The billion-dollar blunder

I join the rest of the country in the belief that lending a billion US dollars to the International Monetary Fund was a blunder on the part of the Monetary Board.

Even if we have the foreign reserves to afford the loan, the reality is that annually, 40 percent of our annual budget is automatically geared towards debt servicing.  A good part of these loans benefitted only a dictator and his cronies.  This means that only 60 percent of our national budget may be spent for all other expenses of government. I suspect that after deducting payroll and basic infrastructure, very little is in fact left of the budget to pay for delivery of basic social services. In fact, in the proposed 2013 budget of P2 trillion, only P318.5 billion is earmarked for education, social services and public health. This is a measly 12 percent of the total budget. And yet the Monetary Board now says we can afford to lend P42 billion to the IMF?

I do concede that it does look good for the country. But public finance should not just score “pogi” points. It must prioritize, like all other public policy decisions, what is best for the country and its people. On this basis, I dare say that the billion dollars could be better spent financing micro-livelihood projects for the very poor, or even earmarked for a new lending window for the country’s hard-pressed exporters.

Yes, the professed goal of assisting the debt crisis in Europe is noble. I have consistently written about this crisis since it does not appear to be high in the list of priorities of our policy makers. But the reality is that no one knows exactly how much would be required to bail out the debt-stricken economies of Greece, Portugal and Spain. Already, the 750-billion euro package approved by the EU does not seem enough. While the billion dollars which we lent may help, the reality is the amount is too large for us to lend, and yet too small to solve the problem.

Besides, given that a billion will not solve Europe’s financial woes, perhaps it would have been better to allocate the same towards alleviating the plight of Filipinos who will be affected by the crisis. Here, Filipino seafarers manning Greek vessels, as well as exporters to the continent, should have been given priority- if it is true that we have surplus capital.

Which bring me to another point. With total indebtedness of at least $60 billion and with Budget Secretary Florencio Abad declaring that at least 2 percent of the proposed 2013 budget will be financed through loans, it is obvious that we simply cannot afford to be a creditor. Perhaps, the billion dollars should have been spent to retire some of our foreign indebtedness in anticipation of the crisis in Europe.

But beyond policy, there too is the issue of legality. I recall that part of our successful challenge against the legality of the Northrail contract was that it was not, among others, submitted to Congress despite the very clear constitutional requirement that no public fund shall be spent without an appropriation provided by law. At least 30 percent of this project was to be financed by public funds and the rest financed through a loan to be extended by the Chinese EXIM bank. The test in jurisprudence on what should be covered by an appropriations law is whether an act is likely to involve a charge on the national treasury. And unless I am wrong, while the Bangko Sentral has the task of safekeeping our foreign reserves, it does not have unrestricted powers on how the reserves should be disbursed. Insofar as it may have a charge on public coffers, a law from Congress would be required.

But even assuming that congressional approval is not required for the loan, there is still the issue of whether the lending falls within the powers of the Bangko Sentral. The law creating the Bangko Sentral had to be passed precisely because the Central Bank of the past became bankrupt. Nonetheless, under the new Central Bank Act, the institution had powers to regulate the banking industry and to promote stability of the peso. I doubt that the billion-dollar loan could fall under any of these two broad legal mandates. Perhaps, members of the Board believed that insofar as the billion dollars may alleviate the crisis in Europe, it might fall under the mandate of promoting the stability of the peso. This, though, is a stretched argument as the usual tools in defending the value of the peso is through the bank’s mandate in determining money supply, setting borrowing rates, and intervention in the forex market.

The conclusion is that the billion-dollar loan may have been ultra-vires.


(Published in the Manila Standard Today newspaper on /2012/June/28)

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4 comments on “The billion-dollar blunder

  1. Hi Harry:
    The IMF is sui generis as a kind of central bank of central banks. All banks create money (i.e. currency or deposits) against reserves. A good and proper bank must then hold reserves or if it makes sense loan out its resources. The balance between liquid reserves and loans is an issue on which under the banking laws the BSP has discretion. The question then is whether the BSP acted with ‘grave abuse’.

    I submit not. The BSP technically lends to any entity against which it has a claim, such as the US government (thru T-bills), or the IMF (thru the PH reserve position in the Fund – no mystery in that, that’s been in the books since day 1 of PH membership in the IMF).

    The IMF is a crisis manager with real money pooled from its members. It is a quintessential cooperative institution. It works mostly by suasion when talking to creditors, and a bit more forcefully when dealing with debtors. Only countries can lend to or borrow from the IMF. A $1B contribution to the pool set aside for a European crisis is a symbolic gesture that says the PH is a member in good standing, who can well expect reciprocal treatment if for some reason a new Asian crisis erupts and affects us.

    So the ‘blunder’ isn’t so; it is more of a misunderstanding of what the IMF is all about.

  2. Blogger says:

    I agree with orlando. Moreover, the IBON foundation and some senators, as contained in some editorials, agree that there is nothing wrong with such loan. A closer scrutiny would yield a view that in the long run, it is more beneficial for the Philippines in the end.

  3. aaron a. legaspi says:

    Mr. Harry-We should give the BSP the benefit of the doubt. The only thing I would like to know as a filipino is to have this lending transparent and explained to the public in laymans term the benefits we will get as a nation and most important the assurance that we will be paid back. Another thing that BSP should explain in simple terms is why if its main duty is to stabilize the peso why is it continuously decreasing in value (from $1 to P2 since the creation of the 1st Central Bank in the 1950s) now it is P43 to $1. Do you call this stability?

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