Signs and Wonders

In our column in another broadsheet last week, we stressed that building fiscal buffers is urgent. This is one way of ensuring that we reinforce the resiliency of the economy, what with the unprecedented stimulus package and hopelessly weak revenue collection during the COVID-19 pandemic. With sharp increases in both the fiscal deficit and public debt, fiscal buffers need to be built through higher saving, meaningful budget reallocation and conscionable public spending.

This much was also stressed by Krishna Srinivasan, IMF director of the Asia-Pacific Department, during a press briefing on April 18 at the sidelines of the IMF-World Bank Group Spring Meetings. He concluded that “to reduce debt levels and curtail debt service costs, governments need to collect more revenues and streamline expenditure.” The goal here is to “free up budgetary space for spending on developing needs, social safety nets, and climate mitigation adaptation.”

In the light of the no-new-tax fiscal policy, it seems the Philippines may not be keen on putting up enough fiscal buffers to ensure the sustainability of public spending on key social programs and infrastructure projects.

Based on the April 4 review of the Medium-Term Macroeconomic Assumptions and Fiscal Program for Fiscal Year 2024-2028, we are looking at a projected fiscal deficit of P1.48 trillion for 2024. This is 5.6% of GDP. Financing this shortfall would require higher revenues and more careful expenditure lest the government is forced to incur higher debt. Unfortunately, the government had already announced at the end of April that it was hiking its planned borrowing to P2.57 trillion from last year’s P2.19 trillion. This is no small increase; this is a 17% jump. How to explain this also escapes us, particularly in the light of the decision of the economic managers to lower our growth target for this year to 6-7%.

Normally, if growth targets are downgraded, the government should be able to manage with less revenues and less borrowings because public spending does not have to do the heavy lifting.

Offhand, we cannot assign brownie points to the reported decline in the country’s public debt, from P15.18 trillion in February to P14.9 trillion in March. It is simply a flash in the pan. In the first place, such a debt level is nearly twice the pre-pandemic public debt of P7.7 trillion, all in a space of only four years. Relative to the year-ago level of P13.86 trillion, the latest figure is about 8% higher. It should never be lost on us, too, that the decline of nearly P253 billion was due to net repayments of maturing government obligations. Since the National Government (NG) is also planning to issue additional government bonds, we are likely to see the debt stock rise again by perhaps even more.

In fact, during the same month of March, no less than the Bureau of the Treasury announced that the National Government’s debt service bill almost quadrupled, from P142 billion to P534 billion. Debt service consists of both principal and interest payments on the maturing debt stock.

Any decline in the debt stock could only be temporary when the fiscal deficit remains high and the government is not contemplating any compensatory adjustment in the tax structure. A legacy mostly of the pandemic, our huge borrowings, mostly through retail treasury bonds, matured and had to be serviced. Without sufficient revenue, we borrow to service previous borrowings.

True, higher debt servicing was also driven by the higher interest rate following the lead of the Bangko Sentral ng Pilipinas’ policy rate. But our own higher public debt actually motivates possible crowding out in the credit market, and therefore interest rates are driven up. We need to be careful, however, not to meddle with monetary policy to ease the fiscal burden; higher inflation could ensue and exacerbate the fiscal woes. Last year, both private consumption and public spending were curtailed more by price pressures than by the high cost of money.

Fiscal sustainability may not be achieved if it were to be supported by public asset sales or forced increase in the dividends due from government-owned or -controlled corporations (GOCCs). These revenue sources are just not sustainable.

We hope the Finance department’s expectation of a P100 billion proceeds from “the pipeline of government assets that are up for sale to help bridge the Marcos administration’s budget deficit and cut debt” would materialize. If last year’s record of the Privatization and Management Office is to be our yardstick, it’s going to be a tall order. The sale of nonperforming state assets plus dividends and other forms of revenues only aggregated to P1.88 billion.

While legal, the recent increase in the rate of dividends to be collected from the GOCCs from 50% to 75% of their earnings is also analogous with what was done with the Maharlika Investment Fund. Government diverted the same public funds away from, one, directly funding social services and infrastructure on the part of GOCCs, and two, from lending to households and businesses on the part of both the Land Bank and the Development Bank of the Philippines. But, come to think of it, the Implementing Rules and Regulations of the Dividend Law simply says the Finance department may request such an increase, and only in the event that they have excess cash or windfall earnings. The element of uncertainty remains. More importantly, GOCCs have their own specific mandates from the law, and reducing what would be left with them is like undermining their ability to deliver on their respective mandates which have presumably social value.

What is disturbing here is that whatever may be realized from GOCC dividends would be used to “unlock the unprogrammed appropriations of the 2024 General Appropriations Act.” Recall that these unprogrammed appropriations may be funded by whatever money is raised by the Government in the course of the year. For this year, the amount rose by P450 billion from last year’s P281.9 billion to P731.4 billion. This is the same subject of the proposed petition of Senate Minority Leader Aquilino Pimentel III before the Supreme Court questioning its constitutionality.

How much can we expect from the GOCCs?

Some P100 billion is expected from GOCCs, 47 of which had remitted P88.6 billion as of May 6 this year. What is envisioned is that these dividends could help build 1,600 kilometers of farm-to-market roads, construct 8,000 new public classrooms and irrigate an extra 25,000 hectares of farmland. Did Congress miss out on these social requirements in the budget, or were they relegated to the unappropriated portion that would be implemented subject to availability of funds?

It is surprising that we remain in financial straits even if we normally accept extraordinary assistance from some international financial institutions like the Asian Development Bank (ADB). At the end of April, the ADB announced that the Philippines received $4.51 billion worth of financial assistance from its ordinary capital resources on top of the $3.86 billion in co-financing loans.

Perhaps so, because we continue to incur additional, unexpected expenses. The Fund was quite emphatic about the need to rationalize expenditures to attain fiscal sustainability. It’s no exaggeration, but the outstanding is-sue about the unfunded military pension could be a game changer. Restoring the regulatory powers of the National Food Authority would not only undermine the initial progress under the rice tariffication law, but it would also restore the huge financial burden under its mantra of buying high and selling low. Beefing up our military capability would cost us around $35 billion or nearly P2 trillion, easily a third of our annual national budget. Over a period of 10 years, that would be around P200 billion annually. This is urgent in the light of the developments in the West Philippine Sea and the cause of protecting our sovereignty.

What do we make of all this?

If fiscal sustainability is a situation when the debt to GDP ratio is steady, or is moderating over time, our fiscal numbers may be pointing us away from it.

However, a low-hanging fruit is promoting good governance. If the old estimate of 20% of the annual budget being lost to corruption, that would be over P1 trillion, something quite close to the annual fiscal deficit after the pandemic, nearly the same amount that drives us to borrow from both domestic and external capital markets.

Any reduction in corruption is a reduction in the amount we need to borrow, a small but decisive step to fiscal sustainability.


Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.