Red flags on government debts

The Philippine government is to go on a borrowing binge from 2017 onward to fund a massive infrastructure program estimated to cost $167 billion (P8.5 trillion) over 10 years. This raises the specter of a debt bondage reminiscent of the Marcos years.

China, as part of its One Belt, One Road program, leads all donors with a pledge of $15 billion for large-scale infrastructure projects and a $3-billion credit facility from the Bank of China. Japan has offered $8.1 billion in official loans and private investments. Not to be outdone, the Asian Development Bank dangled a $100-million loan for feasibility studies on infrastructure projects and, in May, pledged $770 million for water-related projects.

To allay fears, Budget Secretary Benjamin Diokno argued that only 20 percent of the infrastructure budget would come from foreign borrowings while the rest will be coursed through domestic loans. But 20 percent is still $33.4 billion or P1.65 trillion. This would bring the Philippines’ total foreign debt to P3.81 trillion, a 76.4-percent increase from the December 2016 figure. The domestic debt component would drive up the total debt stock to P15 trillion (before interest), a 146-percent jump from the December 2016 total of P6.09 trillion. This excludes new loans not related to infrastructure.

Incurring debts, of course, is not necessarily bad if it ultimately benefits the poor and marginalized sectors of the population. Otherwise, debts that privilege only the rich and propertied classes can be deemed illegitimate transactions. It is thus essential to raise a number of red flags with respect to government loans, and foreign aid in particular. These are based on the country’s long experience of dependence on foreign aid including official development assistance and on loans in general.

What safeguard mechanisms are in place relative to the social and environmental impact of loan projects that could result in forced dislocations of affected communities or widespread ecological harm? Will loan conditionalities impinge on sovereign rights or tie the Philippine government to fiscal restraints that will prevent the allocation of funds for social protection? Will loan contracts effectively grant firms from donor countries the right to extract our natural resources to feed their economies?

Will the loans be tied or untied? Tied loans typically end up in the hands of the donor country through feasibility studies, consultancies, procurement, and actual project construction. The aid is thus rechanneled back into the donor country’s economy.

The impact on the government budget should also be considered. Under the automatic appropriations law, debt service has the first cut of the budget before any other item. This debilitating law has prevented the government from allocating more funds for social development such as health, education, and housing. It has first to be repealed. Foreign-loan-funded projects also normally require local counterpart funding costing billions of pesos. Delays in implementation could also add to the debt service due to the imposition of commitment fees.

Unless these debt-related issues are addressed properly, the country might just end up with billions of dollars in illegitimate debts that only bleed public coffers. The Indian government, for one, in boycotting the recent Beijing Belt and Road Summit, warned that China’s Silk Road initiative could impose an “unsustainable debt burden” for recipient countries as they may “struggle to pay back loans for huge infrastructure projects” funded by China.

Furthermore, Forbes magazine estimates that, within 10 years, even at a minimum concessional interest rate of 5 percent, the Philippines would be saddled with an additional debt of P13.75 trillion from the infrastructure program alone. By then, the country’s debt-to-GDP ratio will hit 136 percent, a quantum leap from the current ratio of 42.1 percent. At this point, the Philippines could ignominiously reenter a period of debt peonage.

———— Eduardo C. Tadem, PhD, is president of the Freedom from Debt Coalition and professorial lecturer in Asian studies at the University of the Philippines Diliman.