foreign resources available for investment together might reach_a level of between P 1.1 aid 1.2 billion by the fiscal year 1961, as against"790 million in 1956. As compared with these resources, actual investment in 1956 was about P 850 million, and is projected in the Fiscal Plan as rising to about P 1.3 billion by FY 1961. (See Ap,endix Table 17) The difference between these savings and investment magnitudes representsthe inflationary increase in the money supply. Table 15 Total Savings and Investment: 1956 and 1961 (Millions of pesos) Calendar Year Fiscal Year 1956 1/ 1961 Private savings 669 80 Government savings 66 230 Foreign resources 56 8o Total savinc 791 11 C0 Total investment 851 130C0 Difference (inflationary gap) 60 150 1/ Derived from national accounts estimates, which are not available on a 7--ud -'year .i~~ - 27 - 83 * Theinfltioarygap shoim, in la_le 15 epee that pr oe tary expansion which is not offset by a growth in real output, and which reserves.1/ In 1956 when the money supply rose by P 146 million 2/or 11%, ±L1 ito,)IL th no,) i-i A/O UII 1L L,~ LUJ_L. 1 %, l'L.it:,i lC 1 U k)J-L L UIt:- -L&IA, _CLD U LuOj be put at P 86 million. The remaining P 60 million, corresponding to a 4% increase in~ the nIC iny j Upp-Ly, VVd ct _LI ,t;±)1t, JUiLUL .L Jl Wit; _iB,,UC10C;' 3.5)0 in prices during the year. By 1961, it may be assumed that real output -L-L- Ut, LIIU.L UllbL11r, UY )/0 U.L- V/0 cLluudiLy, Zju L'11CU CL h,ruvvUIl _11 wt-_ mlitUIY Suppl~y of perhaps P 100 million may be envisaged as compatible with internal finan- CLCL sUUUblJ Ie remainder ol about P 15U niiLun WUuiU, luWVer stil amount to 7% or 8% of the money supply. Thus, unless additional non-inflation- ary financial resources can be mobilized, it would appear that the overall investment targets indicated in the Government's Fiscal Plan cannot be realized without a substantial increase in inflationary pressures. The Fiscal Plan did, in fact, indicate that annual domestic price increases of 575 or more might occur. on. The growing awareness of the dangers of continued inflationvry fin- ancing has, however, led the Philipoine authorities to the view that govern- ment savings should be increased beyond the level projected in the Fiscal Plan. But if tax revenues cannot be increased to the extent necessary to permit the investment targets to be reached in full without inflationary con- sequences, it seems probable that expenditures will be kept at, or near, the limits of available non-inflationary financial sources. The revision of the public investment program for the current fiscal year, outlined in the preceding chapter, has shown that the Government's policies are sufficiently flexible to avoid the risks of major domestic price increases or sustained losses of foreign exchange reserves in order to fulfill any specific invest- ment "targets". This flexibility is as important a factor in the long-term outlook as the bold plans to mobilize additional resources through increased taxation. The Allocation of Investment Resources 85. Of total investment of P850 million in 1956, about P 250 million was in the public sector. In the Fiscal Plan, this component is shown as in- creasing to about P 450 million by 1961. The illustrative projections for private investment, on the other hand, suggests a slower rate of expansion-- from about P 600 million in 1956 to P 8L0 million in 1961. However, impor-- tant changes have already been made in plans for the public sector investment. 86. The recent changes in the Government's investment program involve the elimination of a large part of the investments planned in chemical man- ufacturing (estimated earlier at P 130 million for the five-year period), and almost all of the investments planned. in cement and textiles. (Appendix Table 17 shows the details of the original plan.) The interest shown by Drivate enterprises in a number of these nrojects was responsible for the major part of these cuts. Other projects have been suspended indefinitely. The Government is however, proceeding with the expansion of the fertilizer 1/ Any change in foreign exchange reserves would be reflected in the figure for use of foreign resources shoin in Table 15. 2/ Excluding changes in balance of government corporations, local govern- ments and U.S. Government entities, which are treated here as part of savings. - 28 - plant owned by the National Power Corporation. 87. The Gcvernment also has ambitIous plans for the development of an iron and stool industry and a related e ansio f prouction. Th project has been justiIied on the grounds that it will utlize doriestic iron coal and electric pow-r, and xwijl' recsult in substani imprt savings, but present indications are that production costs are likely to be high. Pivat e invEstors av e shwn no01 n -ters i h t Te i gram envisages outlays averaging P 36 million annually over the next four years fr ts roject, c ed to PIl m - o t-ta gvn investment in manufacturing and min:ing during 1955. 88. Total projected outlays for the other sectors of the public invest- ment programn appear well jlstifiebtu. deve Ul lo pment requiremet s. ft economy. In these sectors, irvestments increased substantially between 1955 and 1y5, ULt are prujecuteu as rallinLg al aroun LIe 1956 eel oVu_ Uver the- next few years (see Appendix Table 17). Agriculture, flood conu-rci, trans- port and power are of Iarticulariy high priorit. In the case of -ow7r, it appears possible that part of the requird- expansion mi ght be carried out by private utilities. 