Enormous debtBianca V. BansalanViha Marie BaylosisRonyn M. LascoHannah Mayen C. Sevilla

Problem/ IssueExternal debt of the Philippine government. 

What we already know?

• Republic of the Philippines external debt is the amount of money owed by the Filipinos to foreign creditors such as Asian Development Bank (ADB) and the World Bank.

• In 2010, the total outstanding foreign debt of the country is US$ 60 billion, which accounts for 31.8% of the Gross Domestic Product (GDP) of that same year. The external debt portfolio consists mostly of medium to long-term loans, used to finance the economic activities and reforms of the government.

Beginning of Phil. High external debts…•Ferdinand Marcos (Dec 1965 - Feb 1986)

▫During the years 1966 to 1969, Marcos borrowed a great amount of money to finance his domestic expansion and reforms. This expansion in the government budget led to increases in the current account deficit and crisis in the balance of payments.

•Corazon Aquino (Feb 1986 - Jun 1992)

▫When Corazon Aquino won the February 1986 presidential elections, the external debt increased to some US$ 28 billion. She aimed to meet debt-service payments and reduce debt size in the long run.

•Fidel V. Ramos (Jun 1992 - Jun 1998)

▫The 12th president of the Philippines, President Fidel Ramos was able to uplift the economy of the country through focusing on “people empowerment” and “global competitiveness.” During his time, the Philippines was considered as one of the “Tiger Cub Economies” in Asia with its continuous growth and prosperity.

•Joseph Ejercito Estrada (Jun 1998 - Jan 2001)

▫The Estrada administration was not able to follow through on the achievements of the previous administration. Plagued with rumors on corrupt and inept actions of the government, the country lost some of the trust of foreign entrepreneurs and investors, thus reducing the source of finances of the administration. This had further caused the country to borrow from banks and financing institutions in national and international levels, which in turn caused the Philippines to be more in debt.

Gloria Macapagal-Arroyo (Jan 2001 - June 2010)•During Arroyo administration, foreign debt of the

country had reached its peak in 2003 with an outstanding of US$ 57.6 billion, which is more than the combined borrowings of the last two governments. This has eventually led to a state of fiscal crisis with huge amount of deficit, as admitted by President Arroyo in 2004.

What do we need to know?

USBillion$

External Debt

• a portion of the total debt of a country that is borrowed from creditors outside the country. These creditors may include foreign banks, private corporations or individuals. These loans are to be paid in the currency in which the loan was made thus, the country may export goods to the lending country.

• Type of Debt▫ The external debt remained predominantly medium to long-term (MLT) in nature, with

these accounts representing 90.6 percent of the total external debt. MLT accounts are those which are paid more than a year and is distributed over a longer period of time.

• Borrower▫ The Bangko Sentral ng Pilipinas (BSP) is the financial institution that regulates and

approves the amount of external debt the Philippines. It also controls and makes sure that there is enough money to be paid and there is sustainability in the country’s external debt.

• Institutional Creditors

▫ The World Bank is a financial institution that aids third-world countries in their development by lending them money. Its main goal is to lessen poverty in the whole world.

• Country Creditors

▫ The Philippines does not only borrow from financial institutions but also to foreign countries with high supply of money. Some of these countries are the United States of America, Japan, United Kingdom, France, and Germany.

Risk of External debts to the Philippines

• The country might focus too much and allot a big part of its budget to the payment of the debt and forget the other aspects of the country that it has to work on.

• The reputation of a country is also at stake when external debt is looked at and may discourage investments to enter into the country.

• High external debt also tends to precipitate crises - if, at some point, investors lose faith in the Philippines' ability to service its external debt or its ability to roll the debt over, they would be expected to pull capital out of the country.

World BankMotto Working for a World Free of

Poverty

Type International organization

Legal status Treaty

Purpose/ focus: Crediting

Location: Washington, D.C., U.S.

