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Balance of Payments

and Trade (Millions of U.S. Dollars)

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1/ Bank lending rates on secured loans; weighted average for all maturities. 2/ Actual weighted average rate for January September.


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3/ Money market rates; weighted average for all types of
4/ Actual average for January August.
5/ Based on Philippine Government data.
6/ Based on u.s. Department of Commerce statistics.

CV =

customs valuation basis. 77 Bilateral official development assistance (draw-downs) 87

Preliminary N/A Not available. Sources: National Economic and Development Authority, Central Bank of the Philippines, Department of Finance, U.S. Survey of Current Business.

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Following a severe recession in 1983-85, the economy experienced a strong recovery between 1986 and 1989. But beginning in late 1989 growth started to sag as inflation, high interest rates, fiscal and trade imbalances, an attempted coup, the Iraqi occupation of Kuwait, and a series of natural disasters disrupted consumer and investment spending. Potential investors are now taking a wait-and-see approach pending the outcome of the May 1992 general elections. Gross National Product (GNP) growth in 1990 dipped to 3.7 percent and growth in 1991 is anticipated to be less than one percent. Serious poverty continues to burden the Philippine economy. Per capita income in 1990 stood at $713, but unbalanced income distribution means that half the country's 62 million people live below the poverty line.

The Philippine government fiscal deficit continued to be a major source of economic concern during 1991. The deficit exceeded three percent of GNP in 1990, although sharp spending cuts are aimed at reducing it to less than one percent of GNP in 1991. The consolidated public sector deficit (including government corporations and the Central Bank) was 5-6 percent of GNP. Most of the shortfall has been financed by domestic borrowing, primarily through Treasury bills. Thus, public sector demand for funds has kept interest rates high, although in 1991 they dropped to roughly 20 percent from the 30 percent levels of 1990. In 1991 service on the government's domestic debt consumed 30 percent of the budget. The Philippines' $28.9 billion foreign debt also remains a major preoccupation of policymakers.

The Central Bank has used periodic "mopping up" operations a combination of Treasury bill floats, adjustments of reserve requirements, and reverse repurchase operations to attempt to keep liquidity in compliance with International Monetary Fund (IMF) targets. Pinched by a burgeoning trade deficit, the Central Bank, which generally intervenes in the foreign exchange market, was forced to allow the peso to depreciate by 25 percent in nominal terms in 1990. However, due to weak import demand and greater foreign exchange reserves, the peso recovered by four percent from January to October 1991, raising concern about Philippine export competitiveness.

Foreign trade, especially imports, slowed in the first


half of 1991 because of the general economic slowdown and a temporary nine percent additional import levy imposed to increase government revenues. The levy was reduced in August 1991 to five percent, and is scheduled to be eliminated entirely during the first half of 1992. The Philippines continues to run a trade surplus with the United States, amounting to $729 million in 1990. Overall trade is in deficit, however, the gap was $4 billion in 1990 on exports of $8.2 billion and imports of $12.2 billion.

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Commercial banks are required to make dollar purchases in the official interbank market. The exchange rate is free floating but strongly influenced by Central Bank intervention in support of the peso-dollar rate. Traders also buy and sell dollars at a premium on a vibrant parallel market for those who cannot, or will not, justify their purchases under foreign exchange and tax regulations.

The Philippine government has traditionally attempted to maintain a somewhat overvalued peso, given the high import component of the country's export products, high debt service costs on the country's nearly $29 billion in foreign borrowings, and strong demand for imported consumer goods by those able to afford an international lifestyle.

The peso appreciated by 0.9 percent in June 1991 to approximately 27.75 pesos to the dollar, and by November was below 27:1. Slowed economic activity, savings from reduced oil prices, and inflows of dollars from multilateral institutions have resulted in a buildup of foreign exchange reserves, resulting in a strengthening of the peso in the parallel market. Continued weak import demand will allow the Central Bank to maintain the present exchange rate in the short run, but when economic activity increases, demand for foreign currency will increase and push the value of the peso lower. The question of the proper value of the peso may be an election year issue in 1992; exporters are attempting to organize better to push for more export-oriented tariff and exchange rate policies.

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The government's economic leadership continues to pursue much-needed structural economic reforms, including measures to liberalize and promote foreign investment, accelerate financial sector reform, privatize state-owned assets, and improve government revenue gathering. Economic planners face resistance, however, from both the Congress (especially the Senate) and from political leaders in the Administration. An executive order restructuring the country's tariff system was pushed through the bureaucracy in 1991 after an earlier, more ambitious attempt at tariff reform was quashed by bureaucratic and private sector resistance. This reform, which will lower tariffs in stages over the next four years, should be a boon for U.S. exporters of many finished and semi-finished products. The government continues to liberalize imports by eliminating quantitative restrictions, an initiative begun in 1987.


