Tight balancing act

The government is in a financial bind. While the coronavirus pandemic has necessitated additional expenses in the tens of billions of pesos, its main revenue source — local taxes and imposts on imports — has been constricted by the same health crisis afflicting the globe.

Economic activity, the health of which determines the amount of taxes generated by the state, virtually stalled during the lockdown imposed on Luzon since March this year, and the slight easing of the quarantine restrictions is expected to provide only a slight relief. For the year, the Duterte administration’s economic managers have all resigned to the fact that the economy, as measured by the gross domestic product (GDP), would shrink by as much as 4 percent.

The result is that the government has to look elsewhere for money to offset the revenues lost due to the pandemic to address the effects on the economy, focusing on the millions who suddenly lost jobs and the marginalized sectors. The quickest solution is to borrow. Thus far, some $5.76 billion in foreign loans have been secured to address the impact of the pandemic.

These are all concessional — fetching low interest rates (some less than 1 percent) and long repayment periods (exceeding 10 years) — the biggest of which were $2.6 billion from the Asian Development Bank; $1.2 billion from the World Bank; $750 million from the Beijing-sponsored Asian Infrastructure Investment Bank; and $275.7 million from the French Development Agency. Of these borrowings, $2.26 billion were already disbursed or infused into the budget, according to Malacañang.

As of June 9, the Department of Finance has also raised P1.2 trillion in net domestic borrowings through the sale of government securities. This is on top of the P300-billion financing support from the Bangko Sentral ng Pilipinas. State firms also remitted a total of P149.2 billion in dividends as of June 19.

However, the latest Department of Budget and Management data showed that the national government had released only P355.7 billion in funds for COVID-19 response as of June 22. These were for emergency subsidies and other forms of assistance to poor and low-income households; wage subsidies for small businesses; assistance to displaced employees and repatriated Filipino workers; and procurement of test kits and other critical medical supplies to fight the virus.

While the government can borrow more to help the country recover from this crisis, fiscal prudence is also important so as not to create much bigger problems going forward, or for the next administration to have to resolve. An accepted measure of fiscal prudence is the so-called budget deficit-to-GDP ratio. The government is sticking to a fiscal deficit of up to 9 percent of GDP this year, on par with the country’s regional peers and other developing countries. A budget gap beyond this ceiling is considered “very dangerous.” The Cabinet-level Development Budget Coordination Committee already projected the budget deficit to hit P1.61 trillion this year, or 8.4 percent of GDP.

The government has other options. One is to ask Congress to convene a special session to pass pending stimulus bills. However, such stimulus programs should have the corresponding sources of funding, not via additional borrowings. It can also sell assets to raise money. However, since the global economy is hard-pressed, it might be difficult to get attractive prices for state-owned property and companies at this time.

One other option is to again ask the private sector to help address pressing concerns, especially unemployment. Expediting the approval of big-ticket infrastructure projects — airports, seaports, etc. — is an example. Construction has a big multiplier effect, generating direct, indirect, and induced employment. Many in the private sector are just awaiting the go-ahead from the government for big infrastructure projects they have proposed long ago.

The government simply cannot go on a borrowing spree. A prudent fiscal program is necessary to protect the country’s credit-worthiness. Contracting loans to finance the country’s COVID-19 response is not bad per se. It just has to be managed with utmost care — and, as a cardinal obligation to the public that will pay for the loans, with utmost transparency.