89. The Governm,nt'-s development plan gives only general indications of the direction envisaged for private investment, but it is clear that indus- trial expansion is viewed as having top priority. It is plannei to continue directin- private investment through selective controls over impor-s, credit policy and tax exemptions. The Government's priority evaluation procedure for private investment takes accoumt of the contribution of eact project to the national product, the amount of employment it creates, and its foreig ex- change earning or savings potential. Durinr the past few years, the use of these criteria has led to a reduction of investments In "packaging plants" which loomed large in the earlier phase of industrial development. The major increases since 1953 have been in more basic enterprises, particularly in. textile spinning and weaving, rubber, cement and parer production and oil re- fining. Inrestment has also grown substantially 2n the mining, timber and plywood industries. Export__Prospects 90. The probable development of export demand has an imnportant beuring on the growth prospects of the Philippine economy, both through its direct im- pact on output in the export sectors, and through its influence on the po- tential level of imports. 91. It has already been pointed out tiat, while the value of export sales is not expected to increase significantly during fiscal 1958 over the record levels of fiscal 1957, an important increase in foreign exchange proceeds. may result from the tightening of barter trade regulations. Their full impact is not likely to be realized until FY 1959, when an increase of t20-30 million in receipts over those of FY1957 may be expected. 92. In the lInger term, the nain factors influencing the exnort prospects will be: (i) the ability of sugar, coconut products and abaca to sustain the loss of nrpfFranp. in thp IT. mnrket or in find q1to-rnativP mirkPt q. U.S. duties are applied to Philippine products, and (ii) the export growth nn+.rn+.n in -oIn+ ioI-r ?nT r n"? nvnn nrl i n(yI CrC nr. -.)f i .i n n-ri oin -m I I r mni nn-rn I z and forest products. 93. During the next few years, production of coconut products will probably average less than its present rec ord level, ...hich7 has been. due inllag par to a prolonged freedom from typhoon conditions. In the longer run, exports _j no -- - f than ) ii - / a year, sime ll l_p n exports will have to rely mainly on the European and U.S. markets where tai Inos oiI seeds ond p-trolem, der-i-a -i-es a r supp....lying an ;n--rea - in Ishre of the raw material requirements of margarine, soap and detergent producers. The "A willr g1 row faster V but w-.L be- supJP_lied- 41Main1ly fromIL _LUvC_ proV- duction, especially in India. It is expected that the price will rise moder- y lui UI -UW 17U UJ0Vle±. IVU 1l4 UUl'b WVI4H1 I.LgIlu ilU d pfUMyPjJ UU'bum.UL- what better are the possibilities for improvement in the quality of Philippine copra, now generaLLy Oeudered s liw, and the i Uproveu compeitive pVositU1 of copra that has resulted from the recent removal of the U.S. processing tax 94. The gradual increase in the U.S. tariff on rhilippine sugar imports to the Cuban level is not expected. to reduce sugar exports to the United States. Under present quota imitations, no increase is expected in total sugar exports, but it is not impossible that moderate increases in the Philipoine quota under the International Sugar kgreement might eventually be achieved. TIe possibility of taking advantage of such an increase might depend, however, on lowering domestic production costs, which make Philippine sugar hardly competitive in the world market except in periods of high prices. 95. The price of abaca, which is now exceptionally high because of the world shipbuilding boom, is expected to drop substantially in the next few years. Even assuming price stability thereafter, there is likely to be a gradual decline in the volume of abaca exports, as synthetic fibres displace it in the manufacture of rope. However, measures in the Philippines to lower production costs could retard or even prevent the decline for some years. 96. The large timber resources of the Philippines are still under-utilized, and give promise for a substantial expansion of production for the foresee- able future. The high level of investment in the timber and woodworking industries over the past year or two has already resulted in an important increase in productive capacity, particularly of plywood. A substantial expansion in lumber and plywood exports to the United States and other markets seems likely. 97. On the basis of known deposits, the volume of Philippine minerals exports can be substantially expanded. It might be reasonable to project a doubling of output over the next 10 or 15 years, but because of the likeli- hood of somewhat lower average prices than in 1956, the value of exports might grow at a lower rate - perhaps 3 to h' a year on the average. - 30 - 9A Among nth,r Prnnr+ t t. n-rnrinton nf annned inecaple has been expanding strongly in the past few years, and should maintain a steady but other minor crops such as coffee and cacao are more promising. These -oseot+ will be aff-e*d khmwever byr +he -ol a+1 17lv hich4 o-n + nf an duction. This factor will also tend to inhibit the development of exports of manuf actured products, hchmight+ ot0+1,poepssbea te~i of the growing industrialization. Finally, there are also the possibilities of norking a -large deposit of nickel1ifero0us ore, and ofP striking o-Il Both1 prospects remain highly uncertain, however. Net Invisible Receiots and Overall Balance 99. It seems likely that the rate of U.S. government expenditures in the rniippines kouner tnan aidj vdll be maintairieu at about weir U rlud_1v for the next ten years or so. U.S. authorities estimate that veterans pay- ments may increase from about ,vl millicn in 190 to abouO 4* mullou in 1961 and stay at that level until 1968, but other U.S. ex,penditures may de- cline correspondingly. As imports rise, invisible outlays for freight will