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• Publication Date: February 1, 1985
• Content Type: REPORT

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Directorate of Seer-et
The Philippines:
Living With a
Foreign Debt Hangover
EA 85-10013
February 1985
Copy 319
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Directorate of Secret
Intelligence
The ,Philippines:
10,
? L' 117:4-h
w
ng i a
Foreign Debt Hangover
Office of East Asian Analysis.
Comments and queries are welcome and may be
directed to the Chief, Southeast Asia Division, OEA,
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Secret
EA 85-10013
February 1985
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The Philippines:
Living With a
Foreign Debt Hangover
Key Judgments The Philippines faces a prolonged struggle resuming even modest economic
Information available growth under the burden of its $25 billion foreign debt. The recovery will
as of 18 January 1985 be especially sensitive to adverse developments in the international econo-
was used in this report.
my and domestic political turmoil-further complicating the Philippines'
quest for social stability.
Based on our econometric work that simulates the effects of Manila's debt
rescheduling, we believe that the economic outlook through 1986 is bleak:
? National output will decline by 2 percent in 1985.
? The economy will grow no more than 2 percent in 1986 because of IMF-
mandated restrictive monetary and fiscal policies designed to limit
imports and ease inflationary pressures.
? Another round of debt rescheduling will be required in 1986, and again
in 1987, to avoid a surge in principal repayments that would otherwise be
due.
A nascent economic recovery could be under way by the 1987 presidential
election, if favorable economic conditions prevail abroad and the Philip-
pines continues reforms pledged to its creditors in recent negotiations with
the IMF. This assumes that President Marcos remains in power or that
there is a fairly smooth transition to a new government with a minimum of
domestic political upheaval, if he is incapacitated or dies during the next
two years.
On the other hand, if Manila breaks with its creditors it will postpone any
chance of economic recovery until 1987. We believe noncompliance during
1985 alone, for example, would contract output by 7 percent. Backsliding
on compliance, nonetheless, could result from turmoil accompanying a
divisive presidential succession struggle, social discontent and unrest in
reaction to austerity, or an acceleration of the Communist-backed insur-
gency and a widespread deterioration in domestic security.
Even if all goes well at home and abroad, the debt crisis will continue to
slow economic activity through 1990, and the political costs of austerity for
the government will be substantial because of rising unemployment and
higher taxes. With domestic stability and sound economic policies, favor-
able world economic conditions, and satisfactory levels of foreign financ-
ing, we expect annual GNP growth rates by 1988 of no better than 4
percent. Debt service will continue to be a burden and will reduce resources
available for investment, consumption, and government spending. This
would coincide with a period of rapid growth in the working-age popula-
tion-3.3 percent annually-projected to be the highest in Asia and would
ensure that the average Filipino experiences little improvement in living
standards.
Secret
EA 85-10013
February 1985
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Anatomy of a Foreign Debt Crisis
Manila's foreign debt has increased tenfold since
1970, reaching $25 billion in 1984. A decadelong
spending spree was made possible by an abundance of
government guarantees to private Philippine borrow-
ers linked to the Marcos administration and Ma-
nila's continued support for an overvalued peso-
which artificially cheapened imports. In conjunction
with a concentration of economic power in President
Marcos's hands, borrowing has led to an explosive
growth of state-controlled monopolies.
Philippine investment became in-
creasingly inefficient during the 1970s, and, on aver-
age, investment was 35 percent less productive than in
similiar Asian countries.
The cost of the borrowing binge mounted rapidly by
the early 1980s, aggravated by rising international
interest rates, lower prices for Philippine export
commodities, and the 1981-82 world recession. The
Central Bank's growing dependence on expensive
short-term borrowing for balance-of-payments sup-
port-such debt rose from 2 percent of GNP in 1970
to 17 percent in 1983-helped push debt service
payments up to $2.9 billion in 1983. Debt service
absorbed 35 percent of export earning and placed an
unsustainable strain on the country's foreign ex-
change reserves, which dropped from an equivalent of
4.7 months of imports in 1979 to 1.4 months by 1983.
Furthermore, inept management of those reserves left
little more than $100 million on hand in mid-1983 to
meet debt rollovers totaling $250 million a week.
