15 December 2008
Debt & Public Finance
The Freedom from Debt Coalition welcomes the Senate’s move to reallocate P30B-P50B for a stimulus package intended to finance additional spending for infrastructure, health, education, and the environment from debt service and lump-sum allocations in the President’s 2009 budget submission.
This step is in line with what FDC has long advocated: the reallocation of funds from an unending process of servicing the Philippines’ debt to much needed social and economic spending.
The 2009 Budget must be a responsible response to the recession that is sure to hit the economy as a consequence of the US financial collapse. Financial analysts predict that the Philippines in 2009 will suffer sharply increased unemployment and underemployment as growth slows down. That the likely scenario will be worse is indicated by the fact that our two biggest export markets, the US and Japan, have already lapsed into recession, as have many of the European economies that are important destinations of our overseas workers. The deep declines in export earnings and remittances that will certainly occur, as well as the return of overseas workers who have lost their jobs, will translate into a significant loss of demand, reduced growth, and rising unemployment.
FDC has long identified the annual debt service as the biggest and most underutilized source of financing. However, the non-transparent and non-accountable way that an imperial executive has managed the process of contracting and servicing debt has stood in the way of Congress’ ability to exercise its power of the purse in this area. Both Houses of Congress took a firm stand in reducing debt service payments in the 2008 Budget, but this was negated by a presidential veto. This time the Senate and the House of Representatives can do no less than to continue the initiative to reduce debt service and to exercise independent judgment in the performance of their fundamental task of crafting a budget that supports the people’s basic needs and the country’s economic requirements in this period of global recession.
FDC also notes positively the Senate’s move to form a budget oversight committee to monitor the expenditures in the 2009 budget, similar to the Lower House’s initiative. It is in subjecting budget expenditures to utmost scrutiny that we can ensure the proper disbursement of the people’s money.
But even as FDC recognizes the importance of the Senate’s action in democratizing fiscal policies, we caution the lawmakers against treating the 2009 budget and the corollary initiatives as a substitute for a comprehensive economic development strategy. Budgetary reallocation from debt servicing to social services must be seen as but one component, albeit an important one, in the formation of a genuine development strategy after over two decades in which the country’s economic priority has been debt servicing, not development.Two Necessary Moves: Debt Moratorium and Debt Audit
Indeed, from the perspective of both meeting the coming emergency and moving the country to sustained development, a full-fledged moratorium on paying a foreign debt that has in reality been paid many times over were it not for onerous terms of repayment is a sine qua non. P50 billion is a start but P200 billion is necessary. Clearly the opportunity cost of servicing debt in times of crisis is the spread of economic instability that will inevitably trigger wide-ranging social unrest.
We thus enjoin the 14th Senate to pass the 2009 National Budget with a special provision implementing an immediate debt moratorium, to cover all external debt payments amounting to P200B.
The moratorium should be in effect until an official comprehensive investigation and audit of all public debt and contingent liabilities is completed by Congress. Upon completion of the debt audit, it will be necessary to repudiate fraudulent, wasteful, and/or useless debts. Moreover, it would be appropriate to renegotiate and revise the contracts and payment schemes of other questionable debts to ease the burden on tax payers and help contribute to the stabilization of the national economy in a time of crisis.
Already, FDC has identified 42 loan items for 23 projects/programs with a combined interest payments worth $95.52M or P4.59B, including interest payments worth $237.74 million or P11.41 billion for proposed loans (bonds, programs and projects) for 2009. Payments of these loans will result in the unjustified waste of resources needed to counteract the negative impact of the recession.
In order to offset a scenario in which the moratorium will lead to ballooning debt in the event of failure to repudiate illegitimate debt or renegotiate debt contracts, it would also be necessary to freeze interests accruing throughout the duration of the moratorium. Accumulated principal payments should also be spread out. Unilateral Debt Reduction: An International Trend
Our lawmakers must heed the example of Argentina. Former President Nestor Kirchner’s unilateral reduction of that country’s debt to foreign creditors beginning in 2002 resulted in the saved resources being channeled to domestic investment, resulting in four straight years of 10 per cent GDP growth. Following Kirchner’s example, Ecuador President Rafael Correa has cancelled payment of some $30M on foreign bonds he calls “immoral and illegitimate.” A 14-month official debt audit that inspected Ecuador’s finances from 1976 to 2006 reported that this portion of the foreign debt was channeled to illegal and corrupt activities.
Last week, in Brazil, the President of the Chamber of Deputies, Arlindo Chinaglia, signed an act creating a “Parliamentary Commission of Inquiry.” The body aims to investigate the public debts of the federal, state, and municipal governments; the payment of interest of these debts; the beneficiaries of these payments; and “their monumental impact on the social policies and sustainable development of the country.” The Way Forward
A debt moratorium and a debt audit are two of a number of drastic reforms needed to ensure the budgetary process plays its role in a comprehensive strategy to lift the country from the ongoing plague of economic crisis and underdevelopment. The Senate has made a start in the right direction by reallocating funds. It should muster the courage to take these other more difficult but necessary steps.
(Signed)DR. WALDEN BELLONational President
Freedom from Debt Coalition