World Bank Documentdocuments.worldbank.org/curated/pt/569161468293475139/...Documnt of The World Bank FOR OFM-CLAL USE ONLY NjMICROFICHE COPY Feport No. :P- 5881-PH Type: (PR) Title:

Documnt of

The World Bank

FOR OFM-CLAL USE ONLY Nj

MICROFICHE COPY

Feport No. :P- 5881-PH Type: (PR)Title: ECONOMIC INTEGRATION PROGRAMAuthor: KHARAS, H Rept No, P-5881-PnExt.:80505 Room:D8093A Dept.:EA10C

REPORT AND RECONMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL RANK FOR R STRUCTION AND D

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED WAN

IN AN AMO EQUIVALENT TO US$200 MILION

TO THE

REPUBLIC OF PHILIPPINES

FOR AN

ECONOMIC INTEGRATION PROGRAM

NOVEMBER 2, 1992

This document has a restricted distribution and may be used by recipients only in the performace oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY AOL(as of June 30, 1992)

Currency Unit = Peso (P)US$1 = P 26.1

WEIGHTS AND LMASURES

1 mete 3.2808 feet (ft)1 kilometr (m) 0 0.62 mile (mi)1 square kilometr (sq kmi) - 0.3861 square miles (sq mi)1 liter (1) 1.1 quarts (qt) or 0.26 gallons (gal)1 liter per capita per day (1cpd) = 0.2642 gal per capita per day

ABREMATI AND ACRNMS

BOT - Build-Operate-TransferCBP - Central Bank of the PhilippinescG - Consultative GroupDDSR - Debt and Debt Service ReductionElL - Economic Integration LoanERB - Energy Regulatory BoardERL - Economic Recovery LoanGC - Government CorporationGDP - Gross Domestic ProductGNP - Gross National ProductICB - Intenaional Competitive BiddingIRR - Implementing Rules and RegulationsLTFRB - Land Transportation Franchising and

Regulatory BoardMARINA - Maritime Industry AuthorityNG - National GovernmentNGO - Non-Govermment OrganizatonNPC - National Power CorporationODA - Official Development AssistanceOPSF - Oil Price Stabilization FundQR - Quantative RestrictionSAL - Structura Adjustment LoanWSP - Wholesale Price

ESALCAR

January 1 - December 31

FOR OMCIAL USE ONLY

I" eOf Q1

Loaa d PgranSummary .................................. . . i

FM. mmeEconomy ............................................ I

A. Intmcduction ....................................... . . . 1B. PoiRcy efznsn tie *1 9 s .................................. 1C. RecentEcnomnic evelopmenls .... ............................. 2

FRAJ . Ihe Adjsnt Ptogam .......................................... 4

A.. is Adjustneat Efort In Perpectve ............................. 4B. IIoCuffent PoUcy Ageb .................................... 4C. lhe Govenme ReformPn om ...............................rg 6

mAR m.: Projected Macoeconomic Deveopments and Fancing Needs . ............ 13

A. Ecoinic Prospects ...................................... 13B. Fnancgs . ................................... .. 1S

nnoPpE ILoan .......................................I:..e.. 17

A. Backgound and Lan Objective ............................... 17B. BE Status and Bank/Fund Coordinat..n.... 18C. ConddonsofEffecdveessandTrancheReldeae .... ................. 18D. Ds*enient .... 19B. Proumen: ............................. . 20F. AccountsandAudits . . . ............................. 20G. lontring .... 20H. Risks ................................... 20

PAII Wold Bank StWe and Opetios ............................. 21

A.. noducion ............................................ 21B. Pan Bank Lenling. ....................................... 22C. Portbo Sau nd the Link to Country AssistneS W . ............. 24D. lhe BanVs FtwmAssistan StratW ............................. 25B. TwoKeySSustnabffity Isss: Poverty pnd theE nw nm ............. 29F. Scale ad Composition of Lading .............................. 310. Useof lDAResources ...................................... 31H. Citeia for Judging Sucm ................................... 32

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be dislosed without World Bank authoration.

I. AU CoordinaIon ...................... 32J. IFCandIvIGA . ..... ................ 32

P r ................ ........................... 33

1 Iitorsof Policy Reonm .................................... 122 DsbutionofBankLedigbySo", Y84-92......... 233 Bank Group Adjusten LaendI sI 1986 ........................... 24

Annex I Key Macroeconomic bdiatom .34Anne I Policy Letter .38Amu M PoHcyMatrix . 61AnnexIV Stu of BankGwupOpeaiousinthePbilippines .65Annex V Tintie of Key Events .68

IBRD No. 24105

-BLIC- T

-ECNI--IRWION

LnA and 1!g_ _wnm=

Republic of the Philippines

Mount: US$200 million

Ta: 20 yeas, including five years of grace, at the Bank's standard variable intrestrate

DulrJnogn: ETh , roposed program supports the consolidaton of a suitable medium-termfrmework in which structural reform, coupled with debt and de1' service

can be implemented in a growth-orented manner. Ihe programaddresses those areas which are considered essnial for integrg all regionsof the Philippine economy with the rest of the world. These include: (i)maroconomic management through improvement of Central Bank financesand appropriate energ pricing policies; Qi) promotion of investment throughimplementation of a new foreigp investment act, privazation andencourgemet of private participation in fastructure project; (iii)ratonalizadon of the tariff regime and remova of quantitative restrictions onimports; (iv) introducton of greatsr competiton into land and sea wanport;ad (v) removal of retictions on foeig exchange ansactons on both thecurr and capital accou. The loan would finance general imports ofgoods at a time when freign resves are being reduced by the needs of thedebt and debt sevice reduction opao and an inciient investmentreovery.

ad Rift: The mai benefit from the loan will derive from the Support it wll give to theGovernments efforts to achieve a more compeotive economy. The indicatrsof success would be (i) a substial increase in private foreign and domesticinvestmnt; (ii) a more efficiet allocation of resources thanks to trade reform,coupled with more effective domestic import-sbstiton brought about bymore competve internal transport; ad (iii) greater macecnmic stabilityin te face of exnal shocks. Ihe main risk relate to possible delays orinadequate impleaon of refori, if instability in the forep exchagemart canot be managed through noal mic means, especiallyif fiscal balances deteiore. However, there is a high level of Governmentcomunitment to the refrm and many pd,ro actions have already been tak

ihe proposed loan would be disbursed in two tranches, of US$120 million andUS$80 million equivalent respectively. The first tranche would be availableupo ffcdveness of the loan and the second tranche would be released uponcompletion of agreed acstons, expected to be In the third quarter o; 1993.

Not applicable

None

MRD No. 24105

RlRT AND RECOMATION OF THE PIRIDENTor TM RNATIONAL BANK FOR RECNSUCTION ANI DEVEPOM

TO THE EXECVsE DIRECTORSON A PROPOSE LOAN

TO TM REPUBLC OF TIE PHNESFOR AN ECONOMIC INEGRATION PROGRAM

I submit for your approv the following report and re ndon o a proposed EconomicIntegatio Loan tD the Republic of the Philppines for the eqwaent of US$200 million to support theGovermw's medium term program of om c tbi on ad stucu reform Th loanwod ave a term of twenly yas, including a grac period of five years, at die Ban's andard vaiable

PART I =EOOMY

A. ISAdudo

1. The most reet Country Brief wa distributed in June 1992. IT latest Coutry EcoomicRepot, entiled Pubc Seoer RwPilSliaon and lagditusM Oteport No. 10056-PR) ws distrbd on Februy 20, 1992. The Presidens Report on the Second Vocaional TranigProject (Repor;. Ilo. P 5732-PH), which was distributed on May 11, 1992, also contDas an update onreo economic develpments and on the Bank's asiste strteg. A briefig note on the recently

nded debt and debt servke reduetion (DDSR) agreement with commecal bans was diributed tothe Board on September 25, 1992.

2. Following a peaceful and democratic trasion of power for the first time in m thantwenty yeas, the new AdIIstatio of Prident Ramos has sought to develop a growth-oriendadjutmn prom focsn on world competveness in producton and people empomedomldlRy. The first stVp in is program has been the successfu conclusin of a comprehive8_COCM tD restrctue medium nd long term extra debt held by cmmerild banks (see BridefingNot, SaM-lZ73). t is neoked that the full beb of this W would only be adcived ifparalll ac no are tn on a stabiliaon prgm and alo on strut mesures toIntegrate th Phipineconomy more closely widt the economy. ITe Government, aidedby the Bank through its poliqy diaogue, has deloped a broad program of reom to complement Is debtreducto program, building on the policis put In place by the Aquino Adminion. The mainecoomic develop_ent ismes undelying the Govmen's policy agenda, and the BankWs strateg andsuppt for ti program, are smumarized beow.

B. Poic in the 19ft

S. Alowugh the Philippine econmy grew strongy in the 1970s, by around 6.5 prcet perye, the n for strca adjusmt was evident by dhe end of the decade. Externa debt had rapidly

to 53 perct of GDP by 1980 and the heavy inven ir t o geerate growthhad produced unsustainable curmret accou deficb of over 8 percen The public corpoate sector wasepning rapidly into high risk, capital intensive projects. Foreig capital was beig iated intopiate through public financial without adequat supervision or of projt di. And industri sr growth was incrasingly ring on cotucdon in tie nontadedgoods soeor, rathr ta on fier growth. Tbes defects in the growth proces wereappr In tbe lure to ahieve asubstantia t s ationIntructure of employmen towwads thefbra we earing sector, and In the abce of dgnificant progrs In reducing poverty. The

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Identfied problem, theW, was to raise the efficiency of Ivetnt trough displined demandand through a mediumterm adjustm program targeted at reructuring of the industria

sectr, finanial irdiation and energ pricing.

4. The Philippin has progressed significanty in implementing this adjusn program. Since1983, and particaly since the mge in Government In 1986, the authorities have made concertedefts to correct a wide array of structua problems. Reforms in agricultura pricing and marketing,theofinan sector, privadzaon, trade and tariff liberadization, direct and indirect taxes and invesmentincenives he been undetakn, along with procedumes to set priorMies for public Investments. Sugarand coconut mowpolies hav been disbanded, interest rates are now determined by market forces, thebias twards capi ntensity in investment incentives has been effectively removed, the Board oflyonve_ has steamlined procedur and taken on a more promotional role, a value added tax andImved income tax measures have been iplemented reducing tax disbrtions, and trade reorm hasbeen pursued. Taken together, these measures have subnll opened the economy to competiton andcorrectd majr policy-induced intenal distortions.

5. The reform effort of the Philippines has received substanil support from the intermationalcmmqunity. The Bank has provided broad support for the implementation of structura reforms with asies of policy4ased structural and sectotal adjustment loans, and the IMP has supported theGovemmept with program In place on an uninterupted basis since 1985. Official donors have providedsgnificn new resource flows through the mechanism of the Philippines Assistance Program/Multil*eruA.htme Initiative, commit about US$8 bilion over the last three years. At the same tdme, thepWiippins has sgt to reduce its external debt sernce burden through a seres of rescheduling

_greemm with the Paris Club and private cotmercial banis. In addition, a combination of debtre on, Intate -including a debt buybacL in 1990 supported by officia donors - have led to a totalcmmerci debt reduction of over US$3.3 billion as of the end of 1991.

C. RecemgcDag nI Ds&mou

6. Depitsuccesses in strcturd reforms and an initrecovery of growth between 1986"89,the twin goals of stabilization and sustainable growth have eluded the Govemment. Slippage in fiscal andmonetay policy in late 1989, together with the Gulf crisis and an unprented s&des of naturaldisste_,undermined econmic perfmance. The fiscal and current account deficits worened in thesecond part of 1989, and these woisome developments coninuedduing 1990, result in a slowdownof growth to 2 percen

7. Ihe worening of fiscal balances in 1990 has been the most important cause of the pooreconamic perfman. The deficit of the consolidat public sector increased from 4.2 percent of GDPin 1989 to 5.3 percen In 1990. The delay in adjustng domestic oil prices to changes in the exchangeat and ntaona pries led t a large deficit in the Oil Price Stabilizaion Fund (OPSF), compounded

by gowg domestic Interest rates as the Governmet sought to protect the deficit by mainining anovaled eoxha rate. The fiscal imbalances were therefore also reflected in the deterioration of the

&ten ban - the current account defict increased from 2.5 to over 5 percent of GDP.

8. The 1990 developments upset the Government's macroeconomic program, supported by anExteded Pund Facility agreed with the IMF in March 1989 and subseently revised in November 1989.In NOvmber and Decenmber 1990, the Goveme took corrective measures, and frmuted astabin progm focusing on tightr fiscal and monetay policy that won the support of an BEStaod-By Arngement in March 1991. A Budget Summit was held between the Execuive and the

-3 -

Lgaw brandhes, rdlng In an Wreemen to llmit th 1991 budget at the same nominal lvd as1990; domsdc oil prices wer brought In line with intern *nal prices; an import surcharge of 9 pecnwas IntoduOd as an additioa temporary reveaue measure; the exchange rae was allowed to diprecatby abot 25 percent; and rSeve reqiemet On commercia bak deposits wee rise from 21 to 25percen.

9. Overl, the Government has made considerable progress in achieving iS stabilizadon goas,even within the original targes major expenditures for disaster relief The deceeatiof economic activity and e effts of th irport surchargv - together wi the decline In itaionaoil pices and Iest rates - have led to a subntial Improvement in extel b s and allowed alWe increase in interna teserves by about US$2.5 billion in 1991. Ihe decline In domesdc nominaInterest tes, following a mar exchange rate deprecialon in late 1990, and the hap reductin incapial etsin te fir half of 1991 have led to a large improvement in the National Gownment(NM deficit he deficit of t!s OPSF has also been mfmd Ito a modest surplus, allowing for arcduon of domestic oil prices of about 14 percent in Augu 1991, again In December 1991 and mostreety In May 1992. All told, the consolidated public sector deficit for 1991 was 2.7 percent of GNP,coompard with a program target of 3.5 percent of GNP, a significant accomplishnt, and an importantbads for the proposed operation.

10. Achievement of the stabilization targets has not been easy, because of the need to sterlizelrge amout of forei capital that have retned to the country. Sterzaion of these inflows bascreated an asin in the supply of public domestic debt which, in tmn, has slowed the decline InInere rtes. In addimon, deficit of the Cental Bank of the Phippines (CBp) in 1991 has beenfnance through isng debt; but the reldng itest dcarges create e tations of future CBp deficitsad an associated tra of inflationary money creadon. These factors are minting expected realtrstates in the Phlpines at levels which, at around 11 percent, are high compaed to i aionad

re. Bringi down intre ates is, therefore, seen as one of the key elements in the recovery ofpha-t investment

11. The sharply contactonary monetary and fiscal stance has been successfully sustaind bythe Governent. through 1991 and 1992, creatig an emerging track record of decidsve m c

which, albeit at a high shorttem cost in tem of foene growth, has pired freshconfidnce. Reuning flight capital, atrcted by high peso interest rates, has allowed the Cea Bankto puase over US$3 billion since 1991 In freign excha markets, causg unacomed problemswith stiliztn and an appreciating crn. GDP has however delied in 1991, by I percent, andhas bee fat In th fist half of 1992, when an incipient recovery was choked off by competvenlosses and sers enegy sh ges have reslted in duption of productve activi acros all sectors.Howver, as emergqcy measures taken by the Govetnment to stem the energ crsis ar mplementedand as price stabiity is restored, the economy is expected to resume growth.

12. In spite of substatl ptogress on fiscal consolidation - the public sector deficit ha beenreduced to a projected level of less dtan 2 percen of GNP in 1992 - moneaty mamgement problems,read to the szeable exasion of foreig excag resves, led to a delay of the second review of theIMP Stad-By Arrangemet, origily sedled fo April but actually completed in October. In thecontet of this rview, the Stsnd-BY has been extended through March 31, 1993.

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PART EL AD1(1 ROGT

A. MEfLBrLin

13. Despite the stcuctl tefom Intied In the 1980s and he progress tn maco micstabato, the economy has yet to attan an efficin sustainable growth path. T1ree principal fatorhav consained progress. Fist, the recrd on Implemeatn as been mied. The abity of theGovetment to sustn a stable c nviraoment has been complicad, as tn many other

nwuls, by political presse and by the presence of high exten debt. Teo debt burden hasprevened te consolided public sector dfick (incun the Cnta Bank) from being further reducedin the absence of reseduling of ine obligato. In addiio, high external debt obligations havebeen pnasble for large recrent deficis of the CBP, and the continued suscepiility of CBP netIncome -A balance d to excage rate movement has hurt the effectiveaess of monetary

14. Second, economic pefomace has been csained by the high degree of uncraityregrig the future course of policies. To some extent, his has resmted from political diffrencesbewe the Govermet and 1he Leslate, but the station also owes in part to continued highexten debt obliaons. Ivmesto in the Phipines face the prospect fui exteMnad transaonsmay be dirupted by resictimpbsed oan trade or sapital flows. A history of such intventine exists;in 1983 te Govment rolled back trade refos and Imposed quantiave restricto on imports anda complex import licensing scheme. In 1991, an acrosste-boa tariff surhg of 9 pecen wasimposed on hImrt. Feas of such actons tag place in the fuue persis - Wgered by balance ofpaynoo pressur tha coud result ther from increases in global inest rates or from a faiure toreach a raeduling acord wth creditor banks. Similarly, investors face the prspect tha domestcpoitic preses could tier unilateral action lmiing exten debt sevice and force a cosdymn_o wit- 1 ; h foe comm_ bobs.

15. Thr, trad and inetm refm have been more tentatve tan neesary, at leas in patbecas of the foreig excag presses t have continuously resufaced whever growth hasrecovered. As a result, the eo=nomy remains parialy protcted, unable to benit fully fom inegratonwithe rest of the world.

B. Ck rua PolicyAeDA

16. Mme Philiine Govemen see to addres these three c tthrough theImpltof a strong macrconomic and strtal reform program, suported by a comprehereductiOf commerca bank extenal debt and debt service. Ither e atree broad component in heeoomic Intert progm. First, remaining distoions in the real sector of the econmy need to beremoved. The Goveenmt has introduced a oeral Forei Investm Act, passed by Congress In June1991, to alow for highe proporo oforeif equity ownership in most companies and to expand thesect where fg investment can fredy flow. As part of this exmsion, the Government has aprogatoecooorage ptepa pninmaorinmfioructeprojecthghrBd-OpugahTlsferW ) schems, and both foreign and domesic private investment are cted to tabe advantge of thesenew opportunq e.

-S .

17. In adton, th Govnmen has receny removed, In July 1992, most of the remlaieroicto (Qs) on. imprs, completing a process of tarifficatlon which was sated with

the first SAL in 1980. One of the key components of is procs, the liberaizaon of commrilvehicles pots, wil hep reduce he co of Intal transprt and hus pmo domic competitionby interat htnal makets. It will be complemented by measures to roeuce the regulatory

nglehold aroud tnsport seces t has led to high costs for the rest of Industry. Transportservic, especiy truckg and ier-Idand shbippig, have long been dominated by monopolistcfinciso holdes and the new rerms are designed to Introduce greatr compeiton in the areas, fistby admi rdfoms and then by ter tuonalIzation n a now Transport Sevices Act ITh

Ms wil eiminate comic baders to entry In and ex from the Industry, allow fr a broad bandoffes at wil failitate price-based competlt a and elimi operauor subsidies.

18. The second comonent of Intrito involves the libeizati of the fore exchangemarke Until this years lagdy unenorceable reations haEie been restricdtg the trade and ue offoeg exchange. For xamle, foreign capital accounts were segregated In spal Foreg CurencyDeposit Uni and coud nt be sorced from export or oth trade earnng, although de faCt thePhuips has long had an open capil account, fueled by lage volumes of worker remittances nd byunder-Invoicing of exports. By August, almost all restricdons on sale or purcae of foreign curcyhad been removed. Thus, the Philppine Goverent has successfy reormed the forei exchanp

arket Ii a manmer that is central to the policy objective of achieving a markeatdermined exchange rat.

19. lhetird component of Integration focuses on nstdonal capabilities to provideInprovedtools for eonmc managemen Th most important priority In thds regard i to improve the condnof Catal Bank finances. The Central Bank has lar net forei excha labiities which wereI d r lst ifparldy through borrowing to defend the peso in the ealUy 1980s and pardy truwgh theprvisof foward cover to public corporations at nadeque price. The opeating deficits of the CBP

e nOW so larg as tO affect sgnIfntly Its cAaty to carry out an Indqedet monetary policy.Indeed, if the CBP losses wer fuly monetized, nmfation would accelerate and the peso would depredateshaply in nominal tems; In addtio, without leducng CBD deficits, the proposed liberization of theexchae rat coud not be sstained.

20. As an essent first step towards a cowprehensve soludo to the CDP finaci condiion,US$960 milion of foreig currency swas, entered wih domestic commercial ba in 1983 andsubsquaey olled ov, have been uwoA exiWngui a costy foreign, crny lbit. Inaddiion, the Treasmy plan to help finane the CDP dect by placing deposits with it at zero inteast,by Isuing it a speW seies of htest beaing bonds and by budgetig for_. increae in CBP capital.

ians needs to be follwed up by a aoe resucturing of ase and liabilites ofth CBP - both domesdc and foreign - and an adequate hcra in authrized CBP capital, as discussedin detail in the Bas, 'CiU Market SW (Report No.10053-PH). Sepaate disci areprocedi with the CBP along dtese lines in collaboraton wih the ID.

21. The Goveament refom program is supported by a program for the reducion of commaealbank extenal debt and debt service. Agreement on a ce rtcgt of public restructuredextnal commercil bank debt wreached In outine in Augcat 1991, and it is being implmented instages: in Febrary, 19 the term st was issued; in May, 19 a cah buyback was concluded; inJuly the agreement to restuctur remainig dets Into debt exchag bonds was signed; and in October,1992 the deal was fially closed.

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22. Ibis debt staegy Is ecsary to allow thke Goveament to pursue a broadening anddeepg of the reform process with a consitet mediuterm financing plan in place, benefitting thefisa siwution directly, by a reduction in eal interest servce, and indirecty, by a reduction indomestc est rt that should follow the opeaton, If the experience of otier countries following debtretuction is any guide. Just as the debt agreement is crucial to allow the implementation andsustainablity of the Goverament refbrm program, the ful benefits of the comprehensive debt agreementreached with comnercial crditors will only be achieved if the operation proceeds in parallel with anadequate ma;roeconomic stailization program and with strucural measures to itegrate the Philippineeoomy more closely witi the itenational economy.

23. (3overnmer acknowledgement of these priies for adion is based on the successes andfailur of past policy expermes. Its commitment to action is rooted in the emergence of a windowof oppormity provided by the unprecedtd level of foreign exchange reserves built up over the pastyear trougb efctive stabilization policies (although these have been reduced from a peak of US$5.4billion reached in March to US$4 billion in September as a result of the reqirements for financing thecash buyback, unwinding of Central Bank swaps and provision of collateral for debt exchange bonds) andby the willinns of commacial banis to entertain a comprehensive debt setlement.