The government also succeeded in pushing the milestone Foreign Investment Act of 1991 through the Congress. The new law is an attempt to encourage foreign investment by opening up new areas to investment and lowering the required domestic equity share for joint ventures in several other sectors. A bill liberalizing the Philippines' oligopolistic banking sector is also in the works, although it is not clear whether it will get through Congress during the Aquino Administration, which ends in June 1992. Financial liberalization of this kind would be an important complement to foreign investment liberalization.

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Privatization of state-owned assets (many of which are collapsed Marcos-era firms) has stalled, due in part to poor market conditions. The government has also proposed a number of revenue enhancement measures; under pressure from the IMF and international creditors, the Administration has squeezed government expenditures but is still faced with a yawning central government deficit next year. As the country approaches an election season, administrative measures for improved tax collection would seem to be more possible than Congressional approval of new taxes.

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As of June 1991 the Philippines' foreign debt totalled $28.9 billion, or roughly 63 percent of GNP. The debt is overwhelmingly public sector (81 percent) and about half of it is owed to commercial banks or suppliers. Debt servicing consumes approximately 25 percent of export earnings. Servicing was suspended in 1983 in the midst of a political and economic crisis. Relations with the international financial community began to move back to normal with the completion of a debt rescheduling agreement in 1985. The Aquino Administration, which came to power in 1986, has reiterated the country's determination to service its debt while pursuing structural reforms to alleviate the debt burden through growth.

The Philippines was unable to meet the conditions of a medium-term IMF program and has also experienced some difficulty in meeting the monetary targets set in a more modest 18-month standby agreement approved in February 1991. Heavy Central Bank purchases of foreiga exchange and higher-than-expected levels of domestic bank reserve deficiencies have complicated efforts to meet these benchmarks. AN IMF review of the country's key performance criteria took place in November 199 ha

The country is on generally good terms with its commercial bank creditors. Since 1983, the Philippines has periodically rescheduled both its commercial and its Paris Club. (official creditor) debt. In August 1992 the Philippine government and its commercial bank creditors agreed on principle on the structure of a $5:3 billion debt relief package, a Brady-type program with a menu of options such as par bonds and interest rate reduction bonds. Negotiations between the government and the banks continue; one important issue still to be resolved is the inclusion of debt paper related to the Bataan nuclear power plant. The government is



under pressure to repudiate the nuclear debt because of questions surrounding the original contract and the construction of the plant, while creditors insist that it be included in the rescheduling package. In June 1991 Paris Club creditors rescheduled $1.5 billion of official Philippine debt; a bilateral U.S. - Philippine agreement to implement the Paris Club pact is now under review.

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Tariffs and Other Import Charges : The government undertook tariff reform as part of a broader trade liberalization program under a 1981 World Bank structural adjustment program. As a result, most tariff rates were set between 10 and 50 percent and average nominal tariff rates fell from 42 percent in 1979 to 28 percent in 1991.

Continuing the reform process, President Aquino signed Executive Order 470 (E.O. 470) on July 20, 1991, putting into place a tariff reduction, restructuring, and simplification program. In effect since August 22, 1991 E.O. 470 will be phased in over a four year period, resulting in average nominal tariff rates of 20 percent. Upon its full implementation, E.O. 470 will have compressed the current seven-tier tariff structure to a four tier structure of 3, 10, 20, and 30 percent.

Selected products will be exempt from this basic framework. Tariffs will remain at 50 percent and 40 percent for such products as meat, fish, and produce, garments, textiles, glass, home appliances, audio and television equipment, and other consumer goods. While the tariffs on most of these products will be phased down into the basic framework over the life of the program, some 208 products identified as "strategic" will continue to attract 50 percent tariff rates. Included in this group are rice, vegetable oils, sugar, fruits, and luxury consumer goods such as alcohol, tobacco, and leather goods.

Import Licenses: Under the government's import liberalization program, prior clearances from Philippine government agencies, such as the Central Bank, the Board of Investments, and agencies of the Department of Trade and Industry, are no longer needed to open letters of credit for most imports. However, clearance requirements for certain restricted or controlled items still apply. Commodity imports financed through foreign credits still require prior approval from the Central Bank. The Philippines is a signatory to the GATT Import Licensing Code.

Between 1981 and 1991, licensing requirements were lifted on 2,489 items representing 90 percent of the 2,762 commodities identified for liberalization over a twelve year period. In September 1991 a cabinet-level committee approved a working-level recommendation to remove import licensing requirements from an additional 61 products, primarily consumer electronics. Those products which remain to be deregulated include more sensitive products such as animal and meat products, consumer durables and transport equipment. In addition, over 100 of these products are unlikely to be

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