Rather than change interest rates when business conditions change, Philippine banks are said to vary the amount of collateral required. The personal standing of the borrower and the type of security the borrower can offer seem to be more important in the granting of credit by banks and other credit institutions than the rate of interest.

The Central Bank rate on advances to other banks, primarily the Philippine National Bank, which was 3 percent in 1949 and 1950, was reduced to 2 percent and then further reduced in January 1954 to 112 percent.

The interest rates charged by the Rehabilitation Finance Corporation in early postwar years ranged from 4 to 6 percent per year-6 percent on regular real estate loans and 4 percent on all industrial, agricultural, and real estate loans granted for rehabilitation. In 1949 the rates were increased to a uniform 6 percent per year on all classes of loans and still remain at this level. The rural banks charge an interest rate of 12 percent.

THE CENTRAL BANK

The Central Bank of the Philippines was authorized by the Central Bank Act of June 1948 9 and commenced operations early in 1949 as an entirely new institution. The Bank, an institution completely Government owned and controlled, is the Government's fiscal agent, banker, and adviser on financial and economic matters.

Republic Act No. 265, approved in June 1948.

It has the statutory objective of maintaining monetary stability, preserving the international stability and convertibility of the peso, and promoting "a rising level of production, employment and real income in the Philippines." It performs banking operations for other banks and the Government, and deals with the public only in the course of open market operations.

In addition to sole responsibility for the note issue, the Bank has broad regulatory authority over credit and exchange operations of the banking system and has the right to examine all banks periodically. It is the Government's agent in issuing and placing Government securities and is responsible for stabilizing the value of Government securities through its administration of a "Securities Stabilization Fund." Central Bank policy is determined by a Monetary Board of 7 persons, 4 of them ex officio and 3 appointed by the President.

The Bank possesses a number of anti-inflationary weapons, including the power to conduct open market operations, using securities of its own issue for this purpose when necessary. It may vary the discount rate in accordance with the character and terms of the credit requested and the requirements of national monetary policy. It also has broad power to alter reserve requirements on commercial bank deposits.

The principal direct measures taken by the Bank to regulate credit operations of the commercial banks have been in the fixing of reserve requirements and the application of selective credit control. Minimum reserve requirements were set by the Bank, effective January 1949, at 18 percent against peso demand deposits, 5 percent against time deposits, and 10 percent against deposit liabilities in foreign currencies. These ratios are still in effect, for the Central Bank has never used its power to vary them.10

In order to help develop a market for Government securities, the Bank provided that 518 of the required reserve for demand deposits may be held in Government securities, while the remainder must be held in the form of a cash deposit with the Central Bank. The entire reserve against time and savings deposits may be held in the form of securities in lieu of a cash deposit with the Central Bank. The reserve against deposits in foreign currencies must be in the form of a cash deposit with the Central Bank or in deposits of approved foreign securities held abroad. The Central Bank's reserve requirements have not been an important factor in restricting bank credit, however, since the commercial banks have consistently maintained a large amount of excess

reserves.

10 The Central Bank Act provided that the minimum ratios applicable to peso deposit shall not be less than 5 percent or more than 25 percent for time and savings deposits and shall not be less than 10 percent or more than 50 percent for demand deposits. In time of inflation, however, the Monetary_Board may set higher ratios but not exceeding 100 percent. For deposits in foreign currencies the minimum ratio may not be below 10 percent nor above 100 percent.

The Central Bank has instituted selective control measures mainly to reinforce import controls. The most important of these measures was the requirement of a cash margin of 80 percent on letters of credit covering the import of certain nonessential and luxury goods (Circular No. 19 of November 1949). This circular was revoked in October 1953, however, since the Central Bank can now effectively control imports without it inasmuch as, in July 1953, the Bank took over the administration of exchange licensing of import payments.

A second measure, effective November 1951, was the requirement that banks maintain a minimum reserve of 70 percent against their outstanding letters of credit. This regulation was intended to serve as a deterrent to the expansion of import credits. In December 1953 the 70-percent minimum was reduced to 50 percent in order to encourage more credit extension by banks.

Not confronted with any serious problem of inflation since it came into being, the domestic monetary policy of the Central Bank has been primarily concerned with mobilizing domestic capital and directing bank credit into desirable investment. It has advocated "abundant credit" for productive purposes and used "moral influence" in the curtailment of credit for speculative and nonessential purposes.

The selective control measures described above have had only a limited effect, however, in changing the lending habits of banks in the Philippines. the financing of foregn trade conditions to be by far the predominant type of lending by the commercial banks, and there has been no sizable increase in loans to finance local production. The Central Bank's regulation of interest rates and its use of open market operations also have been of limited usefulness.

Important features of the Central Bank's domestic operations are its advances to the Government and the Philippine National Bank and its purchases of Rehabilitation Finance Corporation bonds. As of the end of 1953 the Central Bank had 280 million pesos outstanding in loans and investments. The largest items in its credit portfolio consisted of Rehabilitation and Development bonds (178 million pesos), Rehabilitation Finance Corporation bonds (52 million pesos), Treasury Certificate Account (21 million pesos), and advances to other banks (19 million pesos)."