24. Ihe current proposal for Bank assistance builds on these developments, and is based on threepillars: firs, actions already undertaken by the Government, including several Iey legislative initves,where the Bank has been actively enging the Goverme through its policy dWogue; second, theconclusion of the ageement between the Government and its commercial bank creditors, resolvingmedum and long term commercial bank debt; and third, addtional actions by the Government to deepenthe reform effort

C. The Goemment Refgrm nrogm

25. The Governmt, aided by the Bank through Its poicy dWogue, has developed a broadprogram of reform to complement its debt reduction program The reform agenda of the AquinoAdministration was spelled out in a medium-term program, *33m Philpine Agenda for Sued Qmoh

eomet, presented to and endorsed by the Consultative Group at its meeting in July 1989;piogress reports on this agenda were presnted to and endorsed by CG meetngs in February 1991 and1992. The new Adm n has expressed i desire to build on thi agenda and this is reflected Inis Letter of Development Policy (Arne U). Key deti ar mmarized below. 1

26. EgWim 3b Foieign IML iI Act of June 1991 has subtantily libetalizedthe environment for foreig investment. The passage of this legslation is a considerable step forwardin two important respects. Frst, it allows entry into all bar a few specified sectors on a short 'negativei. he shift to a negative Hst makes the legiation tasparent and is accompanied by removal of therequiremeot tht forein investonrs obtai authorizatio from the Board of Investment. Second, 100percent foreign equity is to be allowed in all bar a few sectors. Resticted areas Indclude public worksconstruco, natural resouce extraction, retai trade and a few selected professional activities. Whilecert manuf n acdvities may be eligible for inclusion on the negative list ater a transitional periodof three years, the intent is to ensure that the list wil continue to be short by specifing crieia in atransparent fashion in the Implementing Rules and Regulations.

' Reform in most of these areas has been supported by the Bank in the context of itsongoing policy dialogue and discussions related to preparation of the Economic Inegration Program. Keyitems are underined. They are so dicatd in the Policy Mat in Annex 3.

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27. The proposed Bank loan supports these foreign Investmen developmes and provides amonitor of thek Inme Rides n Regleadons falthis Act. e criteria under which sectors couldbe addi to he negaive list for foreign investunet at a later date, once the transitional three year openwindow i over, have beean 6fined in a supplementary appendix (issued in April 1992), wbich providesfor a more taparent system, but still leaves room for intpreto and thus must be carefullymoniored. The policy hite, however, is to keep the negative list as short as possible, pardicularly inmanufacturig. In the futre, areas not covered by the Act, such as baking and tnsport, may also becovered under secomr specific legislation. Other complementay measures to encourage foreign investmentrelte to the fll and immediate repatration of dividends, profits and capital from all registered foreigninvesutm embodied in the foreign exchange liberalization measures, and streamlining of procedures forobtain work pemts for foreignps.

28. & d elSsfekMMd = Schemes. Mesures included inthe proposed loan would alsoennce private secor paticipation in BOT schemes. Pision of infastructre via BOT schemes is oneara where sniicant foreign invest is anticipated, and has been made possible by passage of an aI

S XBO and by periodic approval of a listing of projects and sectors eligible for BOT. Pardybecaus of low maan and investment by cash-strapped public enteprises, infrastructure hasemerged as a significant bottleneck to growth, with periodic breakdowns in power, water and transportsystems, and private participation in this sector will be crucial.

29. The proposed loan includes the review of the gudelines for private sector access to ODAon market terms. The domestic pvate sector is also expected to patcipate acdvely In BOT, espciayIn power and teleconicatins, but currently faces financa constraints. The local utC::3 companieshav the domestic baking ystem, and because of country risk, are cumntly unable to tap

financig sources. Meanwhile, foreign ODA is available for iatrucre projects butcanot be easly mobilized for private sector uses. The Government has consequently ised a set ofImpeing liRules and Regulations idicat how ODA may be cnnelled into private sectorinfrructure projects on market, not concsonal, terms, and is discussing with the Bank altnative

for catalyzing private sector financing for i c ure.

30. Prival. The Government has achieved consdrable success in is program ofpdvaaon of state corporans. Ihe World Bank's Govwtment Corporations Reform Program hadsported pivzation by reqiring that at least 50 percent of assets should be offered for sale beforesecond tranche release. The Government has progressed weU beyond this. It has etended the life ofth.e AM Pg irziaonTms -a key instition for managing privatization - unt December 1993, andacieved a sales taret of 68 percent of public corporate assets. Several other big ticket items are beingpreped for sale, including the Naon Steel Corporatiand te Manila Hotel. he Govnment isalso exploring pdvazan into further areas such as energ generaion, water boards and ports. Theproposed loan woud enend the support for privadzati bond the tem of the GovernmentCorpotions Reform Pogram, to ensure that the pace of priaization is maiained in a quatitaveSea.

31. i refornm. In August 1991, a new Tariff Code MO 470) was introduced with theobjecdve of euragng export-oriented growth by lowering nominal and efective protection, b.in:ulatinginvement by reducing tariffs on capital goods, and simplifying CUstoms administration by reducing tariffdispron and toe nmber of tariff band. Ihe program of tariff reform and trade liberalizaton -inited in 1980 wih the first Philipine SAL - bas gone trough several stages. In 1980-82 and againIn 198649, d reductions of adminisave restctions on imports were accomplished, but, inthe inrm, extn pyents cises were responsible for periodi intuptions of the implementation

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of the tra lbeaI atIon progra Passage of the 1991 Tariff Code ra mJor adJustmet Inau. The averg s mport-weigbted tarlff, which has been brougt down fiom 43 prcent in 1980 to20 paeen currently, will be Arthr reduced to 14 prcet by July 1995, and with te elInatIon of mostquantative restriions tarlfs wi become the princpal source of protection for almost all domesticallyprode tadable goods. Ih mamnmum taff wi be 30 percent (with a few eacepdons largly Ingrdcultu where a 50 perceat rate will apply), and thae would be just four tariff bands, considerably

reducin the ahnst complexty of implementing the tariff code. In genal, raw materials andcapa goods Impt wll carry lower tarffs than consumer goods, but both the level and dispersion ofefectv prtectio rat would also be brought down; the level of efective poction is scheduled tofal fom 35 pecn to 28 peret in manuf for ample. Ihe phasing in of iff reductions isnecess to avoid hap losses in reveumo in the near term, and allows protected Industrie tim to adjusttOD the nw regime, theeby secuing a broad political coalition In favor of refom. The pace of tariffWjusti,_ has been alrated with the removal of dt etUraory acrosshboad import srcag

May 1992, and the reducto of intra-ASEAN trffs on a n uber of key products.

32. Ihe 1991 Tariff Code did not cover some tems whee importation was previously govenedby qutiative restictons. Thus, the Government has Inrduced new taiff acording to the Code Inorder to make opertonad both its eadlier decision to remove QRs on some 208 Iems and its recetdeciso to liberalize 68 addItional item. The Governent has aopted two principles in setting tarffson these Ims: ) the transitional tariff rate is no more than double the sttory tariff rate that wilpival afterJuly 1995 (with the sole exceptionof corn); and (i) these tariffs are to be phased outby July1995.

33. The reduction of tariff dispersion under the new Tariff Code and the removal of remaningI--l WM'- restrcton on imports will simpfy considerably customs diniogmandive

efficie of resourcal on. This is to be firaer reinforced by meaures tan custmsi I I - -1 to strmline procedur, reduce smuggling and strengthen revenue collecon. The

Govermen has signed an for a comprehensie imort s 4ulaneLshm building on asuccesfu pflot project undertaken by a prvate firm, the Societe Generate de Surveillance. Furher_uawW will occur as the Govermet moves from Home Conumpton Value as the basis for impt

valation to a system of Fair Maket Value which is more widely used across the world. The Bank, inclaboration with tIhe MP, is also workng on additional measures to improve customs administationwiho te objecie of raiing tadff collections towards their potential levels. Through the tariff rvision,the Govm has reted its policy of dc-emaing the role of tariffs in indusi and tradeprmoton. Th effectie tax on epore associaed with tarffs should be reduced throu te operatnof newly e lied o-atop ahops for streamlining tax and duty drawbacks for exporters.

34. Qr . Ihe Goverment I about to complete a significant program ofreplaci quanttaive restctons on imports with tariffs. Although in the beginng of 1992 thePhilIppines no logr had widespread QRs on imports, these still existed in a few selected are. Mm

has made a policy docision to remove ORs fFom 276 im= t iems, ilu a broad rangeof consumer elecroc and agrcultal products, corn, commercial vehicles and related spare parts. Theliminaton of Qts on the importation of commercial vehicles is an Important stp towards reducing cost

in the tansport sector, and has broad likg tioughout the economy. Similady, liberalizaton of cornIs an impo_ meu for the frter growth of the livestock industry. Following recutnuKoiDmostQB& Inmuachg quantiatve restrictiom wil remain on only a few Items, coverigarund 2.5% of import items. In most of these cases (69 items, luding drugs, i andfrearms), resction rflect health and safety concers. In other cases, they are the result of legiatonqpeificaly reated to certain products (agricultural goods) where the Goverment has undaken to

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preet legilaton to Cogres for th removal of QR-based prowco Last, there ar a set ofrestrictions on products In sectors which hoe price regulatons, including coad and petroleum products.In theso latter cases, the Govemmet hu preented a timound acton program for removal of QRs intndem wit a broader derelaton of these sector.

35. With the ages on tarnf d themva of QRs suppoted by the prwposed loan, thePhippines w ll be one of the most open counries in the region. Ihe i, however, a cost in terof f fiscal revenues and it Is esseal t the success of the trade reform program thesereves be replaced.

36. l. LTbraiza Ihe Government I redefining its role in the aportctorthro a thre-ronged strategy. Fist, the pe system of heavy regulation is beng refed toinroduce grtr elements of market-deteed competiionL In the past, entry and exit in the ransportsevices indutry was higy gulated, resfting in a costly and hnfficie transp industry. Hightransport costs are an importat reaon why domestic competition remains weak, why internd marksstay fi_ and why the bis bowar economic activity ocated in Metro Maila remains stong.M2 Govnmen has recntoly issued a anew olicy direcive which viws entry into and exit fom thetransportn idustry as a buiness decsion, promotes cmpetion on maor mutes through Providing forat les two frchise holders, libaizes rate seing, and pbas out specal financing and incentivepmrog. eU DI h eiiogbv bee kWeentesd vja nw fIn rulnes agd gMces of therglaoy board which oversee operations In land and sea taort and eit a ultmately. wfllbemne jnstMohd Wdan Ar new D°"i Sence At

37. Te second prong of the tasport se is to involve the private sector to a much greterdgee in t management and opation of transport infra .In the case of lipphin Airlies,for example - privaized in Januy 1992 - the Govenment has witdrw from the direct prision oftransport svices, and this principle may be exteded to other areas including por and bus . Third,

siderble portio of tho centraly administered road nework are beng devolved to LocalGov _, In cojuncdon with the devolution of reves as stipulated In the Local Goverment CodeOf Jauar 1992, and this should help give more prominence to ma n activities.

38. .N01gd 1t. prin the Philippines are rgulatd by the Energy Rgulatory BoardRB), an i body headed by a Preidential appointee. The ERB sets wholesale prices (WSP)

fr petroleum-reatd products and opea an Oil Price Stabilizatio Fund to which payments are madeby the oil companies, or from which the of copane are reimbursd, whenev the cost of the productcomputed by the ERB differ fom the wholesale price. There is, however, an asymmey In price

- reductionscan be made automatically, while iwres are subject to public heaings.Cosequently, the OPSF has periodically run into deficit, cai fiscal problems and creati largesuddn caes in domestic ofl pices. It also creates a diron through crossies to maintarelaive y prices tited towards specific m. Thebjective of the energ priing reforms, whihwil be Implemented a part of te EL, is to depoliticize the system, elimiate hidden cross-subsdies andresit e ac gais or losses of the OPSF to lovds which would not have s a

aceconomic efcU.

39. At present, the OPSF i in suplus by anund PS bllion as a resultof weaker tban epectedInenaton oil prices and a stronger an exped pesoldola exchane rat. Lgiadon is in Congreto allocate a porto of this surplus to the capializatioD and investment needs of the National PowerCorporatn, whi faces serious financial difficulties. The splus, neverthele, creates an apppria

qppoilty fow the Governent to reform the system.

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40. Although the longterm objective for oil pricing i totl dergation, the Govement isconcemed that is may not lead to a more efficient outom giv the cartelised gructure of the industy,couped with low refining capacy and high cost of enty. Acordingly, the Ewh Secor Plan whichi bein preaed with sistae from the World Bank and whose adopdon is included in the EIL, wouldexplo two altenatives, In addion to full dereli, to impove the fimctioning of the current system:(a) le_sli tomandaw auomatic changes in the WSP when the OPSF balance reaches a minimum ormaximum level; and (b) an indexation of the WSP to chaniges in the SingWore prices (or otherinenanl bendcmk) for simlr products, converted into pesos.

41. Foreign Egix Drgdathm. Until recendy, fore exchange tading in the Philippineswas resicted to a few registered dealers, exportes surrendered all foreign exchange eanigs and certaintransctions hincluding capital account uansactions, were largely prohibited. These rules were, however,bard to enfrce in an open economy, especialy one which relied on attractig large amounts of

_mktam from abroad, and in which an infonnal grey market operated with a small premium on theofficial e ge rate.

42. he fist sificant steps towards foreign exchange reform were ten in early 1992. DSntion rtio for eMo was nreased to 40% reducing transaction Cm. Pull and immedit

and rm cp for all te of inemn were pemt, theimproved laoy evironmt for foreigninvestment. IQgnadn IUorMn ClUdlzxem1Uesand

t oth£ serie e ts. wer from foreign exehanap regulations and the roceeds weregal to be frel bout and sold. Individuas and Corporations could source foreign currency

deoit, or odter 1eg investme, from these funds. At the sme time, commerci banksgemed to ma_nan net foreign asset positions in relation to their canital base and actively particpatedIn a dgo off-fioor interbank forignagb= market

43. After a review of progress with the foreign exchange liberalization conducted in July-AugustI992, t CP moved to Tsof the . entails full retention by exportrs of

roeig exchange recets and fe use of foreig exchange funds purchased in the market. The off-fioorUtr market has also been broadened and daily tsctLor volumes are almost ten times as high asprior to e efm. The end point of the proces is almost completely open capital and current accountsand a more mark-tend and depoliticized exchange rate, which should provide clear, immediatesigals as tD the adequcy of the Governmen's macnic program.

44. P net income immovme For several years, the CBP has suffered annual losses ofover 2 percent of GNP, primaiy as a result of serving commercial enal debt obligations. Becasethee losses have been financed by money creation or, in the short tem, by issue of CBP Bils, theirpresece has served to reduce the ability of the CBP to pursue a tight monetary policy. Reducing theCBP deficit, by mean of the DDSR operation, will help reduce the consolidated fiscal deficit and willallow for me Indepeence of the CBP from the NG, increasing it credibility as an inflaion fightington. bepresent m mic stuadon provides a favotable context in which to deal with the

