Caught In the Debt Trap

Filomeno Sta. Ana III is secretary general of the Freedom from Debt Coalition, an alliance of more than 250 people's organizations of varying political persuasions working for a people-oriented debt policy. Its minimum program calls for: a moratorium of the Philippines' foreign debt service payments until acceptable terms based on the country's capacity to pay are arranged; disengagement from loans that did not benefit the Filipino people; and a limitation on foreign debt service payments to no more than 10 percent of the Philippines' export earnings.

Multinational Monitor: What are the main activities of the Freedom From Debt Coalition?

Men Sta. Ana: Public education is our essential task. We would like to say that we have gained a lot in terms of our public education work, and this is borne out by independent surveys. Our equivalent of the U.S. Gallup polls has come out with a succession of surveys showing that an overwhelming majority of Filipinos, over 80 percent, is sensitive to the debt problem, and a clear-cut majority, more than 60 percent, is opposed to the prevailing debt management policies. We would like to think that our popular education work has contributed to the general awareness of people, and their opposition to the debt policies.

We also engage in lobbying and advocacy work. We have a policy analysis research team to strengthen our advocacy work. Finally, there is an important international component of our campaign.

We recognize that the debt problem cannot be solved only on the national level, that in fact, a bigger part of the problem really lies in the struggle on the international front. We stress that the just resolution of the debt crises can be attained, not only by our strong campaign on the national level, but only if we also get broader support from the international community. We wonder, for example, why government officials are insensitive to the popular support for meaningful debt reform. One reason is that these officials are more concerned about the pressure coming from the international institutions. They listen more closely to what these international institutions are saying than to what our people are saying, and that's why we have to exert strong international pressure - to at least neutralize our rivals on major international levels.

MM: How big is the Philippine debt, and how was it contracted?

Sta. Ana: Right now, the Philippine foreign debt stands at a little over US530 billion. And even the World Bank projects that the debt will go up as high as $40 billion by the end of the term of President Ramos. The bulk of foreign debt right now is official debt, that is, debt owed to multilateral and bilateral official creditors.

The rapid accumulation of debt began during the Marcos regime. There was a sudden increase in the debt in the mid-l 970s and early 1980s, and this can be related to worldwide trends at that time - the commercial banks were really urging Third World countries to borrow money with soft terms, relatively low interest, and long terms of retainment. However, the bubble burst in the first half of the 1980s, when Mexico went into arrears and several Latin American countries followed suit.

It was in this context that the Philippines debt crisis exploded in 1984. The international problem was aggravated by Marcos's mismanagement of the economy. In fact, there was already capital flight in the early 1980s. Political instability also contributed to the economic mess. In 1983, Benigno Aquino was assassinated and this led to an upheaval unmatched in Philippine history, and that political upheaval also had a negative impact on the economy. From 1984 to 1986, the economy really went into a slump. Marcos was forced to declare a moratorium on debt service payment. But both the commercial banks and the official creditors refused to provide new money or assistance to the dictatorship.

Cory Aquino inherited this problem. Unfortunately, she failed to capitalize on her tremendous popularity, both here and abroad, to get substantial debt concessions. It was a very opportune time for Cory Aquino to negotiate for substantial debt reduction, especially considering that a significant amount of the debt she inherited from the previous regime was considered fraudulent. But her policy was to honor all debts, regardless of the fraud and corruption involved in a sizeable amount of the actual debt-inducing transactions.

This honorable debt policy led to a massive transfer of resources from the Philippines to the creditor countries between 1986 and 1991. There was an average of negative $1.5 billion transferred each year. That is to say, more money went out to service the debt than came in. Another manifestation of that problem is that, until recently, the biggest chunk of the budget went to servicing the debt.

Now domestic debt servicing has a bigger share of the budget. But we assert that there is a close relationship between the foreign debt and the domestic debt. In the first place, domestic debt would not have suddenly increased if not for this policy of fully and faithfully honoring the foreign debt. Since there was no new money coming from the international creditors and government did not have enough determination to tax the rich, the government's resort was to borrow from our domestic sources to finance its programs and projects. That significantly contributed to the dramatic increase in domestic debt, as well as to the jacking up of interest from domestic debt. So we now have a big foreign debt and a big domestic debt.

