Fiscal issues

2011 national budget: reducing the debt burden

A COA report released in 2008 noted a number of serious issues in bridge projects funded by foreign debt (Photo from http://www.pia.gov.ph)

The House of Representatives today (September 1) started its review of the P1.645-trillion national budget submitted by Malacañang.  Rep. Emilio Abaya of Cavite, chair of the committee on appropriations, has earlier promised a thorough deliberation of the Aquino administration’s proposed budget.

Sec. Butch Abad of the Department of Budget and Management (DBM) called the proposed 2011 budget a “reform budget”. The first budget of the new government is supposedly anchored on the basic governance principles of, among others, fiscal responsibility to reduce debt and bias in allocating resources for the poor.

Increased debt burden

But the spending plan submitted by Pres. Noynoy Aquino to Congress even increased the debt burden and like his predecessors, effectively marginalized resources for the poor. In fact, almost 77.5 percent of the P104.4-billion increase in the 2011 budget came from the huge P80.88-billion rise in interest payments for government’s debt. While personal services grew by P47.24 billion, maintenance and other operating expenses (MOOE) fell by P10.92 billion and capital outlays and net lending, by P12.8 billion. The said declines reflect the avowed policy of the Aquino administration of turning over to the private sector vital functions of government, including the provision of services and undertaking infrastructure development. Public infrastructure, for instance, fell by P21.13 billion in the 2011 budget. This policy will ultimately take its toll on the poor and marginalized in the form of, among others, exorbitant user fees. (See Table)

The Aquino administration is proposing interest payments of P357.09 billion in the 2011 budget, or 21.7 percent of its planned spending program. But the total debt burden for 2011 could actually reach P823.27 billion if the principal amortization of P466.18 billion is added to interest payments. Thus, debt burden (interest payments plus principal amortization) represents 38.9 percent of what the Aquino administration is willing to spend in its 2011 budget. (See Table)

Such a heavy debt burden means that fewer resources are available to spend for social and economic services badly needed by the people. What makes it doubly unjust is that many of the projects and programs funded by these debts did not benefit the people, or worse, even made life more difficult for them while private contractors, corrupt government officials, and the creditors rake in billions of pesos in taxpayers’ money.

Anomalous projects

Many of these anomalous and questionable loans can be easily identified. Take the case of the notorious bridge projects undertaken by the previous administration. In June 2008, the Commission on Audit (COA) released its findings on selected bridge projects undertaken by the Arroyo administration from 2002 to 2006, which were funded by various loan agreements with foreign creditors.

The COA noted a number of “lapses in the process of implementation” of these bridge projects such as uninstalled and unaccounted construction materials, use of expensive materials despite the availability of a cheap alternative, project delays that resulted in commitment penalties, construction of bridges in inappropriate places, overlapping of bridge projects, poor quality of constructed bridges, projects overshooting the approved budget, etc.

Based on the COA findings, I tabulated below some of these foreign debt-funded bridge projects to give an idea how much in taxpayers’ money are being wasted on debt servicing. Five questionable projects alone already cost $62.93 million in principal amortization and interest payments for 2011. That’s around P2.83 billion (at an exchange rate of P45 per US dollar) in funds that could be used for more meaningful and beneficial purposes. If the policy of automatic appropriation for debt servicing is not repealed soon, these onerous and questionable loans will continue to drain our budget and resources for many more years to come. (See Table, click to enlarge)

To be sure, these foreign debt-funded bridge projects exposed by the COA are just a small sample of the many anomalous loans incurred by government and unjustly being passed on the people. Not included in the table above, for instance, is the First National Roads Improvement Project (NRIP) in which the Philippines borrowed $150 million from the World Bank. The loan closed in March 2007 and we have already been servicing our debt to the World Bank when the country learned that five Filipino and Chinese contractors that participated in the project were involved in bid-rigging. For 2011, we will pay the World Bank $14.74 million (about P663 million) in principal amortization and interest payments for the anomaly-ridden NRIP and the country will continue to service the loan until 2020.