Manila's international credit rating, which began
slipping in 1981 following a major financial crisis in
the private sector, plummeted in early August 1983
amid rumors that Marcos was seriously ill and a
succession struggle was under way. In the turbulent
aftermath of Aquino's 21 August assassination, in-
vestor confidence evaporated. Manila devalued the
peso by 22 percent in early October in a desperate but
futile effort to obtain a new IMF standby loan and to
stem a flight of peso capital into dollars. On 17
October 1983, out of money and credit, Manila
declared a moratorium on principal repayments to
foreign creditors, froze foreign exchange transactions,
and asked the IMF and foreign bankers to organize
debt rescheduling. Manila's arrears to foreign credi-
tors exceeded $1.6 billion with another $1.6 billion in
outstanding contingent liabilities for standby letters
of credit and contract guarantees.
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The Philippines:
Living With a
Foreign Debt Hangover
Factors at Play
After a year of economic decline, political unrest, and
intense bargaining, Manila has reached agreement
with the IMF on an economic adjustment program
and completed negotiations with its creditors on a
plan to restructure much of the Philippines' $25
billion foreign debt (see table 1).' The agreements
follow protracted negotiations in which Manila ex-
pected-unrealistically-to avoid an unpopular aus-
terity program by persuading the IMF to ease its
demands for onerous domestic economic policy ad-
justments. According to US Embassy reporting, the
government was persuaded to accept the IMF's tough
policy recommendations by the Central Bank's rapid-
ly deteriorating foreign exchange reserves, a spate of
headline-grabbing bank failures, and a US-initiated
delay in approval of a $150 million loan by the World
Table 1
Composition of Manila's Foreign Debt:
October 1983 Moratorium Levels a
Bank.
The agreements come at a time when political ten-
sions in Manila are high and speculation that Presi-
dent Marcos is seriously ill is rampant. The uncertain-
ty surrounding Marcos's health has increased concern
both within and outside the government that a presi-
dential succession is much closer than has been
previously believed. Of special concern is that Mar-
cos's habit of keeping political institutions weak-
including an ambiguous succession mechanism-en-
sures a rocky road to new leadership if he becomes
incapacitated or dies.'
' The constitution calls for the Speaker of the National Assembly to
act as caretaker president if Marcos dies or is incapacitated before
his term expires in 1987. The National Assembly is to agree on
special election rules within seven days, and the Speaker is then
required to set an election within 60 days of Marcos's demise.
Constitutional provisions prevent the Speaker from declaring mar-
tial law, dissolving the Assembly, and using the presidential
decreemakin veers.
Total foreign debt 24,281
Medium- and long-term debt, by creditor 15,027
Banks and financial institutions 7,724
Supplier credits 1,496
Multilateral donors 3,780
World Bank 1,877
1,351
805
546
535
9,254
7,944
Supplier credits 1,230
Others 80
a Manila's foreign debt has changed very little since the October
1983 moratorium. As of 30 June 1984, Manila's total foreign debt
stood at $24.8 billion, divided between $15.4 billion in medium- and
long-term credits and $9.4 billion in short-term credits. Debt, as
defined by the bank advisory committee and IMF, does not,
however, include an estimated $3.2 billion in arrears or government
liabilities on foreign construction contracts and long-term leases.
sion process.
The jockeying among Marcos's inner circle that has
accompanied his current health crisis has intensified
widespread anxiety about the soundness of the succes-
,doubts over the prospects for a constitutional
succession recently have dominated the agenda of
senior officials in the military, the cabinet, and the
ruling party. Differing legal interpretations of the
succession mechanism, moreover, could, if Marcos
dies, prompt debate within the National Assembly
over whether the Speaker would share presidential
authority with the Prime Minister.
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Figure 1
The Philippines: External Debt and
Debt Service, 1973-83
a Includes IMF loans.
b Includes short-term trade financing.
c Central bank and commercial bank short-term
borrowing to finance international reserves.
As a result of these concerns, the Philippines' econom-
ic outlook-even with the financial adjustment and
debt restructuring agreements in place-is clouded by
the possibility that presidential succession or incapaci-
tation could alter the economic policies Manila has
settled on with its creditors. We can envision two
basic policymaking environments in the next few
years. One environment-which may prevail either if
Marcos remains in office or if his successor is drawn
from the ruling elite or the moderate opposition-
would reflect policy continuity, featuring reasonably
good working relations between the government and
its foreign creditors. We assume the Marcos govern-
ment or its successor would decide it had no other
option but to comply with most, if not all, of the
creditors' austerity program in return for continued
financial support. In this case, we believe the current
financial rescue package for the Philippines would
remain intact through 1986-the last year of the new
program.
