ROMEO G. ROXAS:  THE MISCONCEPTION ABOUT THE NATIONAL PUBLIC DEBT

MANILA
, April 5, 2004
 (STAR)
By Atty. Romeo G. Roxas - The country’s national debt has reached P3.41 trillion as of January this year. It is made to appear that with 82 million Filipinos now, each of us will have a debt burden of P41,585.

This is not exactly the case, however. The public debt is not passed on to each Filipino for him or her to pay. Instead, the public debt is for government to pay out of the taxes and revenues raised.

This national public debt was incurred by the government in order to invest in the construction of our infrastructure most especially roads and the establishment of utilities, specially in the area of power, energy and water.

It so happened that when the government borrowed from foreign sources to invest in our development projects, the exchange rate was probably about P20 to the dollar. Now, however, because of the continued devaluation of the peso, the exchange rate is P56 against the dollar. Naturally, then, the country’s national public debt correspondingly ballooned.

Yet, as earlier year stated, the national public debt is being presented to the people by the media as a bane to the economy and an undeserving burden to the citizens and taxpayers. It is made to appear that it is something that should be religiously avoided. This perceived malady of a national public debt is shrouded in misconceptions and negative biases. The truth of the matter, as will hereafter be discussed, is that a national public debt especially for a developing nation is a healthy and unavoidable necessity.

It is obvious that a country in its infant stage of development does not have the stream of revenues or taxes needed to adequately and completely metamorphose the nation into economic adulthood. Lacking the requisite wherewithal to develop, but moved by the compulsion to develop now by building all the infrastructure and utilities and producing all the essential goods and services needed by the people, government has little option but to borrow now to meet the country’s urgent financial needs. Hence, incurring a national public debt is inevitable and is part of the growing pains of a developing nation.

There are two ways to go about this. One is to borrow from foreign sources and the other is to borrow money internally. Which is the better way to go?

To answer that well, we must trace a bit of the history of money. Money, even after World War II, was metallic based, that is, only as much of it can be issued by a country that is covered by a corresponding value of metal, gold or silver, that it holds. Currencies then had to be backed-up by metal of equal value in order for it to be acceptable in international trade and commerce.

All this changed in 1967 when, in Nixon’s time, the concept of money changed from being ‘metal-based’ to being fiat-based. Countries adopted the managed-currency policy upon the principle that enough currency should be printed as will properly support the needs of a country. Since all countries could issue as much currency as it determines, the test of the strength of a currency is not its volume but the strength of the economy of the issuing country itself. Using this yardstick, the American dollar came to be conceded as the international currency owing to its position as the strongest and mightiest economy in the world.

This being the case, a country will do well to strengthen its own economy by being the first to acknowledge and to have the trust and confidence in its own currency, as the United States did. Thus, America, in order to fully develop its economy, borrowed from itself its own money to finance all that we know and see as the United States today. Their internal borrowings were calculated to be paid and collaterized against future taxes as taxes would be continuously generated as and when their infrastructure and utilities are used. America today has the biggest national public debt in the world, and it bothers them not at all. The same road to success was trod by the G-7 nations.

In the case of the Philippines, concededly not having the present wherewithal to finance its total development needs, we could have followed the American formula of internal borrowings to underwrite our march to progress and modernization.

The formula and idea is simply for government to create all the needed funds to finance our total development now by floating long-term, low interest 30-year bonds with a five-year grace period, which our own central bank shall be mandated to purchase through the creation and issuance of new local money. The internal borrowings shall be secured against future taxes which, like death, are a certainty of occurrence in any case. The game plan is to build all that the country needs now to modernize with the cost to be recouped thereon through taxes generated as and while the people use and enjoy these facilities.

This issuance of local money to keep abreast with a country’s financial requirements for development can be done since currencies are no longer metal-based, but are now managed currencies.

We should, therefore, amend forthwith Section 117 of the New Central Bank Law that prohibits the Bangko Sentral from guaranteeing the placement of government issuances of securities. The section absolutely decapitates the power of the central bank to assist government in raising funds on a long-term, low-interest basis in local currency to finance the needed investments in infrastructure and utilities in order to build all our roads, highways, ports, airports, bridges, schools, hospitals, markets and establish water, power and telecommunications facilities.

This has created a very abnormal situation where our own government, instead of running to the BSP for loans for public projects, has to seek funding through continued foreign borrowings. It is no wonder then that both the government and the private sector, without exception and without let-up continuously resort to foreign borrowings to finance our development projects. This, of course, exposed the local borrowers to the vagaries of fluctuations in the exchange rate vis-a-vis the dollar that invariably leads to the devaluation of the peso. In turn, the foreign debt consistently ballooned such that our national public debt itself skyrocketed without any fault or participation whatsoever on the part of our local borrowers, both government or private sector. In consequence, many of our local companies went bankrupt and had to close down, saddled and buried with foreign debt.

The Maynilad water company of the Lopezes is a graphic, vivid and recent example of how government non-support of a local business forced the company to turn to foreign funders for credit and, in the process, got gobbled-up by that loan shark called devaluation. Our next article shall dissect the anatomy of the Maynilad fiasco.

What is the lesson that can be learned from this?

Like America which did not resort to foreign borrowings but instead borrowed internally to modernize its country, and even going as far as outer space exploration, the Philippines must follow the same path by borrowing internally with new local money to finance its development.

For had our government authorities instead embarked on an expansionist monetary policy that looks with favor the formula of internal borrowings with new money to develop the country, then assuredly the public debt, which is not a bad thing, would have been contained at a manageable level. Even so, as is, our public debt is still low compared with other countries and it is obvious now that we must even borrow more to catalyze our development, but using internal borrowings for the process.

It is never too late to veer towards the right direction. Delayed as we are, we must put our act together as a people and bring back our national esteem, pride and honor by depending solely on ourselves, and not on foreigners whose only agenda is to exploit our naivety and to keep us undeveloped for us not to be a threat and competitor to their own foreign businesses and interest.

You may write your comments/suggestions at 15/F Equitable Tower, Paseo de Roxas, Makati City or through e-mail at " rgroxas@lawyer.com"

(Editor’s note: We beg the indulgence of our readers who are at times asked to read a lengthy piece. The purpose of our writings, however, being advocacy and not merely commentary in nature, compels us to dissect a given problem, analyze its causes and effects, and offer studied solutions. The length of the article should be irrelevant to such an approach.)


Reported by: Sol Jose Vanzi

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