Debt for neoliberal reforms

Aside from infrastructure projects, there are also programs bankrolled by foreign debt that introduced neoliberal structural reforms in the Philippines. One example is the ongoing power sector restructuring program that will supposedly address high electricity cost and power supply insecurity through privatization and deregulation. But after many years of restructuring, what we have are frequent brownouts and monthly increases in our electricity bills while the auction of state-owned power assets has been repeatedly marred by irregularities (the latest case is Angat Dam privatization) and industry participants again and again manipulate electricity rates. Worse, taxpayers have been paying for the debts used to implement these anti-people power reforms.

The power sector restructuring program, which included the bribery-ridden railroading of the Electric Power Industry Reform Act (EPIRA) in 2001, has been mainly funded by the Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC). For 2011, the Aquino administration wants us to shell out $121.34 million to service the principal amortization and interest payments of four loan accounts with the ADB and JBIC for the implementation of power sector reforms. (See Table) The amount is on top of the debt servicing, worth $151.07 million in 2011, for the loans incurred by the National Power Corporation (NAPOCOR).

A more meticulous review of Philippine debts will certainly yield more anomalous transactions ranging from loans associated with the privatization of water utilities, loans for the mandatory importation of agricultural goods including rice from the US, loans used in infrastructure projects fraught with corruption, etc.

Challenge Congress, Noynoy

Our resources are indeed limited, constantly undermined by a fundamentally weak and backward economy and systemic corruption. Thus, lawmakers, as they review the 2011 budget proposal of the Aquino administration, must be pressured to take a serious look into these questionable and anomalous debts. We must compel them to at least suspend payments for these debts (and later work towards their complete repudiation). Congress can pass a 2011 budget stipulating that certain debts must not be serviced due to unresolved issues of corruption, program failure, etc. This move will also challenge President Aquino – will he veto such a budget and choose to honor his predecessors’, including Gloria Arroyo’s, illegitimate debts?

Servicing debts that did not benefit the people and the country amid chronic poverty and hunger and severe lack of social services is not only immoral and unjust. It is also inconsistent with genuine and sustainable development since it deprives government the capacity and the resources to invest in its people and spur the economy.

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2010 elections, Fiscal issues

Debt and deficit as election issue

The state of public coffers as an electoral agenda in the coming May polls is not getting the national attention it rightfully deserves. Except for a recent statement by Liberal Party standard bearer Noynoy Aquino that he will not impose new taxes and raise existing ones if elected, presidentiables have not touched the crucial issues of the burgeoning budget deficit and mounting debt that government faces. Vows to curb graft and corruption, meanwhile, are statements too general to pass as a concrete platform in terms of protecting and raising public revenues.

But the reality is that whoever becomes the next President will have to run a government that is almost P5 trillion deep in debt and with a budget deficit of P300 billion or more. Thus, whatever promises about providing for the basic needs of the people especially the poor are empty rhetoric unless candidates disclose how they intend to address the worsening fiscal situation.

Debt accumulation

Every second, the country’s debt is growing by P8,394.54. That’s the average pace in the last nine years and it is still accelerating. Last year, it was expanding by P8,462.36 per second. The rate at which the debt stock is accumulating is indeed alarmingly high.

As of October last year, the total debt of the national government including its outstanding and contingent liabilities was about P4.99 trillion. Outstanding debt refers to unpaid obligations while contingent debt includes government guarantees to state-owned corporations and financial institutions.

At the end of 2000 before the current Arroyo administration took over, the total debt was P2.65 trillion. It means that under the incumbent regime, government’s debt increased by P2.34 trillion. Such huge amount of accumulated debt makes President Gloria Macapagal-Arroyo the heaviest borrower among all post-EDSA presidents.