also increase, so that, on balance, net receipts on invisible account may go down slowly over the long run. As indicated in paragraph 81 a decline in U.S. aid seems possible, but the total of receipts from reparations, aid, anr long term capital transactions other than new borrowing should reach about E.40 million in 1958 and remain at about that level for some time. 100. The overall impression to be derived from these prospects is that foreign exchange available for financing imports will rise from the 1956 level of $500 million by an annual average of $10 million to $12 million, or 2% over the next decade or so. This modest growth in the total value of imports would not be compatible with a high rate of economic growth, without a substantial further increase in the production of goods now im- ported and a consequent shift in the composition of imports toward a high- er proportion of capital goods and raw materials. Prospects for Import Substitution 101. As already indicated, however, it has been a major aim of govern- ment policy in the post-war period to encourage the development of pro- duction which will reduce the need for imports of finished goods. Plants which have come into production in the last four years have already re- sulted in a substantial volume of import substitution--about $90 million all told. The investments made during 1956 and 1957 in import-savings industries might add savings of another 530 or $40 million a year. Tex- tiles. oaper. cement. oil Droducts. rubber, fertilizer and assembly of durable equipment make up the bulk of this import substitution (see Appendix Tables Aand 11). After deducting the foreign exchange com- ponent of this production, estimated at about 50% (including the remit- tance of earnings where foreiLn investment is involved). the net foreign exchange savings resulting from this group of industries may be estimated at aIrndr ;ACn millinn. Thnrp h l -Pen qiihatantial rHiution in imnorts of food products since 1949, although there are significant year to year n-h_qnrrP which -rflpnt. hnt.h v.q-riAtirnq in rran vierl qnr in imnort licensing policy. Over the longer run, it seems likely that the relatively small imports of re, coffo dan tobaccod m a liine,d re aorandirt.s icvingsb thrth the expanded output of dai.ry products, meat and fish, are also a distinct possibility. - 31 - 102. In total it may be estimated that the annual rate of import substitu- tion of the past few years of ,12 million to U15 million can be maintained at least for the next few years. Together with the growth in foreign ex- change receipts, this would permit an increase in "essential" annual imports of about $25 million or P 50 million, which would probably be compatible with a 5% annual growth rate in the national product. While it is conceivable that this rate of import substitution could be maintained for an indefinite period, there would be a considerable risk that an uneconomical pattern of production might emerge if such expansion were to be indefinitely dependent on a high degree of protection from external comDetition. With greater reliance on monetary and fiscal techniques to influence the level and direction of demand, however, it should prove iossible for the Philinines to permit a gradual re- laxation of direct controls without jeopardizing its production prospects. Overall Growth Prospects 103. These balance of payments prospects, together with the encouraging out- lnok for savings and investment.gnnnr well for continned growth o f' Phllin- pines economy. Because foreig:n exchange reserves can no longer oe drawn down a. th v were in the neriod from 1 ih through mid-19 7 and heause unused productive resources are no longer available on the same scale as they were eaqrlie-r in t.hepo-a nperiod, i+tis po ae that the avrae rate opf ep- pansion in the next five or ten years will be somewhat slower than that ~hevd ve tepast decade. But if the resources available for invrestiment. are efficiently used, it should be possible to maintain a growv.th rate of about 5%T nper yeAr fo-r th+ orsealpf~ 0 . L ~ VV 'J. U11 ~ A. --k 1_ V.A I , Ii L. L L L L Z- Q ..\.14 _LU LII CLLI.J. jc.u-y L~U J0 Ueu O'C'U uildau U11: L ult±0 _1ri1 U-U U O- Ullt5 1L_LLP pines is only about $80 million (see paragraph 38). As Appendix Table 6 in- CL . LU t5 0 j).I 1 U 0± UUU O U CLA Ud1U.1ir, 0± O. A. ±. is sched~uled to reachI a peak of about o16 million in 1960 and then drop to a level of $2 million 'L _ - nztn -tL - hn III- .--- I _ - - - - I T - -I - .---1_ Dy 10). iLue riL±Lppues na nla maue payiiLe1u I) Lle Uniueu obaues Since 1954 as provided for by the Romulo-Snyder Agreement, which was signed in 1950.. Certain technical questions regarding the amount of the liability under this loan are currently under consideration by the two governments. 105. According to present plans, the Philippines will soon use an additional y-$0 million of the Eximbank line of credit, and may obtain additional sup-oliers' credits to finance some of its current development expenditures. However, the total amounts from these sources are not likely to become sub- stantial. 106. In view of this low level of external debt, and of the prospect that external balance can be achieved along with a growing volume of foreign trade, there would seem to be considerable leeway for an expansion of long-term borrowing by the Philippines, provided that sound financial policies are pursued. The Government has recently taken steps to reduce inflationary pressures and to halt the loss of foreign exchange reserves, and has stated its intention of taking further action if necessary to achieve these objec- tives both in the short run and over the longer run. The proposed loan of $21 million should, therefore, be within the capacity of the Philippines to service without undue strain on its resources. Appendlix Table 1 Net National Product By Injdustrial rjgin at Constant Prices (Billions of pesos at 1952 -,rices) 1. Agriculture: 194_. :1948 1949. !LgA i2_i 1952 13 1_4 9.5. 