Till debt do us part

Bribery scandal, my article for Global Voices.

The most important legislative measure passed by the Philippine Congress every year is the General Appropriations Act — the national budget. Through the power of the purse, Congress can reward performing government agencies with higher funding and punish inefficient public institutions with reduced subsidies.

This year, the principal sponsor of the GAA complained that Congress could not provide higher funding for social services since half the national budget is automatically earmarked to service the country’s foreign debt. The lawmaker has articulated what peoples’ organizations have been pointing out for decades: the Automatic Appropriations Act and the government policy to resort to foreign borrowing have led to less spending for productive social and economic services.

After the downfall of the Marcos dictatorship in 1986, President Cory Aquino assured international financial institutions that the Philippines would honor its debt commitments. The country went on to pay onerous and anomalous debts which were acquired during the Marcos era. Succeeding governments remained dependent on foreign loans to finance large-scale government projects.

Recognizing that huge external debt payments by developing countries are taking away the resources needed for development, the International Monetary Fund and the World Bank put in place a debt relief initiative for Heavily Indebted Poor Countries. This innovation has proved successful; more than 20 African countries have benefited from debt reduction packages.

Unfortunately for the Philippines, it is not included in the Heavily Indebted Poor Countries category since it has proven that it can pay its debts through an automatic appropriation in its annual budget. Besides, the Philippines is identified as a middle-income country whose economy is sustained by remittances from overseas Filipino workers.

To resolve this dilemma, Philippine House Speaker Jose De Venecia proposed at the United Nations General Assembly in September 2005 an expanded debt relief program to include heavily indebted middle-income countries like the Philippines. The proposal was to seek conversion of debts into equities to increase investment toward the attainment of the U.N. Millennium Development Goals.

A debt-for-equity swap is not an original idea of De Venecia. This was used extensively in Latin America during the international debt crisis in the 1980s. This process involves three parties: the debtor, foreign investor and the creditor-country. According to the non-government group Jubilee Plus, the debt-equity swap entails the following:

"A commercial debt is converted into an investment in the debtor country. The holder of the debt sells the debt back to the debtor government for local currency; and the local currency is then used to buy a share in a company or to buy property or productive capital in the debtor country."

Civil society groups believe that De Venecia’s proposal could worsen the debt situation of the country. His scheme would be impossible to implement in the Philippines since most of the country’s debts are commercial debts which are difficult to swap.

Researcher Miriam Azurin-Abaja notes that De Venecia’s proposal does not include a debt discount. The proposal also "transforms creditors into owners of the best assets in the debtor-country, sans tax and other transaction costs."

Azurin-Abaja believes the De Venecia proposal would create new forms of debt since debt-equity swap does not promote cancellation or relief. The government will have to borrow again to pay the entire amount owed to a creditor.

Civil society groups are worried that the De Venecia proposal will "put bad creditors off the hook." Illegitimate debts will be honored. This is in contrast to the Vatican-backed Jubilee Campaign that anomalous loans which did not benefit the people should not be paid. The De Venecia proposal could sabotage the debt cancellation program for Heavily Indebted Poor Countries.

Speaker De Venecia should remember that during the Aquino administration, a debt-equity swap was briefly implemented but was suspended because of inflationary costs.

Instead of debt-equity, the Philippines can pursue debt-for-development swaps that do not require transfer of vital public assets. This was already done before. In 1990, the Philippines signed a debt-for-goods deal with Romania. In 1995, a debt-for-nature swap with Switzerland was approved. A debt-for-development agreement with France was used to construct a housing resettlement project in Tarlac.

Civil society groups want an immediate audit of all public debts to determine what onerous debts should be cancelled. Congress can also repeal the Automatic Appropriations Law. Instead of loans, developed countries should increase their Official Development Assistance for developing countries.

Debt conversion has the potential to reduce the debt stock of poor countries but it is no solution to the debt crisis.

The United Nations has recognized that eliminating poverty requires heavy investments for social and economic services. Developing countries cannot reduce poverty if half of their expenditures are used to pay foreign debt. There is a need for fair partnership and genuine dialogue between rich and poor nations.

Related entries:

Paris declaration
Get high on drugs
Gloria and Cory
Marcos as scapegoat


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