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May 15, 1989

WHEREAS, the Government of the Philippines and the Government of the United States entered into a Memorandum of Agreement dated October 17, 1988 upon the conclusion of the second quinquennial  review of the Military Bases Agreement pursuant to an Exchange of Notes dated January 1, 1979; and

WHEREAS, Article IX of the Memorandum of Agreement states that "the Government of the United States will develop with the Government of the Philippines a program of budget support for the Philippine Government" and further states that "the United States will propose rapid disbursement of a substantial portion of $248 mi 11 ion in ESF for U.S. fiscal years 1988 and 1989 and a substantial portion of the fiscal year 1990 ESF, in the anticipated amount of $160 million, which may be appropriated for the Philippines to assure continued progress in implementation of agreed on Philippine economic and administrative reforms" and that "these cash transfers would enhance significantly the financial ability of the Government of the Philippines to undertake a voluntary, market-oriented debt reduction program in 1990, or earlier if desirable and feasible"; and

WHEREAS, the Government of the Philippines and the Government of the United States are desirous of recording their agreement in principle on a program to carry out the aforementioned provisions of Article IX of the Memorandum of Agreement and on other matters related to Economic Support Fund ("ESF") assistance made available to the Government of the Philippines.

NOW THEREFORE, the Government of the Philippines and the Government of the United States ( the "Parties") agree as follows:

ARTICLE I — CASH TRANSFER ASSISTANCE

The Government of the Philippines and the Government of the United States, acting through the Agency for International Development ("A.I.D.") will enter into an agreement (the "cash transfer agreement") pursuant to which A.I.D. will grant to the Government of the Philippines $218 million in Economic Support Funds ("ESF") to help meet the foreign exchange requirements of the Government of the Philippines and to provide support for the Government of the Philippines' budget for 1989 and 1990 for essential services in such areas as education, health, population and the environment, as follows:

Section1. A.I.D. will obligate $169 million under the cash transfer agreement in 1989 from ESF previously appropriated by the Congress of the United States for U.S. fiscal years 1988 and 1989. A.I.D. will obligate the balance of $49 million under the cash transfer agreement in 1990, subject to the availability of funds therefor, from ESF requested for appropriation by the Congress of the United States for U.S. fiscal year 1990.

Section 2. The cash transfer agreement will provide for an initial disbursement of $104 million by A.I.D. immediately following execution of the agreement.  The agreement will schedule a second disbursement of $65 million by A.I.D. on or about January 1, 1990 and a third disbursement of $49 million by A.I.D. on or about July 1, 1990.  Disbursements by A.I.D. will be made pursuant to such terms and conditions as the Government of the Philippines and A.I.D. may agree upon in the cash transfer agreement or otherwise.  The Government of the Philippines recognizes and agrees that disbursements by A.I.D. pursuant to the cash transfer agreement will be made in accordance with suitable arrangements that further the intent of Article IX of the Memorandum of Agreement of October 17, 1988 to assure continued progress in implementation of agreed on Philippine economic and administrative reforms.

Section 3. The cash transfer agreement will provide for the deposit into a dollar special account of dollar disbursed by A.I.D.  The Parties agree that dollars held in the dollar special account will be used, in accordance with such terms and conditions as the Government of the Philippines and A.I.D. may agree upon in the cash transfer agreement or otherwise, to pay official debt of the Government of the Philippines to multilateral lending institutions, or for such other purposes as the Parties may agree upon.

Section 4. The cash transfer agreement will provide for the deposit into a peso special account by the Government of the Philippines of pesos equivalent to each disbursement of dollars by A.I.D.  The Parties agree that pesos held in the peso special account will be used, in accordance with such terms and conditions as the Government of the Philippines and A.I.D. may agree upon in the cash transfer agreement or otherwise, according to the following priorities:

First, the peso equivalent of not less than $4 million deposited in the peso special account in connection with the initial disbursement of dollars by A.I.D. and the peso equivalent of not less than $10 million deposited in the peso special account in connection with the third disbursement of dollars by A.I.D., will be used to help the Government of the Philippines implement, for calendar years 1989, 1990 and 1991, the provisions of paragraph 3 of Section 1 of the Annex to the Agreement on Economic and Technical Cooperation, which entered into force on May 21, 1951; and