96 Principal export crops 0.46 .35 0.35 0.37 0.50 0.4B 0.46 0.52 0.55 0.55 Food cro-s and other cash crop 0.84 0,78 0.85 0.91 0.914 1.04 1.19 1.22 1.24 1.28 !eat and poultry products 0.75 0.47 0.57 0-73 0.78 0.82 0.86 0.91 0.96 1.00 Fishing 0.15 0.11 0.15 0.14 0.26 0.27 0.27 0.30 0.31 0.32 Forestry 0.14 0.. 18 0.21 0.22 0.24 0.20 0-.2-.23 .0.25 0.25 _0. 29. Total agriculture 2.34 1.89 2.13 2. 47 2.72 2,81 3.01 3.20 3.32 3.50 2. Mining (0.41) 0.03 0.05 0.07 0.08 0.10 0.10 0.11 0.11 0.12 3. i,anufacturing 0.42 0.43 0.% 5 0. .61 ,6 0.83 0.8 1.00 1.15 Subtotal (1-3) (2,75) 2.34 2.61 3.06 3.41 3.54 3.9,4 4.16 4.43 -4.77 4. Construction 0.32 0.30 0.26 0.23 0.22 0.24 0.22 0.25 0.29 5. Transport and oommunications 0.20 0.21 0.22 0.22 0.24 0.25 0.27 0.28 0.30 6. Trade 0.74 0.75 0.80 0-79 0.81 0.80 0.84 0.93 0.99 7. Government 0.33 0.35 0. 41 0.41 0.49 0.58 0.63 0.71 0.74. 8. Other services 1.16 1.19 1.25 1.20 1.25 1,L28 ..1.383 149,4 Subtotal (4-8) (2.) 2.7 2.80 2.914 2.8 3.01 3.15 3.66 .86 9. Net national product (5.4o) 5.09 5.41 6.00 6.26 6.56 7.09 7.50 8.09 8.63 Source: These estimates have been prepare,d by the IBKD Mission on the basis of the follovwing: 1) For agriculture: production indices for the various subgroups were derived from the data shown in Table 2 and the implied 1952 prices derived from Tables 2 2a; the agricultural product estimates for 1952 given in Table la were the.n multiplied by the production indices to obtain constant value estimates for the other years. 2) Yor manufacturing 1949-1952 and. for miLning: the indices of )roduction given in the Central Bank Statistical Bulletin (Dec. 1956), pace 167. 3) For manufacturing 1952-1955: the national product estimates at current prices given in Appendix Table la. 4) Hanufacturing 1955-1956. a rcvised index prepared b the Central Bank: on the basis of a sample covoring firms in- production during 1955. 5) All other sectors: the current rice data given in A.-endix Table la, deflated with the retail price index. 6) 1940. all sectors except agriculture: very rough estiates based mainly on current price natienal accounts in formation for -)reuar perind. PENDT TAEP 1 a NET NATI FAL mRODUCT BY I,DUJ3ST2IAL RIGI1 AT CURREZil' PICF$ (Millions of pesos) I t em 1948 1949 1950 19519 5952 1953 1954 1955 1956 1. Agriculture 2% 2,0, 22505 2,77 2,8(6 3,009 3,318 3161 3,322 Food, Kport & o3her cash crops 1,338 1,284 1,426 1,575 1,549 1,597 1,619 1,619 1,617 Livestock 784 625 771 777 849 998 1,012 1,007 1,106 Fishing 148 276 197 262 276 272 272 293 294 Forestry 181 186 179 249 209 224 300 329 396 Less: depreciation 65 63 68 76 77 32 85 87 91 2. Mining 25 40 55 79 98 107 105 121 141 3. Maanufacturing 440 440 502 630 639 834 850 1,001 1,193 4. Construction 307 276 239 237 221 236 205 230 260 5. Transportati.on & coimunication 1/ 195 193 205 222 242 242 235 250 286 6. Trade 716 709 752 838 809 780 781 861 953 7. Government 321 377 386 431 4'7 544 574 64ß 700 8. Other Services 1,121 1,121 1278 2'7 1,252 163 1267 352 1475 Personal services 240 240 274 343 310 313 317 353 445 Recreational services 22 22 23 26 26 27 27 28 :29 Private educa-tional services 115 (859 (981 103 106 98 91 85 77 P:rofessional services 156 ( 161 178 182 186 209 233 A1 others 2/ 588 ( ( 624 632 643 656 672 691 9. Net National Product at Factor Cost 5,511 5_4_ 5,922 6 487 6,554 '15 7,145 7,624 ,335 -/ IcUSivE or electriciLy n-1 ri public utilities. 2/ Including imputed rent on dwellings. Source:: Central Bank of Philippines, Eighth Annual Report (1956). xPiENDIl~ TIBLE 2 PRODUCT-I OF TiTC 0210i TII L '.UCT-, 1940; 194.'-1957 (Thousanrd mtric tons) Commoy-__- . - 1940 1943 1949 1950 1951 1952 1953 1954 1955 195- 1957 / A. Export Crops Coconut products - Copra 739 823 698 780 1,072 954 856 942 1,103 1,140 1,264 Desiccatd coconut 41 45 59 66 66 52 61 44 40 42 44 Coconut oil 213b/ 90 102 135 136 145 141 1.47 152a/ 203a/ n.a. Copra meal or cake - 54 73 98 75 81 74 73 85 95 n.a. Sugar cane products - Sugar, centrifugal 947 361 662 621 848 976 1,028 1,301 , 244 1, ,1,10 1iuscovado and panoeha 50 35 31 33 37 40 58 51 91c/ 93 c/ n.a. Abaca 172 100 75 93 130 115 119 106 105 120 129 Tobacco 32 22 22 26 30 27 22 28 8 B. Food Products & iinor Cash Cro:s ?ic e (rough) 2, 363 2, 241 2,491 2,606 2,616 2,30 3,16 4 3,182 3,203 3,273 3,320 Ccrn (she:lled) 572 521 534 574 603 762 710 780 770 849 855 Beans and ve,:etables 116 65 80 87 115 168 208 216 223 227 232 Coffee (dry beans) 2 4 4 4 5 5 6 6 7 7 8 Cacao (dry be.ans) 0.5 0.7 0.6 0.7 0.8 1. 1 1 . 2 2 2 Fruits and nuts 372 260 303 370 392 424 556 600 626 648 673 Peanuts (anshelled) 7 7 10 21 16 15 17 18 18 18 18 Root Crops 615 524 528 664 699 732 1,135 1,180 1,2(C)0 1,260 1,300 C. Meat and poultry products_a 237 131 165 216 233 248 263 279 282 336 n.a. D. Fish a/ 179 130 158 147 296 313 306 344 863 374 n.a. E. Forestry (million bd. feet) Logs 924 1,055 1,134 1,351 1,153 1,361 1,545 1, 663 1,919 n.a. Lumber 1,u93 414 510 508 466 437 420 419 338 417 n.a. a/ Calenidar year figure, b/ 1937 figure, c/ Estirate of theSugar !,uota Office, d/ Preliminar, e/Estimate as of May 1 Source: 1956 Annual Report, Central Bank of Philipines supplemented by data provided diroetly. AP 'EIDI T' DLE 2a ESTIMATE D CURRET PROlUCTI' VELUE OF PRINCD1AL AICULTURiL ?ROUCTS, 1948 - 1956 (M:illior's of -esos) I t e 1948 1949 1950 1951 1952 1953 1954 1955 1956 A. Principa Export Crops 5 443 44 63_0 505 41 55 31 524 Coconut procduct-s 350 252 247 434 251 212 270 269 286 C opra 326 219 211 292 238 201 239 236 224 Other 24 33 36 42 13 11 31 33 23 Su'r Cane products 75 132 ,1 145 165 10 223 201 166 Abaca 48 48 53 0 69 61 57 35 35 T oba~cco 12 Il 21 21 20 20 25 26 37 B. Food Products & 1;inor Cash Cro,s/ 906 977 847 1,030 1,102 1,1,5 1,147 1,179 1,176 Rice (rough) 656 736 581 695 696 67' 611 628 6600 Corn (shelled) 97 107 89 108 128 125 109 107 120 Beans ind ve.et,bles 14 16 19 35 54 46 73 81 82 Coffee (dry beans) 5 4 5 12 12 16 18 1l 10 C-ao (dry beans) 1 2 3 5 4 4 6 4 Fruits & nuts (includin- peanuts) 78 68 95 105 116 148 170 157 191 Roo t c:ro ps 43 38 50 63 83 159 154 184 164 Other food crops 11 6 5 6 6 6 1 3 3 Pubber 1 1 1 3 2 3 2 2 2 C. leat and poultry -rolucts 2f 903 694 91 945 1, 022 1,225 '226 1,253 1,18 D. Fish 164 297 215 283 298 295 29n 322 325 1 For food products, wholesale prices have apparently been used in estimating production value. 