A 'PONZI' GAME?

Such improvements in the debt situation, however, do not hide the fact that since 2001 when Arroyo came to power, the country's outstanding external debt has actually risen by US$3.7 billion, even reaching a high of US$57.4 billion in 2003. 

While it declined to US$53.4 billion in 2006, attributed to the weakening of the U.S. dollar and Arroyo's prepayment strategy, the external debt again increased by US$1.5 billion last year.

Table 1: National Government Outstanding Debt (in billion pesos) * as of April 2008 Source: Bureau of the Treasury 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* TOTAL 1,775.3 2,166.7 2,384.9 2,815.4 3,355.1 3,811.9 3,888.2 3,851.5 3,712.4 3,871.7   Foreign 796.9 1,098.5 1,137.2 1,344.3 1,651.3 1,810.7 1,723.9 1,697.4 1,511.3 1,570.3   Domestic 978.4 1,068.2 1,247.7 1,471.2 1,703.8 2,001.2 2,164.3 2,154.1 2,201.2 2,301.4 GROWTH RATE 18.7% 22.0% 10.1% 18.1% 19.2% 13.6% 2.0% -0.9% -3.6% 4.1%

The Arroyo government has justified its practice of prepaying maturing debts, saying this saves the country several millions of dollars in interest payments. Yet, whatever slight decrease in the debt stock had been registered has just easily been offset by government's continued heavy borrowings.

Economists have even likened Arroyo's aggressive borrowing to repay maturing principals of old debts to a Ponzi game (commonly known as pyramiding) that can only be sustained as long as interest rates for new loans are lower than the previous ones.

No less than the ADB has pointed out the unsustainability of this core debt management strategy in a study in 2006.

What is worse, the FDC says, is that Arroyo's borrowings have always exceeded the budget deficits.

	Table 2: National Government Debt Service Payments (in billion pesos) * as proposed in 2008 GAA Source: Bureau of the Treasury; DBM 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* TOTAL 205.4 227.8 274.4 358.0 470.0 601.7 678.9 854.4 614.1 598.1 INTEREST 106.3 140.9 174.8 185.9 226.4 260.9 299.8 310.1 267.8 269.8 PRINCIPAL 99.1 86.9 99.6 172.1 243.6 340.8 379.1 544.3 346.3 328.3

In the FDC's view, Arroyo has achieved two major fiscal records: Of four Philippine presidents since the 1986 EDSA people power revolt, she is the most aggressive borrower, and also the largest payer, of debts. From 2001 to 2007, the FDC reports that the Arroyo government had paid out P3.8 trillion to foreign and domestic lenders. This is more than double the combined debt service payments of P1.8 trillion of her three predecessors from 1986 to 2000.

And contrary to what her government would want the public to believe, the FDC warns that the debt problem is not yet over.

The P42,819.42 debt burden on every Filipino citizen does not include the national government's contingent liabilities that by end-2007 has amounted to P484 billion, according to the FDC.

These are potential debts as a consequence of government's expressed or implied commitments to directly assume the liability of other entities should these fail to honor their obligations. Much of these contingent liabilities are foreign-currency denominated amounting to P419 billion.

ABUSE OF POWER?

Economists like Dr. Benjamin Diokno have been questioning the legal basis for prepaying some national debts which are not yet due and demandable. The practice, says the former budget secretary under the Aquino and Estrada administration, undermines the power of the purse of Congress.

“The executive department has probably abused the automaticity of debt service payment by prepaying public debt without congressional imprimatur, and creating indebtedness — which translates into money to be paid out of the Treasury in the future — without prior approval of Congress,” says Diokno.

“Under certain conditions, it is also poor economics,” he argues. “For example, the government incurred huge losses when it prepaid foreign loans when the peso exchange rate was P50 to the U.S. dollar say two years ago, when we could pay now at P41 to the U.S. dollar.”

Debt servicing has remained a top priority of the Arroyo government; it has consistently and fiercely upheld automatic appropriation for debt service — money that critics say should have been spent on the urgent needs of the people instead of the government resorting to giving meager doleouts.

Freed funds from the debt service, according to FDC, should be enough to cover whatever revenue shortfalls would result from the reformed value-added tax (R-VAT) on oil and electricity.

IN DEFENSE OF VAT

In her eighth SONA, Arroyo defended the continued imposition of VAT on petroleum products and power. Lifting this, she said, would turn back the fiscal reforms in place and would be tantamount to “strip(ping) our people of the means to ride out the world food and energy crisis.”

But Lidy Nacpil, FDC vice president, dismisses Arroyo's claim as “deceptive.”

“It deflects from one of the fundamental reasons why we are so vulnerable to the economic crisis, which is the country’s enduring debt burden,” she says, adding that the amount of debt service eclipses all other expenditures, including all the subsidy programs of the government.

“A moratorium alone on interest payments is more than enough to cover for the expected revenues for ‘General Sales Tax, Turnover, or VAT,’ pegged at P204.9 billion,” points out Nacpil.

This year, payments allotted for the principal amortization of debts actually total P328.3 billion, and for interest payments, P269.8 billion.

	SCRAP ILLEGITIMATE DEBTS. Anti-debt activists have found an ally in Congress, which passed the 2008 General Appropriations Act with a provision prohibitng payments to loans deemed "illegitimate." Arroyo, however, vetoed the provision. [photo courtesy of FDC]

In the first four months of 2008, P306.7 billion — P119 billion in interest payments and P187.7 billion in principal payments — have already been spent to service maturing debts.

There would have been less expenditure on debt service had Arroyo not vetoed the special provision in the P1.227-trillion General Appropriations Act of 2008 prohibiting interest payments amounting to P25.9 billion (out of the total P269.8 billion) for what Congress considered to be “tainted, fraudulent and useless loans” pending their renegotiation or condonation.

It was the first time in a decade, and under Arroyo, that Congress had passed such special provision.

In her veto message after signing the three-months delayed 2008 budget in March, Arroyo evidently deemed the country's credit rating in the global community more paramount, noting “with grave concern” the proposed congressional prohibition on interest payments.

“While Congress may have been impelled by the best of intentions this restriction is a clear encroachment of the constitutional guarantee on non-impairment of contracts,” she stressed