The other environment-which would reflect a higher
degree of domestic political turmoil-would see Ma-
nila breaking with its creditors and adopting more
politically expedient economic policies. Such turmoil
might result from a protracted succession struggle, for
example, possibly, including an extraconstitutional bid
for power by someone like Imelda Marcos. It also
could emerge from social discontent and unrest in
reaction to financial austerity or the widespread dete-
rioration in domestic security that might occur if the
Communist-backed rural insurgency continues to gain
strength. Because the course of political developments
in the near term cannot be predicted with any preci-
sion, this assessment evaluates the economic growth
paths that are likely to result from either set of
circumstances-which will in turn bear heavily on the
Philippines' long-term chances for internal stability.
The Current Economic Picture
The Philippines' financial problems have already tak-
en a heavy toll on the economy. Our analysis suggests
that real GNP will record a decline for 1984 of 5.5
percent, compared with a 1.4-percent increase in
1983. Our analysis also indicates that public and
private investment outlays have dropped by one-third,
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Table 2
The Philippines: Balance of Payments
Coconut products
965
759
756
590
622
753
Sugar
238
474
609
440
321
315
Lumber
484
433
383
293
323
325
1,520
6,142
1,385
-311
Short-term loans (net)
-558
196
-213
-56
-836
-500
Other
281
406
35
53
-35
140
Overall balance
-603
-372
-732
-1,638
-2,124
-2,286
Cumulative arrears on interest and principal
payments-including debt payments covered by the
moratorium
1,600
2,700
while current government expenditures have fallen 14
percent. Furthermore, on the heels of successive de-
valuations and rapid money supply growth in early
1984, inflation is running at a 60-percent annual rate,
after averaging no more than 15 percent annually
over the last three years
The domestic impact of the financial crisis was slow in
coming. urban con-
sumers maintained living standards by drawing on
savings and relying on assistance from relatives. In
the countryside; relatively stable farm incomes per-
mitted many to continue consuming at traditional
levels. Manufacturers and retailers, on the other
hand, drew on stockpiled inventories and relied on
black-market import financing in an attempt to sus-
tain business operations. The initial economic shock
was also moderated by an active black market in
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The Philippines' recent economic decline and IMF-
supported austerity measures are hitting urban cen-
ters disproportionately hard. Devaluations and the
floating exchange rate system, tight monetary poli-
cies, and higher taxes and utility fees are undermin-
ing the profitability of import-intensive industries
that cater to the domestic market, supplying bever-
ages, tobacco products, textiles, appliances, drugs,
and cement. These industries-dominated by busi-
ness associates of President Marcos-have long been
protected by discriminatory economic policies. 0
over one-fourth of
the firms in this sector-which employs 10 percent of
the national labor force and produces 19 percent of
GNP face temporary or permanent closure.
Losses in the manufacturing sector will continue as
imports become increasingly expensive, high interest
rates further raise production costs, and domestic
demand remains weak.
production-85 percent of which is sold in the domes-
tic market-will decline 1 percent annually in 1985
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Although exporters and farmers are not escaping
unscathedfrom the austerity measures, they are the
intended beneficiaries of the IMF 's efforts at econom-
ic restructuring. Export manufacturers-and their
urban work force-should eventually benefit from
exchange rate and tariff policies favoring labor-
intensive export production. Although we project that
the restructuring effort could stimulate export
growth rates of 12 percent beginning in 1987, we
expect continued strikes and protests by urban work-
ers opposing austerity measures until production
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The economic adjustment program is having a mixed
impact on agriculture, where production accounts for
approximately one-fourth of national production and
employs half the labor force. Although farmers will
receive higher prices for their products because peso
devaluations increase export revenues and price con-
trols on major food crops will be eliminated, produc-
tion costs will also climb as devaluations increase
fertilizer prices-already up over 30 percent in
1984-and high interest rates drive up the cost of
production loans. According to Philippine press re-
ports, some rice farmers are switching to lower
yielding varieties that require few manufactured in-
puts-a step that will reduce total rice production
and contribute to Manila's estimated need to import
about 300,000 metric tons of rice in 1985.