Membership 188 countries (IBRD)172 countries (IDA)

President Jim Yong Kim

Main organ Board of Directors

Parent organization

World Bank Group

Website Worldbank.org

History:•The World Bank was created at Bretton Woods in 1944 to lend

to European countries to help them rebuild after World War II. It was the world's first multilateral development bank, and was funded through the sale of World Bonds. Its first loans were to France and other European countries, but soon lent money to Chile, Mexico and India to build power plants and railways. By 1975, the Bank also lent money to countries to help with family planning, pollution control and environmentalism.

•The World Bank comprises two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).

President

•Jim Yong Kim▫A naturalised American citizen before taking office.

Physician and anthropologist, co-founder of Partners in Health and 17th President of Dartmouth College. Elected on 16 April 2012.

Purpose

•The World Bank has one central purpose: to promote economic and social progress in developing countries by helping to raise productivity so that their people may live a better and fuller life.

GOALS:• The World Bank focuses its policies around achieving

eight Millennium Development Goals by 2015. The World Bank claims that the goals "provide [it] with targets and yardsticks for measuring results" and working toward its ultimate goal of reducing global poverty and growing developing nations (About Us - Our Work, 2012).The goals are as follows:▫1) Eradicate extreme poverty and hunger

2) Achieve universal primary education3) Promote gender equality and empower women4) Reduce child mortality5) Improve maternal health6) Combat HIV/AIDS, malaria and other diseases7) Ensure environmental sustainability8) Develop a global partnership for development

ISSUES

• Henry Hazlitt argued that the World Bank along with the monetary system it was designed within would promote world inflation and "a world in which international trade is State-dominated" when they were being advocated.  Stiglitz argued that the so-called free market reform policies which the Bank advocates are often harmful to economic development if implemented badly, too quickly ("shock therapy"), in the wrong sequence or in weak, uncompetitive economies.

• The other issue of the World Bank has been the way in which it is governed. While the World Bank represents 188 countries, it is run by a small number of economically powerful countries. These countries (which also provide most of the institution's funding) choose the leadership and senior management of the World Bank, and so their interests dominate the bank. Titus Alexander argues that the unequal voting power of western countries and the World Bank's role in developing countries makes it similar to the South African Development Bank under apartheid, and therefore a pillar of global apartheid.

• The United States Senate Committee on Foreign Relations reported the World Bank and other international financial institutions for focusing too much “on issuing loans rather than on achieving concrete development results within a finite period of time” and called on the institution to “strengthen anti-corruption efforts.”

• October Rebellion was the collective name for the series of protest events surrounding the fall 2007 meetings of the World Bank andInternational Monetary Fund on October 19 – 20, 2007, in Washington, D.C., United States. The events were organized by the October Coalition. According to the October Coalition's call to action, the group demanded an end to all third world debt using the financial institutions' own resources, the end to structural adjustment policies believed to prioritize profit over the lives of individuals, and an end to social and environmental issues caused by oil and gas production, mining, and certain kinds of infrastructure development.

• World Bank Oslo 2002 Protests were organized by Oslo 2002, an umbrella organization for about 50 participating organizations including labour unions, political parties, environmental organizations, church organizations and ATTAC from Norway, Sweden and Denmark. While each participant had its own reasons, here were the Oslo 2002 network mottos:▫ "Our world is not for sale--stop the World Bank’s undemocratic market

policies!"▫ "Cancel Third World debt--release the choke hold!!"▫ "Free trade pollutes!"▫ "Yes to women and women’s rights--no to the World Bank!"▫ "Stop the World Bank’s attack on labour rights!"The network claimed that the World Bank is an undemocratic institution used by rich nations to control poor countries. EinarBraathen and ReidunHeiene of ATTAC Norway and the Oslo 2002 network also criticized the bank for believing too much in market-based solutions.

ISSUES

Asian Development Bank (ADB)• The Asian Development Bank (ADB) is a regional development

bank established on 22 August 1966 to facilitate economic development of countries in Asia.The bank admits the members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP, formerly known as the United Nations Economic Commission for Asia and the Far East) and non-regional developed countries.

• From 31 members at its establishment, ADB now has 67 members - of which 48 are from within Asia and the Pacific and 19 outside. ADB was modeled closely on the World Bank, and has a similar weighted voting system where votes are distributed in proportion with member's capital subscriptions.