In addition, the domestic economy despite the aggressive hype about its growth by the Arroyo administration is not coping with the rapid accumulation of government debt. From 2001 to 2008, government’s annual outstanding debt as a portion of the yearly gross domestic product (GDP) was pegged at 67.8 percent. Comparing it with its immediate predecessor, the Estrada administration (1998 – 2000), the debt-to-GDP ratio was at 60.1 percent. Note that the GDP under Arroyo supposedly expanded by 4.8 percent per year and only 3.5 percent per year under deposed President Joseph Estrada.

For creditors, the higher the debt-to-GDP ratio, the higher the risk of default or inability to make future payments. But for the great majority of the people, it means that the economy, already hampered by structural issues of highly skewed distribution of wealth, would be further unable to provide opportunities for decent living.

Impact on the people

Current debt levels mean that each of the 92.23 million Filipinos is now practically in debt by around P54,093.46 to government’s creditors. And at the rate that government debt is growing since 2001, each Filipino would have a debt of about P56,965.97 by the end of 2010.

But the direct impact on the people of this huge debt can be measured by how much pressure it puts on public resources. The Arroyo administration has shelled out more than twice the amount it borrowed from creditors. From 2001 to 2009 (until November only), government has so far paid its creditors a total of P5.06 trillion for interest and principal payments.

It means that every second, the country is giving out P17,970.90 to pay for government debts. It also means that each Filipino has practically shelled out P54,832.39 to pay for such debts and yet still owes government’s creditors almost the same amount.

Every year since 2001, the amount of debt servicing has been equivalent to 42.7 percent of annual government expenditures and 67.4 percent of annual revenues. Stated more simply, it means that for every P10 that government spends more than P4 go to its creditors while out of every P10 it collects from the people’s taxes and other revenue measures, almost P7 are used to pay for its debt.

More money that go to debt servicing means less money that go to the people for social services. To compare, in 2008 (latest available data), debt servicing for interest and principal payments comprised 47.6 percent of total public expenditures. Education, culture, and manpower development accounted for only 14.5 percent; social security, welfare and employment, 5.5 percent; health, 1.2 percent; land distribution, 0.3 percent; housing and community development, 0.02 percent; and other social services, 0.1 percent. Even if we add the share of these social services together, they will still not comprise even half of public expenditures that went to debt servicing.

Note that the public expenditures for health, education, and housing cited above include spending for police and military schools, hospitals, and housing programs. Thus, actual spending that directly benefited the civilian poor are much smaller. Unfortunately, such data for the said period are not available.

Budget gap and debt trap

Government justifies its heavy borrowing by pointing to the budget deficit, or the gap between its revenues and expenditures. To bridge this gap, government is forced to borrow. And just how big is this gap? As of November 2009, the budget deficit is pegged at P272.52 billion – already an all-time high in absolute terms (and the December figures have not yet been accounted for). It is also P22.52 billion higher than what government anticipated for the whole 2009.

From January to November last year, total revenues was at P1.02 trillion but total expenditures was bigger at P1.29 trillion. To finance the deficit, government raised P541.02 billion through borrowing during the period, mostly through the foreign and domestic bond markets. But if government’s deficit is only P272.52 billion, why did it borrow almost twice the amount? Because portion of the borrowings will cover not only interest payments (which is 20.1 percent of the reported expenditures) but also for principal amortization, which reached P332.91 billion during the 11-month period. In other words, government borrows not only to bridge the deficit gap but to settle as well its old and existing debts.

This cycle goes on and on, worsening in every turn.

What must be done?

One way is to raise revenues. But it does not necessarily mean new (such as the text tax) and higher taxes as the Arroyo administration repeatedly claims. There are numerous ways to raise public resources without subjecting the people to additional burden – curb corruption and bureaucratic wastage, reverse trade and investment liberalization, improve tax collection efficiency, collect proper taxes from the biggest foreign and local corporations instead of giving over generous fiscal incentives, to name a few.