On balance, we believe that the New Peoples' Army
(NPA)-the military wing of the Communist Party of
the Philippines-will benefit from the recession and
debt crisis. For one thing, reduced military spending
is restricting armed forces training programs; putting
equipment modernization programs on hold; and
adversely affecting overall operations, maintenance,
combat readiness, and morale. When fighting the
insurgents, government forces often have insufficient
equipment, food, or transportation, according to US
Embassy reporting.
Although national-level linkages between the debt
crisis and the insurgency can be inferred, cause and
effect is much more dcult to establish at the local
level citizens support the NPA
primarily because of specific, local grievances such as
an abusive official or soldier, government inaction in
providing a needed service such as medical assist-
ance, or an injustice suffered at the hands of the local
legal system.
The rural poor, moreover, are not a homogeneous
group, but include such diverse groups as upland
farmers, the landless, and fishermen, all of whom live
at the edge of the money economy and depend on
multiple-income sources for survival. Although the
IMF-supported economic reforms are aimed at re-
versing economic policies discriminating against the
rural producer, an effective development program for
the rural poor cannot be undertaken amid the budget
cutbacks and high interest rates sought by the IMF.
Furthermore, development programs, flexible ex-
change rates, and higher farm-gate prices largely
benefit the better off farmers who sell to the urban or
export market.
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foreign currency, which initially prevented acute scar-
cities and pricing distortions; by the government's
preelection spending, which stimulated consumption
through June 1984; and by the debt moratorium,
which deferred about $80 million in monthly debt
principal repayments.
the state of the
domestic economy is now far more serious. Consum-
ers, for example, are finding it hard to make ends
meet as real wages have declined by 25 percent.
Unemployment has grown by 300,000 in Manila
alone
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short supply. even
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exchange, face difficulties financing production, ob-
taining necessary inputs, and remaining competitive
with foreign producers.
If the course of events in other financially troubled
developing countries is repeated in the Philippines, the
domestic slowdown will produce external financial
benefits. The economy's trade deficit already has
registered its first improvement since 1977. We calcu-
late that the current account deficit will shrink by
$1.2 billion for 1984-largely because of a drastic 23-
percent decline in imports. Although the nearly 50-
percent depreciation of the peso since October 1983
has not immediately aided most exporters-who must
cope with increasing wage costs and are hampered by
the high-import content of their production-the de-
preciation promises to boost exporters' profits and
encourage export-oriented production in the years
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ments through 1985.
The Rescue: A Foundation for Recovery
Manila's multiyear rescue package-the key to the
country's economic future-includes arrangements
for financing the balance of payments and stipulations
on economic policy designed to cure the country's
financial ills over the longer term The
basic ingredients are a $615 million IMF'standby
loan, an $8.5 billion financing package from commer-
cial creditors-consisting of new loans, rescheduled
debt payments, and revolving trade credits-and $3
billion in new loans and rescheduled debt payments
from official creditors. The rescue package is based on
the IMF's calculations that Manila needs $3.9 billion
in financing to meet its foreign exchange require-
The economic policy concessions required of Manila
by the IMF are considerable. As a precondition to
IMF approval of the adjustment program, in mid-
October Manila implemented a unified floating ex-
change rate system-a step designed to stimulate
exports by correcting the overvalued peso. The adjust-
ment program also requires that Manila cut the
public-sector budget deficit by increasing revenues
with new sales and excise taxes, repealing tax exemp-
tions enjoyed by public entities and various private-
sector organizations, and raising utility rates.
In addition, the government has promised to reduce
investment expenditures, constrain growth of the
money supply, limit wage increases, freeze public-
sector hiring, virtually eliminate subsidies to public
corporations and public financial institutions, and
improve the efficiency of public-sector financial insti-
tutions. Futhermore, the government is to enact agri-
cultural marketing and pricing reforms designed to
increase supplies for domestic consumption and ex-
port. Special emphasis will be given to dismantling the
government-sanctioned sugar and coconut monopo-
lies.