Second, the peso equivalent of not less than $3 million deposited in the peso special account in connection with the initial disbursement of dollars by A.I.D., will be made available to finance accounting and monitoring services for the cash transfer program; and

Third, the balance of funds deposited or held in the peso special account from time to time will be used to support the Government of the Philippines' budget for essential services in such areas as education, health, population and the environment;

provided, however, that the Government of the Philippines and A.I.D. shall conclude consultations regarding the provisions of paragraph 3 of Section 1 of the Annex to the Agreement on Economic and Technical Cooperation prior to each of the first and third disbursements of dollars by A.I.D.;  and provided, further, that the Government of the United States agrees that pesos need not be provided for the second priority use if prior to the execution of the cash transfer agreement the Government of the Philippines shall have satisfied the reporting requirements under (i) the Grant Agreement for the Budget Support Program dated June 25, 1986, (ii) the Grant Agreement for Budget Support Program II dated May 28, 1987, (iii) the 1986 P.L. 480 Title I Sales Proceeds Agreement dated October 26, 1986, (iv) the Agricultural Commodity Grant Agreement dated June 16, 1987, (v) the 1986 Section 416 Sales Proceeds Agreement dated May 8, 1987 and (vi) the 1987 Section 416 Sales Proceeds Agreement dated May 11, 1988; and provided, further, that any amounts made available for the first priority use that are at any time determined by agreement of the Government of the Philippines and A.I.D. not to be required therefor, shal1 thereafter be provided for the third priority use; and provided, further, that any amounts made available for the second priority use that are at any time determined by agreement of the Government of the Philippines and A.I.D. not to be required therefor, shall thereafter be provided for the third priority use.

ARTICLE II — PROJECT AND PROGRAM ASSISTANCE

The Parties will enter into appropriate agreements pursuant to which A.I.D. will grant to the Government of the Philippines $190 million in ESF for economic development projects and programs, as follows:

Section 1. The Parties agree that A.I.D. will obligate a total of $79 million on a grant basis in 1989 from ESF previously appropriated by the Congress of the United States for U.S. fiscal years 1988 and 1989, on such terms and conditions as the Parties may agree upon, to provide incremental funding for the Regional Development Fund Project in the amount of approximately $35 million, for the Rural Infrastructure Fund Project in the amount of approximately $39 million, for the Project Design Project in the amount of approximately $3 million, and for the Technical Resources Project in the amount of approximately $2 million. The Parties further agree that A.I.D. will obligate, subject to the availability of funds, a total of $13 million on, a grant basis in 1990 from ESF that may be appropriated by the Congress of the United States for U.S. fiscal year 1990, on such terms and conditions as the Parties may agree upon, to provide incremental funding for the Regional Development Fund Project in the amount of approximately $7 million, for the Project Design Project in the amount of approximately $3 million, and for the Technical Resources Project in the amount of approximately $3 million.

Section 2.The Parties agree that A.I.D. will obligate, subject to the availability of funds, a total of $98 million on a grant basis from ESF that may be appropriated by the Congress of the United States for U.S. fiscal year 1990, on such terms and conditions as the Parties may agree upon, to provide funding for economic development projects and programs.  The Parties agree that of this total amount and subject to the foregoing conditions and programmatic requirements, A.I.D. will make available $50 million for mutually agreed upon programs to support selected sectors of the Philippine economy ("sector support programs"). The Parties further agree that of this total amount and subject to the foregoing conditions and programmatic requirements, A.I.D. will make available $48 million for mutually agreed upon ongoing or new project or sector assistance activities and that they will hold such reviews and discussions as may be requested by either side for the purpose of determining on or before June 1, 1990 the purposes and activities for which such funds shall be obligated.

ARTICLE III — FURTHER AGREEMENTS

Section 1. The Parties agree that this Memorandum of Understanding constitutes the agreement of the Parties on the program of assistance contemplated by Article IX of the Memorandum of Agreement of October 17, 1988 and constitutes the request of the Government of the Philippines to the Government of the United States for such assistance, for such purposes, in such amounts and on such terms and conditions as herein set forth.

Section 2. The Parties agree to proceed with all deliberate speed to negotiate and enter into appropriate agreements to carry out the agreements in principle set forth herein.

IN WITNESS WHEREOF, the Republic of the Philippines and the United States of America, each acting through its duly authorized representatives, have caused this Memorandum of Understanding to be signed in their names and delivered as of the day and year first above written.