Ramos is claiming that the foreign debt problem is not a burden at this time. He says that the debt service ratio has gone down, that before it was 40 percent of export earnings, and now it is down to less than 20 percent. The data is questionable, because the debt service statistics were changed to be based not only on export earnings, but also on the remittances of overseas workers. Never theless, we argue that government, indeed, was able to reduce the debt service ratios, but at the expense of killing the economy. The economic slowdown began in 1991, and, up to now, we have remained stagnant.

So there is a relationship between the reduction of debts on the one hand and the decline of the economy and the decline of people's standard of living on the other hand.

If the government had reduced the amount of debt servicing, then the savings from such reduction could have been used to stimulate our economy. It could have been used for development spending. It could have been used on infrastructure, which in turn would have stimulated growth and employment. That's the basic story.

At the same time, if we are forward looking, we cannot confidently say that the debt crisis is over. The debt problem in the Philippine context follows a vicious cycle. Right now, because the economy is in recession, there is not much demand for imports. We are an import dependent economy, so when the economy is picking up, the imports also increase. So there's not much demand for dollars at this time to finance the imports, and therefore we have a relatively high level of a foreign exchange reserves. But the question is: can this be sustained? So long as reforms are not in place, reforms that should address the structural problems of the economy, then we can expect an added foreign exchange crisis in three years, or even in the short-term period. That will come at a time when the economy will pickup, and there will be tremendous pressure on foreign exchange.

MM: Who has benefited from the government's debt policy?

Sta. Ana: The commercial banks in particular have benefited most from the government's policy of faithfully paying the debt. The biggest percentage of foreign debt was owed to commercial banks. But Aquino insisted on repaying the commercial banks even though the commercial banks were not providing new money. There was even a year-1989 - when not a single U.S. cent came in from the commercial banks.

Now, the commercial banks are safe. We have repaid a large amount to the commercial banks and last year, the Ramos administration, continuing Aquino's policy, secured a large portion of commercial bank debt. This is to say that a big portion, about 70 percent of commercial bank debt, was converted into bonds. That undermined our longstanding challenge to those debts as tainted with fraud; they are now legitimate because of the securitization deal. Since they have been converted into bonds, and since other parties are now involved, it would be more difficult for us to go after the original commercial papers.

The domestic banks also gained a lot. As a result of governments' resort to domestic borrowing, domestic interest rates went up. The domestic banks profited from the wide margin between the lending rate and the savings rate. There was even a time when lending rates hit over 20 percent, while a saver would get an interest rate of only 6 percent per annum.

MM: How much responsibility do you pin on the multilateral lending agencies for the debt debacle?

Sta. Ana: The culpability of the official creditors, particularly the IMF and the World Bank, is in introducing an economic program that resulted in the contraction of the economy, and in the impoverishment of the people. In exchange for new loans, government had to follow the high conditionality of these multilateral institutions. In fact, the features of the IMF program, established in 1990, were the main factors for the recession in 199 L This was the fault of both the IMF and the government. The IMF accepted the program whereby the government relied on regressive taxation - in particular, the import levy. This import levy instantly killed the economy. Since the economy is import dependent, if you put in place a 9 percent import levy, investors and manufacturers continue their imports but pass on their costs to the consumers. That import levy was one main reason behind the economic recession. The levy was a feature of that IMF program.

Of course one can argue that it wasn't the IMF that put in place the levy. Still and all, the IMF designed that program.

MM: What is the essence of your critique of the IMF program ?

Sta. Ana: The IMF program is not sensitive to the real needs of the people. The bottom line of the IMF is that indebted countries, like the Philippines, must repay their debt. So, they will introduce conditionalities that will guarantee repayment of the debt.

Now no one would quarrel about increasing government revenues. The problem, however, is the kind of revenues that the government collects. It is basically depressive. For example, the IMF supports the recent levy on petroleum. The problem with a petroleum tax is that it is indirect, and therefore regressive. The oil companies pass on the cost to the consumer. We maintain that the best way to increase revenues is to collect taxes more efficiently. It is a question of political determination on behalf of the Ramos administration to go after the tax evaders. President Ramos is making noise about going after certain tax evaders. The big question is whether he really is determined to go after these people, or whether it is just a defensive action in response to mounting criticism from even the big business community about favors given to a certain set of ethnic Chinese businessmen. Right now, it's too early to tell. He knows who the tax evaders are. He can go after them any time, if he really wants to.

