1. Overview on the Fiscal and Debt Crisis (work in progress) Lidy B. Nacpil Freedom from Debt Coalition

2. FISCAL CRISIS FISCAL  From the latin word “fiscus” meaning PURSE or TREASURY  INCOME - revenues from taxes, tariffs, non-tax, (borrowings)  SPENDING - budget and off-budget expenditures (and other disbursements)

3. SIGNS OF THE FISCAL CRISIS NATIONAL BUDGET DEFICIT -- increasing sharply since 1998  1998 (9.30%)  1999 (19.24%)  2000 (19.67%)  2001 (21.02%)  2002 (28.40%)  2003 (24.89%)  2004 Projected (22.88%)

6. FACTORS THAT LED TO THE FISCAL CRISIS  THE DEBT -- The problem of the DEBT is the biggest factor that led to the crisis  FALLING REVENUES

7. THE PROBLEM OF THE DEBT  The Debt has been a major problem for the Philippine for more than two decades.

8.  The TOTAL DEBT of the Philippines is composed of the following: –Public Debt – government borrowings –Private Debt – private corporations and private entities This is a classification based on the borrowers

9.  It is the PUBLIC DEBT that is immediately relevant to the Fiscal Crisis but the Private Sector Debt has also an important impact on the economy as a whole.  Public sector debt as of end December 2003 is 5.9 trillion pesos – about 130% of GDP (Source: Department of Finance)

10.  Debt is also classified based on creditor: –FOREIGN or EXTERNAL –DOMESTIC Thus we have PUBLIC DEBT – external/foreign and domestic (Private Debt is also both external/foreign and domestic)

11.  Foreign Debt or External Debt is debt owed in foreign currency to foreign creditors such as: –Multilateral Financial Institutions  IMF and World Bank –Bilateral Creditors  Governments and their financial institutions –International and Foreign Commercial Banks –Foreign buyers of Phil Government issued bonds and other similar instruments

12.  Domestic debt is debt owed to Philippine creditors and includes those in Pesos as well as dollar-denominated loans: –Buyers of Treasury Bills and Bonds and other similar instruments –Philippine Banks and other Financial Institutions

13. Structure of the Public Sector Debt  National Government Foreign and Domestic  14 Monitored GOCCs Foreign and Domestic –Central Bank / CB-BOL Foreign and Domestic –Bangko Sentral Foreign and Domestic –Government Financial Institutions Foreign and Domestic Less GOCC Onlent or Guaranteed by NG

14. 14 Monitored GOCCs  Home Guaranty Corporation  Light Rail Transit Authority  Local Water Utilities Administration  Metropolitan Waterworks & Sewerage System  National Development Company  National Electrification Administration  National Food Authority  National Housing Authority  National Irrigation Administration  National Power Corporation  Philippine Economic Zone Authority  Philippine National Oil Company  Philippine National Railways  Philippine Ports Authority

15. Government Finance Institutions (GFIs)  Al Amanah Islamic Investment Bank of the Philippines  National Home Mortgage Finance Corporation  Development Bank of the Philippines  Land Bank of the Philippines  Philippine Crop Insurance Corporation  Trade & Investment Development Corporation of the Philippines

16.  The Debt is not only a problem of the Philippines – it a problem of more than 100 countries. Previously referred to as Third World countries, they are now called “the South” or South countries.  The emergence of the global debt problem – a short review of history

17.  Philippine debt started ballooning in the 1970’s: – in 1970: outstanding Foreign debt stood at $2.3 billion; $1.1 billion of which was public debt –By 1979: $13.35 billion -- $7.65 billion public debt –By 1985: US$ 26.25 billion -- $19.12 billion public debt  The Philippines went through a major debt crisis in the 1980’s, when NG debt payments (principal and interest) were claiming from 30% to 50% of the national budget.

18.  In the 1990’s the Philippine debt was declared as “manageable” or “sustainable” by the IMF and World Bank, a claim echoed by the Philippine government.  This was after the Brady securitization program was implemented (Philippines, Argentina, Brazil and several other countries who went through a debt crisis in the 1980’s)  Brady Plan – conversion of a large part of short-term commercial debt in longer term bonds

19.  This declaration of “manageable” or “sustainable” debt was extremely unfortunate. The Philippine government went into “denial” mode and became complacent.  Even when the debt was considered sustainable – NG debt payments were still claiming a big share of the national budget – average of 20%, and this was only interest payments. (Payment of NG debt principal became an off-budget item in 1993).  The outstanding debt continued to grow at a fast rate. From 1993 to 2002, growth was more than double.

20.  In the 1980’s, the main problem was FOREIGN DEBT.  Eventually, public domestic debt grew, as the Philippine government and related institutions borrowed domestically to be able to service the foreign debt. The big increase also took place when access to international credit was limited.  At one point, more than half of public debt was domestic debt.  At the present time, the ratio is about 50-50.

