Philippines fails to meet conditions of loan
Less than a year after reaching a major new lending agreement with the International Monetary Fund, the Philippines is trying to renegotiate it. An IMF loan of $637 million has been the centerpiece of the Philippines' effort to revive its troubled economy. But it is now clear that the Manila government has failed to meet a number of conditions that were attached to the credit when it was formally extended last December.
This failure has jeopardized a $106 million portion of the loan that is to be considered at an IMF meeting today.
Last week the fund suspended payments to Mexico because it had similarly failed to meet credit conditions.
Jose Fernandez, governor of the Philippines Central Bank, recently presented the IMF with a revised draft of the letter of intent on which the loan was based. But banking sources here say the fund is unlikely to consider the proposal at today's meeting although they are expected to accept some rewriting of the original statement.
Manila has had trouble meeting the IMF's conditions almost since the credit was first agreed upon. The second installment of the loan, due to be disbursed last March, was delayed until August because the government was unable to limit its money supply to the fund's targets.
Any delay in the flow of IMF credits disrupts the flow of loan moneys provided by Manila's commercial-bank creditors, who hold most of the nation's $26 billion in foreign debt.
More than 400 foreign banks have agreed to a $10 billion rescue package for the Philippines, made up of some $6 billion in rescheduled debt and new credits of nearly $4 billion. These funds are released only when the IMF approves a portion of its own loan.
Several weeks ago, according to foreign bankers, IMF examiners in Manila listed the problems that may now delay the fund's third installment:
The money supply is still growing 6 percent faster than the fund has stipulated.
The government's budget deficit, which has to be limited to 0.9 percent of the nation's output, is now running at roughly double that percentage.
There has been little progress in restructuring two government-owned banks, the Development Bank of the Philippines and the Philippines National Bank. Together they hold more than $3 billion in problem loans.
The government has also failed to dismantle marketing monopolies in the sugar and coconut industries. Both have long been controlled by close associates of President Ferdinand Marcos.
Bankers in Manila say that Mr. Fernandez has asked the IMF to relax its conditions on both the money supply and the permissible budget deficit. His chief argument, these sources say, is the government's success in bringing inflation down from almost 60 percent a year ago to about 1.5 percent in the first half of this year.
Beyond this, Fernandez and other officials now complain that the IMF's conditions are so stringent that they are choking an economic revival. The government would like to continue spending above the fund's targets to stimulate domestic economic activity.
``They feel they've swallowed the IMF's medicine -- now it's time for a recovery,'' a banker close to the government observes. In the first six months of 1985 the nation's output contracted by 4.6 percent, according to official estimates. This follows shrinkage of 5.5 percent in 1984.
The economy's decline has been a key factor in reducing inflation, since demand has come to a standstill, with a sharp decline in exports. But this has also kept the value of the Philippine peso artifically high.
Bankers and other observers appear to be divided as to the course the IMF should now take. Some agree that the economy would improve if the fund relaxed its credit conditions -- attributing a modest upturn in economic activity recently to Manila's deficit spending.
But many others are more cautious. ``A lack of discipline got us into this mess,'' says one local economist. ``The IMF is the best way to impose some [discipline].''
Dismantling the agricultural monopolies is likely to remain a difficult issue between the IMF and the Marcos government, these sources say. Many bankers expected this to block an agreement altogether during the 15 months it took to negotiate one.