CBP prblem, with puibUc sector ddicits now below 2% of GNP, annualized inflation rumning at singledigt levels for the past three months, and foreign exchange reserves at adequate levels. In thisenvironment the indicated structural refrms in fin exchange and CBP net income support shoudhave the desrd effect of bringing down domestic re Interest rates to single digi levels, a keypreqisite for raising private sector investment and growth.

* ~~~~~~~~~~~- 11 -

45. Mm proposed loan would support the first of two planned steps towards a fid resolution ofthe CBP problem in the medium terma. In this frst step, several measures have been tak to impwvethe CBP deficit by over PS billion In 1992 and P8 billon on an annualized basis. First, &Ignfl=amounts of CBP extra bt and debt service have been eliminated tirough the buyback and the debt

the Nationdl Government has issued al new money and debt excage bondsassoiated with the Brady operatd Second, the NG has increased its non-inters bef deosits Int CM Third, the NG has issued special Treasur bills and notes to the CBP. yielding annual interestnme of over P3 billion. Fourth, the CMP has unwound its foreign e san gbligtions A44QmestccggorciL baslcs. These swaps, amounting to a fce value of almost US$1 billion, had beentoied over sine 1983 although their origina duraton was three monts. Subsani frig excnelosses on thse WapS have been incumed but not paid and, Including accumuted Ineest, they nowamount to an additional US$1 billion. By widing down the swaps, the CBP will save co erableinterest e ditures (estimated at P2.3 bilion per year) and will also protect itslom furter foreigeKchmge loe that could arie from ex e rate moements. Last, under the term of the prwposedloan, the Govenment will prove for the payment of agready approved CBP capital in a budgetsubmission to Congress.

46. Othet I=. In addion to progressing on the policy fro, the Goverment Is commitdto addr moe deep rooted Issues which conine to constain short-run growth and the sustabilityof the growth proces. In acknowledging that the private seCtor must play a lead role in the gowthstatw , the Government Is also cogizat of the fact tat uncerinty over political and economicdVe1vlpment has hampered private investment. The strategy to deal with Ut u Cetainty Is tO build atrack recOrd of maCrOeConOmiC discipline and ctuimty in adjustment, and to renforce ths withmeaures to dea with the extern deb At the same dime, by addressing long term Issues such aspopulation growth, natural resource degradaton and land distibudon, the sustainability of the growthprces is buntessed.

47. When implemented, the most recent round of reforms In freign investment, trade, tansportand fo exchange wfll largely complete the structural adjustment effort, leaving the Philipines witha business enviroment which would compare favorably to many of its neighbors and other reformingcounties. This may not have been achieved as smoothly and quickly as might have been desired andfurther consolidadon of reforms is required in a mumber of areas, notably tax collection, but theremanig problems are viewed more as a matter of improving imple on ctivene. than as amatter for addiona policy chage. Viewed from the perspectve of a decade of effort, significantbackliig has been avoided and the speed and depth of policy refdrm have been sinficant Cable 1).

t The second tep wod drw on the conclusions of the recenty completed 'Cah Kula SW(Report No. 10053-PH4, Febry 1992).

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Table 1: Indicators of Policy Reform

Philippines 1 Indnesia I pex1co - I ChileaPolicy Area 1980 1985 1991 1995 I 1962 1965 1991 I 1962 1965 1991 11973 1960 1989................................................. ..................................... ....................................Fscal expenditure a 10 10 16 n.s. 1 11 12 11 22 20 22 28 25 211

(7 of CDP) II

Extwml debt b 30 S7 56 n.s. 1 1S 36 47 34 50 33 33 35 60

Averag tariff (in X)Umlefghted 43 28 27 21 37 27 20 27 23 13 105 10 10lsport wefghted n.s. 18 19 1S 22 13 10 n.e. 12 n.a. 94 10 10

leot Licensing (1 coveae)I eUt"hted 52 35 5 1 n.a. 32 %d 10 100 12 n.s. 50s e 0 Xe 0 %eIlport weighted 33 %c 33 13 Ic 1 n.a. 43 %d 13 100 35 14 n.s. n.a. n.o.

Pulfc enterprises n.s. 700 %f 304 79 208 214 211 1155 920 265 496 43 27

Forelgn direct inetent Ngfrom US and Japen (U US)

Total 283 188 355 n.e. 2586 1306 1752 834 778 769 n.e. 118 265In _ufacturifn 127 117 21S n.a. 203 19f 208 67 627 632 n.e. 29 147

Notes:A' Current govermuent expendfture as X of 6DP.V External medium and long-term pubilc debt as X of CoP.

A ctually 1981 and 1990.A ctually 1986.A Approximate.

Y Actually 1987.3 1960 or 1962 figure fs average 1981-84; 1965 ffgure if everage 1985-88; 1991 figure is actually 1989.

Sources: World BSnk staff reports; Philippine Tariff Comaission; Philppin s' Department of Finance; Vfttorio Corbo (1985), tReforms and acroecmicAdJustments n Chile drifng 1974-84', WLd Loeel, 13:8, pP. 893A916; Rotf J. Luders (1990), thile'f Massive SOE Divestfture Proram: 197-1990,Fa tures and Successes,w paper presented to Conference on Privatazation and Osmership Changes in East ond Central Europe, World SBan, Wash DC, Jie 13-14,1990.

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PART LJA.

A. EmnncBW

48. After a decade of trerm effort, the Phlippines Is now In a positiont resume growth ona sustand pat. Wme ongoing stabiiatio program bas successfuly reduced fis pressures, currenaccount deficis and inflaton. The debt resucturing operation agreed with conmercial bank crdisad curetly In progess mt only addes the Isue of cmmercial bank debt In a compr nemanner, but also provides an opporunity to reduce the burden of foreigl debt sevice on extenalpayms and n fi baWces. Finally, gmss inteatonal reseves of the Cental Bank ar now atadequate levds, although they have been depleted by the demaids for resources posed by the closingof the debt resuctrng opeao

49. T he Philippines can rlistcdly aim for a target growt of GDP of around 5.5 peren peryea. Afer a decine of 1 percent in GDP in 1991 and a fat fi six months of 1992, growth momentum

expected to buld in the latter balf of 1992 when the success of fiscal and monetary policies In bringingdown hinai and Incrasing reseves is reflected In lower iner rates and improved private sector

nc in macronomic sbt. Given the widesped oms already insttuted, growth shouldaspont quickly to impoved macroeco omic condions, and bufld into a full-fledged recovery by 1993

which can be sustaned thereafter. Given important demographic changes, with population growth nowprojected at 1.8 perce per year over the next decade, this represents a sigdificant inaease i incomeper capita, and is exp to lead to a rse in both per capita private conumpon nd avings.

50. Ihe growth sceario presntd below is blkt around an expansion of public nd privateinvstment, which would stmlte the labor-intensive construction idustry, and around a steady increasein c iveess tough red exchange re movemenu which should give a marked boost to the ruraecoomy. Although It is bard to project the new emnloyment at would be created, beaus ofuncertahWo over how wages wil react in the Phipine conte - where insttdIon factors rate ma forcplay a bey role in formal sector wage minaion - it is safe to say that a sIgifIcantdent would be made in unemlot and underemployment. Thus, the projected sceario shd proveto be socialy accptabMe.

Si. Ie GlobaA Uen . From the point of view of the Philippine economy, the prospecXfor the global envronment ae not very encouraging, although some uptun from the weak prfomaeof the last two yeas i forest. he patter of the global oudook is mila to that of the las ten years:a declins in the relative imporunce of prinary commodities, but a positive environment for mauturedexport growth. On the positve side, the growth rate of world trade in volume tems shodud pick up toabout 6 percen after two years of low 4 percent growth. At the same dme, given the significant Inteetin BuildpeatTransfer projects, over US$1 billion of direct foreg investment per year could beattated to the lippines. On the negative side, the outook for aggegat OBCD growth and for themajor pimay commodity exports is not encouraging, nd LIBOR is forecast to rise from preset ows.Fixed itert pvisions in the debt restucturing package would however provide a valuable cushionagainst the lotte.

52. te 2Domestic lenrmn t. The public setor has the oporniy to iniae a recovey byIncreasing gvowth-Inducing sedn in Iructur and maintence. Ihe primayI bstment of this

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ncase will, tefo be thde st otepis sector, padtcully public utilites. Boes of the negecof ctpSbl wesum In the past, die o n f' reqWromem for infrastructur spending ae enormous, andwil condtime to be costined both by cumrt funding availability and by limited institution capacityin the ageces responsible fo the impl n of the investment program. For is rise in invesentto occur, it asumed da stat enterprise maintain user fees at sufficienty high levels that at least 25peret of thek investmen can be finanta by intenal cash generation.

53. Significantparticipatio of the private sector, both forei and domestic, particularly in theeer sector, is eviagd toug Build-Ope Transfer schmes. Importan invesme in othersecr wil aso nvolve both public and priva funing. Teleommcations is largely private, as arecertain ubors I tanspot where deglaton could be acmpanied by the mode of the fleetof ships, tucs and plan. Public investme wil focus on power, waw and sanitation, urban tasport,roads, bddges ad pos.

54. End Policv. Tbe incease in infrauctr requirements will require a reallocation by theNational Government of towrds mane and investment. In the short tm, anyincrease in te deficit must be limitd by rapid impl ion of aleady identified measures to raierevenues and control . In the longer run the National Government must move towards abalance, or evea a surplus positn, in order to bring down the overall public sector debt.

5S. The chaUenge for the Natona Government will be to contai its deficit while either on-le aftor _oeing bforeign assisutc to other agencis for investmt. The tax effort must reforebe the focal point of fl policy. Overall, the scenario assumes tha taxe can be raised by o-af ofoneercen of GDP each yea over the next four years. This is, however, a net figure. Revenue lossesfrom the curet program of reducion in customs tarifs ad from the windi down of the privatfzationprogram in the medium tem - aftker h pn of remaining big-ick items - wil need to bereplaced. Ihe actual l tax eff, therefore, is much higher than 0.5 percen of GDP per year;in fact, it is over one percentge point of GDP per year. A small part of this would come simply fromgowth, give the renewed buoyncy of the tax system, but all the remaider must be collected througa concted effort to broaden the tax base and increase collection efficiency.

56. Acordin to the Bank's medium term pojectim, tho consolidated public sector deficit(excuding surplus. of social securt Instiuto and prfts of goverment financal instutons) couldrie to over 3 percent of GDP In te short run, largely becauso of growing deficts in state enterprises.The qualt of deficits, however, driven by hi capital invesm in ructur, differeatestm frm past deficits which had revived iftionary fears in 1989190. Financing of thWe deicitswould Involve a baance between domestic and foreign borrowing. In order to reduce crowding-o ofprivatesment, total domestic public debt should stabili at around current levels of 28 percent ofGDP in the near term, before declining in the medium tn Because of the long maturities deired forfinning Infrtu project, the pattern of the past eight years of subsiun domestc for foreigpborrowing cannot be continued. As a percent of GDP, foreig debt can now be stabflized at presentlevels.

S7. M. TMe gowth stamtegy is predicated on a recovery of private invesment,both fori and domesdc. A stable finaal enviomet is a prqisie for this to occur. bIflationin the Consumer Price Index sould be kept to a level of around 7 perce. is wll require maintenanceof a policy of tight domestic crt, especlly as inflaonary pressures may build in the early stages of

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reowvey whea agregae demand gowth cold outtp the ra of capacity epansion. Monety policy,on the other hand, could be more flexible, d on portfolio shifts betwee peso and fwreigncurrency denomiad istruments. hI the lbralized capitlk account onment t the Philppinesnow fces fOllwig t removal of foreig exkane controls, pursuit of ierest and exchange ratestability to avoid large spcultve flows of funds will become impotant Ingredient of money and creditpolicy.

S8. OnCe a recovey in hports star to be felt, pressur ao the peso to depeciate wil Increase._ a real depreciatin of the peso of about 4 percen per year over the medium term would

be necesr to offsat th real appreciation that has occurred since the beginning of 1991. A significantimprvement In copetvene Is requird to keep te balcof payme manageable. An investment-led rovery, with high Imortd capi goods componen for power gation and telecommunicatonsequimnt, wil place sigificat pressur on the balac of paymet even if It is paty offset by higherinflows of frig Inesm as DOT conacts are undertaken Tbus, the remainder of the trade balance,paticlarly nuacturd exports, must be in a position to respond quickly.

59. M A summary of he mediumterm outcomes Is shown In AnnexL Detal are dce in the trecen Basic Economic Repr on the PhYppines (Report No. 11061-PH),which has Just been sew to the Govenmnt Despite a global oudook that is not vey encouraging, realGDP growth of aund 5.5 peet would be possie, driven by investment and muuhmred exports.iblly, both the pubc and privae sector would participate in the inves drive. In the medium

term, it would be the prvat sector that would sustain the montum of growth while the public sector-ed back iuctur8 speWnding.

60. The recovery projected fbr the three years difer from the boom enjoyed In 1986-89in many impont ways, maig this recwvery sustainable where the previou one was not. First, theexpansion nreal public consumptin, associated wih Increases in real wages for public sector employees,hat accompanied the 1986-89 recovery is to be avoided, and the projected increases in public

a _nsumpto actvity need to be concentae on at insatr mucture rather than on wages.Seond, te cur account defict sod b allowed to widen, as direct fog hvestm and portflioshbifs towards peso ass finne pivae seeor invesment, athr tm mosty conumptn ad inerepayments as in th past

61. ThIrd, the tax effort Is higr and pic sector debt lower in the past. However, thesiz of the deficit does not quikldy decine in the projecton as public inv et is maintained at levelscompaible with sustainable growth. Fmally, with a diffent exage rte and trade policy, theexplon in imports that accompanied th 1986-89 recovery should be avoided. Imrts are stillexpeed to rie ar a GDP growth, but to danger of exces import pressres should be avoidednOw, with greater cretibility in fisa and monetary policy, with phaed tar reductons secured, withex e convertibi assured, nd with the potental to speculae on peso movments in fiana assetsremoving the hi ot to speculate through inventory ato

62. The projectd inc in investment - 6.5 percent poins of GDP higher than In 1992 -- despite the renewed itrest of foreign investors in th Philippines, will requie a icrease

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In domestc savingsp. Ipojece dth less than 2.5 perceag points would binanced thgh highetforeg svings, Us the reaIoning 4 points must be financed though domestic savings.

63. IMEsdc Most of the increase svings wil be fom the private sector. Over thepast two yeas of suggh grwth, private savings have been nr down to maintain consumption. As theteovoy materiizes, pive savings sould increase. f measr to reduce the taxation on finanidal

in are iodc4 and with a deepening of the governm securides market to favor small,non-competive bid he tedcqy for pivae sving to rise In the upswing of the boom can be

and sustaned. Even with these measures, the senario conservatively esmates a recoveryof private uvt to levels below historical ones. Ihe reovery of public sector savig will reqconsist"_dkft by the Natinal Goverment and stte enterprises to ince revenues and holdep UtLin check. The redction in domestic inte rates and exa interest payments -ollowig the DDSR oeation - would allow for additional savings to be generated.

64. P. Ihe need to continue to rely heavly on foreig savings implies tatdthePpn is still far from a full recovery from its debt crisis. The reference scenario shown in Table4, Awn I, indicates that e Phippines' total gross financial requirements for 1993-97 would amountto US$27.9 billion. is figure has been significantly lowered by the gross svin associated with thecommrcial debt sacurng operation curny in progress. Ths opation is a voluntay, mu;tl-optionpackage, covern aU medium and long term cmmeil bank credis under pubLic sector rtrucing

_pemub and aU 1985 'New Money", for a total amount of US$4.6 biSlion. Under the terms of thisopeaton, hoes of digible debt may choose between the following opdtos: new money bonds,temporay intera reducton bonds, prinpa collateralized bonds, and buybacs. On the basis of thecommrcia bak cma to date, this DDSR operation wil yield to interest sving of US$1.5bmion and derd princpal saig of US$1.8 bilion over the period 1993-97. Details on the operationae reprted in the bdefg not (SecM92-1273) presented to the Board on September 25, 1992.

65. Even after te Implementation of this DDSR operation, large amortization payments areprojected, totag more thad US$2 bilion per year over the period. Thus, with debt service obligations,the reor gap and foreig exchange reserve wcumulaion to be financed, the Philippines must mobilizemg -n 11- lyUS$5 billion in gross alpitat inflows - or redins - per year t meet te projected

66. me projected level of fincig is achievable, provided that the Philippines pursues itsprogn of adjustment within a stable ma fimework The expted sources of fhincngIncudo, h desending order of mpoace, di from multilateral and bilatal donors, directforei Investment and official gras. Of the total financing requirements, about US$2 billion can benised wihout increasing public sectr as , by official grants, direct foreigp lnvemt, newpra sector short-term credits to fice trade expansion and odter capital. The remainder must beraised by the puWc sector borrowing.

60. awns d L _ amon new public debt he amounted to around US$2 bilion in recentyer. n orde for this to contine st levels at least as higl, the disburement rate on OfficialDeveome Ant , rpaticulaly on taditio projects, must be raised. After allowing for amoderaw hu:r in diuemrat es, and after allowing for the disurement from the proposed loanIn 1992 and 1993, finaning gaps, averaging US$1.3-1.7 billion per year, would start to arieIn 1994 (Amex I, Table 4).

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68. BFurdih rsceduling of pro-utoff Paris Club obligations, along the lines of the 1991resceduling ag would provide substant addidona finning. he fiacing gap estimat for1994-97 would then be reduced to about US$500 million per year. Sevea altenatves could then

ntbu to flling the remaing flnacig needs: the rtu to the bond market-which theGovement i eected t test shordy - or higher leves of fwrig inves . Thus, the scenatio isrobust Furthermore, fei exchang reserves, which are exected to increase In line with Impottgowdti, could be made available to fince unfor needs. No ars on debt service obligations arecolaed.

PART IV. THE JRQ. L,

A. P n.QftIm

69. The propsed IBRD policy loan wM help strenten the balance of payments posion of thePhiippirn at a time when mijor dcmges are being Implemented which aim at further integrating theeconomy wih the international system The loan would support the consolidation of a suitable medium-term frmwork in which struct refoc- coupled with debt and debt service reduction, can be pursuedIn a growth-oriented mamner. The lo will support macroeconomic =thuwgh improvemetof Centra Rak finances and appropriat eer pdcing policies, and will improve the envionment forrivate investment thou ple on of the new Foreigp Ilvestmnt Code, trade and transportliberalzatn ad the l a of th foreig curency market The reform program spported bythe poposed loa has been edoed by the Consultative Grow dur its latest meeting in March 1992.

70. The loan, In amount of US$200 millin to be dsued In two tranches (of US$120minion and US$80 million respetvely), would fance gener Import of goods to meet part of thextera finani requfrments at a tm when fori resources have been drained by the needs of theDPSR operatio and when an Investment recovey anticipated. Ierest In possble cofinancing hasbeen exrse by Japan EXIM Bank. Together, these sources wodd help fll te unfinanced gap in 1993and woud edce tD mamageable dsz the 1994 gap, according to the Banes medium term projections.

71. Te prposed loan complemens past Dank policy-aed leding in the Philippines. Thetheme of tariff r m and removal of quantitative retions were Induded In earlier Bank progrms(SAL I In 1980 and ERL in 1987), and the proposed loan completes thbis proces. Similarly, while theGovernment FinDa Instio wer restuctrd In the cotext of the ERL, and Centr Banksupervison strengthened through the Financi Sctor Loan (1989), the proposed opeation in thefinancial restructuring of the Central Bank of the PhUippines. The Govenment Coporato ReformProgram in 1987 sUported the O eprvainV progrm, ad condionity on prvaizatniS exeded furhe in the propoed lo Wb m stblity and a comprehensive debt

_restrIcturin opeaton In place, and with trade, i and traport reform haing removed majord_is It the real economy, tils operton has extended the sequence of reforms tD its logicalconusion, namely fu liberli of the frei echange mar",

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B. _ Stat_L Bank/Fund QgdkU dW

72. The Govenmet prrm ao cniues to rive the financial support of the IMP. Thescond eview of the currnt Stand-By Anment altough delayed, was successfully concluded inOctober 1992. Mb. Pbhlippines has been allowed to draw down SDRS1.9 mIllion in fund se-aside fordebt reduction under this arrangement The Stand-By has been tended to Marh 1993. Initdssos bee the I1 nd the Philippi authorities on a sucesor program are expected to begin eary 1993.

73. Ihere has been extsive cooperation betwee the Dank and the IMP at various stges, bothin the developme of the policy progm and in disussions of the exte debt agreement recentycoa Lded. Vaious Fund agreeme have supported progams inited by the Bank, includingplvgation ard energy pricing. Lkewise, the BDak has providd pport to refrms primay underthe gudan the diW, includig tax reorm and the exchange rate. Other Issues, such as debtreucuing propos, trade lieization and the rmoval of marktn monopolies in agriculre werejoinly deveopd and spported. Ban and Fund Staff have partlcIp*ted on a regular basis in eaci others'missions.

C. i d an Rd

74. Complian with thi aged upon macroeomic program is a clear condition fur thenomic Intation Loan. A sound macoecnmic outcome for 1992 appears likely, with the

nsolate pubc sector deficit now projected at 1.9 percent of GNP compared with an itial targetof 2.7 percent, iflato in sile digits, and reserves at tolerable levl. Ihe seoond review of the IMStad-By Aragement was successfully completed in October 992. Most of the conditionality for theloam has been up-fron, and acton (descried In the attached Policy Matix) which the Bank had stronglyencouraed the Philippine Govenmt to purse during its on-going policy dialogue, have already been

lemented, Includig several of the key pieces or lisation. Thus, the first tranche would be avilableuponlkan ffectvee. Ue sie of the first tranche has been set at 60 percent of the totad loan to reflectth greaterl iie d progress in prvatitn foreig excage dereglation and unwindn of

by the Cetal Ba At the samtime, the foreig exchange needs for h remainder of this yearare largo becas the debt deal has dminshed Ceatal Bank reseres.

75. Mhmrltase of hd second tranche, planned for the third quarter of l993, would becon~t upon a ty overall pge on m mic progrm impn d the

iXemp a of pecific odo detiled in the policy max (Annex H) and summarized below(pm. 76). As put of the Dank's congti policy dialogue with the Government, it will monitor theGovenent c nc program, aticulated it the Leter of Development Policy (Amn II), toensure It rema fully consistent with te imple ion of structural reforms. Second trabeconditions, te , are applied to a range of sectors to ensure effective follow-through in each areawhre poliy cnes have already been implemented

76.. he second nche wud be released after the Goverme bas provided the Bank withydsfamy eviden tihat, in addition to the maitenance of a sound macrowe mic framewoflc

(a) al actow (icluding offering for sale) neesary towards the transfr to privae perons oftitle to the capitl, preseny owned by the public sector, of at least 95 GK!s, rpresentng

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75 percent of die value in 1985 of the public ¢sst of Governmen Copoatons, whichhave been approve for prtizadton under the Program bave been completed;

(b) the tariff code (BO 470) has been rily applied, and the Governnt has taken alacdoi necesay, including submission of legiation to Cong, to eliminate allquaitative rinsc on imprts of al goods cept for those which have been agreedto for healt sfety and natonal defec reasons and ose induded In -heradtional development progrms for cars and mtorcyles;

(c) die Govemt has proposed for aoption by its Congre dft legion to change themethod of computtion of tariffs to one based on fair mat value (Brmssls definition);

(d) an Ener Ser Plan, satisfbctoy to the Bak, has been adopted and Pf engy rdeadprice reform mesures, as scheduled in this Plan, bav been implementd;