The commercial bank financing agreement makes an
important contribution to Manila's short-term quest
for financial stability by postponing a large share of
the country's principal repayments-$2.1 billion due
in 1984 and 1985-thus providing relief equivalent to
about 20 percent of export earnings. Furthermore, the
financing package permits foreign banks to extend
rescheduling through 1986 at their option. This would
postpone another $1.2 billion in amortization pay-
ments-provided that the IMF approves a new adjust-
ment program extending at least through December
1986.
Alternative Economic Futures
With debt restructuring and the rescue package in
mind, and with the aid of an econometric model, we
have analyzed the probable courses for the economy 25X1
during the next several years. The actual path taken
will reflect a combination of external factors that we
cannot forecast with any precision, including changes
in world trade, international interest rates, and oil
prices If, for example, GNP growth 25X1
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in the Philippines' major trading partners falls 2
percentage points below our baseline scenario, we
project that, by 1988, Philippine per capita GNP
would be 10 percent below our baseline level
Reflecting our expectations about alternate policy-
making environments in Manila in the years ahead,
we have devised two basic simulations. In general, we
believe that Manila will be faced with choosing
between the policy prescriptions of its creditors-
chiefly the IMF-or charting a course that seems
more politically expedient. Our baseline forecast,
thus, is one of policy continuity. Our alternative
forecast simulates a break between Manila and the
IMF.
In either case, our simulations show that the economy
will continue contracting through 1985 from the
cumulative impact of declining imports, high interest
rates, and tax increases combined with reductions in
government spending and declining investment. Nev-
ertheless, we believe that the $10 billion financial
rescue package of new loans and rescheduled debt,
along with fundamental economic reforms, can form
the basis of an economic recovery beginning in late
1986.
Our Baseline Forecast. However essential it may be to
the economy's long-term well-being, the IMF pro-
gram does not signal an immediate renewal of the 7-
percent average annual growth rates the Philippines
enjoyed in the 1970s. In fact, austere fiscal policies
will hold down domestic demand while tight monetary
policies, with interest rates in excess of 40 percent and
slow money supply growth, should significantly re-
strict domestic bank lending in 1985.
With the IMF-supported austerity program in place
and favorable external economic conditions, we be-
lieve real GNP will decline by approximately 2 per-
cent in 1985 before growing by about 2 percent in
1986. A population growth rate of more than 2.5
percent annually, however, will result in per capita
income in 1986 below the 1983 level.
Manila's annual requirements for new medium- and
long-term foreign lending through 1988 will be sub-
stantial, $1.4 billion-an amount we believe Manila
can secure, if only barely, from its official and
commercial creditors. Such financing, nevertheless,
will not be sufficient to rebuild foreign exchange
reserves from their current dangerously low levels.
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Moreover, Manila will need to extend its debt re-
scheduling agreements into 1986 and 1987 to deal
with amortization payments on commercial and offi-
cial debt, which will total nearly $2 billion annually.
The Downside Risk. Even if the Philippines' current
political problems ease, we believe that the costs of
austerity through 1986 will continue to be heavy. The
Philippines' strained relations with its creditors and its
recent record of tough negotiations with the IMF
suggest that Manila could be tempted into a confron-
tation with the IMF over economic policy sometime
during this period. Manila, for example, promises to
limit nominal wage increases this year to no more
than the projected inflation rate of 25 percent and to
freeze public-sector hirings. Furthermore, additional
taxes and higher utility fees are planned. Continued
domestic unrest could prompt the government to
grant tax, wage, or price relief-moves that might
jeopardize the hard-won financial rescue package and
condemn the economy to further recession. Tax and
agricultural reforms, moreover, will require that Mar-
cos withdraw economic privileges from his closest
associates-men like Eduardo Cojuangco, who has
been one of Marcos's strongest supporters for more
than a decade.
Quarterly IMF reviews-which monitor Manila's
compliance with quantitative economic performance
targets and the policy guidelines of the program-are
currently the basis for continuing with loan disburse-
ments. The Philippines, however, has already failed to
meet the first performance target set by the IMF-
the 31 December money supply level. This develop-
ment temporarily puts Manila out of compliance with
the Fund's program. As a result, the IMF is postpon-
ing loan disbursements scheduled for March, al-
though disbursements could resume in May if the
government brings the money supply down to target
levels. Among other things, Manila's failure to meet
the money supply targets may hold up disbursement
of new commercial bank financing, which depends on
continued compliance with the IMF program. F_
If Manila remains out of compliance with IMF
targets and loan disbursements cease-as they did in
1983-the Philippines would need to balance its
external accounts rapidly. The small amounts of new
external financing and precariously low foreign ex-
change reserves-which in October 1984 plunged to a
historically low $470 million-would be insufficient
to support the $1 billion current account deficit
projected for 1985. To trim the external deficit, we
would anticipate additional budget cuts, higher inter-
est rates, quantitative restrictions on imports, and a
request to creditors for another moratorium on exter-
nal debt payments.
Such a course-however politically tempting initial-
ly-is not a realistic long-run option for any Philip-
pine government, in our judgment. As a result of
austerity without the financial cushion of the rescue
package, for example, we believe real GNP would fall
by over 7 percent in 1985-compared with the 2-
percent decline under the IMF-supported program
(see figure 2). Belt-tightening would cut investment in
1985 by 30 percent from 1984's already low levels,
trim government consumption one-quarter, and
squeeze another 1 percent out of private consumption.
Furthermore, despite measures to restrict domestic
demand, Manila would risk driving inflation to 45
percent in 1985-as domestic spending concentrates
on the few imported and domestic goods available for
purchase.
For their part, commercial and official creditors
would probably not remain passive during another
debt moratorium. Banks probably would suspend loan
disbursements and selectively refuse to renew trade
credits. Furthermore, if Manila fails to keep current
on payments to official creditors, some bilateral do-
nors will be required to suspend further assistance.
For this reason, we believe that the passage of time
strongly favors a continued-if frequently tense-
relationship between Manila and its creditors.
Looking to 1990
Our analysis indicates that in the longer term the
economy would benefit from a bout of belt-tightening
and economic reforms, leading-in the absence of
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Figure 2
The Philippines: Forecasts of Real GNP Growth,1984-86
radical shifts in economic policy-to moderate growth
by the end of the decade. A floating peso and
restrained domestic demand-which curtails imports
and rewards exporters-would lead to impressive
reductions in the trade balance. Overall, we believe
that fundamental economic reforms-changing the
nature of the agricultural monopolies, the pattern of
rural development, and the tax structure-would en-
able the economy to emulate eventually some of its
more successful Asian neighbors such as Thailand
and Malaysia. These reforms are considerably more
likely now that they have IMF and World Bank
sponsorship.
Even if all goes well, Manila's foreign debt burden
will continue to constrain economic growth through
1990, depressing living standards and further aggra-
vating already high unemployment levels. With sound
economic policies, favorable conditions prevailing in
the world economy, and some measure of business
confidence restored, by the late 1980s our simulations
suggest that annual GNP growth rates will not exceed
4 percent (see figure 3).
Imports will be constrained as the Philippines be-
comes a net exporter of foreign exchange because its
interest payments on foreign debt-which will aver-
age more than $3 billion annually-will exceed net
capital inflows by about $2 billion. Limited imports,
combined with little domestic investment and high
interest rates, preclude rapid growth in the key agri-
cultural and manufacturing sectors-which together
account for nearly half of national output and employ
almost two-thirds of the labor force. Furthermore,
debt service payments will bunch again in 1989-
jumping $500 million over 1988 levels-when re-
scheduled loans begin falling due. Without additional
debt rescheduling agreements, debt service payments
will continue absorbing nearly 40 percent of export
earnings by 1990, reducing foreign exchange avail-
able for productive investments, private consumption,
or government spending.
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014, NO... NOT AG,hlN''
With the labor force projected to be growing at a 3.3-
percent annual rate through the decade, and only
modest amounts of new investments being made, the
economic recovery will not create enough jobs to
absorb the 800,000 new workers entering the labor
force each year, aggravating unrest among the mar-
ginally employed.' We cannot predict what level of
urban unemployment would produce social unrest,
and several social institutions in the Philippines, such
as the extended family system, act as "shock absorb-
ers" in a deteriorating labor market. At the very least,
however, these institutions will undergo added strains
for the near future, and we believe the risk of social
unrest will increase as a result. For these reasons, we
believe that the Philippines' road back to financial
stability will be long, difficult, and easily derailed by
both domestic and external factors.
'The government can expect virtually no relief from population
pressures before the year 2000, and providing jobs for a rapidly
growing labor force will be Manila's most difficult economic
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Figure 3
The Philippines: Projected GNP Growth and Debt Payments
Under Favorable Conditions, Through 1990
a Preliminary
b optimistic scenario projections.
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Figure 4
The Philippines: Index of Projected
Per Capita Real GNP, 1983-90
Classical recession
Tight money
Oil supply
disruption
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Appendix B
IMF Programs in
the Philippines
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The Philippines' relative economic stability through
1980 was attributed by many analysts to a long
working relationship between Manila's technocrats
and the IMF. Manila, indeed, has entered short-term
IMF adjustment programs almost continuously since
1967. Until 1978, however, the programs were rela-
tively small-less than $50 million-and were used by
Manila largely to secure the Fund's "Good House-
keeping seal," an approval which paved the way for
large-scale borrowings in the international credit mar-
kets.
The programs were largely successful in meeting their
immediate objectives and minimizing the disruptive
impact of the first and second oil-price shocks in
1973-74 and in 1979-80. The IMF's balance-of-
payments objectives were not achieved through funda-
mental structural adjustments to tariffs or taxes,
however-even though the Fund recommended such
reforms-but by Manila's heavy borrowing from in-
ternational creditors. In fact, we believe Manila's
current financial crisis illustrates the failure of short-
term adjustment efforts that are implemented in the
absence of a longer term program of economic policy
reforms. In the Philippines, such longer term reforms
began only in 1980 with the World Bank's first
structural adjustment program.
A recent University of the Philippines study reported-
ly concludes that, although the IMF had been aware
of Manila's circumventions of its programs, the Fund
failed to grasp their impact on the economy's plunge
into a debt crisis. The study also criticizes the Fund
for not slowing the Philippines' accumulation of short-
term credit. The Fund's successes and failures in the
Philippines since 1970 are detailed in the following
paragraphs.
acceleration of short-term capital inflows, however,
permitted Manila to meet the IMF's balance-of-
payments targets.
The 1976-78 Period
Manila was under a three-year extended fund pro-
gram aimed at achieving balanced and accelerated
economic growth and a workable balance-of-pay-
ments deficit and raising tax revenues to 16 percent of
GNP. The extended program came close to meeting
its annual targets. This "success," however, was ob-
tained largely because rising export prices led to
better-than-expected terms of trade. Structural ad-
justments in the tax system were not achieved and tax
revenue reached only 14 percent of GNP.
The 1979 Program
The IMF approved a one-year standby to help Manila
adjust to the second oil-price shock, consolidate gains
made under the extended fund program, and make
headway in reforming the tax structure. Program
targets were achieved, but fundamental tax reforms
were not put into place.
The 1980-81 Period
The IMF developed a two-year standby program that
continued the basic objectives of the 1976-78 pro-
gram. Additionally, the program sought to accelerate
investments in the energy and industrial sectors.
Overall, Manila turned in a poor performance meet-
ing program targets. Following a 1981 domestic fi-
nancial crisis and worse-than-expected terms of trade,
the IMF relaxed program targets to protect domestic
incomes. The IMF learned in late 1983 that Manila
had been manipulating its published international
reserve and monetary data since 1981, thereby hiding
the extent of the country's economic deterioration.'
The 1970-75 Period
The IMF approved six standby loans for Manila, each
designed to maintain economic growth, limit the
balance-of-payments deficit, and trim inflation. Over-
all, economic performance was erratic during this
period. Implementation was delayed by severe flood-
ing in 1971 and the oil-price increase of 1973. An
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The 1982-83 Period
Despite lengthy and intense negotiations, Manila and
the IMF were unable to develop a program for 1982.
The two parties disagreed on targets for the govern-
ment's budget deficit, the balance-of-payments defi-
cit, and external debt.
In February 1983 the IMF approved a one-year, $350
million standby loan on the condition that Manila
would trim the government's budget deficit, signifi-
cantly increase exports, restrain money growth, and
limit new foreign borrowings. The Fund expected
these actions to pave the way for economic growth
rates of 4 percent annually in 1984 and 1985. The
program and loan disbursements were suspended after
the June 1983 performance review concluded that
25X1 Manila was not in compliance with many of the
program's basic targets
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