Rapid growth of debt, budget gap points to uncertain economic recovery
First of two parts
DESPITE the optimism of government policymakers, an economic rebound from the effects of the coronavirus disease 2019 (Covid-19) pandemic in the Philippines is an uncertain prospect for the foreseeable future because of the combined effects of massive government borrowing, shrinking revenues, and an unexpected contraction of the economy in the first quarter of the year, an analysis of developments since March 8 has shown.
On March 8, President Rodrigo Duterte signed Proclamation 922, placing the entire country under a state of emergency amid the spread of the novel coronavirus in the community. This effectively marked the beginning of the official government effort to combat the pandemic, and was followed up about a week later, on March 16, by the announcement of a P27.1-billion initial pandemic response and economic stimulus package.
Although many people understood the P27.1-billion response package as new spending, in reality its components — with one notable exception — simply represented existing budget programs that were applicable to the anti-coronavirus effort and could be prioritized.
These expenditures included P2 billion for financial support to business and workers from the Department of Labor and Employment’s P9.5-billion budget for social protection of vulnerable workers; P1.2 billion for unemployment benefits for displaced workers under the Social Security System; P3 billion of the Technical Education and Skills Development Authority’s P3.1-billion Training for Work Scholarship Program to support skills training for displaced workers; P14 billion for various programs and projects under the Department of Tourism to boost the hard-hit tourism industry, from unspent travel tax revenues of the Tourism Infrastructure and Enterprise Zone Authority; P2.8 billion for the Survival and Recovery Aid Program of the Agricultural Credit Policy Council under the Department of Agriculture, which had been initially given a budget of P2.5 billion in the 2020 General Appropriations Act; and P1 billion of the P1.5-billion Pondo sa Pagbabago at Pag-Asenso Microfinancing special loan program of the Small Business Corp. under the Department of Trade and Industry.
The notable exception, as it were, the part of the response package that consisted of new funds was a P3.1-billion line-item to directly address medical efforts against Covid-19, including the purchase of testing kits and personal protective equipment for medical personnel. A portion of that amount was funded by a $3-million (approximately P150 million) grant from Asian Development Bank for Covid-19 emergency response that was approved on March 13. The remainder, slightly less than P3 billion, was drawn from revenues of the Philippine Amusement and Gaming Corp. and the Philippine Charity Sweepstakes Office; those funds would have been earmarked for healthcare-related expenditures even under normal circumstances, but had not yet been allocated.
Ballooning price tag
The government’s Covid-19 response was initially estimated to cost about P600 billion, although the Department of Finance did not put an “official” price tag on the effort until April 7. At that point, a rough breakdown of the sources of the funds indicated that about two-thirds would have to come from borrowing; about P205 billion had been diverted from the 2019 and 2020 national budgets, P300 billion was available from a six-month government bond repurchase agreement the Bangko Sentral ng Pilipinas (BSP) had arranged with the Bureau of the Treasury (BTr), and the remainder, up to P100 billion, to be sourced from loans.
The latter disclosure was surprising to some observers, because in President Duterte’s first weekly report to Congress on March 30, as required by Republic Act (RA) 11469 or the “Bayanihan to Heal As One Act” signed on March 24, the government indicated it had more than enough funds lined up to cover the P600-billion plan.
The President’s report enumerated P864.1 billion in available funding for the Covid-19 response. Besides the BSP repurchase agreement funds, the administration war chest included about P364 billion in budget items that could be realigned under RA 11469, P100 billion generated by a BTr “cash sweep” of excess balances from national agencies and government-owned and -controlled corporations (GOCCs), and another P100 in anticipated new dividends to be remitted by GOCCs, with the remainder, up to P100 billion, to be sourced from loans.
There were, however, two significant problems, which would be revealed over the next couple of weeks.
The first problem was that the initial P600-billion cost estimate was apparently wildly optimistic. On April 9, Finance Secretary Carlos Dominguez 3rd unveiled a comprehensive response plan consisting of four key parts — emergency financial support to vulnerable households and workers, additional public health resources to fight Covid-19, fiscal and monetary actions, and a general economic recovery plan. The new price tag was nearly double the original estimate at P1.17 trillion, or about 6.0 percent of gross domestic product. That figure was revised upward again on April 21 to P1.49 trillion.
The second problem was that even though financial resources had been identified, collecting them fast enough to keep up with rapid government spending was proving to be a serious challenge. By April 24, economic managers were admitting that the government was facing a short-term cash crunch: Out of P397 billion that the administration had been able to realign from the budget, P352 billion had already been spent.
In order to avoid running out entirely, the administration would either have to resort to asking Congress for a supplemental budget, tap loans from outside sources, or both. This was not unexpected however, as Dominguez had already disclosed that up to $6 billion (about P304.2 billion) would have to be borrowed to fund the government’s P1.49-trillion response and recovery plan, triple the P100 billion that had originally been anticipated.