World Development, Vol. 14, No.& pp. 993-1018,1986. 03OS-750X/86 $3.00 + 0.00 Printed in Great Britain. Pergamon Journals Ltd. Foreign Debt, Balance of Payments, and the Economic Crisis of the Philippines in 1983-84 ELI M. REMOLONA* zyxwvutsrqponmlkjihgfedcbaZYXWVUT University of the Philippines MAHAR MANGAHAS Development Academy of the Philippines and FILOLOGO PANTE, Jr. Philippines Institute for Development Studies 1. INTRODUCTION In August 1984 the Philippines faced its worst balance-of-payments crisis since the end of the Second World War. Foreign exchange reserves were virtually depleted in the latter part of 1983, as international banking flows came to a stand- still. In October of that year, a 90-day mora- torium on amortization of external debt was declared. Since then, the moratorium has been extended thrice, pending the approval by the International Monetary Fund of a $635 million standby loan and the rescheduling of the country’s debt with its other creditors. This crisis is the culmination of mounting current account deficits for at least six years. The worsening of the current account was due in part to a severe deterioration in the country’s terms of trade and in part to a policy response that relied heavily on foreign borrowing to the neglect of other adjustment measures. Not only did such borrowing finance the perceived investment re- quirements of the country’s growth strategy; it also financed an accumulation of exchange re- serves that for a time prevented any real depre- ciation of the peso. This paper provides an account of the Philip- pine macroeconomic experience leading to the current difficulties, and pays special attention to the relationships between external shocks and domestic policy responses. With the aid of a simple forecasting model, the paper also makes a preliminary assessment of the country’s medium- term growth prospects in the light of the short- term austerity measures being adopted to resolve the debt problem. The next section presents an overview of the balance of payments as it evolved between 1971 and 1983 and broadly indicated the role of external shocks and domestic policies. Section 3 subsequently focuses on the current account by applying a decomposition analysis. Section 4 inquires more deeply into the developments between 1979 and 1983 by conducting counter- factual exercises to isolate the effects of various external shocks and policy responses. Section 5 reports on the simulation of a simple forecasting model designed to evaluate the country’s growth prospects, and Section 6 contains the concluding remarks. 2. AN OVERVIEW OF THE BALANCE OF PAYMENTS (a) Balance- of- pay ments experience, 1971- 83 The striking feature of the balance-of- payments experience of the Philippines during *The authors are Assistant Professor, U.P. School of Economics, Vice-President, Research for Develop- ment Department, Development Academy of the Philippines, and President, Philippine Institute for Development Studies, respectively. The views ex- pressed in this report are those of the authors and do not necessarily reflect those of the UNCTAD Sec- retariat or UNDP. 993