2/ Covers values of dressed meat, poultry consum-tion and production of e,.s for nabicn,al income puroses. 0_ur?ce:National Incom ctionv of Centril Bank Resrch- DeRecrtrent. APPENDIX TABLE 3 PHIILIPPINE LIVsr CC.K PûD ULTJY POPULATIOI PRE AND POST AR_# 1940 1950 1952 1953 1954 1955 1956 Carabaos 3, 015,400 1, 902, 920 2, 439, 070 2, 510,110 2,930,590 3,279,110 3, 590, 580 Cattle 1,396,260 698,060 738,990 762,290 763,350 205,360 336,00 Horses 343,500 206,140 213,530 219,330 197,200 207,710 214,140 Hors 4,446,790 2,899,130 4, 442,540 4, 793,620 4,367,630 5,239,390 5, 765,370 Goats 420,000 355,43() 384, 000 391,030 438,200 453,760 477,110 Sheep 40, 000 26,35 21, 76 20, 710 15,720 16, 40 17,06. C1icikens 27,000, 0CO 27,363,500 32,089, 50 37, 392,150 39,30470 44,553,590 50,290,100 Duce ks 700, 000 953, 900 1,046, 600 1,243, 900 1,379,380 1, 693, 550 2,163,470 Cee se 30,000 31,2c 24,00 25, 450 85,370 91,30 94, 900 Turkeys 45,000 37, 200 24,090 24, 900 30, 210 33, 540 36, 910 ii Data from the Division of A :ricultural Economics, Deartment of Alriculture ;nd iatural Resources. Source: "Livestock and Paultry in the Phi-ippines", rmimeo2ra1hed report by Frank E. Moo,re, USO, .nnila, March 1957. IVIANUFACTURING: GRD.OSS VALUE OFF OUTPUT FUR, SELEUTED SEC0SU (Millions of Pesos) Fo10 111 1191 'A Beverages 125 126 130 140 Tobacco manufactures -PR A7 Sub-total: food., bev. & tob. 402 379 450 489 Spinning, weaving & finishing Rope & twine, etc. 14 13 15 17 Sub--toua-L, textiles ;)U 42 69C Footwear 14 13 14 Other clothing 36 h2 45 Sub-total, clothing 50 55 59 1 Basic industrial chemicals- 41 Medical & pharmaceutical products 6 7 24 28 Soap and other c eansing components 26 2o 39 53 Other chemicalsE/ 17 17 15 28 Sub--total, chemicals 54 56 99 124 Petroleum products - 21 104 137 Paper products 26 28 35 46 Printing 7 6 8 11 Rubber products 7 12 13 16 Leather products 1 3 3 4 Total non-durables 561 5d9 7b1 875 Durables: I-Vood and cork products 13 23 25 30 Non--metallic .mineral productsd/ 26 26 20 24 Basic metal products 3 4 9 16 Finished metal products 15 16 35 48 Electrical machinery and equipment 5 6 14 21 Transport equipment l 24 44 50 Miscellaneous durable equipment 7 8 13 13 Total durables 83 107 160 202 Grand total 644 696 821 1,077 a/ Eccluding processing of major agricultural export products (sugar, dessicated coconut and copra meal). b/ Mainly fertilizers. F/ Excluding vegetable (coconut) oils. d/ Eccluding cement. Uote: This table is based on a large but incomplete sample of the manufacturing sector, and represents gross value of sales, rather than value added by manufac- turing. The latter concept is, of course, the basis for the manufacturing com- ponent of the net national oroduct as shown in Anpendix Table 1. in addition, the coverage of this table is broader for 1955 and 1956 than it is for 1953 and 1954, and as a result the increases between 1954 and 1955 are probably somehat overstated as an indicator of the overall trend in manufacturing. Source: Central Bank of Philippines - 1956 Annual Report (draft) Table on Pages 58-66. APPENDIX TABLE 5 PRODUCTIC-7 OF :.IlNJRALS 1949 1950 1951 1>52 1953 1954 1955 1956 1957 Gold (1,000 oz.) 288 33h 394 469 430 416 L19 h06 a) 1,000 metric tons: Iron ore n.a. 370 599 903 1,170 1,218 1,425 1,)431 d Chromite ore 247 251 335 5)4 1 557 451 598 709 177 Copper (metal content) 6 10 13 13 13 lb 17 27 Manganese ore 27 30 22 21 22 9 12 4 6 Lead (metal content) 0.4 0.9 0.6 2.3 2.4 1.8 2.3 2.1 - Coal 123 199 151 139 155 117 130 152 n.a. Source: Central Bank of Philippines. APPENDIX TABLE 6 EXTERNAL PUBLIC DGBT OUTSTA TD E D BR 31, 1956%Y (thousands of U.S. dollars equivalent) Item. Amount Percent TOTAL DEBT OUTSTANDING DECE-BER 31, 1956 141,578 100.00 Disbursed and still outstanding 73,578 51.97 Undisbursed. 68,000 48.03 U.S. DOLLARS 131,578 92.97 Disbursed and still outstanding 73,578 51q97 C-/ -)UUJ I 20u1u J4u- 71 Suppliers' credits 3/ 3,705 2.62 U.S. Government loans 127,873 90.32 Disbursed and still outstanding 69,873 49.35 Undisbursed 58,000 40.97 EKport-ImDort Bank loans 76,800 5L.25 Disbursed and still outstanding 18,800 13.28 Undisbursed 2/ R0n0 10.97 Other U.S. Government loans / 51,073 36.07 IDUrT TTDTT OO If /ITTO 0 f-7 all undisbursed) 10,000 7.06 DEET CONTRACTED JANUARY 1 - JULY 31, 1957 (all .sunliers credits) , Ao inn. on Source: IBRD - Statistics Division TDoes not include the following: (a) U.S. Government surplus property credit outstanding in the amount of $612.000 as of December 31, 1956. This credit is payable in local currency, real property and improvements to real property; and (b) $15,000,000 purchase of U.S. dollars from I'F. L I 1V:jz.L Z U' Ui U L L±I J ± U U VV-L,iI UI lle J1 Ex di-i, B nk. 3/ Amount outstanding June 30, 1955. Several of these credits have down pay-- ments payable within 30 days of the contract. They have been aproved by the Central Bank which will arrange for the transfer of foreign exchange. / Includes: Amount Outstanding loan, 3%, 197-64. dk7n non nn i - nn 070() ation loan, 24%, 1947-63 ,47 ).oR ~V non 1m 1-~ ), oP 2fo, 1950-60 a/ a/ See Pararach-18L. 5/ The repayment terms provide that any installment of principal and inte.e:3* may be paid either in U.