21. DomesticExternalTotal 19931,260.70652.101,912.80 19941,289.20660.201,949.40 19951,453.60713.502,167.10 19961,502.60734.602,237.20 19971,586.901,082.402,669.30 19981,721.201,230.302,951.50 19992,196.601,469.703,666.30 20002,542.001,855.204,397.20 20012,286.302,125.104,411.40 20022,765.402,397.305,162.70 Outstanding Public Sector Debt 1993 to 2002 in Php billions

22. Outstanding Public Sector Debt (% of total for the Year) DomesticExternal 199365.91%34.09% 199466.13%33.87% 199567.08%32.92% 199667.16%32.84% 199759.45%40.55% 199858.32%41.68% 199959.91%40.09% 200057.81%42.19% 200151.83%48.17% 200253.56%46.44%

24.  These figures are in Philippine pesos. But since foreign debt is owed in foreign currencies, any change in foreign exchange rates means an automatic change in the Phil peso value of the foreign debt.

25. A closer look at the Public Debt  Breakdown of PUBLIC SECTOR DEBT as of the year 2002 is the following

26. Domestic ExternalTotal Total*2,765.4 2,397.45,162.8 National Government 1,492.3 1,914.9 3,407.2 14 Monitored GOCCs 895.7 474.4 1,370.1 Central Bank/CB-BOL - 67.1 Bangko Sentral 164.3 450.4 614.7 Gov’t Financial Institutions 234.2 153.4 387.6 (* Already less: GOCC Debt Onlent or Guaranteed by NG) 21.1 662.8 683.9 2002 Outstanding Public Sector Debt (in Php Billion) Source: Dept of Finance

27. 2002 Outstanding Public Sector Debt (in % of Total) DomesticExternalTotal 100% National Government 53.5562.5758.27 14 Monitored GOCCs 32.1415.523.43 Central Bank/CB-BOL - 2.221.14 Bangko Sentral 5.8914.7110.51 Government Financial Institutions8.45.06.62 Less: GOCC Debt Onlent or Guaranteed by NG

29. National Government Debt

30.  The outstanding NG debts as of February 2004 in Philippines pesos is 3,407,109,000,000 (trillion).

31. The Outstanding NG debt figures in Philippine pesos for the years 1999 to 2004: The Outstanding NG debt figures in Philippine pesos for the years 1999 to 2004:  1999 – 1,775,356,000,000 (trillion)  2000 - 2,166,710,000,000 (trillion)  2001 - 2,384,917,000,000 (trillion)  2002 - 2,815,468,000,000 (trillion)  2003 - 3,355,108,000,000 (trillion)  2004 - 3,407, 109,000,000 (trillion)

37. IMPACT of the NATIONAL GOVERNMENT (NG) ON THE FISCAL CRISIS  The NG debt payments (interest and principal) is the biggest contributing factor to the current fiscal crisis.  Payments on interests on the NG debt have been claiming a large portion of the NG budget for a long time, crowding out spending for other items.  It is the largest item in the NG Budget, and the % has been increasing in recent years. In 2004, it is larger than all Social Service items combined.  Interest payments and principal payments of the NG debt is equivalent to 80% of 2004 revenues; For 2005 – debt payments are projected to be equivalent to 95% of revenues.

42. THE AUTOMATIC APPROPRIATIONS LAW ON DEBT PAYMENTS  Marcos Presidential Decree 1177  Institutionalized by Pres. Aquino in the Administrative Code  Debt payments as the highest priority in government spending

43. THE PROBLEM OF REVENUES  The other factor to the crisis is the problem of revenues.  Growth of revenues has been slowing down in the last few years: – 1997 financial crisis – affecting growth and correspondingly tax collection – aggressive trade liberalization since 1995 – problems of efficiency in collection, tax avoidance and evasion

44. THE PROBLEM OF REVENUES  Aggressive trade liberalization since1995 –1995 to 2003 – value of imports grew by 41.1% – but customs collections of import duties declined by 35.7%

45. THE PROBLEM OF REVENUES  Growth of expenditures has also slowed down since the late 1990’s but it is growing faster than revenues.

47. NG Tax_NonTax Revenues 1990 -2004 (In million pesos) 180,902 220,787 242,714 260,405 336,160 361,220 410,450 471,843 Tax Revenues 151,700 182,275 208,706 230,170 271,305 310,517 367,895 412,165 Nontax Revenues 29,202 38,512 34,008 30,235 64,855 50,703 42,555 59,678 Source: Bureau of the Treasury 22.05%9.93%7.29%29.09%7.45%13.63%14.96% 11.28%5.37%5.65%19.27%12.68%11.84%18.18% 462,516 478,503 514,762 558,218567,141 584,062671,194 Tax Revenues 416,585 431,687 460,034 498,880496,372530,774601,392 Nontax Revenues 45,931 46,816 54,728 59,33870,76953,28869,802 Source: Bureau of the Treasury -1.98%3.46%7.58%8.44%1.60%2.98%14.92% 9.28%7.99%17.59%2.55%6.02%9.36%6.57% REVENUES Growth of Revenues from Previous year Growth of expenditures from previous year Growth of Revenues from Previous year Growth of expenditures frm Previous year 2000 REVENUES PARTICULARS 19961997 199819992001200220032004 199219931994199519901991 PARTICULARS

48.  The major solution of previous governments to the problem of huge debt payments and the growing deficit has been to BORROW and to KEEP ON BORROWING.  Levels of borrowing has increased dramatically since 19980.  And by borrowing more and more, the government gets deeper and deeper in debt.

