Speech at the induction of officers of the Credit Management Association of the Philippines, Inc., on 28 June 2012, at Shangri-la Makati Hotel.
Today, there is an economic crisis in Europe, because certain members of the European Union – namely, Greece, Spain, Ireland, and Portugal – are bankrupt. These bankrupt countries have two choices. The first choice is to exit from the European Union, and possibly cause the downfall of the EU. The second choice is to apply for loans from the International Monetary Fund, and accept such conditionalities as: reducing public spending, increasing collection of taxes, liberalizing their international economic relations, and even improving other areas of government.
The IMF said that it will raise $456B for loans to those European countries. As part of the European Union program, the IMF chair has requested the Philippines to lend money to its pool of funds.
The IMF request for a loan has been granted by the Aquino administration, and has stirred a controversy over two issues, which I will answer summarily:
- Is the loan constitutional, since it was granted without congressional participation? Answer: Under the Constitution, there is no legal obstacle to the loan.
- Is it wise to issue the loan, considering our Third World status? Answer: Questions of wisdom in foreign policy should be addressed to President Aquino when, as the country’s lone spokesperson in foreign affairs, he is privy to confidential information that is not available to Congress.
Questions of legality have been raised, because the loan was granted without information to, or the advice of Congress, particularly the Senate which share the foreign policy power with the President. Such questions have no legal basis. The Constitution provides that the President may contract foreign loans on behalf of our republic. (Constitution, Art. 7, Sec. 20). The only limitation on the President’s power is that he should have the prior concurrence of the Monetary Board, and that his power is subject to such limitations as may be provided by law.
At present, there is no such law that requires the President to consult Congress or the Senate. If the Senate wishes to participate in the foreign loan process, then it should pass a bill to that effect.
Further, the Constitution provides that the Central Bank shall function as the central monetary authority (Constitution, Art. 12, Sec. 20). Accordingly, the Central Bank Act provides that the Monetary Board may authorize the Bangko Sentral to grant loans to and receive loans from foreign banks and other foreign or international entities, both public and private. (R.A. No. 7653, Chap. 4, Art. 2, Sec. 75).
Perhaps the controversy over the Philippine loan to the IMF springs more from the trauma that the Philippines suffered during our country’s own foreign debt crisis in the 1980s. The IMF provided bailout funds to our country, but it demanded painful structural adjustments, such as budgetary cutbacks, trade liberalization, deregulation, and privatization. It is said that those structural adjustments dislocated irreversibly the economy of the Philippines.
One of the IMF’s conditions for the rescue loan that it extended to the Philippines was the Automatic Appropriations Law. This law mandates that among budgetary expenditures, debt servicing should have priority allocation. Thus, the Philippines has allocated 20 to 25% of our national budget to debt servicing.
Although the IMF has provided relief for states facing financial crises, it needs to be emphasized that the IMF needs to walk a fine line. On the one hand, IMF should encourage the provision of funding that will be beneficial for both the borrower and the lender. On the other hand, the IMF should avoid moral hazard, meaning a government that has fallen into a financial crisis and has been bailed out of the crisis is likely to behave more recklessly, adopting inappropriate policies and over-borrowing. This is the so-called “moral hazard dilemma.”
At the beginning of 2000, some analysts already demonstrated that the IMF patterns of lending respond to the geopolitical interests of the United States, its dominant member. According to Professor Lisa Martin of Harvard, the “public choice” school has studied the IMF as a self-interested organization attempting to assert itself in the face of constant political demands from its powerful member states. We Filipinos must be aware that through the exercise of authority that is perceived as legitimate, specially because it has the veneer of science, the IMF and the World Bank may in fact be able to pursue agendas that have little relationship to the interest of either major donors or borrowers.
Having issued this cautionary note about the IMF, let me proceed to the most important question of all: Instead of lending money for European countries, why don’t we use the money to help the poor in our own country? The answer is that we cannot do so. Under the new Central Bank Act, the Bangko Sentral ng Pilipinas is mandated to maintain international reserves adequate to meet any foreseeable net demands for foreign currencies. (R.A. No. 7653, Sec. 65). Our country’s international reserves are invested in accordance with the investment guideline that only investment-grade and highly-rated financial instruments of non-residents should qualify.
There is a difference between national government money and BSP money. National government money comes from tax and non-tax revenues. BSP money comes from investment income, supervisory fees, and miscellaneous income. BSP international reserves form part of its total assets.
Gross national reserves or GIR are external assets that are available to and controlled by monetary authorities and Central Bank. These are comprised of monetary gold, foreign exchange assets, and other claims in foreign currencies. The GIR are held primarily for precautionary reasons. These reserves serve as a contingency buffer when there is insufficient domestic foreign exchange supply, or when there is a foreign exchange shortage during market stresses.
The corollary question is: Why is the BSP lending to the IMF, when over 38% of the Philippine population are living below the poverty line? The answer is that it is the national government and not the BSP which is directly responsible for addressing poverty with resources coming from the budget. Furthermore, when the Philippines lends to the IMF, our loan indirectly supports the poor, particularly the OFWs.
When we grant the loan to the IMF, the BSP level of international reserves will remain the same. Only the computation of the reserves will change. To allay the fears of our people, let me emphasize that: There is no impact whatsoever on budget allocation of the national government. Under the law, the BSP can freely convert any of the assets in its international reserves into other assets. Lending to the IMF is just one form of BSP investment using its reserves.
The IMF will pay interest on its loan from the Philippines at the SDR interest rate, which at present is about .12%.
Another common question is why we are not using our international reserves to either pay off the debts of our national government, or to fund more infrastructure projects of the government. Again, the answer is the legal provision that our international reserves follow an investment guideline mandating that only investment-grade and highly-rated financial instruments of non-residents should qualify. Therefore, the BSP cannot lend part of its reserves to the national government to retire Philippine public debt, and the law prohibits the BSP from engaging in development banking or finance.
There should be no anxiety that if we need the money we are lending to solve a problem in the balance of payments, we might not be able to get our money back in time. As long as the problem arises from the balance of payments, the IMF will return our loan.