-. dollars o in Philintine pos a+ e sole option of the Philippines. If repayment is made in U.S. dollars, interest made in pesos, interest is calculated at 4%. AXIIJX TABJIb 7 ESTiNATED LITU-KIAL EPVICE ON EXT-KNAL PUdL.C D.ET (millions of dollars) To U.. To other U.S,. Export-Import Bank Government Y/ Supliets; Total Year Principal Interest Principal Interest Creditsj/ Principal Interest Total 1957 1.02 .89 6.58 .76 3.73 11.33 1.65 12.98 1958 3.22 1.22 9.58 .90 2.00 ih.80 2.12 16.92 1959 3.22 1.08 9.58 .67 .60 13.39 1,75 15.14 1960 3.22 .9h 12.08 .43 .68 15.98 1.37 17.34 1961 3.22 .80 6.08 .12 .54 9.8h .92 10.76 1962 3.22 .67 .08 - .54 3.84 .67 h.51 1963 1.22 .55 .08 - .36 1.66 .55 2.21 1964 1.22 .50 6 - 1.38 .50 1.88 1965 1.22 .45 - - - 1.22 .L5 1.67 1966 1.22 .ho - - - 1.22 .ho 1.62 1967 1.22 .35 -- - - 1.22 .35 1.57 1968 1.02 .31 - - 1.02 .31 1.33 1969 1.02 .26 - - - 1.02 .26 1.28 1970 1.02 .22 - - - 1.02 .22 1.24 Jource:I DRD - SU at-StiCS D J0ivi 1/ Service contractuallv dup. 2/ Estimated rourh on bHsis of information available regarding contract.- APPIMT- TAPT.P8 ~C~prrN t~'TLT\1~' P? LT,:q,1Tr,.-)rq1 11~ -1 C ~7 1956 (Actual 1st half 2nd half 17e7andise ikbcport 11,(CE) 213.5 221.5 212.9 212.3 201.8 UUld \UBWly minud)} n.r 0.1 1.) ae Q*. U.S. Govt. Expenditures 61.4 48.6 63.8 57.7 58.0 m1scelLaneous invisiblez 39.0 )4 -k- .u -.u Total 317.2 276.1 31_3 .5 308.c-2 298.0 FAYMENTS 2 7MercHandise Imports (CIF)-/ 256.1 277.9 274.5 328.7 263.1 ,hl. Govt. Expenditures 6.y .1 0.7 0. 0.0 Miscellaneous Invisibles 32.3 - 32.3 32.0 29.1 295.3 283.0 313.3 367.2 29o.0 Net Receipts (Disbursements) 21.9 (6.9) - (59.0) - 1/ 'Net receipts 2/ Exclusive of barter transactions. According to Department of Commerce and Industry no--dollar import office barter transactions since January 1, 1956 in millions of dollars have been: Barter Permit Actual Actual Values Exports Imports 1956 39.4 25.d 8.9 1st half 1957 30.6 22.8 .OM 70.0 21.9 Estimated on the basis of $8.8 million of barter imports during the first 4 months of this period. 3/ As approved by the Monetary Board in June, 1957. 4/ Amount purchased by Central Bank. AFENDIX TABLE 9 INTERNATIOi\iNIAL RESLEES (millions of U. S. dollars) End of End of Comercial year Quarter Central Bank Bankm I/ Ttal 1 9 60 356 1951 247 59 306 1952 236 70 306 1953 240 56 296 1954 207 65 272 1955 1 189 65 254 2 192 52 244 3 191 55 24.5 4 155 54 209 1956 1 152 70 222 2 166 68 234 3 169 6923 4 161 6z 225 1957 1 146 79 225 2 127 65 192 3 (Oct.4) 119 69 178 Source: Central Bank of the Philippines. / Holdin-s of authorized agent banks in the Philippines net of the foreign exchange liabilities of such banks. ARpendix Table 10 Value of Philippine Exports 1949-1957 (millions of pesos) Jan-June 1949 1951 1953 1955 1956 1957 1956 Coconut Produets 254 L17 311 304 348 168 158 Copra 179 306 233 237 268 131 123 Coconut 0il 35 49 34 33 48 20 23 Dessicated coconut 39 30 31 26 26 1 10 Other d/ 1 32 16 8 6 2 Su ar Produets 90 135 193 216 205 (129) 127 CentrifuLP 0 g( 1 10 213 2n 1297 i. Other - 7 1 3 4 (2) 2 Abaca and Manufactures 62 141 83 60 75 43 38 Ropes and mats 4 7 5 4 5 3 - Forest Products 9 37 65 89 105 (52) 41 2- 23 4, 40 67t 8 Lumber 5 11 12 16 14 (49 (44 Plywood and other 2 3 7 6 8 (5) 3 Mineral Products 72 3 21 _81 110 .Q49 __A Copper Concentrates 6 3 ( 11 21 8 8 ,ixed Concentrates n.a. 16 23 27 (10) 11 Iron ore 5 l4 23 21 23 12 10 Chromite are 6 10 19 21 28 15 12 Other 8 10 6 5 11 (4) 5 Canned Pinea-wle b/ 14 16 23 12 19 (13) 8 Tobacco 6 9 8 10 _() _ All other _å 66 50 32 30 (24) 21 Total Exports 522 871 808 802 902 484 450 a/ Includes copra cake and meal, and minor valuation adjustments b/ Includes pineapple juice Appendix Table 10a Volume and Unit Values of Principal Philippine Exports Jan - June 19L 1951 1953 1955 1956 1957 1956 A. Volume in thousand metric tons Copra 529 772 603 105 966 480 440 Coconut oil 61 78 59 74 109 51 L9 Dessicated coconut 58 47 49 49 49 25 19 Sugar, centrifugal 415 567 782 927 892 548 563 Abaca, unnanufactured 63 128 112 112 122 59 63 Logs and Lumber a/ 8 264 532 826 876 464 375 Copper concentrates 23 11 n.a. 31 64 35 20 Mixed concentrates n.a. 59 52 54 60 30 Iron ore 350 892 1,292 1,271 1,480 743 6]3 Chromite ore 235 367 557 657 727 341 351 Canned pineapple b/ 40 53 76 37 49 (32) 26 L. Unit values in pesos per ton Copra. 320 395 385 295 277, 272 280 Coconut oil 573 630 576 445 440 390 470 Dessicated coconut 670 640 630 530 530 560 530 Sugar. centrifu:al 218 227 245 228 225 233 222 Abaca unmanufactured 920 1,050 700 500 570 680 5:55 Logs and Lumber a/ 160 132 109 114 112 106 116 Comper concentrates 240 273 n.a. 355 335 235 400 Mixed concentrates n.a. 270 LLO /25 -50 n.a- 365 Iron ore 14 17 19 16 16 23 15 Chrnm-'te are 2/ 26 31 2 1. A 4; Canned pineapple b/ 340 308 290 325 290 375 305 Vc oTnlume in million r)f hnnrrl fp.et* unit uile in npesn per 1000 oard ft b/ Includes pineapple juice Note: Changes in unit values reflect variations in quality and composition as well a inprice kPPE1NDIX TABLE 'Il COOITION OF IVPORTS (iillions of pesos) Jan. -May 1949 1952 1953 1954 1955 1956 1957 1/ Food 296 154 153 158 205 176 89 of which: Cereals 118 69 43 $2 7) 52 31 Coffee, tea etc. 22 6 9 11 12 9 6 Dairy products h8 8 L8 48 $7 59 22 Meat and fish 46 20 27 28 42 39 18 Other food nroducts 6 11 26 19 20 17 12 TÖbacco 35 35 30 21 30 12 1 Raw rubber - - - - - 2 3 Rubber products 23 30 32 28 33 29 9 Textilefibers 2 56 7 19 6 Thread and yarn 10 13 17 24 22 23 12 Grey, white & p-interd cloth -5 3 i1 7 1 97 20 Finished textile and 201 131 130 130 131 69 32 related products COloth,ing &-Pootwea 2-- 13 20 i6 li 3n l) O'rude oil -I -n 6 8 1 UJ.Lk UU J. -Li C- u ( £U Refined petroleum products 70 84 100 101 82 77 38 Paper, paperboard & products 35 31 30 32 38 36 17 Medicinal & pharmecue- tical products 23 17 2 23 25 20 11 Manufactured fertilizers 7 21 14 8 12 8 6 Other chemicais 40 27 39 3$ 50 50 30 Structural metals 53 37 46 64 71 85 37 Metal products 55 37 36 36 37 30 14 Machinery & transport equip. 