Bad Economics to Protect Erap

In the midst of a weakening economy and a political upheaval, Mr. Estrada is adopting economic measures that will only throw us from the frying pan into the fire. In just one week, the government has adopted measures that have serious and adverse effects on the economy.

On 25 October 2000, the Department of Finance (DoF) through the
National Treasury was forced to issue the so-called “cash management
bills” (CMBa) at a rate of 16.045% for the 42-day bills and 16.819% for
the 63-day bills. This came on the heels of the four percent hike in
the overnight borrowing rate of the Bangko Sentral ng Pilipinas (BSP).
In effect, the main borrowing rate of the national government has
increased by at least 6 percentage points from its previous level. The
CMBs have replaced the T-bills as the bellwether of commercial lending,
with prime lending rates having risen to more than 21 percent.

The next day, Mr. Estrada announced his decision to suspend the three
percent tariff on imported oil. The decision only awaits the signing of
an executive order for its implementation. In the meantime, Mr. Estrada
is releasing public money to buy the support of politicians and the
politically backward segment of the masses.

Ill Effects of the Interest-Rate Cure

The high-yielding CMBs are more attractive peso-denominated assets
intended to ease the pressure on the peso exchange rate. The suspension
of the tariff on oil imports, for its part, hopes to cushion the impact
of the continuing increase in oil prices. Mr. Estrada hopes that such
measures will calm the markets and give him more space for political

But a closer analysis of these measures reveals that they are not in the best interest of the economy and the people.

The higher interest rates, for example, have the effect of nudging the
economy to recession next year. The issuance of higher-yielding CMBs
(vis-a-vis the T-bills) is apparently a compromise, in light of the
demand of some quarters to jack up interest rates to as high as 40
percent. At best, the CMBs are the means to fend off the proposal for a
40 percent interest rate that would have certainly strangled the real
economy. At worst, the issuance of CMBs signals the reversal of the
low-interest rate policy theretofore painstakingly defended by the DoF
and theTreasury.

The higher interest rates imposed by the BSP and the DoF have so far
failed to stem the peso’s further devaluation. This is because the
continued peso devaluation only reflects the intensifying political
tension and uncertainty gripping the country. Despite the CMBs having
been able to assist the BSP in mopping up liquidity by close to P14
billion, the peso still depreciated from P49.205/$ to P49.65/$ on the
day of the CMB issuance, to P50.40/$ the day after, and to P51. 08/$ on
27 October. As the political crisis deepens, we can expect the attacks
on the peso to likewise intensify.
The logic of some Gabriel Singson-type of advisers to Mr.
Estrada–contrary to the position taken by those in the DoF, the
Treasury, the National Economic and Development Authority and even the
BSP–is to increase the dosage of the interest-rate cure even more. The
threat of interest rates skyrocketing to 40 percent remains. And Mr.
Estrada will likely prefer this solution, for he believes the falling
peso–a manifestation of the lack of confidence in his leadership–is a
bigger threat to his rule.

Further increasing interest rates will worsen the government’s budget
deficit as a result of the higher domestic debt burden. Moreover, it
will lead to higher inflation since the contraction of supply will
exceed the fall in demand. Worse, another round of interest rate hikes
will strangle growth, worsen employment, and reduce people’s incomes.
The combination of economic stagnation and higher prices will heighten
the political crisis and put the Estrada regime on the brink of total

Populism to Prop Up Erap

Like the interest-rate cure, the suspension of the tariff on oil
imports is bad economics. It is doubtful how long such measure can hold
off any additional increase in oil prices. With the peso’s continued
devaluation and without any reduction in the world price of petroleum,
the local oil prices will require upward adjustments soon.

The suspension of the oil tariff, moreover, means a further reduction
of government revenue, compounding the government’s problem of a
ballooning budget deficit. In turn, a widening budget deficit will
compel government to borrow more and increase domestic interest rates,
thereby aggravating the crisis.

The same is true for other populist measures such as disbursing
willy-nilly pork barrel funds and transferring subsidies to some
sectors with the goal of obtaining their political support.

Economic Measures as Political Tools

All told, economic policies and measures are being used to serve the
political agenda of saving Estrada. We fully agree with BSP Governor
Rafael Buenaventura that a political solution, not economic
instruments, is required to decisively resolve the crisis.

Mr. Estrada has gambled on short-term measures, hoping to calm the
extreme nervousness of markets and appease the people’s anger.
Unfortunately for Estrada, the odds are great that the measures will
not even achieve their intended objectives. What is worse for everyone,
such measures are pushing the economy towards recession.

Thus, the true nature of the measures is now clear. They are aimed at
saving the Estrada presidency, even when it has clearly lost its moral
mandate and credibility. They are meant to serve Estrada’s best
interest, even as this has ceased to represent the best interest of our

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