PUBLIC FINANCE

In the early postwar years the Philippine domestic financial situation was marked by large Government deficits. As of the end of fiscal year 1950 (June 30, 1950), the cumulative postwar

11 Almost all of the advances have been to the Philippine National Bank since other commercial banks maintain a high degree of liquidity and do not rely on the Central Bank for funds.

deficit was estimated at 461 million pesos and except for certain special nonrecurring receipts would have been about 615 million pesos.12

These deficits were first met by drawing on funds held abroad, by transfers from the currency reserve, and by borrowing from the Reconstruction Finance Corporation of the United States.13 Later the Treasury took increasing recourse to the banking system, selling Government securities to the banks to be used as a substitute for cash reserves, and the Central Bank provided a budgetary loan.

Since fiscal year 1950 the budgetary deficits have for the most part been smaller. In 1951 the deficit was reduced to about 43 million pesos and in 1952 the National Government netted a surplus of 73.4 million pesos. In fiscal year 1953 the Government incurred a small deficit and the deficit for fiscal year 1954, according to preliminary figures, increased to about 85 or 95 million pesos. Preliminary estimates for fiscal year 1955 indicate much larger deficits.

The greatly improved budgetary situation after 1950 was largely the result of tax increases and new taxes instituted in 1950 and 1951. These measures included imposing higher levies on individual and corporate incomes and on most commodities subject to specific taxes, raising the percentage sales taxes, and providing a special excise tax on foreign exchange.14

National Revenues and Expenditures

The most recent annual report of the Central Bank gives Government revenues for fiscal year 1953 as 630.8 million pesos and expenditures as 631.1 million, for a slight deficit of 300,000 pesos (table 12). Revised figures for 1953, however, indicate a deficit of 16.7 million pesos.

Tax receipts, amounting to 526.3 million pesos, comprised 83 percent of the total revenue in fiscal year 1953 and provided a comparable share in other recent years. The most important single tax is that on foreign exchange, which has provided about 25 percent of the tax receipts since its imposition in 1951; in fiscal year 1953 this tax yielded 115.1 million pesos. The drop in revenue in fiscal year 1953 as compared with 1952 is largely due to a reduction in proceeds from excise taxes (which includes the tax on foreign exchange), business taxes, and import duties.

12 Economic Survey Mission to the Philippines, Report to the President of the United States, 1950.

13 The U. S. Congress authorized the Reconstruction Finance Corporation to extend a $75-million line of credit to the Philippines in 1946. The first advance of $25 million was made early in 1947 and a total of $60 million was drawn on this credit.

14 Important among the recommendations of the U. S. Economic Survey Mission to the Philippines released in October 1950 were those concerned with revision of the tax structure and with increasing the tax revenue. According to the Mission's findings the Philippine Government's budget could be balanced and tax receipts increased by 60 percent under the then existing conditions of national income.

Total revenue and transfers..

Of the total expenditures those incurred for national defense, education, and economic development are the largest. In fiscal year 1953 defense expenditures constituted 27 percent of the total, education accounted for 26 percent, and economic development for 24 percent. Expenditures for economic development for the 4 years 1950-53 have averaged about 150 million pesos annually.

The budget situation as of the fall of 1954 appeared to have evolved into one of deficit financing as a result of the enactment of a 254.4-millionpeso public works program.15 Total authorized expenditures in the 1955 fiscal year budget of the General Fund (from which all ordinary Government expenditures must be met) amounted to 774 million pesos while the budget's anticipated revenue for the General Fund was only 668 million pesos. Other estimates indicate that the revenue

15 Republic Act 1200 passed in the special session of Congress in 1954, which also authorized the issue of bonds to the extent of 151 million pesos to finance the public works program.

The Public Debt

As of December 1953, the gross public debt of the National and local governments, including Government corporations, was 1,103.6 million pesos, an increase from 790.2 million pesos at the end of 1952. In 1952 the debt had been reduced by 26.1 million pesos, the only postwar year in which a reduction was achieved.

Of the outstanding debt at the end of 1953, obligations incurred to meet ordinary budgetary deficits amounted to 734.4 million pesos while those contracted for development purposes were 369.2 million pesos. More than four-fifths of the outstanding debt, or 898.1 million pesos, represented domestic borrowings while 205.5 million pesos consisted of foreign debts. Table 13 summarizes the foreign segment of the outstanding debt.

CHAPTER XI

Payments

A large part of the national income of the Philippines is derived from exports and from U. S. Government payments, whereas a large part of the country's expenditure is directed toward imports and services acquired abroad. Thus the entire economy is inextricably tied to international receipts and payments which are dominated by trade transactions. Every major force working in the economy manifests itself in one form or another in the balance of payments. Conversely, difficulties in international payments very quickly affect the entire economy of the Philippines.

BALANCE-OF-PAYMENTS POSITION

The Philippines generally had a very strong balance-of-payments position in prewar years. Exports customarily exceeded imports and U. S. Government expenditures provided another substantial source of foreign exchange receipts, so that transactions on current and capital account usually showed a surplus. However, in the postwar period the disruption and destruction of the major export industries together with the large demand for imported capital goods produced a series of trade deficits.