(e) the Goverme has proposed for adoption by hs Congress draft legislation, satsfctoy tothe Bank, and certified as priority legisladon by the President, nforming t laws on landand maitm tport;

(O) the Cental Bank has adopted policy resolutions to enable it to adive ad maintn aposive level of net forei assets, and suh a osition has actally been schievet; and

(g) the Governmnt has proposed measures mncluding budgetauy action) for the payment to, ortransfer of debts from, th Centra Bank in the amount of at least P9.99 billio.

D.. D. Diws

77. I h proceeds of the poposed loan would be disbursed agat the foreIg costs of genalimo based on a standard negative list which includes, iter alia, luxry goods, militay equipment adevironmentally hazdous products. Retoactive finance up to US$40 mllio equivalent would beprve to reWqmbae f mfor eligible himp Incued afterSeptmbe 1,1992.would be adnw d by the Dement of Finance. For goods valued at less than US$5 millione lt, the slified documenion procedue for adjustment operations described in the recentBoard na on this subject (SecM92-767, June 8, 1992) would be followed. For suh contrt, achvalued at less tha US$5 million equent, the Bank would reimburse the Depaent of Finnce on thebas of S of Exenditures prpred from the customs certficaes showing that eligible goodsat ls epal in value to the amount rwestd from the Bank had b Imported into th cowtry duqgthe peiod under T The Philippine Government has Itiuted a Globaliozed rehensImpo Survillance Ssterm, implementd under contract by the Societ Generale de Surviae S),and SGS ctfica of imorttion wM lo be sufficet for i der ho ofExpenditr proures. The customs cetificates will be retaed by the Depmen of Finace forreviewby Bank spervisio mision and for subsequent adi by the external udiors. For conactach vaed at US$5 milion equivalent or more, the Bank would rimburse the Deparme of Fiac

againt traditional I d o c - I -d conacts, Wpplier inivoices, evidence of payment ad evidenc -ofshipmen. Me proposed loan is expected to be disbursed over a period of one yea. Mhm closing datewould be December 1993.

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78. Ibe proceeds of the poposed loan would be used for digible iWports, subject to thstandard negaive ls Both pivate and public sector imports re eligible for financing. port valuedat US$S mllon equivalet and more by both public and pva sector entitles would be procured Inaccordan with simplified ICB procedu ecept for certa commodities which are traded ininternational maks. 'he Govnment of the Philippines has agreed with the Bank on the proposedpr metod for petoleum produc. Procedus for procuring otier commodities would beaeed upon before are me. No wthdrawals shal be made in respect of expenituresIn excess of angrega amount equat to US$40 mUlion for petroleum products and fbodstuff.Imports valued at bdow US$5 million equiaent by public secor entites would be prced using theirown procement procedure. The specific import procedures followed by public sector organizationshave been revIewed In connecion with recent Bank operations and detemned to be sadsfactory. 1motvalued at below US$5 mnion equivalent by privat sector fims would follow established commerciapractice. Expedr for goods procured under contacts for less t US$100,000 would not bedigle for financing under the pwposed loan.

F. A s and Audits

79. The Department of Finance would maintain accounts and o rting inrespect of the progm Audis would be carried out by indedent auditor acceptable to the Bankwithn six months of closig of the fiscal year (Dcember 31) in which disbur under tbe loan aremade.

(.

80. Ihe adjustm program is being coordinated by the International H==c Section,tof Finance. ie policiesare already well in tain and the Govenments commtment to t

is cear. The pposed opeaon reqires moniori of the ostcy of the m cframework, as outlined In the Letter of Development Policy, and the implemetion of specific actodetaied in pagraph 76. Ihe moniog of th ma perfom in particula will be crrIedout dlose coordinto with th IM. the Philippiesm has been delared eligible for an EnbancedStcural Adjustment Facility ant, in the event of such a program being undertaken, the Bank willpartcie in the fonmlation of a PoiUcy Framework Paper. Monitorig of the specific actions detaiedin paagrap 76 will be udetake in the conte of Bank supervision misIons which wil visit thePhilippines prior tO second trache release. The Govement will pre a report on imple tinprior to the spevsom ission and an overl evaluton of the program when the loan is

H. Blin

81. The cipal risks of te opaion relae t the possibilty at lthe reform progm maybe intrWupted or reversed in response to adverse developments, either economic or political. Give thedisapointng grwth perfmance of the past two yeas, there is a concer tha the private invesmentresos to the Govenment program wDI not be as rapid as projected. The sevening of refoms isbeing manaed carely to build confidence and to avoid the ocence of isability, which could leadto policy reversals and thus to diminised credbility and effectiveness of the program. This isparticularly important for the foreig exchange liberalzadon, which has been designed to accompany the

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trade reform poc. If trade reforms wer not implmented, or if they were reved and the economybrought back to a protcted state, th lberalization of frg nesment and of the foreig exchangmatet could be damaging. he progrm therefore emphasizes removal of al remainn quantitativeresrcto so tha resources coming into the country wi be effciently allocated.

82. Foreign eange libealizadto is only advantgwus if the macroeonoic siu udrconol, so dht the exchamge rate responds to rl dovelopmen In the economy. Ihe Phiippines appearsto have fiscal nd credit polcy under contol. Unlike In othr high debt ountries, the consoHdated fiscadeficit in the Piippines Is low, at 2.7 pecent and a projected 1.9 pece of GNP deficit in 1991 and1992 respectively. Annualid core infao appears to be within single digit levels. Thus, conditionsare vey different from those in severa Latin America comtries, where prouacted peiods of vey highdomestic rea interest rates to squex out high in on have led to large cpital inflows and an

le ap aton in the exchage rate. Because of the significant mounts of debt relief fromthe Pai Club and commerial bank creditos, and the reliano on dis fm the muliatIstitow and bilateral donors coordinated thrugh the CO meeting, the new Goverment has signifi-cant incenie to remain in compliance with the agreed upon mc program

83. The volatility in the exchange rate t may accompany a removal of miro-InterventionsIn the foreigxchange market and a shift to a new markt system coud generat press to abadonor delay the rfom progm Under the program, an initial increase in volait s presumed, but shouldbe minmized by the impact on confidence of the maitenc of prudent levels of intational rers.Toe improvemet In the fiancial posWtion of the Central Bank wbich Is part of this operation will allowitto play a stronger role in the management of short-term fluctus In the exchag rate. This requiesdirect folowp, however, alog the lines of recendaons contained in our recen Capil MarketsStudy, and a fiee_tanding opeation to fully restore the heath of the CBP is being dicused. Roductonof CBP deficts also places the exchange rate on a much stronger fioting a t increaes the hmdeaOf the CBP and allows forpoved open market opraions. In addition, the expansion In th numberof players in the fore exchamge market4 to Include tad, ban, households, corporatoandIndividuals i epected to sabii the a rate ally, the Bankers' Assocaton of thePhipines and eorters' asoc s are strony in favor of foreig ecnge dereguaon, and thefom ar investing heavily in hadwe (Telerate systems) to implement the new t a n ts.

84. Most of the policy acdons required to Implement the reform progm bave been tae priorto Board pr ttion. Thi, along with seond tranche conditions, is deigned to provido assurc thtthere wilt b couty in te inplenin of refos.

PArRT V. ND= RAM STIONS

A.

85. Tho A t of Preddent Ramos, on taking office on June 30, 1992, took sealsteps to addres countr's economic problems. First, it has contiued wit the stblizaton progrmand the strecul refm prgms thatbad been started by the Aquno administraton, with the objectivesbeig th m of a stable m nomic framework and greater igation Io h worddeconom. Second, it moved to wrap-up the debt rtucrng opadon wit the commercial bank.

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Third, t ga utmost priority to solvn he energy cris, which was f igthe eomic recovry.this ntext, the Govment proposed reestablishm of the Departm of Energy as fll Cabinet-

level dresponsible for carrying out policy planing for the sector and review of performanceby the key gt Ivod ithe gen and trnsmisionof power in the Phippines.The apointed a new Seary of Enr and in October 1992 the Governm proposeda new 18 c o owa hou increase in eectidc tarf. Four, it Implemented the libeizationof frinp excag om. Fifh, it sbmited tO Congress a list of piority Bils for legidativeapprova, Icluding a series of Bills aimed at inreaing tax revenu colecon and the Bils cncningthe finanial sector - the Central Money Authority (CMA), which bad for a long tm been pendingwith the previous Congress. ITh combination of these iatves indicates that ihere wDI not be a pullingback from the refom procs of th Aguifno Administatio Howevr, the Ramos Admivtration needsto convince Inveto who have dsown renewed interest in the Philippies, that i has the vision andd"eW"natiot sustain and deepen the a*tetprogram and, most of all, to maintain consitency inh faco adverst.

86. Soon aft taking office, the Govenmne began to prepare h Five-Year Medim TetmDeveopment Pogram (TDP), whih wi be cenered around achievement of world economicc _mpetiveness and of uhman resource developmenL First and foremost, the Govermenit

lidhat imestor cafidenc nede to be boltered and that in order to do this, two essentialInrdient need to be prnt (i) ther needs to be an hIproved law and order situation; and QI theinfrastructure base needs tO be expaded so as to provwide investors with the necesary ingredients thatthey find in neiboringcountries. Ihe Govenment Fiates ia f the Phipines is goig to be ableto atract the kind of flows e by countries elsewhere in the region in recent yeas, it wM have to Investhevy in inrsr m ctur, which h lagged under both the Marcos and Aquino A r .

87. The Bank had an hput into the frming of the key economic and sectoral issues through itsprewpaam of an informal document tat was discussed with seected members of the Cabinet inSeptember 1992. The domwas prvided tO membes of the nforma Group on the Philippines(World Bank, IM, Uned Stats, Japan, and more receny, the Asian Development Bank), which meetspeodically to prepa the Ises for tfie broader Condltaive Group (CO) meeting on the Philippines.Ihe ne CO meeting will be held metime n 1993 (pars. 120).

B. lw Bnkt

88. Past Bank lending has been aimed miy at solving m mic stability issues andsectoral adustment poblemis. As of Stember 30, 1992 the Philippines had received 134 Bank loan (ofwhich two wer on Third Window tms) to $7.4 bilon and i IlDA cret amounting to$207 ndUmil After an itelude of nedy 12 years, the Philippines became eligible for IlDA again inApi 1991. An IDA credit of SDR 50 million ($66 million) was approved in June 1991 for theEnironmnt and Natural Resources Sector Adjusment Prgam, and a credit of SDR26.4 million ($36million) was approved fr the Secod Vocadon Training Project In June 1992. IFC's total ssiwastmnts as of September 30, 1992 am d to $835 millon and invesmen held by IFC(1 totalled $381 million. The dsare of the Bank Growup in public MLT debt disbsed and

s currently about 16%, Its shae in public MLT debt seric is about 26%, and the sha ofMD debt service to export is about 4.7%.

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89. Th. Bank has financed pojecs In nely all sectors of the economy, with particularehasih on agcultur, I ture, e, and idust (Fae 2). Leading fo SECALs,transportin,water supply and seweage, and socil sector e grown In ImpotC. Bank lendinghas piaenced two cyces sin the 1970's. I gw from an aveg of le ta $100 miin a yeaIn the early seaetis to about $420 milon per anmnu tn FY8044. It then decreased shaply In FY&5and FY86 becau of the limtd scope for policy-based or ptoject ledi midst the political andecnomioc turmoil ta accmpaned the lat few yearsof fth Ma AdminisrIon. Economic recoveryand reorientato of Govenment policies aftr Ma 1986 facilitated a return to a highe vel of lendingaround $770 millio per annum during ft last t fiscal years. This a included lending for specialnItIatIes/neds, such as the Eartquake Rehilitation Loan ($125 Million, FY91) and the Environment

and Natural Reoc Sector Adjquse Loan ($158 Milion IBRD/SDR 50 miion IDA, FY91) andthe Debt Magemet Loan ($200 Million, FY90).

Table 2: DISUIIO OF BANKDA LEM= BY SErRIY)9(USS millos and percentage)

FY84-86 FY87489 FY90-92sector Amount % Amount % Amount %

Agulture 250.0 43.3 45.0 3.4 168.0 7.3(2) (1) (2)

Industry/I 4.0 0.7 60.0 4.5 405.0 17.6(1) (1) (4)

PowerEg - - 165.5 12.3 481.3 20.9(2) (2)

Trnpot 184.0 31.9 32.0 2.4 150.0 6.5(2) (1) (1)

UrbanWaer Supply 139.7 24.2 160.0 11.9 233.0 10.1(5) (2) (4)

Education/Health - - 70.1 5.2 321.0 13.9(1) (3)

Evironmet - - 224.0 9.7(2)

SAL ISECAL/Debt Rduc - 810.0 60.3 200.0 8.7(3) (1)

Emergency/RehabilItatIon - - - - 125.0 5.4(1)

Tota Amount 577.7 100.0 1342.6 100.0 2307.3 g/100.0No. Poecs 10 11 20

I Includes two IDA credis in t mounot of SDR76 million (JS$102 milion equiWent).

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90. R. Past Bank lendn has comisd of a mix of £nvestm loans andpolicybed loanm, espi y since 1986 Crable 3). Ihere has dso been a planned sequencing of thepolicy loans, stg with the Economic Recvery loan of 1986, and tfien moving on to the key sectorscsidered mot conducive to refr, viz. gy, financial sector, reform of Goveame Corporationsand, In he ctext of the curret proposed loan, forein invesment, trade, trport and regnexcno a Debt managmnt also became a centra focus, as reflected in the DebtMmS.met Lon (Y90) to support he arlier Brady debt deal.

Table 3: BAK GERJP ADJtSENT LENDING SINCE 196

Lton Date Ambot Policy Focus(S N)

cnam-ic Rcovery 1986 300 Refoms of pbltle financial nstitutions, tradeLoan restrictions, pubtsic fnvestmnt, nd tax system

Reform Plrm 19t 200 testrutured controls on pblc corporations,owrnment 1laplemented program of privatization and closure

Cwrprations for over 200 corpoations.

finwncal Sector 19Ju g 300 Reforfed Central Bank regulation and control ofprivate bus, itproved lel system coetitionAmmk banks, depositor protection, interest rates.

Debt Management 1989 200 Supported buy back of US$1.33 billton of externalPr-em debt at a cost of $665 millin; liprovement in debt

_nagemet system.

Dnviromant rd 1991 1S8 l Supported the magament of natural resourc andNatura Resoures IDA strengthening of protection of bioloegiet

divwersity.

V Secod Trandh release aoaiting leogislative actions en the Central Bar* Act.

C. StMs and th Linl to C==nt Assiunc &=atg

91. The Bank has 38 loa under implemoentin ih an undisbursed amount of aro $2.1billion (39 pecen of the totl amount of loans outsding). About 38 percent of the loans exhbit nonear minor probles, and 62 pct ehibit moderato problems. There are no major problem loan, en

ough te have been some diffiles in moving ahead as quickly as originay envisaged on someloans due to GOP oonsuaints ceiliges under the usteri program In FY91

d _ Noma were $359 millon and the disburement ratio was 22 percent. There were no tancheredes in ta yea. In FY92, Bank rose to $538 milLion and the dibwme rsdo wu24.7 peren is figure i Iluded $100 million in tancke reas (for the Reform of Goveanment

Lan1 and th Debt Mgement Loan); for investment projects only, the FY92 disbusementrado wa 0 Pa L

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92. DIssementexperience is se as a proxy for Implementat formamce and the utmateton I being devoted to Impoving the siuati Foremost among the problems in tihe Philippinesl the lack of whedroom' - the Inability of the Governet to alocate uicient enditures under Itsstabilizatnprogram to accommodate all of the investment needs in the various sedora programs. Thishas affected projects implemented by Govenment departme more than those Implemented bygovemen corpoatios, since the latter rely on inte cash generation for the most part. Even if aproject Is Included in the annual expendture program, there are still at tmes difficulties for theGoverment in maklng the acual cah releases on a month-to-month basis as the annual limt are beingstictly maintained. In any given sector, several exteral donors are involved in providing support(usually through separte projes, but in some cases through joint cfning arrangeme). TheDks aroach has been to look at the expendite issue in the macroeconomic context and also at theoeall needs for the sector. Also, there have been additional expenditue pressures caused by the seresof unexpected natural disasters in 1990-91, (e.g. Pinatubo) which has necessitated adjustme in 1992.

93. At the September 1992 Country Imple on Reviews (CIR), the Government and theBank reviewed the B/I DA portfolio and the various issues affecting project imple n (theseranged fiom the headroom" and counterpart funds issues, to issuss of audit compliance, prouementad consultaxt seection). As documented in the Tranche Release Memandum on the Debt ManagementLoA (192-50, dated March 26, 1992), there his been significanprogress made in refining pocumentand consultant selection procedures. Regardirig audits, the Commission on Audit (COA) still retains anover-achn role that tends to stile IndepenentJ and timely actions/decisions by project entity officials.The Bank continues to hihl i issue, recognizing that COA is independent of the Executive Branchand its agcies.

94. Given the consaints to eedre allocations and cunterpart fumding, the centraleconomic ageies in the Government (the National Economic Development Authority (NEDA), theDqmrtment of Budget and Management (DBM) and the Deprment of Finance (DOF)) have beenrefining a raking system for priortizig projects across sectors and across donors. While this can helpto sorout prorites in te short term, it is taa subsi e to formution of a Core Investmet Progam,which the Governmnt hopes to do in the coming year, and which would be protected againt acss-teboard budget cuts. here is a direct ief between the Government's eforts to revist the prioritiesof projects and the Banks own CIR. In fact, the Se 1992 CIR resulted in an underIg thatthe Bank would reexmin its portfolio to atain vwhich of the projects could benefit from modificationand restuctuing and which could proceed as planned. Once the Bank has completed its analysis ofportfolio resuuing needs and potential, it plans to discuss these with the Govenment and thereafterto share the analysis with other donors in order to see if there are generic Issues, the solutions to whichold be helpful to the other multeral and bilatea donors instrumet in providing ODA assistance

to the Phiippines. The next CO meedng will likely consider this issue in some depth, with a view tomaking the utilization of aid in the Philippines more effective generally (para 120).

D. lhe BIaocs biMAssltancegM

95. Wih these building blocks in process, the Bank has been able to refine its country asscestrategy to meet current priorities and challenges. In essence, the nc strategy gives highestpriorty to supporti efforts to make the economy more competitive and to put it on a plane with thefstrowing Asian economies. The Bank's assistance program revolves around the following fivethemes:

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(a) maintain the g on track, by upporting eforts to Improve revenuemobilizat through passage of revoeue measures to broaden the tax base and through

AL - of the exit tax collecon systm;

(b) deen_g the statuo u_xm in the areas of investmet policy, trade policy,ange rate mamgement, and pursuit of extnal debt workout arangements;

(c) deepeng the eoa rfm rm s, eseay In the areas of privat sectrdevelopme, continued reform of govenment cororatons, and expansion of theiratture bas especialy in enegy (see below);

(d) allevang ;yt through human resource development, tamily plamng, eonmentalmanagemint and agrrian reform; and

(e) obWning a= dfectbyeness in utilizing exising aid cmmimet.

96. TheZborWar, 1Bae Bankavdc work remain the co sne i n shapingour asi stregy and in providing the CG members widh upto-date analyses of the peomance ofh economy and medium term prospects. Ihe Bank is currently egaged In a number of economic andsecto studies whih wM contriu to thoe mao mic dialogue, the deinition of development Issuesand the future lending strategy in key secto. Reports on naura rsource management and the

U_ '. V ~e, nery, financal and education sectors were completed in 1990-91 and their findinogsfirmed the bas for curent leading operao in hose areas. MTe last Cotry Economic Reportfoused upon Issues of resource mobilization and allocaton. A Basic Eonomic Report has recently beencomletedtat examine key issues in the Govemment, corporat and household sectors, with a view toproving a cow rhenve picture a t why the growth process in the Phippins has faltered at tmesadhilgbItn the key igrients to achieve sustied growth i the future. Other economic and sectorwork compled in 1991-92 includo a Capital Market Study and a Family Planing Study, as well as astudy on the lrlgatd Agriculture Program. Other studies in progress or planned include decentral-iaton an Infstuctres study, a study on fiancing of education, and a Private SectorA _mumo Study (pai 102).

97.. Bank lnvesment ledig i pected to concetate in the following fivearmu:

(a) a indk1gaio aimd at oval rural development, icluding support services,rura fiae, irrigation opeatons, and natural resource management;

(b) especily energy, telecommunicatns, water supply, wastedisposal systems,and t alleviate cridtical shortages and deficiencies: studies done on thePilippines and esewhere have established a strong link between infrastructure creationand m t i-vestment - the rionale should be to provide the necearyunderp for growth in the priva sector;

(c) private sector deveopment and financial sector deqaug, in cojunction with IFC, tosupport capital ket development, export development, and selected activitide such as theconversion of the falities at Subic Bay into an industrial-commrial-tourism facility;

-27 -

(d) Mspecilly educato, job skitag, and urban and womens heatssues, lungw support for a ande program of fmily plning; nd

(e) oatua ofso4tces and omsS mrtcdonthrough fond and coastzone prteto and m_anagement, sol conavation, Industri pollution conols, andadequat ws disposa sysms.

In fomuating the m and Instruments for leng, because of the Govemens budgetconstnt, the Bank wiU give ateni in the dort ru to devising operations ta depd less onGovernmet budget support, recog g ta not all projects can be implemented by secorpratins Or privat compies (e.g. te soci sectors and pubi k rehablitaon). Whererposle, howwer, the Bank plas to Involve the prvate sector andlor goveanment corporons that bave.good Itna cash geneaton potential.

98. The Bank's earlier empasis on agricultural development has become a broader strategyfor sw ab rural deveopmet. Liberlizaton prgam bha removed many bias agintagicue, and the Gree Revolution has already been completed in tihe Phiippines, yet susthudagricural proucdvity growth remains crucial to the overall national prospects, as wel as povertyaeviaion. nproveme In Irigation, research and eation, the rral fnai markets, andagricltural marketing contne as high priorities, though with a focus on only the most efficient means.Similarly, nurl transport and power are porly developed, yet important In gen tin off-hfm raemployneeL A dsft of budgetary resouces from nua sbsidies to uran public investnt b needed,which thel Bak plam to assist The Govermment has also developed an excellent poiey famework forpromotingVconsation of natu resources, but will need frther extna asistance In le gprogrm to protec and manage forest and cora rees, minimize soil erosion, and ultmaely rerproductiviy to denuded lands.

99. Regrdng In_rasuctue, there is a pardcular need for major expansion elen ldtygamatim and distribuon. The scale of this epansion, however, must be considered from threeperspectives. At the naiona level, enery supply and demand calculations show what is desiable: about700 meawatts per year plus associate trasmission and distrbuton works, costing around $1.3 bilper year for geneaton, transmission and dbution, Includig invesunt by the prvate sector. Thiwould c ns for previos years, when lnvestme have been too low, resuling in a seious eergycrs. Anher pepectve comes from estimates of what the principal energ instiuons and the pirivatesector can reaonably finae given debt and self-financing cotaints. his gives a lower figure forspding abt. Last, the Institutional capacity for expansion must be considered. Th key spendndecions in power must be made cosistent with a reasonable fincing plan and prgm f effidciencyImprovements in the Natona Power Corporation (NPC) and other instuion in th power sector.

100. In the traspt sectr, the road netwrk has suffered from a lack of __e,endb and spending needs to be more than doubled. Rual and prvia roads have baen

paticulady neglected. A road reLabitation program, linked to instudon reorms fr roadmanagemen, needs inased financing. With liberliaton of land and sea traiport policy, rescesneeded to upgrade the nats fleet of tcks and ships are expected to be provided by the private sector.The prvat sector coud also pla a more sinica role In the fiamcg opation and management of

-28 -