Similarly, no one would quarrel about cutting back on unproductive expenditures. But there is a double standard. The IMF doesn't want debt servicing to be cut, despite the fact that debt servicing eats up more than 40 percent of the national budget. So the cutback applies only to social services and economic services. There is the double standard: the IMF will agree to cutbacks on infrastructure spending, but not on debt servicing. Which is more productive? Which is unproductive?

We recognize the need for some kind of adjustment, but we say that such adjustments should take into consideration peoples' needs, especially the needs of the poor.

MM: In addition to more efficient collection of taxes, what is the alternative approach advocated by the Coalition?

Sta. Ana: Our focus is on debt reforms; specifically a sharp reduction of the total debt, a disengagement from the improvident loans, or the loans that didn't benefit the people; and the repeal of a presidential decree, issued by Marcos, but still being applied, providing for automatic appropriations for debt servicing.

We also recognize that debt reforms, especially at this time, though necessary, may not be sufficient to achieve our decided objectives of sustainable growth with social equity. Therefore, debt reforms now have to go hand in hand with other reforms in the economy, and it is in that light that we are pushing forward other alternatives. We are expanding our advocacy to include reforms in the tax system; that's why we are eying a more progressive system of taxation. We also addressing fiscal issues. At this time, we are proposing increased spending in health, education and other essential services. We are also for the lowering of interest rates, and related to that, the dismantling of the bank cartel, which is essentially able to dictate interest rates. We are also supporting the demands of other sectors - the demand of the farmers for agrarian reform, workers' demands for more benefits.

Some elements of this program run counter to the orthodox thinking of government and IMF. For example, we are pushing for increased government spending, and that would even mean deficit spending. Definitely, the IMF is against deficit spending. For the IMF, their ultimate goal is to have a balanced budget. We believe we should increase taxes but that the objective of this is to increase spending for essential items. Even the increase in revenue collection might not be enough to finance growth; and therefore, we are open to deficit spending. We think deficit spending at this time is not a serious problem.

The IMF and the government's economic managers are afraid that deficit spending, by increasing the money supply, will trigger inflation. But in a situation where the economy is stagnant, inflation should not be seen as the principal problem. Production is really down. The productive capacity of a lot of factories and enterprises are below capacity. A lot of the capacities are underutilized. So any increase in money supply can stimulate the economy. There might be some inflation, but it will be palatable. Inflation is a problem when the economy is up, but not at a time when he economy is stagnant.

MM: What are the prospects for achieving your agenda?

Sta. Ana: Well, there are a lot of obstacles. The main obstacle is that Ramos is sticking to the orthodoxy. But there are some positive developments. A majority of cabinet members support reduction of debt servicing and increasing the allocation for basic social and economic services.

MM: So you haven 't given up yet?

Sta. Ana: We have not given up. There's no other recourse but to continue fighting. We are now preparing a new kind of advocacy. Before we focused on the demand for a reduction of debt servicing. Unfortunately, despite the popularity of our demand, Congress, especially the lower house, voted against the reduction of debt servicing. This was because of the pressure from the House leadership and from the president. Now we have adopted a new strategy. Since we know that Congress, or the House of Representatives, will be insensitive to the same position that we have been bantering over the years, we are now taking a different angle. We are concentrating on increasing the budgetary allocations for health and education. So we have a new cause, but with essentially the same message as before. That is, giving priority to people's needs.

MM: How do you assess Ramos' Medium-Term Development Plan?

Sta. Ana: Well, one year has passed, and therefore there is enough basis to make definite conclusions. The main problem is that the government continues to adopt an orthodox economic program, a program that will not, and is in no position to, stimulate economic recovery.

For the first year, the economic problem was devastating, a point illustrated by comparing government's targets- in terms of revenue collection, economic growth, investment and exports - with their performance. For the first year, growth is flat. In fact, real growth is negative, considering that population growth far outstrips the negligible genuine growth. Then, even targets for foreign investments, exports, are below performance simply because of internal economic problems that the Ramos administration failed to address. It's a question of chicken and egg in a manner of speaking. How can we attract foreign investments, how can we make our exports competitive, when we have a lot of problems on infrastructure: bad telephone lines, no power, lack of roads, monstrous traffic jams here in Manila. You cannot attract foreign investments when you have those problems. Exports cannot be competitive and interest rates are high when exporters are faced with power shortages and other problems. So, one goes back to the question of taxes - how can one collect higher taxes when the economy is virtually at a stand still? The key again is, how do you achieve growth? How do you jump start the economy? We go back to our set of proposals. One really has to go against orthodoxy. One has to go against the IMF program.