As pointed out in a previous article: “even without modifying our existing commitments with the World Trade Organization (WTO) and other free trade deals, the Philippines can hike tariffs across the board and raise billions of pesos in revenues. Note that due to continuing trade liberalization, total collections from tariffs on imported goods and services under Arroyo now only account for 2.8% of total revenues and gross domestic product (GDP), compared to around 4.5% for most of the 1990s. In the first half of 2009 alone, we are giving up almost P117 million in potential revenues per month due to lower duties.”

In fact, even onerous taxes such as the 12 percent value added tax (VAT) especially on oil, power, and other essential goods and services can be scrapped and still government can raise needed revenues.

But raising revenues in a pro-people way is just one aspect of the urgent fiscal reforms that we need today. Unless we plug the largest fiscal hole that is debt servicing, our resources will continue to be drained. Thus, all presidentiables must also outline how they intend to address the country’s debt crisis that has been raging on for almost three decades now.

More concretely, what do candidates intend to do with Executive Order (EO) 292 or the Administrative Code of 1987 that provides for automatic debt servicing at the expense of social services? What do they intend to do with odious debts or those debts incurred by past and present administrations that were tainted with corruption and anomalies ala-NBN-ZTE? Or those that only caused death and destruction of livelihood for marginalized communities such as the San Roque Dam?

These are some of the most pressing questions that those who want to steer government in the next six years (if Arroyo’s Charter change scheme will not push through) will have to answer now. ###

Tables

NG debt (in P billion)
Indicator 2000 2008 2009*
Outstanding 2,134.12 4,220.90 4,424.08
Contingent 514.69 545.58 564.96
Total 2,648.81 4,766.48 4,989.04
*As of October
Source: Bureau of the Treasury
NG debt servicing for interest & principal (in P million)
Year Total Interest Principal
2001 274,439 174,834 99,605
2002 357,959 185,861 172,098
2003 469,990 226,408 243,582
2004 601,672 260,901 340,771
2005 678,951 299,807 379,144
2006 854,374 310,108 544,266
2007 614,069 267,800 346,269
2008 612,682 272,218 340,464
2009* 593,055 260,147 332,908
Total 5,057,191 2,258,084 2,799,107
*Jan to Nov
Source: Bureau of the Treasury
Debt servicing vs social services expenditures (in P million), 2008
Indicator Amount % of total (w/ principal payments)
Total expenditure (social services + others) 1,015,597.59
Total expenditure with principal repayments 1,287,815.59 100%
Debt servicing (interest & principal) 612,682 47.6%
Education, culture, & manpower development 186,619.70 14.5%
Health 15,729.22 1.2%
Social security, welfare, & employment 70,307.56 5.5%
Housing & community development 274.42 0.02%
Land distribution 4,166.94 0.3%
Other social services 1,266.45 0.1%
Source: Bureau of the Treasury, BESF 2010
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Climate change, Economy, Poverty

Notes on the economic and social impact of Ondoy and Pepeng

Ondoy victims in Pila, Laguna receive relief goods from volunteers of the Bayan's Bayanihan Alay sa Sambayanan (BALSA)

Ondoy victims in Pila, Laguna receive relief goods from volunteers of Bayan's Bayanihan Alay sa Sambayanan or BALSA (photo from Bulatlat.com)

The twin devastation brought by typhoons Ondoy and Pepeng hit the Philippines at a time when the country is still reeling from the impact of the global financial and economic crisis. According to the latest (as of Oct 16) consolidated report of the National Disaster Coordinating Council (NDCC), the total cost of damage from the two typhoons reached P21.29 billion. The cost of damage to agriculture accounted for 64.8% of the total, and infrastructure, 35.1%. About 7.43 million were affected in the country’s 12 regions, including Metro Manila. (See Table 1)

Initial estimates from the National Economic Development Authority (NEDA), meanwhile, claimed that the macroeconomic impact of the two typhoons is about 0.2% of the gross domestic product (GDP). This could be mitigated, according to NEDA, by remittances from overseas Filipino workers (OFWs) who would tend to send home more money because of emergencies and “will make up for the billions lost in devastating floods”.