•Central to the ADB's advice is encouraging private companies to invest in and construct power plants. They have argued that involving the private sector better distributes economic risks among those who can best absorb them, and that cash-starved government gain benefits at little risk.

• PURPOSE▫The main purpose of the Asian Development Bank is to provide loans and

investment money to the countries of Asia as a way to assist in their development. In particular the loans are granted to the poorer nations in the region so that they can improve both their economic and social conditions. In most cases the loans are treated as commercial loans and need to be paid back with interest by the borrowing country. However in some cases the loans will be concessional requiring that only part of the money be repaid. This will depend on the borrowing country and what the money is being used for.

• GOALS▫ADB is committed to achieving the goals of the MillenniumDevelopment

Goal’s in partner countries through its Enhanced Poverty Reduction Strategy. ADB supports investments relevant to achieving the MDGs and supports the collection of statistics to monitor the progress made toward achieving the MDGs.

Issue

ADB and Napocor•The National Power Corp. (Napocor) is seeking another

waiver from its multilateral creditors, Asian Development Bank (ADB) and the World Bank (WB) for failure to comply with loan agreements, government documents showed.

International Monetary Fund (IMF)

•The IMF works to foster global growth and economic stability. It provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty.

Philippines lend money to IMF

•The Philippines is lending the International Monetary Fund $1 billion to help stabilize the global economy amid the euro zone’s debt crisis, the Bangko Sentral ng Pilipinas said on Wednesday.

•The $1 billion the Philippines lent the IMF forms part of the $456 billion crisis fund that the lender secured from its member-nations to help insulate the global economy from any spillover from the euro zone’s financial difficulties.”

Difference between IMF and World Bank

International Monetary Fund World Bank

• oversees the international monetary system• promotes exchange stability and orderly

exchange relations among its member countries• assists all members--both industrial and

developing countries--that find themselves in temporary balance of payments difficulties by providing short- to medium-term credits

• supplements the currency reserves of its members through the allocation of SDRs (special drawing rights); to date SDR 21.4 billion has been issued to member countries in proportion to their quotas

• draws its financial resources principally from the quota subscriptions of its member countries

• has at its disposal fully paid-in quotas now totaling SDR 145 billion (about $215 billion)

• has a staff of 2,300 drawn from 182 member countries

• seeks to promote the economic development of the world's poorer countries

• assists developing countries through long-term financing of development projects and programs

• provides to the poorest developing countries whose per capita GNP is less than $865 a year special financial assistance through the International Development Association (IDA)

• encourages private enterprises in developing countries through its affiliate, the International Finance Corporation (IFC)

• acquires most of its financial resources by borrowing on the international bond market

• has an authorized capital of $184 billion, of which members pay in about 10 percent

• has a staff of 7,000 drawn from 180 member countries

What Should We do?

Fiscal policy is one of those areas where everyone has an opinion but few people can agree on any given idea. While reducing debt and stimulating the economy are the general goals of most governments in developed economies, achieving those goals often involves tactics that appear to be mutually exclusive and sometimes downright contradictory. 

WAYS TO REDUCE GOVERNMENT EXTERNAL DEBTS:

BondsTake for example the issuance of government debt. Governments often

issue bonds to generate revenue. This enables them to avoid raising taxes and provides money to stimulate the economy, theoretically generating additional tax income from prosperous businesses and taxpayers.

Interest Rate Manipulation•Maintaining low interest rates is another way

governments seek to stimulate the economy, generate tax revenue and, ultimately, reduce the national debt. Low interest rates make it easy for individuals and businesses to borrow money. In turn, the borrowers spend that money on goods and services, which creates jobs and tax revenues. Low interest rates have been employed by the Unites States, the European Union, the United Kingdom and other nations with some degree of success. That noted, interest rates kept at or near zero for extended periods of time have not proved to be a panacea for debt-ridden governments.

•Spending Cuts-the act of reducing spending

•Raise Taxes-tax increases are a common tactic. Despite the

frequency of the practice, most nations face large and growing debts. It is likely that this is largely due to the failure to cut spending. When cash flows increase and spending continues to rise, the increased revenues make little difference to the overall debt level.

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Goodbye!