expenditures and expenditures more directly related to the fiscal year 1955 FOA dollar program will have to be provided for. The Philippine Government is now planning its central government budget for fiscal year 1956, and, in doing so, is making provision for continuation of essential FOA-aided activities.

It is now estimated that in fiscal year 1956, the equivalent of about $71.3 million (P142.7 million) will be needed to support costs of the fiscal year 1955 and earlier programs and some early costs of the fiscal year 1956 program. These funds will have to be provided from counterpart (authorized withdrawals of P38 million $19 million). Philippine appropriations (P48.4 million-$24.2 million; excluding appropriations required for ultimate deposit to the counterpart fund), public borrowing (P27.8 million-$13.9 million) and municipal, Provincial, and private contribution, etc. (P28.5 million-$14.2 million). The mission plans to obligate fiscal year 1955 dollar program funds only after firm assurances have been received from the Philippine Government to the effect that the needed funds will be made available when required.

Proposed Use of Deobligated Funds

It is proposed that all deobligations of prior years' funds materializing during fiscal year 1955 be reobligated for similar uses. A supplementary program totaling about $3 million and including technical cooperation and defense support components has been planned.

It should be noted that the supplementary program proposes the division of the $3 million of deobligations between the technical cooperation ($0.9 million) and defense support ($2.1 million) components. The Philippine program in past years has operated as an integrated program with no differentiation between the technical cooperation and defense support components. Hence, reuse of the funds should not be restricted to one component.

In table 7, which follows, the category source of the estimated deobligations is compared to the proposed reuses.

Table 7.-Source and Reuse of Funds Deobligated During Fiscal Year

VII. Fiscal Year 1956 Proposed Program

This is a proposed tentative program put forward by the Foreign Operations Administration as an illustrative program: This program is subject to many charges as it is studied by the Congress. Its chief value at the moment is that of an example of the application of future United States foreign aid philosophy to a specific country, the Philippines. The proposed program is comprised of three interrelated elements, each designed to meet specific requirements. First, a grant technical-cooperation portion of $7.4 million is included to provide for a portion of the technical needs of the nation which cannot be met locally. Second, a grant defense-support component of $8 million is included for key development projects, which it is hoped will significantly increase the nation's future economic capabilities. This portion of the program is designed to encourage more effective use of Philippine resources; each project will require a Philippine contribution significantly larger than the United States contribution. And third, a government-to-government loan of $25 million of defensesupport funds is proposed as a means of making possible more rapid progress in carrying out the Philippine development program.

The technical-cooperation component of the program is planned to provide the Philippines with the technical assistance required for a number of priority purposes. First, it is expected to facilitate the development of the country program now being prepared by the National Economic Council. Second, it is likewise expected to encourage and facilitate private investment by making technical assistance available for industrial project evaluation and planning. Third, technical guidance will be provided to strengthen the activities of the Government which are designed to encourage increases and diversification of agricultural production. And fourth, assistance will be provided to increase the effectiveness of the Government, particularly through strengthening its fiscal operations, improving the organization and management of key agencies of the executive branch, and making more effective the essential public services, particularly the activities in the fields of health and education most directly related to the solution of political, economic, and social problems.

The technical-cooperation segment of the program will also provide essential foundations for other components of the program. Technical services for evaluation, planning, design, and implementation of many of the projects included in the defense support grant and loan components will be included under the technical cooperation com

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ponent. Without the technical services provided, FOA does not believe that the projects could be carried forward as effectively or as rapidly. The technical-cooperation component is also deemed essential to the success of the program in that it should contribute to the maintenance of balanced development by aiding growth in noneconomic sectors to keep pace with economic development.

The grant funds provided under the defense-support portion of the program will be utilized for important projects similar to those included in past programs. Most of these projects will be essential public facility projects normally considered prerequisite to expansion in the private sector. All of the projects included are high-priority projects in the National Economic Council's program. All can be expected to contribute directly to the attainment of basic program objectives.

Provision of the requested funds on a grant basis by FOA should encourage the Philippine Government to mobilize resources and channel them into desirable basic facilities. The Philippine contribution to the projects will be significantly larger than the United States contribution. Local currency costs of the program will be met largely from public borrowing.

Since the projects included in this element of the program are largely in the public sector and are not directly revenue earning, they are not included in the proposed loan section of the program. Completion of the projects should contribute directly to increases in the economic capabilities of the country and should ultimately provide additional government revenue. If the desire by the United States for the future growth and improvement in the Philippines without continued United States assistance is to be attained, it is the judgment of FOA that both the return from the basic investment and the increased revenues should be allocated to further development of the economy rather than to repayment of loans.

The $25 million defense-support loan portion of the program has been requested by the Philippine Government as a direct outgrowth of the National Economic Council's economic development program. FOA believes the requested assistance should be provided because a capital inflow of this magnitude is essential to the establishment of a significant acceleration in the rate of economic development. Expanded investment in the sectors for which the loan will be utilized is considered essential as a means of overcoming the internal and external economic problems of the country and moving ahead toward the attainment of the basic objectives of improving the economic capabilities of the country.

While the loan is proposed on a government-to-government basis, the funds will be utilized for specific projects. The projects included in the illustrative list prepared by the Government complement the

technical cooperation and defense support project programs. FOA considers that all the projects appear to be of the type necessary to insure fundamental economic growth. Each project might be expected to make a contribution by stimulating further industrial investment in the private sector.

The planning for the projects included in the illustrative list is for the most part already completed, or is in advance stages, and the remainder can be planned to a sufficient extent to permit the funds to be utilized effectively in fiscal year 1956. While a considerable amount of detailed engineering specifications are yet to be completed for most of the projects, FOA considers that there is enough time remaining for this work. All of the projects proposed are similar to activities now carried on within the Philippines. Hence, the technical aspects of the projects are considered to be within the competence of the economy to carry them out.

The Government is prepared to finance the local currency costs of the projects by borrowing from the public and from the banking system. The National Economic Council believes the general inflationary impact of the borrowing will not be severe and that the disadvantages of some small rise in prices will be more than offset by the attainment of a higher level of investment.

FOA and the National Economic Council do not believe that there is any practical way of obtaining financing for the proposed program in the absence of United States assistance of an extraordinary nature. It does not seem likely that sufficient private foreign investment could be interested to carry out the projects. Moreover, it does not appear that there is any public source outside the United States which would be willing to finance the needed capital inflow. Nor is it likely that any significant improvement in the Philippine balance-of-payments condition will occur to provide means of financing the extraordinary capital inflow.

The Government's request for an FOA loan in contrast to a loan from the Export-Import Bank has been justified on the basis of the continued need for an expanding capital inflow which would not impair the ability of the economy to repay loans either on a short-time basis or in dollars. It is believed the capital inflow necessary will not be limited to a span of 3 to 5 years but may stretch beyond by as much as a decade. The exact magnitude of the necessary inflow will depend upon the rate at which projects can be planned and implemented and the rate at which domestic resources can be allocated to investment.

The Government's proposal for fiscal year 1956 is that the loan be on a long-term repayment basis (about 50 years) at a rate of not more than 3 percent interest. It also proposes that repayment be permitted

in local currency with the use of the repayment proceeds to be subject to joint United States-Philippine decision.

The fiscal year 1956 program makes no provision for budgetary support for increased defense activities in view of the uncertain state of planning of force goals, both as to size and timing. However, the prospective deficit in the Central Government budget indicates that unless economic development expenditures would be curtailed at the same time, any agreed expansion of the Armed Forces of the Philippines would raise for serious consideration the question whether United States budgetary support would be required in the form of imports of salable commodities (e. g., surplus agricultural commodities).