150 128 151 174 209 252 112 All other 138 70 75 86 88 74 47 Total 1,173 846 914 965 1,095 1,013 495 1/ Source: Central Bank of Philippines, Statistical Bulletin (Dec. 1956). Pages 141- 146, supplemented by data provided directly by Central Bank Research Departjnent. Total imports ior Jan-June 1957 amounted to -'616 million, as compared to P485 million during Jan-June, 1956. AP7!!DIX TABLE 12 DIRECTICN OF FOPEIGN ThADE (millions of dollars) 1950 _191 1952 193 1954 199 1956 EXPORTS - Tctal 337 435 352 04 405 401 451 To US - Value 26 259 238 264 26 237 2hl Percent 71 63 67 69 62 62 53 To Ja7an - Value 22 30 38 B8 51 58 81 Percent 6 7 11 13 13 15 18 To N. West Europe - Value 37 79 44 49 7h 65 58 Percent 12 19 12 13 18 17 19 Other - Value 32 h2 32 29 34 35 41 Percent 11 11 10 7 6 in TPORTS - Total 349 bi 20 416 4A7 5h2 5n6 From US - Value 256 342 307 322 33 356 30 Percent 75 72 74 77 70 64 60 From apan - Value 5 11 12 8 29 LL 51 Percent 1 2 3 2 6 8 10 From N. W~est Europe - Value 15 24 19 21 Ui 42 61 From O4 V5 8 93 1 From (ther .- Value 66 MO 82 65 86 1oo 93 Peren 20 2 6 16 1 1 1 Sore Diecio of- ineraioa Trade-04L. A.-ENDIL TABLE13 RELATION BETWFEN N-T CREDIT OUTSTJIDD'G AD MCNEY SUPPLY 1949-1957 (Millions of pesos at end of period) 122 1950 1951 192 1953 19I15l 1955I l l952 1956I 1U,6I 19571 Public Sector: 1. Government securities held by Central Bnk 92 158 242 235 231 240 261 295 397 385 451 511 2. Government securities held by commercial banks 66 60 _1 89 121 J L 226 410 2 3. Subtotal: Government securities held by banks (1 & 2) 134 224 302 311 320 361 360 473 623 795 793 828 4. Other Central Bank credit to government 56 61 22 30 30 22 21 82 21 22 22 51 5. Other cormmerciial bank credit to government 50 43 30 39 44 40 24 8 9 10 13 30 6. Subtotal: Other credit by banks to public sector (4 & 5) 106 104 54 69 74 62 45 90 30 32 35 81 7. Gross credit extended by banks to public sector (3 & 6) 240 323 356 380 394 423 405 563 653 827 828 909 Less: 8. National Government balances a/ 41 105 204 163 144 178 127 237 185 322 274 260 9. Savings and time deposits of r>vermaent corporations (6) (7) (7) (7) (7) (7) 7 9 12 17 26 36 10. Miscellaneous accounts of CB and PNB a/ (-43) (-43) (-39) (--45) (-45) (-35) -35 -18 -6 -1 3 17 11. Subtotal: Offsets to credit to public sector (8 & 9 & 10) * 68 172 12 1 99 228 191 338 20) 212 12. Net credit extended to public sector (7 -- 11) 236 260 184 247 280 273 306 335 462 489 525 596 Private Sector: 13. Commercial bank loans, discounts and overdrafts 572 565 756 757 843 849 91 962 1,097 1,102 1,240 1,373 14. Commercial bank holdings of corporate securities 2 6 4 5 3 3 3 6 3 3 2 2 15. Subtotal: Gross credit by banks to private sector (13&1) 574 571 760 762 846 852 935 968 1,10D 1,105 1,242 1,375 Less: 16. Savings, time and other non-mariey deposits of public a/ (320) (341) (380) (370) (421) (437) 484 488 538 547 591 636 17. Miscellaneous accounts of other banks ahl (-311 28 _ (58) 22) (77) 80 _J 106 11 128 140 18. Subtotal: Offsets to credit to private sector (16 & 17) 289 313 384 428 500 514 5+ 584 644 664 719 776 19. Net credit by banks to private sector (15 - 18) 285 258 376 334 346 338 37L 384 456 441 523 599 20. Total net credit extension of domestic origin (12 & 19) 521 5i18 560 589 634 611 677 719 918 930 1,048 1,195 21. International reserves aJ 520 712 608 612 592 576 508 489 418 468 _A9 381 22. Total derived money ply (20 & 21) 1,041 1,230 1,168 1,201 1,226 1,187 1,222 1,208 1,336 1,398 1,497 1,576 23. Errors and omissions24 - 22) -6 -l . -3 -2 13 - 2 -10 24. Actual money supply 1,035 1,229 17165 1,198 1,224 1,200 1,227 12 1o 3 1,417 1,499 J7i For footnotes, see next -,-age. Footnotes to Table 13 IbiU aal., L-(.uuj. Uau-Lut ULI zd U' A~ULbU~ ±~ J1CV -UPL'Y Movement" (cf Central Bank Eighth Annual Report, p. 118), the Central iank adjusts changes in these items to exclude government abroad (from government balances and reserves) and the effect of drawings on the LVT (from miscellaneous accounts and reserves). Such transactions are included in the absolute amounts shown here, but they cancel out in their net effect on the money supply. oy in the tables referred to in footnote aV, changes in errors ana omissions, (recording lags) are .ncluded partly in changes in -iiscel- laneous accounts and partly in changes in reserves. In the text tables 10, 11 and 12 of this report, all changes in errors and omissions have, as a matter of convenience, been included with changes in mis- cellaneous accounts of other banks. Source: Central Bank of Philippines Seventh and Eighth Annual Reports, supplemented by data provided directly for end 1st half 1955, 1956 and 1957. Data shown in parenthesis have been derived from published series on total time and sa,ings depsoits, and total miscellaneous accounts, by backwards extrapolation of breakdowns given for later periods. APPENDIX TABLE 14 DOliESTIC PRICE IDIFKES (1953 = 100) Change in Cost Home and Wages Money Supply Annual Averages of Whole- Import Money Real Liilion Living sale Goods Wages Wagesi/ Pesos) Percent 1950 102 98 98 103 101 /194 /18.6 1951 ill 110 ill 96 87 -9-. 1952 103 101 103 98 95 /38 /3.3 1253 100 100 100 100 100 /26 t/2.2 1954 99 95 96 101 102 /2 - 1955 98 92 94 100 102 7,109 j8a9 1956 100 95 97 101 101 /163 /12.2 1957 1st half 100 97 99 100 100 /67 /4.5 Quarterly averages 1955 1 98 93 94 100 102 2 97 91 93 100 103 3 97 92 9A 101 104 4 99 93 95 101 102 1956 1 96 93 94 100 104 2 98 95 96 101 103 3 100 96 98 102 102 4 101 97 99 102 101 1957 1 99 97 99 100 101 2 100 97 98 100 100 July-August 102 101 102 n.a. n.a. Source* Price indexes are TFS. Changes in money supply are from Central Bank of the Philippines. 