1

The years 1945 and 1946 were dominated by the special conditions of the early postwar period 1 but the balance of payments in 1947, 1948, and 1949 showed characteristics distinguishing those years from the prewar period. There were a smaller volume of exports; a much larger volume of imports; a larger volume of nontrade payments; and a greater importance of U. S. Government disbursements. The net position was a large deficit in 1948 and 1949 compared with moderate surpluses in prewar years.

The Philippines balance-of-payments position seriously deteriorated in 1949. Continued heavy imports, a decline in U. S. Government disburse

In 1945 the Philippines added $256 million to its dollar reserves, representing largely war and postwar military expenditures of the United States while imports were very small ($29 million). In 1946, the Philippines drew down its dollar reserves by $207 million, as a result of the sharp drop in net U. S. military expenditures and the resumption of import trading before export trade had resumed.

2

ments and the prospect of their further decline, and a large outflow of private remittances which reached the level of capital flight in the last part of the year rapidly drew down the foreign exchange reserves. The net reserves, which amounted to $647 million at the end of 1945 and $420 million at the end of 1948, fell to $260 million by the end of 1949. At the rate at which the balance-of-payments deficit was incurred in the last 3 months of 1949, the reserves would have been exhausted within another year.3

As a result of the exchange crisis the Philippine Government imposed exchange and import controls in 1949, the major controls dating from the end of the year. Through this means the Philippines has been able to hold the deficits in check and maintain a safe level of foreign exchange reserves.

In 1950 the foreign exchange reserves rose to $356 million, then dropped to about $300 million in 1951 and fluctuated above and below this level through 1953 (see table 14). As of mid-1954 foreign exchange holdings were about $310 million, but declined to $273 million by the end of the year.

Source: Central Bank of the Philippines, Fifth Annual Report. 1958.

Table 15 summarizes the Philippine balance of payments for 1950-53 and the first half of 1954.

2 There was a large inflow of private funds during the early postwar period, especially in 1947 ($129 million) and to a lesser extent in 1948. These funds were used in the reconstruction of foreign-owned enterprises, primarily American. At the same time, however, and increasingly in 1949 there was a large outflow. These remittances were the repayment of funds borrowed abroad by foreign enterprises, the transfer of profits and depreciation reserves by foreign enterprises, and the outflow of domestic funds.

The Economic Survey Mission to the Philippines, Report to the President of the United States, Washington, D. C., 1950.

ments in the Philippines. In the postwar years 1945-49 U. S. Government expenditures exceeded export receipts, making it possible to maintain imports and remittances at high levels.

Disbursements in 1945-46 amounted to $402 million; and for 1947 totaled $998 million, distributed as follows: Military agencies, $428 million; Philippine War Damage Commission, $302 million; Veterans Administration, $113 million; Reconstruction Finance Corporation, $60 million; and other agencies, $95 million. U. S. Government expenditures in 1950 were several hundred million dollars, but in the years since have been at lower levels.

As shown in table 16, which provides a summary of these expenditures in 1951-53, Veterans Administration payments constituted more than half the disbursements in recent years; military_expenditures were second in importance; and Foreign Operations Administration grants, consisting of merchandise and technical assistance, averaged $13.7 million.

Table 16.-U. S. Government Expenditures in the Philippines,

Private financing:

Remittances.

16

30

Direct investment.

27

10

243

Other..

1

Total..

50

26

74

Net errors and omissions.

-150

30

-52

Cumulative total..

From a balance-of-payments point of view the year 1950 was the most favorable one of this period, resulting from a combination of a relatively small trade deficit and sizable U. S. Government disbursements. In 1951, 1952, and 1953 trade deficits were larger and United States expenditures were reduced from the levels of other postwar years. According to Central Bank figures the deficit in current transactions for 1953 was 29.6 million pesos compared with 39.8 million pesos in 1952 and 64.6 million pesos in 1951 whereas 1950 registered a surplus of 346.2 million pesos.

With the exception of large receipts from the U. S. Government most invisible items in the Philippine balance of payments are relatively small. Receipts from U. Š. Government sources for the postwar period have included U. S. Government grants and loans and other contractual expenditures for pensions to war veterans, military expenditures of the United States in the Philippines, and small U. S. Government pay

FOREIGN TRADE CHARACTERISTICS

In Philippine foreign trade, the key factor— which has been called the lifeblood of the country-has been the predominant role of the United States. From the time of the establishment of reciprocal free trade relations between the two countries in 1909, Philippine trade has been characterized by dependence on the United States as a source of manufactured goods and as a market for Philippine produce.

For a number of years before World War II about 70 percent of the import demand was supplied by the United States, while there were few Philippine export products the bulk of which was not sold in the free American market. More than 80 percent of total Philippine export trade was with the United States. In postwar years the predominance of the United States has remained a major characteristic, but the United States takes a somewhat smaller share of Philippine exports and supplies a larger part of Philippine imports than in prewar years (see the accompanying chart).

See appendix F for more detailed trade data than given in this chapter.