common usr ports If refom In the ippine Port Audhor were adopted to reduce the confict ofintere preaent I ts role as owner, orator, rguator and fimancier on behalf of th public sector.

101. In the urban secor, Infhstructure sevies - transport, water, sanitation and solid wasftdisposa - need I invesmet. Water shortag, In pardcular, could develop into crises over themedium term with swift action. l each of these areas, significant resource mobilation from userfees Is nee y and should provid the bulk of operating epenses. Istuional constaints, in the formof sector institutions besieged by deep-rooted financial problems, condtiue however to limit investmentin the sector.

102. As a development strategy t applies to agricuture, Iustry, energy, tel catons,and tion, the Govenment connues to attach the highest importance to priVate sectordevelopumnt, and private sector development work will be at the center of the Bank's asce strategy.The Bank, together with IFC, is undertaking a Private Sector Asessment Study, which wi assess privatesector actviies, idntify constaint to private sector development, and make recom n for theirremwvL Emphasi will be on selected m subsecoors, on the enery sector and ontelecm nications. At the same dme, the Bk wil continue to follow a multi-faceted approachdeigned to improve the rgatory and operating environment for the private sector, critcal to which willbe contied movement toward further economic derlation.

103. Good progress has been made in the area of privatization where the Goverment exceededthe targes set muder the Refirm of Govenment Cotporations (GCs) LoA (SecM92-99 of Januay 23,1992 regarding release of the hird Tranche). As of August 31, 1992, the Government has offered forsale 84 companes whose asset value represented 62 percent of ttal GC assets. Recnty, theGovenment sold its majority stae in Philippine Airlines (PAL) and is progressing with the sale of hieNationa Steel Corporion. With regard to public sector effiienCy, systematic moniorig is being donein the case of some 30 public enterprses through use of a Performance Evaluadon and Incentive Systemand the Bank intends to continue assit in the review of these findings, as documented in the February1992 Country Ecnmic Report

104. The Bank will contne to follow a multi-fceted approach deigned to improve the regulatory andopeating environment for the private sector. Citical to private sector performance will be contnuedmovement by the new Government toward further economic derelaton. There has been major progresstoward d_erlation and dmplification of proaedures in many sectors, including agriculture, finan,tade, power geneaion and teleonins wit the frameworks established under a series ofBank-suported pgrams. However, there remains considerable scope for further action in the criticalarea of transport (both road and martime).

105. In order to provide the private sector with an environment conducive to Investing in newplant and eipmnt nd expadg or rehablitatg esting plants, the infizstructre (electricky,waer spply, roads and telecommunications facies) needs to be brought up to standard. Projects ingeotherml energy development, expansion of water supply and improved systems for diposa of solidwaste are planned Again, the need to obtain efficiency improvements in the public sector will continueto guide the assistance strategy. Attention wil be given to improving the level, content, and process forallocatng public investment and expditus. Studies undtaken under the Debt Management Loan willhelp to provide the analytical basis for future action on operations and maitance expeditur.Regrding the financing of energy and infrastructreprojects, the Bank welcomes the Goverunent's thrust

-29 -

to seek private seor niatives, such as through Build-Ope;tand-Transfr (B), Build-Otera*md-Own (BOO), and id-Trafer-ad-Opere (BTO) shemes on a concesn basis. IbePbipphs already has had succeU e ience with gas bie power gneraton projec that werdesigned on a BOT basis. Congress passed the BOTrBOO legiaton in July 1990, and the Governmtis developing an Infrtrcture Fund to allow the prvate seor access to ODA fnds for suitable privatsectr projecs.

106. Uhe Bans role in aist the pivate sector wil be geared towards provding a catalyticrole, and not as a sWbtt for commrcal sources of finance, lf the possiblity exists of obainig suchfinanig. Specifically in the past, pratios tsupport private sector development hve been channeledthugh Govaunowned fan tma ; wher thee resources are desinated for inv_estmfin nby a specifc company (under itable onend4 i aragem), the ca will need to be madetha: ) fte couercial market cannt prove the required funds; (i) that IC does not plan to prvieth fnds; and (ii) hat a suitable policy envronment petains to the sectoropraton In questioL Thus,in the justifi*caion for speciflc projects, the evolving mat prospects for the Phippines Inrdeion to Investmen noeeds and sources wll be closely reviewed.

107. In the health sector, the _ to p health care and preventv meaures andthe pasge of the geeic drug law to control the cost of health cae provon have consuted imporntgains, which shod be preserved and reinforced at the Local Goverment level where many of theallocative deciions in health wi now be made. Other programs, such as famiy planning need to betaken up a prior by the nation and local governmen. Major spending decsions need to be madeconacning hospital-based services, where intemal efficiency gains canbe comideable from a rationalizedsym As dtere is a den willigness-opay for health sevices, and the private health systemis often prerrd tD the public system, the scope for mobizng other resources, icuding privateemployerprvision and NGOs is consdable. The Bank has an active program in urban healt systemsand is ptr ing a Women's Realth and Safe Moherhood project, together with biteral donors. Ingeneral, imp qrving aces of the poor to adequate preventv care is a key element in the povertyalleviatin strateg.

108. In oducaon, the principal thrust towards prima education needs to be reinforced, anda closer look should be en at seconday and higher education. In hi education, unit costs can bebrougt down though a process of consolidation of smal sized scdools. Secodary education costs intho public sector are also above those in th private sector with no videt quality diffences, and thereative roles of tee must be cnidered to justify epio n of public sendary schooling budges.In primary educadon, greatr focus needs to be placed on ipoving quality and thereby reducin drop-out and reptton, especlly for hose from poorer households. Conpos shifts indexpes

fom tace salaies to tetbo and oter ipu can benefit this. The Bank has a broad program ofasdsmw in primy and secondary education, vocaionl traii, and shaply focued progms insience and engineering education.

E. Two Keq &U_i"tymes: Povexq and tfie MivMMonmn

109. noe ulIty of economic gowth ad the improvement in socia welfus in u hingeupon progres in tacklin ky issues ctng the environment and poverty reduction, and therefore theseneed tD be cosdered In more detail. As the Ramos Ad a empts to put ecomic growthback on a sstinable basis, V will contin to be at the forefront As a follow-p to

.30-

the Envionmet and Natural Reour Sector AdjustPm Progm, other initiatives are planned, suchas hnprment of blodiver siy and asstan to the nana ageies in coductinenviromena impact " _ . Support for the outrs deforts to Improve the mageme ofnational pafrs and protectd aras wi continue to be an area of ion, in conj on with theGEP, and a second prject in nal teoUC managemet is plainned. The Bank plans to contue todevetop progam in conjuncon witht Global Evhmet Facility (G), especially in he naualeou management aa Projects to reduce oidustrial pollution,and improve solid wast maagenmee aso under co atin

110. Philippine has taken Important stps In nvhnment protecdon. The country has arich but fae blodiversiy, which is at risk both frm natural elments and asters, as wel asuncontroled exploitadIon. 1"'Me Philnie Pro for S l, the Govemmethas frmdatd its plan in fou areas: (a) tetheningthe presrvation of natural resourc, especiallyfores d national pars; (b) coolling IduiW air polluti; (c) reducing uan degrada roughbeter sym of human and idustrial waste managemen, Including the eradico of toxic wasut; and(d) ngn the protet of cotal waters and fisheries.

111. A good sa in aing environment isues has been made with the Environmen asndNaturd Res Sector Adjustm Loan/Credt (Ln. 3360 /Cr. 2277), a hybrid policy and invesmenSupport oprat that focuse upon povert, natr resource management , and envroet

in the uplads. The Govrment has complied with all conditions and rMeas of the secondtranche wi be r mend shoty.

112. Rapid urbaizaon and exansion of the Iusria sector has been achieved at the expenseof a av_dmwus P ~-' IF n mmm - deadaton, primarily in Metro Manila and other urban cetr. Induyaccounts Xt fo about 30 percent of orgaic waer pollution and an increasing load of toxic andhamrdou wa"s. This comes as a res of various factors: (a) failure to enfce dfvely exstgpollution cont regultons; (b) Inadeu of public infuture to cope with the increasing load ofpollton; and (c) fiu to esa i an effecve land use plan to control the agglomera of pollutingiduste. It is impoa hat efrs ae made to eslish an I management strabegy tocontol and reduce industi poluton while eacing industi growth.

113. An Industria Envionmen Management Study, misted by the Bank, is under preaationto dvelop an Intiuta firamork for the effecive manam of citW iclfisks and,simultaneusly, an Industri Efficiency and Pollution Conr investment project is being prpared toaddres tie iadu of .ollectv treatmnt facities for Indusal waSte, to support indfUStdes Willingto invs in poluton control equpment, and to provide technical ssistance to goverment agenciesimpleX_ AIW regulations.

114. T'e Bank Goup's ste for in the Philippines Is based on a Bankstudy of th poverty low, which w ditbuted in October 1988 (Report No. 7144-P and has beenpdated by the recent analysis in the Basic Eonomic Report (fothcming for distribution). The

proposed agenda has three mainelementssstainable al devdopment (noraiboth land reformand addeing the nges bween pop n povety and e on); filypling;and expandd, tionalized, socia sector support In all thre areas there wil be a need to involve andSUpportp e vohmtary and non-overmental organizatons: the Philippines is reatively well-ndowedwih such institutio, and gvernent policy iS conducive to their i aon in service dely.

-31 -

bnpl_ n of a boad th stategy, rogningb from mily plni and a clearVI_ should also provMe furht meanm of red g povery.

11S. Ihe Bans efo to suport povet all on will need to be broad-based though self-sta proje, as wel as thrugh aotg spefc tag in appriat prjec. Spei emphasiswill be give to developing tage safety nts, as experience to date in th Phiippin has no beesucceul in devising concte progrms that embody clear and easily managed safet net schemes.Projects in water supply and seage, espeally in the smaller tOwns and commuities, should hwe asgnicant impact on improving liineg conditions for the poor. The Govenme's PRO-POOR prgram

comprisn sec lIne rag prgms atute pron and so8il programs) targeted to thecpales with the lest resources is likely to be preserved In some form, althugh there could be

modificatons Wmade by the w govmen. he Bank wil devot special emphais to working wlt thegovemment in removing socia hiqualies tog provision of cost-offective program dth reach theIntended beneficaie couty-wide.

116. Regarding t tm gf o other serie and ownomic opportunes, a Bankassessmet on Women in Development (WID) in the PhWlippins was completed In 1989. Whfle theindicato showed that women have reasonably good access to educadon, employment opportuni andvies, the ma areas kenfied for mwoving their condition vlve matenal health and family

plannn services. In additon to the women hea and family planing Inidatives, the Bank Group wilcontnue to include WID components In sitable projects aimed at imprving the economic conditons ofthe ura and rra poor.

F. Sna and leLd

117. Mm overall level and pace of Bank Group assitceto the Philpines will dend uponperformance; namely, the abilt of the Ramos AdmIion to build on the policy gains of the past,by niuing to stregte the macroeonomic fam rk and to deepen the s a adjustmetprorm, eseay at the secral level. As noted above, the Bank plans to conoere on investmenlening in Isucture (power, watr supply, and ansport), agricu ad irrgWon, human resoudevelop t, and privae setor deopmnt (in conjunctn with IF). RegardIng tot leadig by theBank a lvel of $500 mllion (a Case) or $700 milon (figh Case) per year is plaed. The raWi dqepnd upon perfmance a diussed in para. 119.

G. Il99 of IDA ROO

118. As noted, in April 1991 the PhUiipns became eligible for IDA resources agin and twocredits i total amount of SDR76 million have been approvd sin then. The Phlippines Is not ectedto receve a age propordon of IDA resources in Is blend of Bank Group funds. Any IDA resrceswould be geared towards af the Govrnmet to take dffult eonomic and policy refomdecsin and to support development In the soca areas, espcay In human resource dvlopmand povety alleviadon. An lusrion of the type of progrm tat could be envisaged, i if theGovement embars upon an expanded family planning program that most of the

of the Bans report added. New Directons In the Philippnes Family Plngrotam (Report No. 9579-Pl, dated October 1, 1991).

I .. � if'

0

0 0

0��*8

- hi �gp�*0 I6Ii:i�;� Ii�

I14� III I'll! III �Ba I

if'

0

I.1IaI

I.P1 � IBorn Ii I.

iii itIlli� 11111 ii I8' Iii

-33 -

(a) an Icain tU on lage Iftructr project and on those nd al and naturalresource based projects th ca bear foreg exchange rik In such projects, IFC'sInvolvemen Is especially Imprtant In mobilizing rdatvey larg addtonal foeig finance;and

(b) emphasis on fee-ased advisoy servces, which concentrae on privatization, rtcturiag,and BOT/BOO projects.

122. Project under prepaion, as well as fitu prospects, include Involvement in a privatemy DMT project (Hopewel Corportion's 700 megawa coa-fired plant in Quezon), in the mining

d petroleum refing sector and In cment. IPC is s workg on advisory asigmentA In the minnsector. In additon, IFC 18 cont=ing is loca currenc loan guare cohme in order to promote long-team financg by local commrcil banks and insurance companies. IFC wll rmin active in suppotingactes which contrbue to ncreased competitiveness of the indu sector and create newemployment opportnte.

123. Rearing MM the Philippine Congress has yet to ratify the Convention aind te newlegisre is ewected to take up this matter towards the end of the year once it has considered theprty Bil (revenues, financial sector, etc.). Partcipation in 1IGA could offer substantial benefit topviat estors who often cie the lack of effective Insurance as a sinifican constaint

PART VLI

124. I am satisfied that the proosed loan would comply wit the Arcles of AgrVeent of theBank, and tht the Executive Directrs apprwve it.

Lewis T. PrstonPrident

Washigto, D.C.November 2, 1992

-34-EXM I

TABLE I KEY NACROICOMONIC INDICATORS................................................................................................................................

'' -lta*^*........ c ......... PtfA ........... ..... ---ZProJecte ........................ 'P.Projected.1988 1969 1900 1991 1W92 1993 1994 1995 1996 199i

A. IDP Gromth Rte (i n 6.31 5.9X 2.43 -1.8X 2.0X 5.3S 5.33 5.4" s.4a S."mY Growth Rte (tin 2) 9.0X 3.8X 1.2X 1.64 2.0X S.4X 5.23 5.52 5.5. 5.73*DTlCaptts Gruwth Rate 6.S5 1.52 -0.8% .0.4X -2.22 0.13 3.43 3.32 3.83 3.73CwisaaptmnCfa lte Growth Rat 4.53 2.53 3.33 -0.53 1.2X *0.9X 2.4X 3.63 3.83 4.23

3. IXIRAL OUT I/ OLT Oebt SOas (fo 1ust) 3384 3710 2822 2509 3769 3533 38es 397 375 3821ILT Debt seivoal 30.63 2942 21.33 20.5X 29.6 25.3X 24.?X 23.23 19.8X 17.8XNIT Debtl Uevce@/P 8.9X 8.8X 6.43 6.53 7.3x 5.42 6.63 6.SX S.9X S.7X

C. NWS5TNRNGros mVatbtP 18.43 21.93 22.53 20.02 20.3 26.32 2.1327.132 .0X 26.83N fto tnwatment/ap 2.3X 3.9X 5.2X 5.03 4.93 6.73 7.33 6.92 6.5X 5.9XPrle1t tngwatmnDP 1s.63 17.02 U.6 17.23 15.73 19.63 19.8 20.23 20.43 20.93

D. wilmotmeto wIg/P 19.80 20." 1J8.63 18.93 16.73 20.4X 21.12 1.13 21.12 21.02

Ntatol Savn/P 19.6 20.3X 19.33 19.13 17.7321.13 22.03 22.1X 22.13 22.0XOom mancsawtqSlP 0.13 1.03 0.3X 2.2X 3.13 3.63 3.82 4.02 4.02 4.13

5. OOYEUUS KITGs.nt 6 qWeJSS/p 14.13 16.53 16.83 17.92 18.12 18.42 18.83 19.12 19.33 19.4XS_ mnt pmdfturee/oP 16.9X 18.43 20.33 15.73 14.92 14.8X 15.03 15.13 15.33 15.3XSeffatl-) w IWOUSM/a p -2.93 -2.13 -3.53 -2.02 -0.53 -1.9X -2.3 -1.83X -"3 O.S0

F. cuRN ACCaTexbport UfS/UP 28.23 28.5 27.93 30.2X 24.73 25.4X 26.53 27.73 29.03 30.4X:I~sr GNU/UIP 26.8X 30.3X 33.4X 31.3 28.63 31.4 32.63 33.7 34.9X 36.2XReal Export UPS GrowithRat 14.73X O.73 1.23 4.63 -0.73 4.22 S.8X 5.9X 6.33 6.43Reel tu69s't UPS Growth Rate 19.63 15.22 10.03 -3.13 11.23 11.43 S.13 5.22 5.13 5.4XNomdnal Export IMPS Grwth 17.63 14.13 2.SX 10.03 4.2X 9.53 10.3X 11.43 11.83 12.0XNomInal iqortllPS Growth 20.126.93 15.43 -1.0 8.23 16.8X 9.73 10.22 10.22 10.63

Curnt Acmunt (tn U#5) 1/. -390 -1456 -2695 -1389 -1528 -2956 -3034 -3135 -3197 -333Curnt A_Cceet/P -1.03 -3.4X -6.13 -3.13X 2.8X -5.2X -S.13X *5.0O -4.8X -4.83................................................................................................................................V1 Atw ^ r1 Ct * nextenf n oacf _ rewd 8nkRtrturing

- 35 -

TABLE 2 WURY BALANCE OF PAYNENTS STATISTICS (1992-97) 1/CUSS Nillion)

.,........._.......... .......................................... _.....................................................................

Pretiminary .................... Projected 1990 191991 1 1 1994 199 1996 1997

........................ ..................................................... __... _ _............

NRCNISE TwE -4020 -3213 -354 -S098 ss57 -s939 -64 -6809A. Exports 8186 83 9551 1032 11361 12715 14253 15965S. Ito 12206 12052 13099 154 16918 1864 20577 229

SERVICES 527 1294 15s 163? 1.99 2259 2561 28A. Man-Factor Service Exports 2915 3375 3180 3619 4019 4421 4913 5478S. Non-Factor Service lwports 1626 1647 1727 1689 0z67 2262 2474 712C. Factor Inca 1843 2192 2197 2372 2527 2633 2745 2662

C.1 Interest on Reserves 60 110 162 191 23? 267 300 3350. Factor Pa>onts 2605 2626 2116 264 2480 2534 22 2739

0.1 Total literest 2/ 2154 2157 1634 1963 1959 1993 2062 21570.2 Profit Renmittances 283 269 661 784 968 1118 1261 1409

NET CURRENT TRAUNSFERS 440 530 486 505 525 S45 S66 587

CURRENT ACCOT BALANCE -3053 -1389 -1528 -2956 -3034 -3135 -3197 -3333

CAPITAL ACCOUNT 3064 3710 1118 3113 3460 3644 3830 4006A. Capital Official Qrants 356 373 383 398 414 430 46 463S. :lrect Foeign Investmsnt 469 654 817 1229 1001 956 995 1014C. Total Net LT Disbursements 886 996 -19 936 1495 1706 1839 1949

C.1 Gross Disbursements 1906 2303 2726 3613 3957 3852 3905C.2 Amortization 2/ 1098 2321 1790 2117 2249 2013 1956

O. Net Short Tom Capitat 9 369 -477 300 300 300 300 300E. CNtSopt FrtTsm pEI -173 245 413 250 250 250 250 250-. Errors & Oissfons 1517 1073 0 0 0 0 0 0

FINANCINGIncrease(-) fn Net Reserves -11 -2322 410 -157 -426 -509 -633 -673

NM ITEWSA. Perts Club Extensfon 915 0 0 0 0 0B. Com isrcal Bnk DDR Savinrs 30 325 746 712 678 64

8.1 Amrtization 0 0 420 420 420 4203.2 Int rest (Gross) 30 325 326 292 258 224

C. thfdsntified Financing 0 559 1276 1733 1679 15SSC.1 Paris Club Eltiibte 1069 1213 1281 1211 839

C.i. Amortization 746 940 1074 1069 7S1C.1.b Interest 322 273 208 142 8B

1/ 3OP projectfons are after Comuercial Bank ODSR operation2/ Oebt service due after reschedulings thru Oeeembor 1992 & ODSR qperation

- 36 --X I

TAML 3 EXTEM L OET AID OLET SERVICE(USS millios)

........ ........................... ,....... .................................

*-- Actua...... Prltiminary ............... Prolted" --..................1988 1989 1990 1991 1992 1993 94 195 1996 1997

..................................................................... ............................................

A. OEOT CUMATTADING S DI08URSE0Totat Long-Tern GO 2450 23368 25139 25516 26661 28102 30453 33472 3671 40014Public & Publicalty Oam. LT 23057 22625 24134 24796 26086 27616 30053 33159 36340 398591. OffIciat Creditors 11743 12521 15160 16087 18280 20133 23493 27422 31302 33140

a. Multttaterat 4805 5010 6300 6515 6733 7177 7860 8419 8972 9613of which IDA 102 102 101 135 132 196 261 325 389 454of idhich ILR0 3408 3492 3943 4009 402 4320 4740 4984 5163 s5

b. 1latetwl 693 7512 8859 573 11547 12957 15633 19002 22330 25527.2. Private CredItors 1131S 10104 8974 8709 7806 7483 6559 5738 5038 4719a. Bonds 610 410 918 851 3863 3929 3922 3899 3899 3896b. Comwerciat lank. 9007 8428 6917 6892 3138 2924 2179 1524 921 676e. Other 1698 1266 1139 966 804 629 459 314 218 147

Private Man-Ouaranteed LT m 743 1006 719 576 486 400 313 231 15SUse of IMF 1093 117? 912 710 817 974 958 897 744 617Short-Term Debt 3864 3952 4431 4827 4431 5031 S331 5631 5931 6231

S. 01UsUIEmNTotat Long-Term DOM 1248 1475 2446 1906 2303 3284 4889 5690 5531 5461Publie & Psbtically Quo. LT 1248 1356 2155 1906 2303 3284 4889 5690 5531 54611. Offiecat Creditors 1081 1234 1485 1727 2175 3173 4882 5687 5531 5461

a. Multilaterat 424 654 853 655 816 965 1173 1079 1119 1258of wichiDA 3 1 0 33 33 66 66 66 66 66of whlch IIRD 258 463 506 345 509 598 748 .94 568 646

b. Si lteral 657 580 632 1072 1359 2208 3710 4608 4412 42032. Private Crediters 167 122 670 179 128 112 6 3 0 0

a. Bonds 0 0 424 0 40 73 0 0 0 0b. Coaercfalt anks 8 0 167 110 16 4 1 0 0 0c. Other 19 122 79 69 72 35 6 3 0 0

Pr1vat eMan-Guaranteed LT 0 119 291 0 0 0 0 0 0 0IMf Purches 94 302 0 476 210 200 200 200 0 0N*t Short-Ten Capitatl -31 189 425 369 300 300 300 300 300 300

C. REPAYNETS I/Total Lang-Tern WOD 1351 898 754 1098 2321 1790 2117 2249 2013 1956Public & Pubtleally Guar. LT 1251 864 707 975 2178 1700 2032 2162 1931 18801. Offteat Creditors 393 377 442 506 625 1266 1522 1758 1651 1622

a. Muttitateral 352 338 390 439 449 468 489 519 S67 616of whih IDA I I I 1 1 1 1 2 2 2Of hich IBRD 283 268 301 319 313 316 328 349 390 436

b. Sitteral 41 39 52 66 176 798 1033 1239 1085 10062. Private Creditors 858 487 265 469 1553 434 510 404 280 258

. Bonds 226 167 175 134 41 7 7 22 0 3b. Ccmafel Basnk 593 261 41 242 1414 218 326 234 184 184c. Other 39 59 49 93 98 209 176 147 96 71

Private IonGuranteed LT 100 34 47 123 144 90 85 87 82 76Iltf Repwhas 196 196 345 202 103 43 216 261 1S3 127

0. INTEREST 1/Total Lon-Term OD 1580 1660 1S26 1411 1448 1744 1707 1728 1782 1864Pubtli & Pbtfcally Gmr. LT 1457 1S83 1471 1336 1376 1678 1652 1684 1749 18411. Offiefat Creditors 572 592 719 626 653 1036 1065 1164 1294 1432

a. Multitaterat 387 380 444 490 480 487 493 524 546 S69ofutbfeh tIA I I I I 1 1 1 2 2 3of sA ch IIRO 289 268 296 334 325 337 346 376 390 399

b. Bflateral 184 212 275 136 173 549 614 7m 1016 1257.2. Private Creditors 8s5 991 752 710 723 642 587 520 455 409

a. Bonds 62 44 27 71 62 236 259 268 267 279b. Co'ircfal anks 774 907 691 598 621 347 5 222 168 117c. Other 49 40 34 42 40 59 43 30 20 12

Private onGuranteed LT 123 77 55 75 73 66 55 44 33 24INF Swvice Chargo 74 84 9 103 86 94 100 87 76 63Interast on Short-Ter Debt 341 402 108 100 100 126 152 178 204 230

...... ......istorical d_ta .i ca:h projectios ae aI/ Nfstorfc t date Is cash, proJect hns are aecrust

- 37 -

ANNEX I

TABLE 4 fIlANCING REQUIRENENTS (19M9297) 1/(USS Nilitarns)

...........................................................................................

1m 1993 1994 1994 1996 1997............... ................................ _ _ ....... *............

GROSS FINANCING REQUIREMENTS 4690 5060 5S61 s832 5690 583S.............................

Non-Interest Current Account 106 *99* -1074 -1142 -1136 -1175

Debt Service Due 21 395S 3753 4077 4242 4075 4114A. Interest 1634 1963 1959 1993 2062 21573. Amortizatfon 2321 1790 2117 2249 2013 1956

8.1 of which: Buyback 1263IncreaseC-) In Gross Reserves 303 -314 -410 -44 -480 S46Purchase of Colateral 444Unifnding of Swps 700

SOURCES 4691 S060 5562 5832 5690 S535

Otficial Grants 383 398 414 430 446 463Direct Foreign Investent 817 1229 1001 956 995 1044NLT Gross Disbursements 2303 2726 3613 39S7 3852 3905Net Short Term Capital 3/ 23 300 300 300 300 300Capital, NEI 4/ 857 250 250 250 250 250Net IMF Purchases 107 157 -16 -61 -153 -127

KM ITEMS:Paris Club Rescheduting 915 0 0 0 0 0Camerecal Bank DOSR Savings 30 325 7U 712 678 644Amortizatfon 0 0 420 420 420 420Interest (Gross) 30 325 326 292 258 224

Unidentified Sources 0 559 1276 1733 1679 1555Parls Club EligIble 1069 1213 1281 1211 839Amortization 746 940 1074 1069 751Interest 322 273 208 142 88

.................. ....................................... _................

1/ B0P projections are after Comrclal Bank ODSR operstion2/ Debt sece after Paris Club rescheduling through end-1992 & 1992 DOSR operation3/ BOP figure includes unwinding of swaps4/' P Figure includes the purchase of collateral

-38- ANNEX II

October 16, 1992

Mr. Lewis T. PrestonPresidentThe World BankWashington, D.C.

Res Economc litegration Loan

Dear Wr. Prelsdent:

The Phl1ippin6 Gornt implmenting a package of wide-rangingreforms in order to restore the economy to a sustainable growth path. Wehave been working with your staff towards World Bank upport for criticalnew initiatives in the areas of -4vestmaent, trade policy, energy policy,transportation policy, foreign exchange management and the strengthening ofthe financial position of the Central Bank. We have also concluded anagreement with our commercial bank creditors to restructure the remainingeligible public sector medium torm external debt, according to terms agreedto in February 1992. This letter provides an overview of the Government'sreform prgroam, indicates the measures already taken and outlines thedirection of future policies.