Table 1. Estimated extent of impact of Ondoy and Pepeng, data cited as of Oct 16, 2009
Indicators Ondoy Pepeng Total
Affected no. of people (in million) 4.32 3.11 7.43
Total no. of casualties, of which: 781 654 1,435
   No. of dead 354 419 773
   No. of injured 390 184 574
   No. of missing 37 51 88
Cost of damage (in P billion), of which: 10.85 10.44 21.29
   Infrastructure 4.08 3.40 7.48
   Agriculture 6.77 7.03 13.8
   Private property n.d.c. 0.003 0.003
Total no. houses damaged, of which: 101,278 33,883 135,161
   Totally 25,259 4,040 29,299
   Partially 76,019 34,843 110,862
Regions affected, of which: III, IV-A, IV-B, V, VI, IX, X, ARMM, CAR, NCR I, II, III, IV-A, V, VI, CAR, NCR n.a.
   No. of barangays 1,902 4,585 n.a.
   No. of municipalities 155 361 n.a.
   No. of cities 30 35 n.a.
   No. of provinces 25 27 n.a.
Notes: n.d.c. – no data cited; n.a. – not applicable
Compiled using data from the NDCC Situation Report No. 31 dated Oct 16, 2009

Because of the need for additional spending for post-Ondoy and Pepeng rehabilitation and reconstruction, on top of the need to pump-prime the economy amid the global financial and economic crisis, the 2009 budget deficit could reach as much as P307.9 billion, according to the Department of Finance (DOF). There is no official figure yet on the actual amount needed for rehabilitation and reconstruction but Congress has already approved a P12-billion supplemental budget for the immediate needs of the typhoon victims.

In addition, a total of P32 billion spread over 10 years is needed to relocate more than half a million illegal settlers, including those occupying waterways in Metro Manila. Mrs. Arroyo has ordered the immediate relocation of families near waterways following the massive flooding caused by Ondoy.

Meanwhile, the Arroyo administration has also successfully raised $1 billion from the global bonds market which it said would be used for its reconstruction efforts in regions affected by Ondoy and Pepeng.

While government tends to downplay the effects of the recent typhoons on the economy, with NEDA pointing out that reconstruction will spur domestic growth, the costs are actually much higher considering the still unquantified short- and medium-term effects of losses in jobs and livelihood due to Ondoy and Pepeng, although independent think tank IBON Foundation, in an estimate, said that Ondoy alone would push at least 276,000 families in NCR, Calabarzon, and Central Luzon into “long-term poverty”.

Note also that official unemployment before the storms ravaged the country was pegged at 7.6% nationwide (National Statistics Office’s July 2009 Labor Force Survey), with the top three highest regional unemployment posted by the NCR (12.1%); Calabarzon (11.1%); and Central Luzon (9.9%) – the regions most affected by the typhoons. These regions account for 79.9% of the total number of permanently displaced workers due to economic reasons from Jan 2008 to Jun 2009 as well as 69.3% of the total number of families affected by Ondoy and Pepeng. (See Table 2

Table 2. Unemployment rate, no. of permanently displaced workers due to economic reasons, and population affected by Ondoy and Pepeng by region
Region Unemployment rate (in %, Jul 2009) No. of permanently displaced workers due to economic reasons (full-year 2008 & 1st half 2009) No. of affected families by Ondoy & Pepeng (as of Oct 16, 2009)
NCR 12.1 40,427 176,776
IV- A – Calabarzon 11.1 22,241 509,221
III – Central Luzon 9.9 9,902 382,788
I – Ilocos Region 6.7 328 234,479
Cordillera Administrative Region 4.6 1,182 54,507
VI – Western Visayas 7.4 1,360 316
X – Northern Mindanao 5.7 982 0
V – Bicol Region 5.4 347 70,389
XII – Socksargen 5.1 226 603
IV-B – Mimaropa 4.3 635 7,296
IX – Zamboanga Peninsula 4.1 295 191
ARMM 3.4   350
II – Cagayan Valley 2.8 308 105,529
National total (including other regions not affected by Ondoy & Pepeng) 7.6 90,788 1,542,445
Compiled using data from the NSO on unemployment, BLES on displaced workers, and NDCC on affected families by Ondoy & Pepeng
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Fiscal issues

Drowned by Ondoy, drowned by debt

A community in Pasig City remains flooded days after tropical storm Ondoy hit Metro Manila and nearby provinces (photo from Bayan - NCR)

A community in Pasig City remains flooded days after tropical storm Ondoy hit Metro Manila and nearby provinces (photo from Bayan - NCR)

Malacañang admitted Thursday (Oct 1) that government’s calamity fund of P1 billion is in danger of being depleted. Thus, members of the Senate and the House of Representatives held an emergency meeting with some Cabinet officials and agreed to pass a P10-billion supplemental budget in the wake of Ondoy’s onslaught in Metro Manila and adjacent provinces last weekend (Sep 26-27).

The problem is where to source the money. Not surprisingly, Department of Finance (DOF) Secretary Margarito Teves announced that they will tap the global bond market again in order to raise funds for relief and rehabilitation of “Ondoy” victims. This would be the third round of global bond issuance for the Philippine government this year, after the $1.5-billion bond sale in January and the $750-million sold in July, and would come ahead of the scheduled Samurai bond issuance later in the year.

But instead of borrowing more which will only aggravate the country’s debt problems, the more sensible step would be for government to cancel debt payments to free up billions of pesos in public funds that can be used for disaster relief and rehabilitation in the immediate, and provide much needed social services in the medium and long-term.

Debt servicing, since the time of the dictator Ferdinand Marcos, has been siphoning valuable public resources from the country, with the current Arroyo administration paying out the biggest amount of public funds for debt servicing. Debt servicing (interest payments and principal amortization) under Mrs. Arroyo has been, on the average, more than 10% of the country’s gross domestic product (GDP) – higher than Aquino’s 8.1%, Ramos’s 6.8% and Estrada’s 6.6 percent.

Under its proposed national budget for 2010, the Arroyo administration will shell out a huge P746.18 billion for debt servicing covering interest payments and principal amortization. In 2009 and 2008, government spent P702.6 billion and P612.68 billion for debt servicing, respectively. These are huge amounts of money, with interest payments in 2010, for instance, eating up 22.1% of the national budget compared with housing’s 0.4%, health’s 2.5%, and education’s 15.3% – all of which will surely require more funds now because of Ondoy and other stronger typhoons expected to hit the country.

Is debt cancellation possible? Ecuador just did it earlier this year, with its President calling the country’s foreign debt “immoral”.

Considering the still unfolding humanitarian crisis that Ondoy has caused and threats of more super typhoons, the

Youth groups under the Serve the People Brigade join relief efforts for Ondoy victims in Laguna (photo from Kabataan party-list - Southern Tagalog)

Youth groups under the Serve the People Brigade join relief efforts for Ondoy victims in Laguna (photo from Kabataan party-list - Southern Tagalog)

Philippines can justify its move to cancel debt servicing and attend to the more immediate needs of its people. On top of this is the long-standing issue that many of the country’s debts are considered odious and thus the people should not be burdened to pay for them.

Current debt-funded projects such as the multi-million dollar road projects being bankrolled by Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC), $100-million text book project of the World Bank, China’s $885.4-million South Luzon railways project, ADB’s $750-million power sector reform programs and projects, among others are tainted with irregularities and corruption and should be considered for debt cancellation.

While emergency grant assistance for disaster relief from foreign donors are welcome, debt cancellation should be a top option for the Philippines in terms of raising sufficient resources in a sustainable manner to deal with disasters and other immediate and basic needs of its people.

As an initial move, Congress must repeal the Marcosian automatic debt servicing rule as provided under the revised Administrative Code of 1987 and rechannel funds allocated to debt servicing in the 2010 national budget to social services and disaster relief and rehabilitation.

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