1/ Money wages deflated by the cost of living index. APPENMDT TABLE 15 NATONALT J Riå T,NT REVENUES AND OBTJGATPONS (FY 1951-1958) (illions of pesos) Estimate -9i OC i9 19Q[3 1 -9)' 1995 1956 1957 1 958 Obligations: 1/ General government 49 51 56 69 94 73 84 97 Econ. development 123 168 151 268 271 351 373 )h7 Soc. development 188 196 215 246 281 318 337 398 Dfense 131U 186 -7t7-18 16 5 7 Debt service h0 Sh 61 52 53 58 95 101 Total obligations 531 655 653 810 847 968 1,057 1,219 Revenues: 2/ Taxation 402 599 531 597 625 683 764 851 Incorme tax 3/ 81 109 17 l05 12 1 l771 19 Import duties 27 32 28 35 45 112 199 239 Excise tax h/ 169 33 281 319 298 270 223 250 License and business taxes 5/ 139 174 152 165 176 180 213 234 Other taxes 42 27 29 28 34 35 50 39 Apportioned to local governments -h0 -56 -76 -59 -56 -56 -62 -60 Other current revenues 87 110 99 74 115 85 183 138 Total revenues I89 7Ö9 30 U7T 75 76 19 7 9 Bugrept surplus or deficit (.-) -h2 54 -23 -139 -107 -200 -110 -230 flhange in ohig.atinsq outstanding n.a. 2h 73 109 hh 83 -6 - Cash surplus or deficit (-) n.a. 78 50 -30 -63 -117 -116 -230 åAd. toficit: Security issues for gov- e r numlc nt corpor atio -_ _ Q9 7 _5) 61 11 _ _i2 Total surplas or deficit (-) n.a. 77 -),2 -102 -12h -231 -211 -253 Financed by: 11National government borrowings 113 - - - 122 2Te 54 170 ment corporations - 1 92 72 61 114 95 23 Ube of naUoLUIL governl- ment balances n.a. -78 -50 30 -59 -85 62 36 Reparations - - - - - - Total financing n.. :7 - 102 127 31 211 2 1/ rcludes bligrations for projects financed by foreign aid counterpart funds. 2/ Excludes changes in foreign aid counterpart funds. 7/ rnporaion inrme tax receipts account for about 2/3 of total. / Includes foreign exchange tax. / Includes the "advancesa taxt collected by customs on many imported goods. 6/ Perived as the differerce bet.een the budret (accounting) deficit and the cash deficit as computed from the äinancin; iter:is. Since rovenues are largely on a cash basis, this residual item as assuned to renresent the lags (on leads) in disbursements behind obli'ations. APENDIX TALE 16 NTATIk'T'OAL GOVERN ENT DEBT As of June 30 (millions of pesos) 19 7 1951 1952 19;3 1254 1955 1956 Est. Total 739 723 1005 1035 1281 1464 15?3 Domestic 5h 51 38 80 87, 1113 1309 1LL26 Foreign 195 185 200 180 168 155 147 Governm,ent Proper 466 1b9 619 97 781 I ni 912 Government corporations 273 27L 366 438 497 563 661 Main Elements in Debt Rehabilitation ang Dev- alopntnn Bond 1/ n00 200n 200 200 200 200- nn 0fn -- _ - r-klu -,I Cuu 1.ua cuu Uu v u CUU CuIJ Backpay Obligations 237 237 h62 L27 14 382 358 --** and -c-n v D~-ods - - uw Treasury Bills and Notes 27 25 15 15 82 168 168 v -.. )1. Al v 7 7 Y 1. H' do U-1 UO QO) RFC Bonds 56 56 108 167 176 180 191 Certificates - - - 7 29 77 139 thr1 11 37 12 16 23 143 uan fom .u . 24 22 22 22 22 22 Romulo-Snyder Loan 59 53 46 39 39 39 39 U0, FC Budget Loan 114 100 90 78 66 54 48 Exiinbank Loan - NPC - - 40 to 39 39 37 Ote 14 21-- 1 1 Source: Calculated frora Central bank data. 1/ These R&D bonds were issued under authority of Sec. 137 of the Central Bank Act (RA 265). All but about P 15 million of thp proceeds were allocated to government corpora,ions to finance development projects. / Represented by non-interest bearing, non-negoti4ble notes held by the DT.' In 1951 the Philippines deposited notes and withdrew peso funds from the ITF to help relieve the difficult financial situatiov in Philippine Government. - 55 - A7"ENDTIX TABLE 17 THE FIIE-YEAR INVESTIENT PLANS A. Projections of Public and Private Investment - Fiscal Plan (Millions of pesos) Revised a/ E'- t-i Te ------Fiscal Plan-------Total Fiscal Year 1256b/ 1957 1958 1958 1959 1960 1961 'Plan Puhi 250 252 333 AOL A30 462 459 2,058 c/ Private 600 n.a. n.a. 716 754 295 338 Total n50 na. n 1,120 191. 1257 1297 a/ Source: Presidentrs Budget Message of February 1957; public investment pro- jections correspond to: "Capital outlays" as given in Annex A, less funds ear- marked for private credit facilities, as piven on page 26. Private investment projections are from Annex G. h/ Calendar year. c/ Includes original plan estimate of ' 323 million for 1957, and of P 04 million for 1958. B. Public Sector Investment Program - Tar7ets Suezested by N.E.C. (Millions of pesos) Estimated Actual Five-Year Flan Annuel 1955 1256 Avera2e Total Agriculture 28 n.a. 62 307 Irrigation construction 11 26 30 149 Agricultural services 17 n.a. 32 158 Utility service sectors 112 160 158 789 Transportation and communications 66 93 93 400 Power development 33 45 42 208 Water supply 10 13 10 9U Flood control 6 4 5 25 Health, education and welfare i0 n.a. 66 322 Scholan hsptalcostucio L9 32 24 12 Other public buildings 9 44 O+har n+nir fn" hoolthi In-nduinon A n.A 27 133 Public housing 3 4 5 25 T.ch r anrd social wlfare - n. 1 7 Manufacturing and mining 11 n.a. 37 433 Chemical manufacturing - n.a. 26 129 Iron and steel and drydock 4 n.a. 16 79 Mining 4 n.a. 14 71 Cement and textiles 3 n.a. 11 57 Other industries - n.a. 13 67 Research - n.a. 6 ^2 / Grand Total 184 (250) a/ 372 1,860-7 For footnotes and source to Part B, see next page. FootnotesL IJo. PartL nu of r[.Qlble 1 7 a/ Assumes unknown items the same as 1955. o/ Tne ailierence between this suggested target and that of r 61umo millIon in the Fiscal Plan may be partly due to differences in definition of investment. Source: Ine Five Year Economic ana Socia' Development Program for Ft t-1yo Adopted by the National Economic Council on January 3, 1957. 1956 estimates provided directly by N.E.C.