49. (27,113)88,896181,698203,815169,76095,30981,285 Interest Payments 79,571 76,491 79,123 72,851 76,522 77,971 99,792 106,290 140,894 181,601 204,267 223,200 Gross Domestic Borrowings Gross Foreign Borrowings TOTAL Gross Net Borrowings Gross Domestic Borrowings Gross Foreign Borrowings TOTAL Gross Net Borrowings

50. NG Foreign and Domestic Borrowings 1986-2003 (In million pesos) Cory AquinoFidel RamosJoseph EstradaGloria Arroyo PARTICULARS1986-19911992-19971998-20002001-2003 (6 years) (3 years) A.Gross Domestic Borrowings273,446254,581411,091737,353 B.Gross Foreign Borrowings109,924146,434314,090498,673 C.Total Borrowings383,370401,015725,181 1,236,026 Source: Bureau of the Treasury Interest Payments305,132462,529346,796609103 Principal Amortization181,715258,798250,772439,434 Total Payments486,847721,327597,7481,048,537

53. 1986-1991 Cory Aquino 1992-1997 Fidel Ramos 1998-2000 Joseph Estrada 2001-2003 Gloria Arroyo 486,847 721,327 597,748 1,048,537 383,370 401,015 725,181 1,236,026 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 Borrowings and Debt Payments per Administration Total BorrowingsTotal Payments

56. Contingent Liabilities  WE SHOULD ALSO LOOK INTO THE PROBLEM OF CONTINGENT LIABILITIES which include: – Sovereign guarantees to debts – Risk guarantees to BOT projects  In 2002, the WB estimate of contingent liabilities is 3.2 trillion pesos.

57. HOW DO WE ADDRESS THE FISCAL CRISIS?  We cannot solve the problem of the fiscal crisis simply by measures to increase revenues.  Cuts on wasteful spending is imperative, but not enough to make up for the deficit.  Cutting down on other items will seriously affecting basic services and important economic programs. As it is, we are not spending enough on education, health, housing, agrarian reform etc.  We cannot continue to borrow at the same rate or even higher because it only brings us deeper into debt.

58. HOW DO WE ADDRESS THE FISCAL CRISIS?  Steps need to be taken to cut debt payments and reduce the outstanding debt.

59. THE PROBLEM OF ONEROUS and UNJUST DEBTS  The problem of the debt is more than the amounts :  debts from onerous transactions  debts with unjust terms  debts tainted with bribery and fraud  debts that financed disastrous and damaging projects  debts of private corporations that the public is paying for  debts of the dictatorship

60.  International creditors should share in the burden, especially those who were accomplices in onerous loan transactions and contracts.  Private corporations, international and domestic, who were party to grossly disadvantageous debt-creating transactions and contracts must also share the burden. (ex. IPP contracts)  Private corporations and individuals whose debts we are paying for must also share the burden. (behest loans)  Past and present government officials must be held accountable for unjust, onerous and fraudulent debts, and debts wasted on corruption  Our people should not be made to pay for debts that cannot be justly considered their debts

61. We urgently call for a THOROUGH INVESTIGATION and AUDIT of PUBLIC DEBT and CONTINGENT LIABILITIES as a necessary and vital step towards a comprehensive and long-term solution to the problem of the debt.

62. Objectives of the DEBT AUDIT  Correcting flaws and weaknesses in the structures, policies and processes related to borrowings, payments, guarantees and contingent liabilities  Stronger, more comprehensive, coherent and consistent laws and regulations, and transparent and accountable oversight and regulatory mechanisms on public borrowings, public guarantees and contingent liabilities

63. Objectives of the DEBT AUDIT  Developing a more judicious, accountable and transparent debt payments policy that  upholds the Philippine national interest and the Filipino people’s rights and welfare as paramount  upholds national sovereignty over the public resources, restores the full power of the purse to Congress, and ensures democratic processes and transparency in determining debt payments  upholds the provision in the Constitution that states Education should have the highest priority in the National Budget

64. Objectives of the DEBT AUDIT  results in substantial reduction in the current level of allocations for debt service  addresses the issue of illegitimate debts > debts involving onerous terms and transactions, fraudulent claims & representations, the circumvention of laws & democratic processes, the financing of projects that have damaging effects on the environment, violates human rights &/or results in the massive displacement and dislocation of people and communities  takes into account creditor responsibility and accountability

65. OTHER IMMEDIATE STEPS  Repeal of Automatic Appropriations Law  Non-payments of illegitimate and onerous debts such as the BNPP debts  Cancellation/annulment of onerous agreements and contracts – ex. NAPOCOR Contracts with Independent Power Producers  Allocation of Education Budget to serve as reference point for a ceiling on debt payments