Although the Phillppines was one of the first countries to receive aWorld lank Structural Adjustment Loan in 1980, the early efforts atadjustment were derailed by a severe acroeconomic crisis triggered by thecut-off of comnercial bank foreign credits towards the end of 1983. Atten-tion turned to stabilization, whlch was successful in lowering inflation andthe current account deficit. But in 1986, When the Auino administrationtook office, tho economy was moribund, having contracted by a cumulative15.5 (at constant 1985 prices) percent in 1984 and 1985, and it was weighteddown by a highly inefficient incentive system, a grossly overextended publicsector, and a net of political instltutions which have not been conducive toprivate sector initLative, Since thea, as underlined below, with the helpof the foreign donor community, we have launched a strong program of reformsto remove policy-induced dLitortions in incentives, reduce the size of thepublic sector, and develop democratic structures and regulatory proceduresthat are both equitable and transparent.

At thls stage, our objectives are to create a world competitive econo-my, led by a dynamic private sector, capable of exploiting the opportunitiesfor development provLded by world trade and financial links. in order toachieve these goals, we are hlghlighting programs which will integrate oureconomy with the rest of the world and which wlll encourage dmestic Ondforeign investments in the Philippines. This involvess rmoving remaun,&ngdistortions in the real economy; relying on market-determined prices toguide resource allocation; providing the necessary infrastructure support;and improving our institutional capability to manage the economy. We aretranslatLng these concepts into speclfic programs for: improving theinvestment climate, by creating a supportive policy envLrorment, reducing

- 39 - ANNEX 11

cumbegsome bureaucratic red-tape and accolerating privatlation; reducingthe anti-export bias, which has ben responsible for the slow developmentand low -fficiency of agriculture and manufacturlng, and launchinq a aa-tionwide program to promote exports; reducing the cost penalties faced bydomestic private producers an a result of inefficient transprt and infra-structure services; and ensuring a more streamlined lmplementatlon ofGovernment policies In a number of key areas.

The reform agenda laid out below epresents the continuation of ef-forts initiated by the AquLno adminlstration. We have made considerableprogress but much remain to be done to establish, in a credible and irre-versible fashion, the new directions we have taken. Coupled with the firstpeaceful transfer of power in decades, we are confident that we can convincedomestic and foreign private investors that we are finally on the path ofrapid, sustainable.development that our neighbors have taken with so muchsuccess.

Iven as the financial savings generated by debt and debt servicereduction are substantial, the Government recognizes that the greaterbenefit from the debt agreement stems from reduced uncertainty and greaterInvestor confidence that is expected to arise from completion of the deal.To further these, a stable macroeconomic environment is necessary. We canpoint with some pride to the macroeconomlc achievements of the lasttwenty-one months during which time we have kept to our objectives, despitemajor natural disasters, an unprecedented reflow of foreogn capltal, a weakdomestic economy and election pressures. We fully lntend to build on thistrack record of good macroeconomic implementation and reinforce the'trendstowards responsible fLical and monetary policy that have been established.:n this endeavor, we will hold preliminary discussLons in November with theIMP towards defining a medium term macroeonomic framework in the context ofa successor program to the current standby arrangement xpiring on March 31,1993. it is our expectation that well in advance of the expiration of ourcurrent IN? program, both the IM and the Bank would have provided augmentedrsources to help finanoc our commercial bank debt package which we Intendto close by end October 1992.

Medium-Term Economig Framework

The Government is fully aware of the need to conduct its policies andprograms within a consistent medium-term framework. it considers theattainment of strong and sustainable economic growth as its major macroeco-nomic objective in the medium-term. In the pursuLt of these objectives, thegovernment is committed to the maintenance of macroeconomic stability andcontinued implementation of structural reforms. Macroeconomic stabilityessentially reqpires maintaining low and stable fiscal and externaldeficits, single digit inflation, adeqate international reserves, and adebt burden that does not compromise the goal of stable and sustained eco-nomic growth. Progress in structural transformation requirts continuedmovement towards an economic system that'is capable of generating moreemployment and can better alleviate poverty. We believe the best way toachieve our economic objectives is to redouble our efforts to make theeconomy more market-oriented, to remov remaining policy-induced distortionsand to provide an environment Ln which the prlvate sector can flourish. The

-40- AN II

Government has adopted and La acting upon a medium-te progrm in whlchstrategles to pursue these objectlves, as quantlfied and wlth aropriatemechanlsms, are deflne for achievlng our targets.

Naeroeconomic Proshe and Objectlve.

after a dlfflcult year of negative growth in 1991, we are optimistlcthat a recovery of at least 2.0 percent growth wlll take place in 1992 andaccelerate thereafter to attaLn an annual average of about 7 per cent growthin the medium term. On the demand side, growth should be led by investmentand exports. Following the completion of our commerclal bank debt agreementand the peaceful transfer of power through democratic processes, the climatefor lnvestment has improved noticeably. Continued pursuit of our structuralreform agenda will ensure that these lnvestments are allocated in anefficient manner. Important new lnvestments are antlclpated in the powerand telecommunications sector, wlth public corporations, domestlc investorsand forelgn investors all contributing 9 Investment rates of about 25percent of GNP should be achievable over the medlum term.

gxports will also be a leading growth sector and we lntend to Lnculcateexport promotion lnto every level of Government. We have achieved somesuccess iA restructurlng our exports, and manufactures now account forthree-quarters of total export earnLngs. However, because of low valueadded in manufactured exports, this accomplLshment has not been suffLcientto prevent recurrent balance of payments crises and we need to pursue a moreeffectlve export promotLoan strategy. Recent structural reforms (see below)and exchange rate policies have made major lnroads ln reducang theanti-export incentive bias of the economy and we are confident that, inoonjunction wlth other promotional actLvltLes ln flnance, marketing, tech-nical assistance and instLtutional strengthenLng, our exports could expandby at least 15 Wercent over the next three years.

In order to flnance thli growth, we must mobllize all avallable doms-tlc and foreign resources. Domestically, we have set a target of 15.4percent of ONP for our 1992 tax effort, and we are commltted to substantLalfurther improveents durLng the next plan period. Under the growth scenarioabove-mentLoned, the tax effort is targeted to rise in 1998 by 1.75percentage polnts above the 1992 levels assuming the existLng tax system andby at least 295 percentage points with the implementation of new taxmeasures and removal of distortLon-LnducLng taxes. Private domestLc savingshad fallen considerably ln the recessLon of 1991, but are expected torecover as incomes rise. Market-determined lnterest rates offer posLtivereal returns to savers and, with a restoration of confldence in the econaomy,we expect savLngs whlch are currently kept abroad to return. We have alsosuccessfully mobliLzed record levels of foreign remittances since last yearthrough improvements ln domestLc bankLng services.

In the short-term, before export momentum is created and before pri-vate savings recover with lncome growth, we antlclpate a defLclt on ourcurrent account of 3-4 percent of GNP. Addlng to our needs, we mustreplenLsh our foreign exchange reserves whleh were depleted by completlng

ANNEX II-41-

the comercial bank debt excharge and buyback and unwlnding swap obligattons-of the:Central lank. We hope to fill much of these needs thiough non-debtfinan4ng, especially prlvate capital lnflows and dixect investments whichare being encouraged through our debt/equlty swap mechanism ad throughIncreased reliance on Buuld-Operate-Transfer type hebmes involving privatesector participation iA Infrastructure Lavestment. Nowever, we stillurgently need support from the international financial community at thistime.

We are confident that with the provision of new financial assistance,the objectives outlined above ares achievable. We recognLze that the chal-lenge will not be easily met, but we are optimLstic that the set of measuresthat we have introduced to improve macroeconomic management and to broadenand deepen our structural reforms will prove effective.

Ixtrn,al, Debt 8trap eor

Debt service by the Phtlippines peaked at 38 percent of exports ofgoods and services ln 1982. Since then lt has been reduced to about 21percent ln 1991 as a result of a debt strategy focused on cash flow relLiffor the balance of payments. We rescheduled Paris Club debts in 1984, 1986,1989 and most recently in 1991. This last rescheduling covered some US$1.Sbillion in Lnterest and principal falling due ln July 1991 to December 1992.Commercial bank debt has also been rescheduled: a 1985 agreement rescheduledabout USS6 billion in repayments and arrears due between 1983-86 and ln1987, seme US$9 billion of payments due over the 1987-92 period were re-scheduled.

Sinee the introduction of the Brady initiative, the focus of the debtstrategy has shifted to include debt and debt service reduction, within acontext of voluntary, market oriented transactions. Thls orientation hascme about in order to reduce the debt overhang and to return the Philip-pines to creditworthiness in as short a period as possible. It has provennecessary because of the recognition that the chronic fiscal deficits in thecountry have been a prime source of balance of payments difficultLes andthat the DDSR can assLst in resolving this aspect of the problem.

In 1990, we concluded the first phase of the new DDSR strategy with abuyback of US$1.3 billion in commercial bank debt, supported by the WorldBank's Debt Xanagement Program Loan. This program also provided waivers forfurther debt reductions, including debt/equlty swaps. This has beensignificant: 42 percent of net foreign investment in 1991 came Lato thecountry through this channel. As of June 1992, total debt reduction ofOS$5.9 billion had been achieved through a combination of measures.

The most recent agreement with the commercial banks covers about USS4.55 billlon, after nettlng out most recent pre-termination of debt onaccount of various debt converslon modalitles (debt for debt, debt forequity, debt for high social impact projects). On May 14, we concluded abuyback of US$ 1.26 billion at an average price of 52 cents per dollar offace value. As of September 30, 1992, commltments to restructure an

- 42 - ANNEX II

additional USS 3.17 billion have been secured. Total debt b6ight back andtende:ed for debt conversion represents 97.4 percent of totai eligible debt.'We are'pursuing subscriptions of the remaining banks to further increaseparticipation. We antLcipate that this agreesmet will yLeld cashflow rellefof about US$1.7 blllion over 1992-97; it reflects an effective debtrzduction estimated at about USS.2 bl1lion.

MamrkegonmLc Manaaement

The outcome of our stablization efforts since February 1991 has beenfavorable. Forelgn exchange reserves strengthened to a peak level of US$S.Sbillion in Aprll 1992, inflation has been reduced to single digit levels andthe consolldated public sector deficit has been brought under control at 1.7percent of GNP in 1991 and will be kept well wLthin the prograumed ceilingof 2.7 percent of GNP in 1992. But stabiliLation has also brought with itunanticipated problems in macroeconomic managemptnt. Tight monetary pollcyintroduced to flght inflation has helped attrect large inflows of capitalfrom abroad. Combined with weak domestlc demand for imports, this hascaused an apprecLatLon of the peso by over 20 percent in real terms between1990 and April 1992 relative to the level prevailing at the end of 1990 andthi is adversely affecting our exports and our growth. At the same time,we have been forced to sterillze the ir flows to avoid excessive monetarygrowth and a rekindling of Lnflation, )ut ln so doing the domestic debt ofthe Govermnent and the Central Bank has expanded. Because of the thinnessof the domestLc capital market, the increase ln public domestic debt haskept our interest rates high, dampening private investment.

We have taken several steps to improv the effectLveness of our macr-oeconomlc management. rn order to improve the allocative efficiency of thedomestLc economy, enhaftce the competLtiveness of Philippine enterprLses andto attract for*ign investments, we have liberalized our foreign exchangeregulations. In the latest Ca Lssuance, commodity and service exporters arenow allowed to retain 100 percent of thelr foreign exchange earnings and tohave free use of these resources. This considerably reduces thetransactions costs faced by exporters who require slgniflcant amounts offoreign exchange to finance Lntermediate inputs and capltal equipment.Second, we have allowed exporters to access loans from Forelgn CurrencyDeposit Unit. (FCDU) funds of up to 100 percent of the values of thelrletters of credits, purchase order or sales contract. Thls has reduced thedemand for peso loans and helped brlng down interest rates. Thlrd, we havesought to broaden the domestic market for government debt through increasLngthe opportunltLes for gmall investors and pension funds to participate lnthe market. Already we are seeLng posLtive slgns from these developments.

The exchange rate has stabilized and depreclated somewhat in nominalterms from Aprll to September 1992 Domestic interest rates have also beensteadily fallLng both in nominal and real terms. We are increasinglyconfident that as our foreign exchange and domestic money markets becomedeeper and more competitive, macroeconomic policy management will becomemore effectlve and we will be able to achieve our medium term goals ofmoderate, single digit inflation and a crapetitive exchange rate at the same

43 ANNEX II

time.

Cixr most pressing COnce.ta continues to be the consolidated publicsector deficit. Although we have reduced the deficit to manageable levels,this has been achiled ia a nwuber of growth-reducinky ways. Because of outlnabillty to generate sufficlent revenues, public investment has beereduced substantially giving rlse to some of the infrastructure bottleneckspresently being experlenced. We remain committed to a program of increasintax revenues with all possible speed. We have approved a met of recom-mendatlons developed jointly by the 2MF and World Bank for improving taxcollection efficLency by the Bureau of Internal Revenue and the BSurau ofCustoms, and we are making strong efforts to achleve the required legisla-tive approval to implement our agenda for ralsing revenues, ineluding, wherewarranted, the introduction of revenue measures designed to broaden the taxbase. Legislation, already submitted to Congress and which are at various -

stages of deliberation and approval lnclude bills whichs (a) increasespenalties for tax evasion, imposing mandatory jall sentences in certaincases, (b) prescribes specific venues for filing and payment of largetaxpayers, (c) eliminates the 10 percent physical lnspectlon requirement forcustoms to facilitate clearing, (d) strengthening the anti-smugglingprovisions of the Tariff and Customs Code, and (e) refinements in the VAT.Bills increasing taxes on cigarettes, alcoholic beverages, imposing taxes onaffluent consumption, such as yachts and sports club memberships, andincreases ln tax on non-essentials from 10 percent to 20 percent are beingfinalized for submission to Congress shortly. Additionally, the executlveis set to implement admainstrative measures such as: increasing fees andcharges, and reclassifyLng cortain positions ln the tax collection agencies-by provlding higher compensation in exchange for security of tenure in orderto achieve greater accountability.

We are also aware of the fact that the public sector defLcit is stlllvulnerable to the effects of Lnternational price shocks and foreign exchangemaovments, particularly in so far as these are translated Lato inereasedsubsidies to publLe corporations, changes in the Oil Price StabilizationFund and payments due on our external debt. We are continuing efforts toreduce thls vulnerability through privatization, quicker responsiveness Lndomostic oil and energy pricing, and debt relief.

At the same time, we have put in place mechanisms to ensure expenditurecontrols. IxpendLtures are being rationalized by reducing the net flow ofresources from the Natlonal Government to public enterprises, by putting asmany public servLces as practical on an unsubsidized basis, by downsizingthe publlc sector and avolding wage adjustments, and by more effective debtmanagement. The monthly programming of cash by an lnter- agency group wasan important ingredient in our success in meeting flical targets ln 1991 and1992 and wlll be continued. Publlc investment programming procedures arebeLng modified into a two track system. The first track, consisting offirmed up projects in the pipellne will receive close attention as tonegotLation schedules, readiness for implementation, and immedLatelyavaLlable and allocable publ$c resources. The second track will consLst ofa longer tem schedule of projects based more on sectoral program/projectprototypes which will be allowed to evolve Lato speclfie projects in a cycle

44 ANNEX II

coordinated with foreign donors.

TO complemnt the medium-term fiscal, monetary and exchange rate stancedescribed above, the Government intends to continue managing internal andexternal public debt with a view to avoiding macroeconomic instability. Thechief risk is related to interest rates and the ability of the publlc sectorto refinance maturing debts in volatile domestic and international finaniUalmarkets. While domestic and foreign interest rates are comparatively low atpresent, the prospect of destabilizing spikes cannot be ignored.Accordingly, we will continue to monitor the size of public domestic andexternal debt so that it can be steadily reduced towards a target of 60percent of GNP. Recent external debt restructuri4g exercises havecontributed towards this objective. Towards this end, the government isundertaking tos la) lengthen the maturities on domestic debt and introducenew instruments that bring down the cost of borrowing, including tappingsmall savers; (b) continue to rely on most concessional funding sources forexternal financing; (c) develop access to the international capital marketsfor government borrowers ln order to reduce reliance on relatively moreexpensive and shortor-term domstic debt, as well as for credit-worthyprivate firms in order to reduce pressure on domestic interest rates; and(d) continue various debt conversion programs where these are stillfinancially advantageous.

Structural Reforms and RKv Proorams. 1986-91

Our overall approach to reform has revolved around three key princi-ples (i) greater attention to poverty alleviation and, social equity; (ii)acceleration of growth and increased economic efficiency: (iii) reducedgovernment involvement in th economy and an emphasis on private initiative.In the light of these objectives, we have undertaken significant reforms inagrliulture, investments, trade policy and the financial, public and socialsectors.

In agriculture, reform measures (partly supported through the WorldBank's Agricultural Inputs Loan) have included: the dismantling of thecoconut, sugar, meat and fertilizer monopolies; lifting of the copra exportban; opening up of wheat and soybean eal importation to the private sector;and lifting of price controls on riew, corn, other feed grains, poultry andpork. New legislation expanding agrarian reform to areas other than riceand corn lands has also been approved, but implementation has been delayed.However, a total of 1.73 million hectares have been distributed to almostone million farmer-beneficiaries.

Investment-related reforms included the rationalization of investmentincentives with the passage of the Omnibus Investment Code in July 1987,simplification of procedures for registering investments and the implemen-tation of a debt/equity conversion scheme. The 1991 Investment PrioritiesPlan was also shortened, enabling the Board of Investments to concentrateits promotional activities on highly selected areas. The 1992 IPPconsisting of 59 investment areas which is shorter than that for the prioryear, was issued last 30 April 1992.

-45- MEX ItI

The trade reform program was launched to promote iatenationallycompetitive industries and to provide quality goods at lower prices toconsumers. The Governzent liltiated this program in 1980, but a balance ofpayments crisis lnterrupted progress and forced the imposLtion of temporaryquantitative controls. In tandem with renewed efforts since 1986 to lowereffective protection rates, we have gradually removed quantitative re-strictions on imports, and in sc-. cases replaced thges with tariff basedprotection to increase transparency and equalixe protectlon across sectors.Quantitative restrictions on 1488 item were lifted from April 1986 to Mareh1991 and these include items liberalized with tariff adjustments.

In the financial sector, the rehabilitation of the Philippine NationalBank and-the Development Bank of the Philippines (DSP) has placed them on asound financLal footing, with support from the World Bank t s Economic Recov-ery Loan. The D3P. Ls being transformed primarily into a wholesale bank withassistance from the World Bank's Financial Sector Loan. This will make theDSP responsible for raising long-term funds and relending them to retailfinancial institutions. To reduce the size of the public sector in banking,the Government has sold 43 percent of the shares of PBS and intends to offerfor sale an additional 8 percent. Further, of six commercial banks previ-ously acquired by the Government, four have been fully sold, another onepartially sold, and the remaining bank is up for privatization.

To reduce the presencs of the Government in the economy, a program wasimplemented to privatize or close government corporations duplicatingprivate sector activities, with assistance from the World Bank's GovernmentCorporate Sector Loan. By August 1992, 88 GOCCs have been offered for salerepresenting 68 percent of asset values of oc0Ca for privatization, of which71 have been privatized/disposed. Some 275 out of 399, or about two-thirds, of the foreclosed non-performing assets of governenst bank havealso been sold back to the private setor.

Public investment has been substantially refocused, reducing the *izeof the program and reorienting expenditures to essential infrastructure inpriority areas. To accelerate project development and implementation,various administrative improvements and institutional support measures wereput in place to improve the capabilities of Implementing agencies. Budge-tary allocations to education, health, housing and other social servicesincreased considerably. The delivery of basic social services to the poorwas also expanded, and support services such as credit, farm-to-market roadsand irrigation provided to land reform beneficiaries.

The Current Reform AMenda: 1992 and Beyond

The current reform agenda is aimed at consolidating and extending thereforms aimed at accelerating growth and increased economic efficiency. Werecognize that in the world economy of today, removal of distortions is notsufficient to create a competitive edge. With the debt agreement, we havean opportunity to change both the reality and the perceptions of investorsof the Phllippines as a place for doing busines. We intend to use-thiswindow to deepen and broaden the reform process, to focus our expenditures

-46- ANNEX I

on critical infrastructur, needs, especially power, and to strengthen ourinstitutions of economic management. Regadig the reform of the Ineentiveregime. -our rram has five coponents (1) investment eberalLzation towelcome foreigners and expand opportunitles for the private sector toparticipate in economic development, especlally in the provision of infra-structure and other hltherto publc servlees; (ii) trade reform to *nsure*fficLent resource allocation and encourage exports; (iii) transport liber-alizatlon to encourage domestic and iaternational trade; (iv) foreignexchange liberalization to achlive greater integration of domestic andforeign markets, encourage more foreign exchange lnflows, and create a moremarket-determlned exchange rate; and (v) development of capital markets,including financial restructuring and support for the Central Bank toenhance its credibility as an independent entity responsible for monetaryand exchange rate polley.

Invesltm*ES Lieaiato

The objectlve of the investment liberalixatLon component is to increasecompetLtLon and efficLent private sector particLpation in the economy.Building oan the new investment incentives passed in 1987, the agenda now isto attract more forelgn investors and to broaden the scope of private sectoractivity. The following measures have been taken:

A. The ForeLgn Snvestment Act (RA 7042) was passed last June 1991and its implementing rules and regulatLons issued on October 28, 1991. Anaddendum with definitionse/clarifications of the eriteria to be used forinclusion of a sector in negative list C of the Regular Forelgn InvestmentNegatlve List was issued on Aprll 21, 1992. A 1Lst of industries strategicto the development of the economy shall be formulated and published by endDecember 1992. With this act and streamlining of the lavestment reviewprocedures of the Board of Investments (301), the Phlilppines is one of themost open countries In the regLon to foreign Lavestment. Foreign investorsexcept those desiring to avaLl of incentives no longer have to obtainauthorization frau 30? and can freely enter all sectors except thosespeeLfLed in a short negative list which includes firms particLpating inpublic works construction, natural resource extractlon, retail trade and afew selected professional activitles. Manufacturing is not a restrLetedarea except for products wlth LmplicstLons on publLc health and safety e.g.drugs and explosives. Nowever, as required by law the transitory foreigninvestment negative list shall be replaced at the end of the transitionalperiod of three years by a fLrst regular negative list. The intent andsplrit of the law and its lmplementLng rules, however, ls to ensure that thenegatlve list continues to be kept short and barrLers to entry are reducedby simplifying regulatory procedures.

B. To further ease the regulations for foreign natLonals Lnvestingln the country to conduct business domestically, a Memorandum of Agreementamong flve concerned agencies on employment of foreign natLonals, providingfor streamlLning of procedures to obtaLn Alien Employment Permits has beenadopted. An Executlve Order simplifying procedures for the conversLon ofvlsa status of cortain foreign nationals was also signed by President Aquino

-47- ANNEX II

on January 8, 1992.

Co. On September 9, 1992, the Central Bank proposed to thePresident for submission to Congress under PresLdintial certification# draftlegislation intended to liberalize the rules governing the entry of foreignbanks through the establishment of branch/branches in the Philippines withfull banking authority.

D The Government is seeking to encourage private participation ininfrastructure investments through a number of measures.

(i) Enactment of the Build-Operate-Transfer Law last July 9,1990 (RA 6957), and the issuance of Implementing Rules on April 3,1991. Already 6 BOT contracts in the energy sector have been sLgned,more than in.any other -otatitry.

(iL) Approval by the BEDA Board of the GuidelLnes for PrivateSector Access to ODA last octobor 9, 1991.

(iii) On-lending of O0A, through Gcvernment fLnancial andsimilar institutions for infrastructure projects. Over the past three.years, US$293.72 mllion has been provLded through such mechanisms.

(Lv) increase in the Single Borrower Limit for banks,irncluding DSP, from 1S percent to 25 percent, which would facllitatesyndications.

We recognize that although our emphasLs L on prlvate sector particL-pation in infrastructure, the prlvate sector may not be able to mobilLsisufficLent finances for the large infrastructure roeuirements of the nextfew years, given country risk perceptions of commurclal external creditors.Accordingly, we will consider on a case-by-case basis, other modalities forchanneling officLal ODA into socially desirable infrastructure projoctsthrough alternative uechanlsms such as coursing financing through governmentnon-bank financial institutions (such as Phllguarantee where the sLagleborrower limit does not apply) and corporations, or encouraging furthersyndications to participating private financLal institutions. We will alsomonitor progress in implementation of; SOT projects to ensure that potentialprocedural delays are quickly identifLed and eliminated.

B. Pursuant to Executive Order No. 11 Lssued by President Fidel V.Rames on August 10, 1992, the life of the Asset Privatization Trust (APT)and the Committee on Privatization (COP) was extended from August 31, 1992to December 31, 1993. With thts, we are continuing our strategy of focusingon large tLeket privatization and expect to offer for sale by mid-1993 atleast 95 GOCCs with 75 percent of asset values (see Annex A for the completelist of 122 corporations together with thelr 1985 valuations). Our largestprivatlzation transaction so far was the sale of 67 percent of Govermentshares in Phllippine alrlines which resulted in gross proceeds of P9.64blllion in cash for the National Goverrment. Government shares LnPhllippLne National Bank amounting to 43 percent were also sold via publicoffering, generating cash proceed of P4.1 billion for the National

-48- ANNEX II

covernment. Additionally, the Government is studying options for furtherexpanding the pr.vatization effort to include ports, power generation,potable water supply and sewrage faclities,, and idle government lands,among others. The development of the former Subic naval base (the area ofwhich La as large as all of Singapore), for which the Bank is providingtechnical asistance, is also being approaehed as a privatLzationundertaking. We *xpect to generate at least P4.0 bilIlon for the publicsector from privatization sales in 1993.

With these measures, we expect to achieve one of the most investorfriendly environments in Asia. We plan to pursue a legLslative agenda tofine-tune incentives in line with other competitor countries, where war-ranted, including passage of the Condominiu Law to provide greatercertainty to foreigners in using land and of net operating loss carry-overincentives. We are also continuing efforts to transform the Board ofInvestment from a regulatory to a promotional body; the Foreign InvestmentsAct, which removes the need for Sol authorization, is one step towards thisgoal.

The trade reform program reflects the Government's determination todevelop efficient market mechanisms to allocate resources and to align thetrade regime with sectoral liberalization programs. To this end, we arecommitted to avoiding prlce or quantity controls on trade flows and we aremoving towards the full dismantling of marketing monopolies and cartols. Wehave approved the removal of quantitative restrictLons on commerc&lIvehicles, as a necessary component of improving the efficiency of thetransport sector. We have institutionalized support for trade reformthrough a process of extensive public hearings, "ad we are sooeking toaccelerate and deepen the process through agreaments reached with otherASIA countries on freer trade. The level and dispersion of protectionafforded through tariffs is now governed by a time-bound schedule of tariffreductions which will make the Philippines an open economy, comparable toour neighbors.

The following measures have bee-h adopteds

A. Tariff adjustments, as provided for in E0 470, issued In 1991,are being phased in over a five year period to reduce the overall level andthe dispersal of tariff protection. The average import-weighted tariff,which has been brought down from 43 percent in 1980 to 16 percent currently,will be further reduced to 14 percent by July 1995. At this time, allsurcharges with a few exceptions, will also have been eliminated. Themaximum tariff will, in general be 30 percent and there will be just fourtariff bands, considerably reducing the administrative complexity ofimplementing the tarlff code. In addition, a policy to further acceleratethe reduction of tariff level to 3 and 10 percent on selected capitalequipment, subject to revenue limitations, is under study by the 30!. Thetemporary import levy, introduced as an mergency fiscal measure in Pebruary1991, was removd in May 1912 In line with our thrust to improve customs

-49- ANNEX II

efficiency, we have impleamted a Clobalied Comprehensive Import Surveil-lance.15ystem. A contract with Societe Generals de Surveillance to implmentthis "stem became effectlve March 16, 1992. Our experience with a pilotprogram was that pre-shipmat inspectlons have reduced technical umugglingand contrLbuted towards hlgher revenue collection. As another step towardsgreater customs transparency, a revlew of the proposal to shLft the basis ofcustoms valuation from Home Consumption Value to lair Market Value (Brusselsdefinition) is now underway.

B As of April 1991, there were 414 Ltems (out of a total of overC,000 tariff lines) covered by quantitative restrlctLons. Of these, a totalof 139 items were liberalLied without tariff adjustment or at reduced ratesof duty under Central Bank Circular Nos. 1337 and 1347 dated 27 April and 27July 1992, respectively. These include consumer electronic products andtheir spare parts, fertilizers, brand new dump trucks, used vessels, anti-biotics, breeding 'animals and other Ltems. Another 125 ltems wereliberalized with temporary tariff adjustments under CB Circular No. 1356issued on September 25, 1992 and E.O. No. 8. Included among these are othertrucks and buses Ltems, consumer durables, meat, fLsh, animal effects, andsugar. An additional 15 ltems are to be liberalized at the latest byDecember 1992, barring legislative action. In the case of corn, however,while the removal of quantitative restriLtions will be undertaken, thetimlng is contingent on the implementation of certain other complementarymeasures. Another 18 items consisting of coal and coal derLvatives andrefined petroleum products are to be liberalized ln conjunction wlth generalprograms to reform these subsectors. Still another 13 items have beenapproved for liberalization but require Congressional action before this canbecome effectlve, and we lntend to submlt such legislatLon to Congress bythe end of this calendar year. Finally, we have decided to retalnrestrictions on 104 items, of whieh 35 relate to items covered under theratLonaLizatLon and development programs 33 for cars, motorcycles and othervehicles,and 2 ltems for antibLotics, and 69 are being retained for health,safety and national defense purposes.

C. Export promotion is one of our top prLoritLes. In addition toreforms on the exchange rate, trade credits and tarlffs, we Latend tostrengthen institutional support to exporters. We have established, and areworking to reLnforce, an Export and DevAhlopment Council, with privatesector particLpatLon. The One-Stop-Shop inter-Agency Center for Tax Credltsand Duty Drawbacks, as embodied in Administrative Order No. 226 (February 7,1992), has commenced operation on 4 May 1992 at Department of Finance. TheCenter Ls envisLoned to achLve an orderly and expeditious processing of taxcredits and duty drawback applications while safeguarding the system fromthe occurrence of undue claims. For the convenience of exporters in theprovinces, the system was already instLtuted outide. of Metro Xanlla.Although the Center is not physically present in the region, an arrangementwas made to use the five BOX Extension Offices ln the procesaLng/evaluatLonof applications for tax credits/duty drawbacks. In addltLon, we are alsostudying some measures to lmprove the transferability of tax credits.

The TOR of the study for indirect exporters has been prepared by thes01* The study is designed to develop a unLform defLnltLon of indLrect

-50- ANNEX II

exporter which will allow their access to tax and duty free importation ofinputsjtax credits, and finaneing as extended to direct exporters.

D. Problemt related to the energy sector continue to be a majorobstacle to economic growth, both through interruptions in the supply ofelectricity and through the financial costs to the budget stemmLng fromimplmentation of the currant system of energy price determination. overthe past few years, the Oil Price Stabilization Fund (OPSP) has generatedlarge deficits and surpluses as a result of slow adjustment of domestlc oilprices. and the National Power Corporation has required cash lnfusions fromthe budget and continues to face difficulties in raising counterpart fundsto finance needed expansions in capacity. Other problems in the sectorinelude sector coordination, environmental and other approval and implemen-tation procedures, equipment maintenance, generation and distributioneffLciencies including system losses (particularly pilferage), geothermalroyalties, and prolotion of energy conservation. In order to correct theseproblems, we have initiated work on an Energy Sector Plan (ESP) focusing onthe critical issues, which is expected to be completed by the middle ofNovember 1992. This would detail how to establish a deregulated, maelet-oriented energy sector, and would make recommendations in terms of: reformof the policy rgime; institutional strengthening; and investment priori-ties. This aotion plan will consider the findings of several studies Onenergy pricing policies that are currently underway, including one financedby the World Bank. It will also take into consideration the implications ofoil import prices and foreign exchange rates on domestic oil prices and onelectricity tariffs. Xt will be carried out under the supervision of theOffice of the Energy affalrs and will be discussed by donors at the nextConsultative Group meeting for the Philippines.

We expect to submit to Congress legislation reforming the energypricir.Z system as a priority act, shortly after reviewing the recommenda-tions contained in the ZSP. Various options could be considered to meet ourobj ctlves of a liberalized, depoliticized oil price system, which wouldeliminate cross-subsidies (except through explicit fiscal means), restrictthe accumulated gaLns or losses of the OPSP, and align domestic andinternatlonal energy prices. These include proposals to implement automatliadjustments to prices as international conditions change and/or the OPS?crosses specified financial thresholdst possible proposals to regulate theindustry through a rate of return criterion, rather than through controlover specific product pricing; and transferring some P2.0 billion of theOPSF balances to fund additional capital requirements of NPC, now beingdiscussed in Congress.

In the short run, we must ensure that existing mechanlims governingoil pricing operate effectively, especially in reflecting current interna-tional prices and foreign exchange rates. Corollary to this, we haveinstituted an automatic pricing formula for electricity, which should changetariffs in proportion to fuel prices, but should endeavor to maintainexisting tariffs until at least an 8 percent return on rate base is achievedby UPC and an internal cash generation of at least 20 percent of theinvestment program is ensured.

ANNEX II-51-

Trananert Liberalization

The Government has given high priority to the rehabilitation andreconstruction of a transport infrastructure system. In addition to main-tenance activities, whLeh are to play a wore promLnent role, the governmentLs redefLning its responsibilities through a three-pronged approach. FIrst,we have initiated a program designed to improve the present regulatorytransport framework through a more market oriented system whlle at the sametim. strengthening standards to ensure safety, the welfare of the public,and protectlon of the envlronment. second, we are Lncreasingly lnvolvingthe private sector in the management and operation of transportinfrastructure and, as in the case of Phllippine Airlines, we are withdraw-Lng from the direct prevision of transport services. Third, we are de-volving substantLal parts of the centrally adminLstered road aetwork tolocal authorities in concert with the general thrust of politLcal andadministratlve decentralization.

The Department of Transport and Communications has issued DepartmentOrder (DO) No. 92-587 (30 March 1992) defining the policy framework on theregulation of transport services. ThLs DO simplifies, reduces and abolishesprocedural and administrative barriers to competitLon wlthin the existinglegal framework. It eases entry into and exit from transport markets byremov:ng or modifying a number of administrative practiees and requiring aminimum of two franchise holders in major routes to avoLd a monopolysituation. It allows for market-determined fares and rates around a guidingrate, except for mandatory rates on routes monopolized by a single operator.It states that the Government will refrain from subsidizing transportoperations, except in cases where no services are offered under market termsand a minimum service level is deemed necessary. Special financing andincentive programs, ineluding direct subsLdies for fleet acquisLtion andexpansion, will be phased out. Detailed rules and procedures forimplementing this DO will be issued by the middle of October 1992 by the tworesponsible regulatory boards (the Land Transportation Franchising andRegulatory Board, and the Maritime Industry AuthorLty).

Our intention is to lnstitutLonalize these policy changes by seekLagnecessary legal adjustments and we intend to submLt a Bill to CongressaccordLngly. We are also working on specific measures regarding safety andenvLronaental protection for land, sea and air transport. We have estab-lished standards for a new motor vehicle inspection system, with twostatLons operational ln Metro Manila, two more established elsewhere inLuzon, and still another two to be set up in Cebu and Davao, for a total ofsix. Thli system will be expanded countrywLde, and will include prlvatesector inspections stations authorlzed by the Government for these purposes.This system should signlflcantly reduce air pollution from vehicle emLssLonsin high densLty urban areas in maritime transport, the Government requlresthat all Phillppine registered ships of more than 500 tons conform to thesafety standards of an internatLonally recognized classLficatLon soeLety.We have also issued guLdelines on the operation of oil tankers in nationalwaters requiring, inter alia, compulsory oll pollution cover. We arerehabilitatLag air navlgation facilitLes and commissioning crash-tire-rescuevehicles to improve air safety. However, we recognize that more still needs

-52- ANNEX II

to bo Acne to enforce existing policLes effectively and to bring safety andenvironmental standards .n transport up to international levels.

ForEaLSMENShane &QWealLzatIon

Until recently, foreign exchange trading in the Philippines was re-stricted to a few regLstered dealers. Exporters had to surrender almost allforelgn exchange earnings and certain transactions, including capltalaccount transactions were largely restricted. As a result, the systemcontaLned an inherent bLas against exporters, both by inereasiag transac-tions costs for those relyLag on imported inteimaediates and by reducing theeffect of market forces on the level of the oxchange rate.

These rules however were hard to enforce La an open economy, and wereincreasingly incondistent with our objectives of promotLig foreign invest-ment and exports. Accordingly, the Central Bank has embarked on a majorprogram to 1Lberalize foreign exchange transactions, with the objective ofachieving full deregulation by the *nd of 1992.

As an in$tial step in this process, significant liberalization meas-ures have been implemented that increase currency convertibility in both thecurrent and capltal accounts of the balance of payments. Among thesemeasures are the expanded access to foreign currency loans of exporters andsubstantial increase in their dollar retention rate to 40 percent, asprovided for in CB Circular No. 1317 issued December 11, 1991 and No. 1319lisued January 3, 1992. CB Ctrcular No. 1334 Lssued April 1, 1992 providedfor free use of retained amounts by the exporter for any purpose. Thesemeasures are expected to reduce the transactions costs of exporterssininficantly, and to provide for a more comeitive export industry.

The provlslons of CB Circular No. 1318 issued January 3, 1992 reducingrestrictions on exchange transactions took effect January 20, 1992. Themajor changes include:

(l) Limitation of mandatory surrender of foreign exchangereceipts to only 15 types of business operations;

'te

($L) Higher coilings f2r travel, education and medical expendi-tures among others;

(lii) Allowance of indlvidual and corporate forelgn exchangedeposLts for operatLonal necessity upon approval bv the Central bank;

(iv) Full and immediate repatriatLon and remlttance privilegesfor all types of investments, whether as direct equity or in lLstedshares or seocurities, without prlor CB approval; and

(v) Expanslon of eligLble deposlts under the foreign currencydeposLt system to include foreign exchange not required for surrender.

A number of important reforms in the foreign exchangs market have also

53 ANNEX I1

been implemented to deepen the market and improve the mechanim for ex-change. rtat determination. In April 1992, a standard approach ws adoptdegarding the computation of the foreign exchange position of co_relal .

banks under Circular gol. 1327 dated January 30, 1992. Specifically, bankscan now maintain an overbought or oversold position of up to 25 percent or15 percent, respectively, of thelx unimpalred capital. Additionally, off-floor interbank trading has bee reopened since April 28, 1992. 'Te lIttingof restrictions on off-floor Interbank trading as contained ln theMemorandum to All Banks No. 9 dated July 30, 1992 bas spurred the develop-ment of the Philippine Dealing System which became fully operational onAugust 3, 1992. The system allows authorized dealers of subsecrber banks todeal on the spot and forward exchahge markets through an ejectronlescreen-based network for sharing Lnformation and undertaking transactions.

Banking transactions of Offshore Banking Units (08Us) and FCDWU havebeen expanded. ODVs can now negotiate inward (export) L/Cs through theirworldwide network of branches and correspondents subject to certain limita-tionsa while FCDUs are now alloeied to Invest ln foreign currency denomintedinstruments.

The Central Bank is also taking steps towards simplifying the report-ing requirements for foreign exchange use. The frequency of reports on ICDUloans to domestic producers and export-oriented firms has been reduced fromweekly to monthly as per Circular Letter of April 30, 1992.

on June 19, 1992, the Monetary Board approved for implementation aunified and codLfied set of regulations liberalizing foreign trade transac-tions (CO circular 1348, July 28, 1992). The reform contained in theCircular are meant to improve the allocative efficlency of the domsticeconomy and enhance the competitiveness of Philippine enterprises.

The major change in import regulations include the streamlining ofthe classification of import commodities; sore liberal arraage_ent forpayment of imports; and the simplification and delisting from prior CBapproval of several import transactions and procedures.

Reforms deregulating export rules consist of expanding the authorizedmodes of payment for exports, lengthening the inward remlttance period forexport proceeds to 180 days, and further simplifying and/or reLaxing rulesgoverning certain export transactions.

The Central BanXi has reviewed, during July 1992, the regulatory polLcyframework for foreign exchange transactions. Based on criteria includingforeign exchange reserve adequacy and the smooth functioning of the off-floor trading system, we have submitted an action plan for further foreignexchange liberalization for consideration of the Monetary Board. In linewith this, the Board lisued a Circular on August 24, 1992 allowing full1lberalization of foreign exchaeg reguatLons covering current transactionswhich included lifting of the mandatory surrender reqpirement of foreignexchange imposed on iS types of business operatlons and allowing AMB tosell forelgn exchange for all types of invlsible payments without prior CSapproval. With these changes, we will be able to slmplify reporting

54 ANNEX II

requireMets, streamlne procedures and institute a simplified system withinthe Central Bank for monLtorLng of foreign exchang transaction.

Central fapk incom 8Sort

The Central lank has been runni anual dsf icits of over P20 biUlionfor the last thre years largely oan account of debts incurred in theperformance of quasL-ftscal actLvitLes such as the large forward coverarrangemnts with pubUL¢ sector corporations: swap arrangement withcommercLal banks} commercial banksi assumption of forelgn obligations of thepublic sector, provl bsn of subsidLizd credit to priority sectors ineludingthe National Oovernment 'and non-performing loans and advances to failedfinacial instithtions. This defieLt problem has severely constrained theconduct of monetary polLcy, At the same time, because of its exposure toexchange losses, CS managment of the exchange rate is impaired. To remedythe situation, we are embarkiag on a plan to reduce the deficit of theCentral Bank with the objectlve of realizing savings of over P10 blllionovor a twelve month perlod.

A. Delivery of Outstanding Swap Contracts

A major source of past and potential CB losses is the outstandingstock of swap contracts that the Central Bank entered into with commercialbanks in 1983 and whlch have been rolled over since then. Between April anaJuly 1992, all outstanding deliverable waps wlth commercial banks amountingto $965 illion were umnwund. The unwlndLng operatLon eliminated not pesodifferentials payable to banks amounting to 311.9 billLion, and facliLtatedthe surrender to CB of P4.8 bllion in CB notes and bonds used to socurLtLzea portion of the blocked lnterest on said peso differentials. Moreover, theswap unwindLng would elLmlnate future interest payments on the pesodifferentials and on the CB securltles, and avert further Lncurrence offorelgn exchange losses. The resulting net reductlon in the CB deficit isestimated to amount to around U4 bllLn annually.

The swap unwlnding complemented earlier actions taken by the CB,namely, the payment of current interest on blocked peso differentialsstarting October 1990, and pay"mnt of,blocked interest payabl. to commercialbanks as of end-1990 ln cash or Centeal Bank bonds/notes over a ten yearWrlid.

3. Financial Assistance from the National Government

Sn a joint Memorandum of Agreement of 17 January 1992, the NationalGovernment agreed to undertake immediate measures to arrest the problem ofCB deficits. One of those measures is the Lisuance of Special SeriesTreasury bills and the deposLt of the pAoceeds therofrom in a non-interestbearing account wlth CS Ln an amount that would generate lnterest savings tothe CB of about 33.5 billion on an annual basis.

