Claiming false credit

You know something is terribly wrong with the Philippine economy when Malacañang and the Bangko Sentral ng Pilipinas (BSP) boast of our being "international creditors" for the first time, and attribute this to "sound fundamentals and management" of the economy.

They try to conjure the illusion that the country is now awash with so much cash that it can afford to contribute a billion dollars to an international fund managed by the International Monetary Fund (IMF) to succor European countries in financial distress.

And, as if that were not enough good news, they add that Filipinos need not worry about losing so much money; in fact we stand to gain more from interest, since the contribution is a loan.

What the government is not telling us is that the Philippines has been classified as an “IMF creditor” by virtue of a narrow technical definition that an IMF member has a “creditor position” if its holdings in the Fund can be used to provide financial assistance to other members.

But this is vastly different from jumping to the conclusion that the Philippines has actually become a “creditor nation”.

Determining whether one is a “net creditor” entails comparing the country’s lending with its borrowing.  Foreign exchange reserves, no matter how high, are not the measure for this.  If positive reserves were the criterion, then the Philippines could claim to have achieved the status of a “creditor nation” since the time of the Marcos martial law years when our external debt was growing by leaps and bounds.

Nothing has changed even with the label “IMF creditor” attached to the Philippines. We remain a heavily indebted nation (US$61.7 billion as of end 2011); highly dependent on foreign sources of financing primarily to shore up the budget deficit averaging some P300 billion a year.  Debt service payments grew by US$ 100 million to US$7.3 billion last year.

It must be clarified at this point that the Gross International Reserves (GIR) held by the BSP is in the form of IMF deposits, other foreign currency deposits elsewhere, gold, Special Drawing Rights (SDR), US Treasury bills and the like.  It is from the deposit of the Philippines/BSP with the IMF (also called “IMF reserve position”) that the US$1 billion has been made available for loan to EU countries in deep financial crisis.

While it is true that these transactions earn interest and the funds can still be technically counted as part of the Philippines' international reserves, a point can be raised about how much the country is losing in terms of lower interest on the IMF loan as compared to other placements with potentially higher yields.

Progressive party list representatives, trade union and peasant leaders - all opponents of government’s prioritization of debt servicing over social services - as well as two Senators and several opinion writers have asked how the BSP (and the Aquino government for that matter) could have the effrontery to “lend” money to the international lender-of-last-resort that is the IMF when the country remains a perennial heavy borrower itself.

These critics ask pointedly whether the money - P43 billion - could be better spent on health, housing, and education for impoverished and barely surviving Filipino families; for land reform and support for an agricultural sector in continuing decline; for job generation as well as infusing life into an anemic economy battered by heightened domestic and global economic crises. In other words, for the government to come to the aid of the majority of the Philippine population rather than contribute to an IMF bail-out fund for heavily indebted countries in the Euro zone.

Again, what the government is not telling us is that the Gross International Reserves (GIR) from which the loan came, and which the BSP boasts to have reached a record high of USD 76.534B, consists of foreign assets that cannot be used in the same way as the National Government fund.

That is, the GIR may not be allocated for regular government programs and projects in order for it to serve three functions: for intervention in the foreign exchange market, for creditworthiness, and for emergencies.  A country’s GIR indicates its ability to repay foreign debt and to defend its currency from speculative attack.  It is used as a yardstick to set the country’s credit ratings.

So why is the Aquino government foisting the false impression on the public that the BSP has so much money in its vaults that could be made available to the government to uplift the people’s dire socio-economic conditions?

Unfortunately, we can only come up with the conclusion that government needs to justify the BSP’s accession that the country contribute to the IMF bail-out fund by (1) claiming that the economy is so robust and well-managed that the Philippines can now boast of being in a position to lend to other countries and (2) arguing that the loan is a worthwhile humanitarian investment and demonstrates the Philippines’ sense of responsibility to the international community.

Moreover, the announcement of BSP Governor Tetangco raises even more questions:
1.  Does the BSP have a free rein on handling/managing the entire GIR?  What check-and-balance is in place to ascertain that the GIR is being managed properly?  Who decides, for example, and how, on the investments and loans being entered into by the BSP from the GIR?  Does this not, after all, belong to the Filipino people as much as the national funds which only Congress can decide to apportion?

2. Was the loan voluntary or mandatory? While the BSP statement implies that the loan was voluntary and undertaken as a contribution to the IMF's efforts "to address the current financial crisis" and "help other countries saddled with financial problems", it is not farfetched that the loan is in fact obligatory or, at the least, is being given under pressure, considering that the Philippine economy continues to be quite dependent on the good graces of international financial institutions such as the IMF and World Bank.

3. Finally, will the IMF fund to which the Filipino people have been made to contribute USD 1B, really be used for the benefit of the people of the distressed countries in the Euro zone?  Or will it again, like the trillions of stimulus funds, be used to bail out big banks and monopoly conglomerates that caused the financial crisis in the first place, or to pressure governments in distressed countries to follow IMF-dictated policies that will only benefit such big banks and conglomerates?  Has not the IMF and WB been the main instruments, in the first place, in carrying out the neoliberal policies that have brought about the global financial and economic crisis?

All said, a closer and more critical look must be taken not only into the management of the country's financial resources, but also into the so-called economic “fundamentals" -- the neoliberal framework on which the policies and decisions by the BSP and economic managers are anchored.

For the grandiose claims that the country is finally free from foreign impositions and restrictions after having exited from the IMF Post-Program Monitoring Arrangement (when the BSP prepaid all Philippine outstanding debts from the IMF in 2006) are now matched by stupendous claims that we are, at long last, a “creditor nation”. #

Published in Business World
29-30 June 2012