Tuesday, June 26, 2012

The Philippines: sulking child or mature young woman?


Below is the article by Dr. Benjamin Diokno regarding the loan to IMF made by the BSP. This blog post is The Economizer's response to this article. 


To lend or not to lend?

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‘Are we better off lending $1-billion to the IMF instead of using the same to help the national government finance its programs against joblessness, poverty, hunger, ignorance, and income inequality?’
That’s not the question. It’s a done deal. Malacanang --or is it Bangko Sentral ng Pilipinas? -- has already decided to extend US$1-billion loan to the International Monetary Fund (IMF) to support the debt-ridden, 17-nation euro zone. The question is whether that decision is intelligent, an act to impress the credit rating agencies, or simply incorrigible?
Those who favor the decision argue that “as a member of the global community of nations ...it is also in our interest to ensure economic and financial stability across the globe.” That’s Bangko Sentral ng Pilipinas Governor Tetangco’s argument, and I assume Aquino’s economic team concurs.
The argument is that by being a member of the 188-nation international financial organization, it carries with it the responsibility of sharing the burden of easing the pains of fellow member countries faced with financial difficulties. 
And then there’s the utang-na-loob rationalization for the loan. For near four decade and until 2006, the Philippines was a net borrower from the IMF. Now that the IMF needs help to raise a $430-billion rescue fund, it is our obligation to support the IMF by pledging a significant, not a token, amount. 
Of course, it assumes that the 40 or so years of IMF tutelage was truly helpful rather than distressing. In the past, whenever IMF lent money to the Philippines, the country had to put in place painful adjustment measures as conditions for the loans. Is the Philippines imposing the same harsh conditions on the IMF this time?
Those who are critical of the decision to lend, on the other hand, said the US$1-billion (approximately P43-billion) could be better used to expand the government’s programs to create jobs, alleviate poverty, and reduce hunger. Charity begins at home, they argue.
Some finance guys may ask: Why not use the $1 billion to retire expensive Philippine public debts? That would translate into smaller budget deficits in the future. 
Also, the critics can’t reconcile the decision to lend $1-billion to the IMF with the continuing propensity of the government to borrow money from abroad to fund its various social and economic programs and projects. The government has to borrow from the World Bank and the Asian Development Bank to fund its conditional cash transfer program. And it has to borrow money from various multilateral banks and bilateral sources to finance the much needed roads and bridges, airports and seaports projects.
Why lend and borrow at the same time? Looking at the issue from a purely financial standpoint, one might ask: Is the Philippine government getting better return on investment for its $1-billion loan to the IMF than what it is paying in interests for its loans from the World Bank, ADB, and other bilateral sources (China, Japan, and others)? 
Some big, fast-growing countries are contributing large amounts to the IMF’s $430-billion rescue fund. The BRICS --Brazil, Russia, India, China and South Africa-- countries pledged to loan $75 billion. China will contribute $43 billion, 10% of the total rescue fund. India, Russia, and Brazil will contribute $10 billion each, South Africa will make up for the rest. 
But these countries, except South Africa, ranked among the top 10 countries in the world in terms of foreign exchange reserves. China is top leader with $3.3 trillion, Russia ranked second with $510 million, Brazil ranked sixth with $374 million, and India ranked ninth with $294 million.
The Philippines, by contrast, ranked 26th, with $76.1-billion gross international reserves.
With China’s hefty reserves, its decision to lend IMF $43 billions appears reasonable. It is also consistent with China’s interest: the euro zone is China’s number one export destination. A hobbled, crawling Europe is not in China’s best interest.
On the other hand, other large countries, certainly much bigger than the Philippines in terms of gross international reserves, are not contributing to the rescue fund. How much is the US committing to the IMF rescue fund? The last time I looked it was zero. 
Won’t the weak euro zone be a drag on economic growth in the Philippines? Not so if we believe our own economic managers. But realistically, a weak Europe will sap the growth potential of the US, Asia and the rest of world. A slower global growth would no doubt affect the Philippines, but not in a big way, and especially if its fiscal policy is bolder and more expansionary. 
But assuming that the Philippines is obliged to contribute to the $430-billion IMF rescue fund, here are some other legitimate questions: Is the $1 billion contribution of the Philippine government small, big, or just right? Can we afford it? Don’t we have better use for it? Or are we just trying to impress the credit rating agencies in our quest for the elusive upgrade to investment grade?
I’m sure that the $1-billion won’t come from the national government. There is no provision for it in the 2012 budget. And putting it in the 2013 budget will most certainly face stiff opposition. The 1987 Philippine Constitution is clear: no money may be released from the Treasury without an appropriation made by law. 
Lending $1 billion (P43 billion) to the IMF goes against the grain for the famously austere President Aquino. He knows he faces large and increasing budgets in his remaining four years. The K+12 education program, the universal health care, the conditional cash transfer (CCT) program, the modernization of the armed forces, the rice sufficiency program, and the public infrastructure program have all huge budgetary requirements. Aquino also needs a large sum to give the agrarian reform program one final push.
Since it is not the national government that is funding the $1-billion loan to the IMF, then it must be the Bangko Sentral ng Pilipinas. But I’m sure BSP, on its own account, does not have that kind of money. BSP was a big loser in recent years -- in 2011, BSP lost P33.7 billion, and in 2010, another P59.0 billion. Even now, BSP is asking the national government for a sizable fund infusion.
As managers of public funds, present and future, our national leaders have to face the Filipino people and answer this difficult question: Are we better off lending $1-billion to the IMF instead of using the same to help the national government finance its programs against joblessness, poverty, hunger, ignorance, and income inequality?
***
Benjamin Diokno is professor of Economics at the School of Economics, University of the Philippines (Diliman). He was formerly secretary of budget and management in the Estrada Cabinet and undersecretary for budget operations in the Aquino 1 administration.




Dr. Diokno's article is pasted in full because The Economizer believes in giving the opposing side the full chance to advance his arguments, and to allow greater time to develop a response. After all, a truncated opposition will lead only to a stunted government. 


To begin, let us summarize the arguments. Dr. Diokno is saying: 

  1. Because, when borrowing from the IMF in the past, the Philippines had to follow strict "structural adjustments" that reduced domestic spending and further eroded the government's ability to spend on education, health and anti-poverty programs, the Philippines should impose the same harsh conditions now;
  2. Instead of lending $1 billion to the IMF, the BSP should have used to money for anti-poor programs within the Philippines ("charity begins at home"); an alternative is to use to money to retire Philippine government debt; 
  3. Lending to the IMF does not sit well with the Philippines' availment of loans from the World Bank and the Asian Development Bank for infrastructure projects and for the US$400-million Conditional Cash Transfer Program; 
  4. The Philippines' Gross International Reserves (GIR) are not as big as those of the other IMF contributors, and that the US is not even contributing; 
  5. The weak euro-zone will not be a big drag on the Philippines anyway, "especially if [the country's] fiscal policy is bolder and more expansionary"; 
  6. We are "just trying to impress the credit rating agencies in our quest for the elusive upgrade to investment grade" rating; 
  7. The BSP is losing money and is "even now ... asking the national government for a sizable fund infusion" that the loan simply makes no sense. 

As we can see, Dr. Diokno puts forward seven arguments for not lending to the IMF -- and we seriously doubt if anyone else can raise another argument. If there are this many reasons not to lend, surely therefore we should NOT lend?


It turns out that this attack by sheer numbers suffers from the same defect that doomed all such attempts throughout history. Namely, you can always fight numbers with quality, and win most of the time. 


For it turns out that the GIR may not be used for any purpose other than to address imbalances in foreign payments and receipts. According to the BSP's SPEI glossary

Gross International Reserves (GIR) are foreign assets that are readily available to and controlled by the BSP for direct financing of payments imbalances and for managing the magnitude of such imbalances. GIR consists of holdings of gold, special drawing rights (SDR), foreign investments, and foreign exchange, including Reserve Position in the Fund (RPF). These assets are valued mark-to- market.

Nothing in this definition suggests that the Reserves may be used to fund government projects, or for any domestic purpose. Therefore, the suggestions that the $1 billion should have been used instead to retire Philippine government debt, or to pay for government anti-poverty programs, or to fund infrastructure projects, or to conduct an expansionary fiscal policy, or to pay for the operations and make whole the BSP's financial position, are -- to put it simply -- illegal. 


Therefore, in one fell swoop, Arguments 2, 3, 5, and 7 are refuted: that's four out of seven arguments.


The glossary definition stands to reason. The reserves are held in foreign assets, to be used to buttress the capital account at times of current account deficits. The Philippines, not being an exporting country, needs much of these reserves and capital account surpluses to service imports, especially of oil, rice, and many basic commodities. These reserves, already in foreign assets, will be used for foreign payments as needed, not domestic projects as creatively designed by our elected politicians. 


If we wish to use the foreign reserves for domestic purposes, the central bank will in effect transfer money from abroad, selling dollars, buying pesos, and spending those pesos in some way. This is not a simple reallocation of money supply -- this is an introduction of new money supply. Without a corresponding increase in productivity, or an increase in production of goods and services, the only way for the economy to respond is through higher prices. Therefore, if the critics want to get their hands on the reserve money, they had better prepare for inflation. 


The fact is that it is the BSP's responsibility to fight inflation, not the critics'. This explains its institutional caution. If critics like Dr. Diokno want the power to spend the money, without the responsibility for its consequences ... well, aren't we glad they are not in the Monetary Board? 


What the BSP is doing is reallocating its portfolio of reserves, from US dollar cash to an interest-bearing IMF contribution. In these times of crises, the 10-year US Treasury yield is 1.69% at last count; how much less is the return for holding US dollar cash? Given such obvious realities, the reallocation is not a stroke of genius -- it is simply a rational action. 


Which is more than what can be said for the critics' paroxysms. 


Argument 1 advocates revenge, but here there is no need for the critics to be concerned, as harsh conditions are already being imposed on Greece, Spain, Italy, Ireland and Portugal -- we can see the public reaction through street riots. 


Argument 4 reminds us of our elementary school days, when the values of sharing and good manners were taught to us by our teachers, parents and classmates. If those United States don't contribute -- should we follow bad example or good? Certainly, we will earn more interest if we follow the good example, which is in turn a good example of enjoying the fruits of righteousness here on earth.


Argument 6 talks about a ratings upgrade. The way The Economizer thinks about it is: if they give it to us, let us accept it. But if we think we can purchase an upgrade for $1 billion, we -- especially the critics -- not really thinking. 


Which brings us to our final point. It is worth remembering the time when Dr. Diokno was in government, as Budget Secretary of President Estrada. It was 1999, and the country was suffering from the Asian financial crisis brought about by heavy foreign borrowing and foreign-exchange mismanagement. The IMF stepped in, imposing the "harsh conditions" on borrowers like the Philippines, who learned the lesson never again to borrow dollars unhedged. 


We cannot help feeling that the slapdash way the article was written, the lack of a clear outline, and the hesitancy of conviction that it displays, point to a personal reason for opposing the IMF loan. The sense is that the IMF last time forced us to do things against our will; we should not reward it now with our hard-earned money. What emerges then, is the image of a child, forced by his mother to play with a kid he didn't like, and now seeing his mother give that kid some of his own lunch money. 


If you find yourself in that position, would you sulk in the corner? Or would you choose to grow up instead?

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