To complement the above measure, the National Government has iLsuedTreasury notes to the Central Bank with a face value of 312.S bllion,

-55- ANNEX II

Lnterest rate of 20 percent and three year maturity, with proceeds added to'.the non-interest pso deposit. This will yield an additional 12 billioninterest savings anually. The National Governmet intends to regularie aportion of these deosits through submitting a reuest to Congress for fullpayment of the remaining P9.99 bllion in authoried*, unpaid Central Bankcapital, or in alternative legislative authorlsations with eqLvalenteffect.

C. Central Bank Savings from the Debt Package

The National ovrnment is to.'issue all new bonds assoecated with thedebt agreement with caomercial banks. The CB should benefLt neverthelessfrom the buyback and interest savings. The expected gain to the ContralDank is estimated at around 11.S billion annually, but in addition, theagrement will lead to more predictable debt servLicg for the CB.

In the long run, we intend to make a strong repr"entation withCongres for the rehabilitation of the Central Dank, to be effected by wayof a major financial restructuring Lnvolving the transfer of certain CentralBank assets and liabilLties to the National Government and a substantialrecapitalization of the CB. Thli will have the effect of the fiscal sectorabsorbing the costs of the Central Bank defielts, by way of tax and othergovernment revenues.. Through such a transfer, we intend to restore the CSto a viable flnancLal position which would, at the same time, leave the CB.protected against exchange losses. Among the assets to be transferred arecertain Central Bank real estate assets previously identifLed. For itspart, the Central Bank will continue to try to minlmise its losses throughs

iL) Organizational streamlinLag and cost control measures;

(iL) Suspension of addLtLonal medium and long term foreign bor-rowing and the attainment and subsequent maintenance of a positive netforeLgn asset position; and

(iLL) Maintenance of market-orLented londing policies.

A permanent solutLon to the problem of Central Bank deficits needs tobe addressed through legilative cha4ges to the Central Bank Act. We areactively pursuLng such changes in co&junction with technical and possiblefinancLal assistance from the World Dank and International Monetary lund.As a complement to this, we are committed to developing domestic capitalmarkets in other areas, including a proposed unification of the Manila andthe MakatL Stock exchanges; deepening of the Government Securities market;and strengthening the role of pension funds in the provision of long-termfinaces to industry.

In light of the Government's strong commLtment to macroeconomicstability, its signlfLcant undertakings in structural reforms and theimportance of the recently completed debt agreement with commercLal bank

-56-ANNAX II

creditors, the GovMent would appreclate favorable cweiderition b given'to it~Irrevst for a US$200 mllUoan conomio Iutegration Loan. TheGovernment of the iwl continue its close consultation with theWorld Bank throughobt the program and will imlement, to the best of itsabity, the measures Indicated In this letter.

We believe'that the reform program we are undertaking and the debt anddebt servLce reduction operation will contribute substantially to ourcontLiued efforts to bring about material improveents in the ecomcLeconditions of the Phlippies and the living standards of Lts people.

Yours sincerely,

Secretary GovernorDepartment of tLnance Central bank of the Philippines

Director Generl SecretaryNational ;cnomie an Development Department of Trade and Industry

Authority

ANNEX II- 57 - ATTACHM I

GCVMU_T CORPORATIONS AP W FOR PRIVATIZATION. ..................... ..........................

AEtS OFVALUE EQUITT

IN UELONING1915 lOES

"EFOREPRIVA-

TIZATION.... ...........................

Agro-Liwstock CoWt I0v. Corp ".? 1001APO Proction Unit Inc. 134.5 1001Asia Goodwill Fishing Corp. 0.6 701Associted Bank 2.6 97gubln Dreging and Dev. torp. 35.5 40XRicoladia sugar 0ev. Corp. 269.7 92Sulder's Brick, Inc. 10.9 1001armns WiVoodworkig t2nd. inm. 2.2 1001

oave. Agrl-Ritnes 0De. Co. 4.8 623ast VisasV AgrfcVlturat Proj. 4.7 lO10

furniture Nwufcturin# Corp. 2.4 1001Inca Coffee Estates Corp. 6.8 1001Katlaran Foodw Cop. 3.4 1OOXPeople's Tech. Termfnal Corp. 10.4 52XPhiltppine Jnabh gank 30.? 1001Philippine Cotton Corp. 347.9 99XPhil. Fruit L Vegetable Ind. 55.9 1001Philippinw Gentfis, Inr. 39.1 1o00Phlifppine Shfpyar Enwinr 1403.8 Pfilippine Sugar Cop. 3163.1 1001Phividec Pay AgroIndustrial 0.5 601Pubtic Estates Authorty 2635.9 1001Repubtic Planters Bank 5836.8 96Ridge Resort & Contion 19.9 55Xan Cartos Fruit Corp. 28.9 1

Wood Waste Utit 'xation £ 0e. 85.3 100XmAC Rbber utate Corp. 7.8 0o0x........... ........................ _ , .... _

ASSET PUtVATIZATION TRUSt 17042.9 94X

Food Terminel, Inc. 702.8 1001asiffoer & Epment Nfg. Corp. 12.7 1001

"ra nsura Agwncy Corp. 27.7 1001Nationat Supr Refineries Corp. 1651.1 100XPhilippine Dairy Corp. 100.5 1001Rputflc Trauport an Shipyard 92.3 100

OPARTMT OF AGICLTURE 2587.0 1001

D0P 0at Center Inc. 2.9 1001Leyt Park 0otels Inc. 101.9 1001N tld tSavings and Loan Aso. 90.0 100111A-Consult Inc. 4.3 1001

eopll's Livelihood Ent. Inc. 6.0 1001

ANUiX II- 58 - . ~~~ATTACHNT I

TOVERME CORPORATIONS APPROE FOR PRIVATIATIION.. ,. ___* .... ... .... .. . ... ..........

ASSETS I OfVALUE EQUITYIN IELONGtkg

1983 GOER.EFOREPlRVA-TIUTIION

Arga Rsort Doelopmsnt Corp. 0.0 100IDSP Sorvice Corpration 0.4 1001PNOC Petrolem Carriers, Inc. 92.0 100XVeteranm Wanpoe & Protectfve 0.8 100X................................................

DIP AND OTHERS 338.3 1001

Metro Nini La Transit Corp. 628.0 1001Philppine Aerospae Dev. Corp. 213.2 1003Philippine Helicopter Servies 14.7 89X................................................

DEPARTMENT OF TRASaPORTATIOlN 855.9 87X

Cecmercial Bank of Manila 1801.1 991Notel Enterprises of the Phil. 127.3 100XManfla Hotel Corporation 286.3 100X

Met Packfng Corp. of the Phil. 87.6 100XPhilippint Plaza Moldings, Inc. 1100.0 1001Phflippino Airltnes, Inc. 10788.4 1001

6SIS 14190.7 99X

Daveo Eqaipent Mfg Cor,p 29.8 101xIntegrated Feed Mtlls Corp. 6.7 86xMaraN u Resort HOtel Inc. 7.9 97XMndsva Coco-Cofr Ind., Inc. 5.2 97XNindev Refrigeration Ind., Inc 3.8 100XNMnte Maria Poultry Farm, Inc. 16.9, 511"MotaIn Springs Dev. Corp. 39.4 98XNorthern Foods Corp. 125.5 84XPancon Prawn Develcpmnet Corp. 0.4 61XPrimary Foods Inc. 0.0 1001Prime Canter Trade Int$l Systen 0.0 1001Shoe Technology Corp. 0.0 531Mood KEal, Inc. 4.6 88X

PRESIOENTtAL MARAG. STAFF 240.1 85%

Asfa tnczstrfes Inc. 302 1001latengas Land Cc,any Inc. 39 601Seta Electric Corp. 14 100XConstructIon Mapoer Dev. 3 1001ffrst Chfcago Leasing & Equip. 128 601CY Real Estate Inc. 9 601

- 59 - ANNEX II- ~~~~~~~~ATTACHMENT I

GOVEMT CORPRTIONS APROVED FOR PRIVATIZATION

AS SES OFVALUE IOU!TY

IN BELONGING1985 GOVERN.

B£tORSPRIVA-

TIZATION.................... ....................................................................

Intornatfoal Corporate ank 539 1001Ewayan Relty Corp. 7 601Lunon ititgrated Services, Inc. 1S 100cNaris Propweties Corp. 914 1001Nirdanmo Textile Corp. 22 I001ladeco Realty Corp. 22 601National Chemical Carrers, tnc 5 60National Marine Corp. 72 100

attl Precision Cutting TooLs 169 1002Uat'l ihfppina Corp. of Phil. 146 1001Natioltl Slfpways Corp. 42 100XNational Steel Corp. 6297 1001NatAl Stevedoring ad Light. 60 100lNat'l Trucking nd Forwardfng 147 1001unC-Guthrie Estates, Inc. 186 60%NDC-Guthrie Plantatiens, Inc. 521 602NDC-Nacida Raw Natertals Corp. 32 100XNOC-Plantations, Inc. 26 1001Negros 0cc. Copperfild Nines 682 85XPhilippine Associated Sglting 8947 61XPhilippine National Lines 16S.5 1001Philippine Phosphate Fertilizer 1898 501Philippine Plate Mitls Coapeny 1512 1001Philippine Pyrite Corp. 8 1001Pinagkaisa Realty Corp. 2 601Refractortes Corp of the PhiL. 278 94XSemirars Coal Corp. 1178 87XTacom Bsay Shipping Co. 12 100XThe Energy Corp. 124 S2UUsDphif Inc. 364 951

NATIOAL DEVELOPHEUT CO. 38737.8 63X

Century Sank 1388.6 100XCentury Holding Corp. 200.6 1001Coco-Chamical Philippines, Inc. 60.5 99XNat*l Realty Development Corp. 28.7 100XNational Service Corp. 11.1 99XNational Warehouing Corp. 36.6 1001NIOC Oil Nitls, Inc. 107.9 1001Phil. Exchange Coopeny, Inc. 5853.8 10O1Philippine National Bank 27000.0 1001Pfltpinas Sank 1686.2 86XPNS lAternational Finance Ltd. 433.6 1001

ANNEX IIATTACHMENT I

- 60 -

SOVREINT OCRPOTIUS APPROW FMr PRIVATIZATION..... * ...... _

*11 I OFVAUR tWIT*

to SILONING19"a GOW.

PRIVA-TIZATION

.... *. .. ... ...........

Po Ver cpital Corp. a.0 IOl..............................................

PHILIPPINE NATIONAL IAK 36815.5 43S

laUsg Coat Corp. 64.5 10OXf10.11 InAmtrtel Estate Inc. 11.8 9gP1toft Refinery Corp. 73.2 saxNlotgas Coal Corp. 442.8 1002PROC Coat Corp. 1116.2 louPROC lmw saqpty ease Inc. 34.1 loXNUC irtne Corp. 49.8 1002PiiOC 01 Carlr Inc. 32.3 I 100X.............. - ..-......--.-.........-.--.......-.-

PHIL. NATIOAL OIL COW. 2519.5 100X

lane. tnurwan 3rokwe, Ir.. 15.6 lOX56ctein *a Sac., Inc. 6.5 10iinfan lnk of te PftIppfnes 3970.0 1iou

................................................

SOCIAL 1 1CURITY MY81 3993.2 1002

TOAL WCe FM PRIVATIZATION 117321 70X

A. Investment Liberization

a. Liberaliaed enviroament for FDI sltouitn Passage of Foreign Investment Act, RA 7062 JAmn 1991, detaiting short negative Satisfactory applicatfon ofup to 100t foreign ownership In most sectors. lIst (natural resounces trade, construction) here equity restrfetions reeain such rules and regutatimon.

durins a three yeer transition period. ImplementIng rules and regulatfons ofthe Act issued inctuding criteria to be used in estabtlshing Item to beIncluded i. neg tive tist (October 1991 and Addendum of 21 April 1992).

b. Sihplify procedures for foreIgn investors Inter-agemncy memwsandum of agrement (March 27, 1992) on streutlining of Satisfactory hiptementationto obtain visas and work perdmts. procedures for Alien Eeployment Permits. Executive order issued sluptifying of the Executive Order and

Special Investors Resident Vfsa appitcatfon procedures CEO 502, 8 Jan. 1992). emorxndum of Agreement.

c. Promote private financing of Conmressionat Act PA 6957 authorizing private sector participation Ininfrastructure, particularty In energy and infrastructure passed in July 1990.teleWo4 emRICatiOns.

1990 Govermnent dewfsion to altow a four yesr royatty deferment to encouragegeotberuml dewelopment by private sector.

Ptiubcation of list of 73 projects approved for SOT.

t pletenting rutes for private sector access to OMA funds issued in October,1991.

d. Reduce goverment partfcipation in 72 BC have been offered for sate, representing 681 of assets to be Campletfon of allt actonseconomy by divestment of severaL large privatixed. Studies underway for remfining GCs to be privatized. Legistation (including offerin3 for sate)g overmnt corporations. extending the life of the APT approved, and extended through Decefter 1993 by necessary towarde the

Presidential Executive Order 11, (August iO, 1992). transfer to private entfftesOf at least 95 GCsrepresenting 751 of the 1985value of SC assets, based ona satisfactory methodotogy.

ooc x_ rmxx

IB. Trade Llberliztian

a. Roducatariff protection, and rkoe Nm Tariff Code prolgted ad signed CEO 470, 20 July 1991), establishin four Satf aplfcatfon ofadeinistratlve cooptaexty by decresmings the single tarff wn th a top rate of 30U and redioing wae tariffs to 14X. tariff cade.average tariff level; the top tariff rate;dispesih n of teriff rates; and the nAbwer of Time-bound schedule pubtin hed teriff rates for specific Items on hfch Rs havetari ff bands, bnean remobed (E0 8, July 24, 1992). Meto u eddHtSnal duties of 1001 of Coqptete elIinatton of CRs an

statutory rates to be phsWed out by uly 1996. imports with the exception ofspecified iwreed pon item.lemovel of import levy effective Kay 1, 199Z.

b. Etimdnate quantitative restrictions (CRs)on key import and reptle ttem with Nonetary Board approvat to tiberatize 208 item, inctuding 61 item In the Satisfaetory 1 ptemntftion ofapprate tariff Cenm r Etectronics Proem. CB Circutars (CMs. 1337, 1347 end 1356) rvlng action ptln for tibatiztion

Os on 26 Items, inctuns comerciaL vbicles and related spare parts lsued. of corn cot nd petroteesrelated prodects.Timead pten of action, appove by the Tin conaittee a0d B ard, to

liberatze corn, coal a petrol. related ltecm.Preparation and Isslosin toCrew s of satisfactory

Cenctuslon e nd tfsfcwtry lqplantatfon of a coWbenksive 1port te... station for thesurveilltance chem. liberatfizatin of 13agricultt Itelsm.

C. tmprove custan efficincCaipetion of the first phase of standardization of the Formats of Nnuafacture.isAnce of AO 266 (7 Feb. 1992) establishing a one-stop-shop to sioptlfy Stimissfon to Congress ofd. Provide exporters-with rebates on tame avaltment of credits on taxes and duties. tegistation to mmee to Fairand duttes. farket Value as basis forIntrodwtlon of autoantic electriecty tariff mchdanism. tariff coqiutotion.

e. Achieve rarket-oriented and depoliticizedenergy pricing system. Eltimnation of deficit in Olt Price StOabilization Fund. cletion of study Improi

tax credits and duty drahocksfor Indirect emporters andc=onuncemInt of imptementationof findings.

Preparation of agreed time-homedI Energ Sector Plan ardIlplementation of energy price

I______________________________________ -___________________________________________________________________ related rtcateendations.

I01

RCOOOXC D Xam

C. Twaimmort LlberatSaatlon

a. Eliminat eeaonomi berriof to entry fnto and DOTC has Issued Oerwmt Order (00) (go. 92-567, dated March Prep iration and subndsslon to COngressexit ftom the industry (1.e. ltnd and marItime 34, 1992) Instructing Its regulate. 1 boards (LYTFU), Land of a satisfactory draft 81lt reformingtransport). Transportatlon franchising and Regultory Board: MARINA, the controtling taow on lnd and

Maritime Inietry Author1ty) to drsft Ispte enting rules In maritime transport (e.g. C_ aeltthb. Reformot pece reultations. bereguate rates, o e nd s Aid k Act Uo. 46, Republic Act no. 776,tariffs and ot earges for passsener and frefsht barriers to entry Into and exit out of the Inxfstry and ici Presdekntfal tecree Mo. 474 Executiveservicee. restreit market based rate and fare setting. Order no. 202, series of 1967 and

Detailed ruces and pcocedures by LTFRB and MARINA for the ImPtenentIng the transportc. Ell ff on of atl operatcr subfdfes, except fapterentietln of the DD so. 92-587 Issued October 16, 1992. lltberatzatfon measures referred todwe n.% Gwenwement dam it n cesary for scilt inder 00 Mo. 92-587.reasns to grsnt stbsidfes. Certification as priority legislatfon of

said fill by the President.

.~~~~~~~~~~~~~~~~~~~~~~

BC PoDIIC XtylDCCX1lo

0. Forelan Exchanoe LiberalizationCO notfee to financial institutfons notifying the reopening of off-floor

a. Reduce restrictions en uses of forelgn foreign exchawn trading.exchange wnd achieve a market determinedexchange rate. CO Circular 1318 authorizing free purchdse nd sale of non-trade foreign Satisfactory

exchange and broadening permitted uses of surrendered foreign exchange, fmplementation ofb. Reduce transaction costs for exporters. inctuding futl and lmediate rqeptriation privit.e95 for registered foreign foreign exhangrec. Ilprove efficiency of currencytransaction procedures. CB circular 1319 incressing retention of foreign exchange to 4OX for

exporters.d. Factiltate repatrfation of liquidatedforeign direct investments. CB circular 1317 liberalizfng loans to exporters from Foreign Currency Deposit

Units up to 70% of export order.

CB letter mendfng circular 1272 allowing banks to maintafn an overboughtforeign exchange position of up to 252 and an oversold position of up to 15Xof unwipaired capital base.

CO Circular 1334 (ApriL 1, 1992) permitting free use of retained forei9nexchange by exporters.

CB Circulars 1348 and 1353 revising the manual on rules and regulationsE. CB Ineamo SaMort governing foreign exchange transactions and further liberalizing foreign

exwiange regulations including: increasina export retention sow cs to 100ta.. Reduce nmnal CB losses by arourd PIO of earnfngs, Increasing aces to dollar denom nated credits, broadeningbillfon to generate greater freedom in participation in retail and uholesale foreign exchange trading activities,setting monetary and exchange rate policy. sieptiffed reporting reqdirements on forefgn exchange transactions, and

streamlined monitoring procedures in the Central Bank.b. Reduce CO exposure to exchange ratechanges Nbemortwim of Agreement (17 Jan. 1992) between CB and NG to increase during Issuance of Monetary

1992 *a zero interest deposits by about P30 billion over end-1991 levets. Bard resolution thatpositive CS net foreign

P32 bfilion in Special Series Treasury Sills and Notes Issued for C8 support asset position beyielding about 20% wnnual interest and wi+h 1-3 year maturities. with proceeds maintained.deposited interest free in CS. Positive CB net foreign

Complete uwfinding of USS960 million in swaps with local comuercial banks and asset positionimplementation of this program. achieved.

P9.99 billion for CBcapital, or equivatent.subnitted to Congress.

- 65- AN= IV

THE STATUS OF BANK RORUP OPERATINS IN MgE PH"LIPPINES

A. StATEENT OF PIANK LOANS AND IDA CREDITS l(As of September 80, 1092)

Loan or Amount (US1 tillIonCredit Feenl (e c ncllatlone Number Year Borrowr Purpoe Bank A0 UndiburFod

Ninety-seven loans and six credits fully disbured 4,090.42 10.1U

Of which SECALS, SALs, and Program Lonns

1900 101 Rep. of tho PhilIppinos SAL I 199.062266 1988 Rep. of the Philippneo SAL It 802.262469 106 Rep. of the Philppines Agrtculture Sector Input 10.002787 1987 Rep. of the PhilIppines Economic Recovery Program 00.002060 190* Rep. of the Philppines Program tor ovt. R;.o.' 200.CO

$ubtota 112.2

2257 1968 Rep. ot the Philippine Regional Clties Develoent 89.44 8.522277 19l1 Rep. of the Philippin Environment Natural Resource W t. 66.00 80.262860 1904 Rep. of the Phil ppines Central Visayas Regional Dcv. 24.97 4.212892 1992 Rep. of the Philippines Second Vocational Training 36.00 a8.312418 1094 Rep. of the Philippines Highways V 102.00 88.912486 1064 Rep. of the Philippines Municipal Development 40.00 11.482676 1986 Rep. of th Phil ppin m Manila Water Distribution 88.00 8.122716 1986 Rep. of the Philippines Rural Roads II 82.00 49.022628 1987 Rep. of the Philtpptnes Provincial Ports 82.00 7.242946 1980 Rep. of the Philippines Irrigation Operations Support 28.50 2.012969 1969 Phil. National Oil Co. Bacon-Manito Geothermal Powor 41.00 1.052969-1 1988 Rep. of the Philippine Bacon-Manito deothermal Power 59.00 48.122074 1006 Rop. of te Phe lippines HousIng Sector 160.00 45.60808 1089 Rep. of th Philippines SMl IV 60.00 .163049* 1909 Rep. ef the Philippines Financial Sector 800.00 150.000604 1609 Dev. Bank othe Phil. Manila Power Distribution 65.60 49.17

a000 1969 Rep. Of the Philippines Hea0th Development 70.10 49.708128 1990 Dev. 4ank of the Phil. Industrial Investment Credit 65.00 .588124 1900 metro. Waterloske A Sew. Angst Water Supply 40.00 10.168146 1900 Rep. of the Philippine. Munielpal Development II 40.00 82.028168 1900 Phil. National Power Corp. Energy Sector Loan 200.00 92.648164 1900 Phil. National Oil Co. Energy Sector Loan 150.00 115.453165 1990 Rep. of the PhilIppin s Energy Sector Loan 40.00 28.74

m804 1890 Rep. of the Philippines Coconut Farms Development 121.60 105.048242 1990 Rep. of the Philippins WS/Sewer/S nitation 65.00 72.218244 1991 Rep. of the Philippines S cond Eleentary Educ tion 200.00 1l2.258261 1991 Rep. of the Philippines Communal Irr iton 1I 46.20 48.25826a 1991 Rep. of th PhilippInes Earthquake Reconstrction 125.00 60.288287 1991 Rep. of th Philippne Industrial Restructuring 175.00 62.708812 1001 Rep. of the Philippine Cottage Enterprise 15.00 18.60385 1001 Rep. of the PhilIppines Rural Finance 160.00 111.718860e 1991 Rep. of the PhilIppin e Environment & Natural RNs. Mgt. 158.00 107.218480 1902 Rep. of the PhilIppIn s Highway Manasement 150.00 160.008486 10*2 Rep. of the PhilIlppins Engineering Sclnce, Education 65.00 64.768489 1002 National Electrif. Adm. Rural Electrification 01.80 91.808455 1092 Rep. of the Philippines Municipal Development III 66.00 68.008628 108 Oev. Bank of the Phil. Telephone System Expansion 184.00 184.00

Total 7,367.22 207.16 2,034.21of which hs been repaid 1 9S8 89 5.79

Total now held by Bank and IDA 20l;SAmount sold 81 B6ot which repaid 31.35

Total undtebursed 2,084.21 74.59 2,106.80

/ The status of the projects listed In Part A to described In a separate report on all Bank/IDA-fainanodprojects In execution, which Is updated twice yearly and eeiculited to the Executive Dirctor on Apel 80an October 81.

a SAL, SECAL or Program Loan

-66 ARMNEK IV

B. statement of IFC Investments(As of September o, 1992)

Total held Undisbs.incld.Fiscal Typ of Ortatnnb ComOtmnt by IFC particpantsThe? obligor Busines i IIj oa (at Cost) portionY n OSIIser Su nez La----- ss T ia ItSie . --

198O/73 Private De. Corp. Dew. Flnanco 16.0 4.4 19.4 - -of the Philippines

1967/99 Manila Electric Cc. Utilities 38.2 4.0 $7.2 28.3 -1970/09 Philippine Long Utilittos 127.7 0.8 128.5 90.0 22.31988/0 Distance Tel. Co.

1970/72 Mariwasa Mtg. Co. Constructlon 0.8 0.4 1.2 - -materials

1970 Paper Ind. Corp. Pulp & Paper - 2.2 2.2 -1971/77 Phillppine Petroleu Ch.mic ls/petrochem.S.2 2.1 8.3 -1972 Marinduque Mining Mining 15.0 - 15.0 -

& Ind. Corp.197$ Victoria* Cham.Corp. Chemical 1.9 0.3 2.2 -1974 FilIpinas Synthatic Textile * Fiber 1.5 - 1.S -

Ftior Corp.1974/79 Maria Critinea Eloctro-chbmic as 1.6 0.6 2.2 0.4 -

Chmical Industry1974 RFM Corporation Food A Food 1.2 - 1.2 -

Processing1976 Phil. Polyamide Textile & Fibers 7.0 - 7.0 -

Ind. Corp.1976 Philagro Edible Coconut Oil and 2.7 0.2 2.8 -

Oil, Inc. Copra1977 Sarmiento Ind. Plywood 3.5 - 3.5 -19?7 AcoJe Mining Co Inc. Mining 3.2 0.6 3.7 1.3 _i978 Cebu Shipyard and Ship-repai ring 2.1 - 2.1 -

Engineoring Works1979/S0 GOn. Milli-ng Corp. Food A Food 4.0 1.7 5.7 1.7 -

Processing1980 Ventures In Industry and Venture capital - 0.2 0.2 - -

Busines Ent., Inc. (VIBES)1900/83/85 All Asia Capital Equipment Leasing 11.1 0.8 11.9 1.7 -

and Leasing19O Consolidated Ind. Industrial Cases 4.5 - 4.S -

Gas Inc. /a1981 Philipppnes XIssoated Copper Smelting - 5.0 5.0 .5

Smelting A Refining Corp.(PASAR)

1981 Davao Union Cement Cement 16.0 .8 16.8 2.4 -Corporation

1981 Loans to Small A Medium Capital Markets 18.0 1.1 19.1 -Scale Ent. (SMSE) /1

1983 NOC-Guthrio Plontations, Inc. Agribusiness 11.0 - 11.0 9.2 -1985 Philippine Overseas Construction 38.0 - 38.0 - -

Contractors198S/91 Purefoods Food Froc. - 4.2 4.2 4.5 -1988 BPI Agribank Finan. Inst. - 1.0 1.0 1.0 _1989 Kewalram Phil. Inc. Texti Iso Fibers 3.0 - 8.0 -1988 Phi Ifund Debt Conversion Fund- 4.2 4.2 -1989 AG & P Construction 10.0 - 10.0 -1989 bnambrocht & Quist Capital Fund - 2.2 2.2 2.3 _1990 "*opow ll Power 10.0 1.1 11.1 8.9 0.21990 Manila Fund Money S Capital - 7.0 7.0 - -

Merkots190O First Phil. Fund Money & Copital - 29.7 29.7 - * -

Markets1090 Avantx Mill Corp. Textile 11.8 2.3 13.6 13.6 0.81991 Best Chemicals Chemicals 6.6 2.3 8.8 8.8 0.81991 Automted Micro-oleet. Electronica 9.0 2.8 11.8 11.8 9.61900 Makati Shangri-La Tourism 59.0 - 59.0 29.5 2".71991 PCI Bank Fin. Inst. 20.0 - 20.0 - -

Sub-Total 453.8 82.1 535.9 205.7 61.8

-67- ANNEX IV

Total held Undltb.tnld.Fieeal Type of Ortatn l Oomltmnto by IFC participantsfenr Obligor BusaIns Loon Eq t (at cot) portion

Approved but not yet signed

1680 Luam Petrochomical /b Petrohemicals 90.0 15.0 10.0 --1991 Mactan Shangri-La Tourlem 24.0 - 24.0 12.0 24.01901 PhIlnio. Nickel mining 90.0 15.0 105.0 50.0 105.01902 PIlIm Shall Petrochemicals 120.0 15.0 195.0 60.0 186.01992 UnIversl Robins Food Procssing - 15.2 15.2 15.2 15.21992 ac4otan Cement Corp. ceent 13.0 5.8 2a.a 23.3 23.31992 Ft layn I Texttl- & Fibers 40.0 5.0 45.0 25.0 25.0

Total Gross Con ltments 836.0 152.6 988.4 381.2 388.8

k Subrequently cane lled.Subsequently dropped.anOuaran _

- 68 -

ANNE V

PHILIPPINES

ECONOMIC INTEGRATION PROGRAM

Timetable of Key Events

(a) Time taken to prepare the project: 12 months, October, 1991 -October, 1992

(b) Prepared by: A. Fabella/Departnent of Finance

(c) First Bank mission: October, 1991

(d) Appraisal mission departure: June, 1992

(e) Negotiations: October, 1992

(f) Planned date of effectiveness: December, 1992

(g) List of relevant PCRs and PPARs: None

The project was prepared by the following Bank staff: Homi Kharas, Task Manager; Erika Jorgensen;Renato Schultz and Dieter Havlicek.

IBRD 24105I11 WrN 14t 1

PHILIPPINESI iozo VI w5TEMWsAY,0

20W 1 Boco"Nod 38Aj la2 Uoco W 39 c -o PROMNCE CAPITALS3 La Mlolo 40ihqus R4 Pon 41 oo * NA-nONAL CAPITAL

MDiLA.JMA1M 42N*"OuWw aREGIO SCAN43 GImA -L- PROVNACE BOUt>APiES

5K9wp Afrot o I7 Ku.oMo u bh P ;449 N REGION BOUNDARIES7 Mouwfabn PtoA4n 45 NS"~o OdISAhIa *ge. 46 8o -4-9 B' 47 S*tq 1 1ITERNAIMONAL BOUNDARIES

II CeGA)%NVALEY Vill E1E149V5WSA-I0 tson" 48 NodhmSwtuA 6 11 C 4

9Wmdfm$awov }

12 b1b. 50 &h S OdaSw o

14 QJ)m 52 soAibm labi SAgaAETO 0 1o 200- amII# CKENTiL LUZON 53; Img n 2 I 2l

l5 t4jevaEd DC W M S 111,10*00 1 gls o ItO iSo 20016Taac 5

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19 8 r S57 &Sl20 se la...,' m iIUTA X NO1 NNIMNA0W

lH 4C 59 sw ,dzi " MarkIv SOUTNIRNW ALAWG 6095w1g.d1N

21 Ammr 614 AandellNoerWI U O22 Qw 62 LUvliZON23 KW .3 3imb OeidwJu I7W24 C..4. 649.frdm,

26ad. 6. _ PHILIPPINE SEA27 Mahuiilu __owsMNIA0

28 )md.. OA.a 67 i DomoOdci29 Modlam OcadUrIIS 68 Ouiao 8. Nod.30p4n*h). 690.vo..dSar , , AAN93

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35 A&o 74 MaoiII s36 Se,.aa 75 &OIl. Rada.a

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Documents

World Bank Documentdocuments.worldbank.org/curated/pt/569161468293475139/...Documnt of The World Bank FOR OFM-CLAL USE ONLY NjMICROFICHE COPY Feport No. :P- 5881-PH Type: (PR) Title: