Page 1

THE SIZE,

FINANCING

AND IMPACT OF THE

PUBLIC SECTOR DEFICIT_ 1975-1984 Rosor/o

G. Monoson

WORKING PAPER SERIES NO. 88-03

April 1988

Philippine Institute for Development Studies


TABLE

List

of

I.

Introduction

II.

The

III.

Financing

IV.

Economic

V.

Conclusion

OF CONTENTS

Tables

Appendix

Bibliography

Size

....................................

of

the

of

the

Impact

Public Public of

the

Sector Sector Fiscal

Resource

Gap

Deficit Deficit

1 ......

2

..........

7

...........

12

......................................

............................................

........................................

29

32

39


LIST

Table

Table

Table

Table

Table

1

2

3

4

5

:

:

:

:

:

OF TABLES

Consolidated Public Sector and Savings, 1975-1984 Savings and Investments and Private Sector,

Investment ..............

of Public 1975-1985

.......

8

Percentage Distribution of Savings Expenditures of the Public Sector by Level of Government ..............

9

Financing of 1975-1984

Public Sector Deficit, ...........................

6

:

Outstanding

External

Table

7

:

Outstanding

Public

Table

8

:

External

Table

9

:

Sources of Change in Net Domestic Credit in Nominal Terms, 1975-1985

Table

Table

10

ii

12

:

:

:

6

Percentage Distribution of Capital Expenditures of the Public Sector by Level of Government ..............

Table

Table

4

Debt

Sources of Credit,

Debt, Debt,

Servicing

1975-1985 1975-1984

Ratio

10 ....

13

......

15

..........

...

17

19

Change in Real Net Domestic 1975-1985 ...................

20

Interest Rates and Public Sector Deficit, 1975-1985 ..................

22

Sources of Change in Reserve Money, 1976-1985 ...........................

25


The Size, Financing and Impact of the PublicSector Deficit, 1975-1984 by Rosario G. Manason

I.

INTRODUCTION The

public is

years

sector

but

a

the

dismal

during poor

cash

sector,

deficits. as

economy on

foreign

spending

in

the

of

is

government

likely

This

performance

given

deficits

role

the

tax

capability to

of huge

deficits

played

a major

role

Moreover,

loans

in

seventies

face in

the the

in

because

financing to grim future.

of

by

system the

prospect

and

is

sector generally

collapse

of

the

high

of heavy

deficit-

eighties, of

the

government

public

the

the

together

government early

This

played

development,

of

rise

expansion

investments.

fiscal

late to

rapid

large

1983-84.

emphasis

country

active

period.

has

having in

the

generation

These

perceived the

this

the

specifically, of

revenue

internal

corporate

witnessed

expenditures, reflection

government with

1975-1982

the levels


2 It the

is

country's

decade.

this

in

the

2

deficit series

on

this

by

fiscal

deficit

economic

in

deficit

In

on

rate,

capital

analyzed. can

It.

be

other

the

period,

THE

from

SIZE

the

been

the

money

profile

chosen section

the

3

reviews

the

to

finance

the

4 focuses

implications

on

of

and the

the

government the

domestic),

5 summarizes

time for

of

creation,

of

government

available

and

last

consistent

Section

has

the

corporations)

deficit-financing

Section

this

not

a

reviews

government

national

past,

(foreign

formation,

the

government

while

particular, debt

of

presents

hand,

government

Finally, drawn

has

of

size

(i.e.

the

the

public

in

60

In

consequences

expenditures.

deficit-spending the

and

the

which

paper

section

aggregate

On

the

sector

1975-1984.

Philippines. manner

This

government

for

present

documents

public

local

that

with

period.

consolidated

plus

context

experience

Section

deficit a

in

fiscal

interest inflation

is

lessons

that

experience.

OF THE

PUBLIC

SECTOR

RESOURCE

GAP !

The

last

decade

unprecedented cent

of

sector (Table aggregate per

cent

played

surge the

i).

in

gross

investment

of

averaged

the

gross

jumped

GNP

public

national

While also

(1975-1984)

in

lead

product i0

21

per

per

1975-1984, in

characterized

investments.

cent

it this

of

capital cent is

of

the

expansion.

by

From

(GNP)

domestic

from

role

is

1.5

_n per

in

1971,

GNP

in

1975-19E14

formation

in

GNP public

in

public

1971 sector

For

the

t_Le

to

0

which same


TABLE

I

CONSOLIDATED

PUBLIC SECTOR INVESTMENT

AND SAVINGS, 1975 - 1984,

(in million pesos)

TOT_W.

NATION__ 90'_ a/ b/

POB_ICSECTOR Ymm

I_tmni

_aviBg_

I-__o

_I,93

LOI/_L 60V_fe_ENT ¢/

Invest_

_avtB_s

I-S _o

|_tmBt

_in._s

I-_Gao

C-_M_}, 5z

_;7_, 32

-?iP_,8l

2%7,6t _.6,

37._. =_6 _e._

-758, _5 -I_. 38

32I,_

-53t,_

85_,_

3_I,N a-_e@

-6_8._ -'348. _

':J83._i_. _34._

1"_/5

817_J,87

4177,%

1976 1977

2e533.f15 i_Y_. 16

4J_3#.3_ 5153._4

1378 1979

1_7_. E_ _.iT_._

7934. 76 126ff7._il2

6795. _ 918¢}.53

_]8. _ _68, fi8

7_3_. 36 1i77Z. TS

-2348. _ -r_3i_. 1?

3"9_._ _'J, _i_

--6z7._ --_7. _l_

i_7. _)_ 1C-_-.._. _

I98(}

_J7t;'.38

z_37. 87

7075. lz

8788. b--/

i3_1.5_

--_.

532._

-87 t. _t_

1_3. _

198_

_'-J6, 71

1"J¢,.._'7, 5|

_3533,L-_

it_.9. _@

z_:J..._., _

JJ 107,_

891,_

--2]19, fe'g.

197S

7.15

3. b5

3.,_

t.58

3._

tgT/ i378

9.41 8.3_

3. 3_ 4._18

6,05 3,8_

z,% _.,76

_._ ,_.e']

1_._ _._

3-/

-.68

3_llt}._'_

.2_

-._

.7_

-,67 -I. 33

,C-'5 .?.E

-,3_ -. 35

,61 ,57

._1 .L_

-.37 -,33

._ .53

,_ ._

-, 3_ -._

.53 .65

i_r/_ l_e

I_._ 8,81

5. 78 5.53

_.Ei _._7

_.51 3.&_

5._ 5,_

-_.89 -1.7_

19_I 1_8_

13, 6_ 9,81

4. _ 3.83

8. 73 5._

k. _@ 3.66

_.i_7 3._1

.53 ,fi5

t983 1_

8,_6 8. 19

_.67 3. 7E

4. _9 ,_.47

3.3_ _._6

_ 3.73

-,_ -I. _3

,_ .17

-._ -._t_

.68 .5_

9.f_

_.38

5.&?.

_._9

3.89

-._

._I

-.,_

.6i

1975--i_ (Ave.)

¢0


TABLE

I:

CONSOLIDATED PUBLIC SECTOR INVESTMENT AND SAVINGS,

1975-1984

(Cont'd|

(in million pesos) PUSL TOTflL PSE's Ymr

lwcntm_t

1_/'3 l':X'/6 I'{77 I378 1979 198e 178I 198_ I_83 13_W I_5--I_W _atio

I ¢

SEC

TO_

E_ T Eft _

ISE_

SOOII_LSEllHtll_ livvelt_

._mvi_s

NOM--FI_IflL

Saviecgz

1-_36=o

4""'"_9. 36 17185._4 1liW_/',._:'_ _.1_' 15878,97 IP.3_,W1 _676T. 31 l_V]_6. 55 1'_I6.6_ 313_.71 1688I_. 8i

97}._ 1316. 33 166I. <'_ 1315, k_ lf_3, E/ _1Z17,33 3314. 3_ _, 9_ W/_iN.tl IT_._5 _257_. 85

39_. 7'_ 158C:,8. 91 9366.3 81.._, 72 1_35, 7 1_I75,_8 23W_._¢{ 15723.65 15716.61 _(i. _li I_=_WI. %

¢¢¢_.54 171{_,56 _F,.._. 37 ,E'5.66 1_, 46 -_I3P-,_Y_ 3_J?. 3k_ 2L_5, 7k 47k.@1 _76. 7_ 181_8. %

_.L>'J 12.81 7.21} 5.3_ 7.;_B *i.68 8.8_ 5.94 5._ 5.% 6,_8

.Sfi .98 1._8 .7_ .75 .8'} 1._R I._ I. 11 .33 ,87

3._3 It.8_ 6. Zl _.6@ 8.53 3.85 7.7_ _.6_ _. 15 5.63 5,61

.41 1.27 .3_ ._}I ._,7 -1..56 i._ ._7 .13 1.27 ,39

.53 ._¢_ .7'} .72 .75 .7,_ .65 .61 .5_ .?6 .6B

o4 q_'m_td

ivlcl_l i_ c'_t¢_oli_i@n.

(,_. 8"_ 9,.12._i_ 11,._,c% 1_'78.32 16_5, 3_ 195_l,_E_ I_3.63 _IP_7, _8 _226. 36 *_k.'a_ 178_. _

I-=3 _a¢_

-i35._ 772.5 ._TL_.87 -iP.,_.66 -5_, 88 -6e_,51 11 i*_.3 -1821,_ -17r._. 35 L.651.81i -768t_. 5

Intmstuwt

t=-_i_gs

_29}. _ 1_8i:i:._ 7694.56 7387.,r_ I_IR_, iI7 l_E!ki,46 I8i_. 12 i_536,9_ l_lq_. I_ IKI. 3_ t 13i_4. 3i

2W2.77 E_. 28 ,.._. T'8 -179. _{} -267, 74 -2i2,¢a6 _3_._5 1717,Tt_ 1H. 15 3815. _ 8t51.5

_._l 7. 7,_ 5._ _. I7 ,+.r_ #.63 .5.% _.33 3.21 3.5@ _, _

._I .17 ._ -. It) -. 1_" -._8 .31 .51 .# .73 .31

F I_OK_Cli_L I-3 _o

lmm_tm_'t

_.T_ _14_. 13 Z$1,56._7 c,T.,_P_. [3 73k':J.78 L-_f76, 59 75,c_7. iiR, _{_.T{._ 1_376,81 4739, k4 ii_, i2 k283,_4 171L>_.57 ._d{7. 26 zE'SI6. _:16 5163,86 l_w_r_.97 7_3. _ 146_5. 37 tii_58. (d{ I_513_. 81 _39_. _

Sivinqs

I-_ _p

131.% _{;8.17 157.':J3 _a,_. i,_ lS_.,c_ _/")&. ,3':J _16. 68 18_.,._ 283. 67 k453. 77 _7"_,57 381_7 3"J8.lk 52_. 1_ k35,6_. #7_, 2k _. 5_ 68_._ 41_'_. _t3 1_379._3 -33'_. I{ _¢878_.61_

_ra ,i{l',lP!10

t"J75 I_76 1_/7 I'J78 {:'_/'9 1_ 1'181 1_ 1963 I_W I975-198k

(_ve,)

lw1_t c/

Iml

_

s_idTes "to(/lhc_Iml_

-. 12 .56 -.38 -.71 -._7 -/_. 3_ .37 -.5_ -.46 ..5@ -,_9

Som,c',e,,J': N_tio_l and local _w_ data mm f_ol Mi_i_,try o_ Fi'_ance (_L,e _lpoe_dix Table l _d _), 6oveeeme_t coP_ i_, d_ta cam fPo_ 8CNCCi_me ¢Ippendix Table 31.

1.8_ 7.57 _._ ,}.2_ 4.76 4.71 $.6W 3.82 2.8{) _.T8 _._3

1.87 3.8_ i.Si 1.15 2.17 1.6_3 1.85 t.54 1.93 hi9 1,74

. I_ .12 .I_ . I2 . {,3 .18 .13 .13 .1_ -1.16 -, i3

1.75 3.(=8 I._R l.t{3 2._¢_ I.W4 1.7_ t._I 1.81 2.35 i.87


5 period,

the

20.3

per

lagged per

public

cent

per

behind, year.

domestic

capital

75.8

per

This

development

cent

factors: government

a

the

increased

to

57.2 be

up

low

(2)

recession

availability

by

of of

9.4

share

foreign

its gross

of

public in

eighties; in

the

the

levels

countercyclical

loans

2).

following

part

government

from

(Table

investment

early

cent

in

the

the

public

the

the

1984

to on

per

dwindled

in

by

sector

maintained

its

cent

the

undertaken

of

consequently per

grew

private

sector

attributed

the

years;

program

rate

effort

for

the

formation,

conscious

make

world

growth

(GDCF)

may

earlier

expenditure to

1975

of

private

capital

expenditures

that

average

formation in

to

while

the

in

(I)

the

an

Although position

investment

annum,

with

dominant

in

sector's

response and

period

up

(3) to

1982.

On per

the

cent

public

other of

GNP

savings

with

the

exhibited rate

of

private

public

in

decade.

the

followed

peak by

hand,

occurring

national

growth

of

sector,

although

savings

increased

by

public

sector's

share

cent

in

by

1975

to 18.7

only

to

A

lesser

per

cent per

gross

22.6

per

sector

of the

led

Public private

in

savings 1984.

was of

Consequently,

domestic

GNP,

period,

terms also

extent. while

4.4

pattern In

cent.

cent

in

similar

public

a

12.2 in

a proportion

revenues.

the

averaged

U pattern

1979.

savings,

expanded

per

inverted in

savings

As

government

savings

15.1

an

sector

rose

the the

sector sector the from


6 TABLE 2:

SAVINGS AND INVESTMENTS OF PUBLIC AND PRIVATE SECTORI 1975-1985 (in million pesos ) $_V

PPivate SeCto_

I N_$

Pal>!ic 5ect_

I N_ESTRENT

_s Savings

I_Piv_e 5ectr_

_l>lic SBetor

I_F/5 i_F/6 197-/ 1978 197"9 I_10

23536._6 _J6_. 51 3_l_J. 76 35783,L_ _5318._ _ 13

*L77._ _h.._.3_ 5153.2* 7'J3_.76 1L_i_7. _ 1_37. 87

27716 3_7! _ _3716 5-f_4 68_6_

_'ST{_.13 Pi_. 15 2"_:J_.8, 36617.81_ ,i_,_J6._5 _.(_2

817_.87 _33. 85 I_13. 16 1_7,_,_=:_ _I7"J6.55 _171_._

!963 1_ tST_ I'_

56! 3_.*5 66778,¥_

17693,_ 19557,51

7_,._,_ 8633_

68"_ob. 81 577_3.L-'3

33=,_,13 _R,J6.71

_=_L>_5. _Y_

113725,9I

¢_1_3

6t'o_s Caoi_al FoPs_io_

_8_ 41_J3 _36_ 513_8 67687 61153

I_C_,_:35 1_

'_6173.73

_,._3_. _1

_18_18

Pm-cewt are-

_sT_

_._

_._7

lee.w

7_._

_,_._7

_.e_

_e

el.s5

Z_.l_

_,_.,_

7_.._1

_._

_._

_ss3 _

76.s7 T/,_S

_z.z,,z _._

_. _ _._

ST._7 _7._

3_.7z _._

_. _._

i_

8_.46

19.54

IN.M

_,_

3_5.1_

1_._

floeec_=

I_tzo_l Rceournts9tall Table I.


7 Nevertheless, behind

public

and in

this the

contributed

were

per

government

a

the

corporate

The

public the

may

be

period.

foreign

to

investment

and

1975-1984.

out

by

(PSEs)

investments to

while

the

national

in

1975-1984

(Table

of

external or

fiscal

external

resource even

cent)

came

per

cent

was

the

government

non-financial deficit

heavily

PSEs,

(Table

cent

in

exceeded

on

was

i).

foreign

program

financed of

financing gap

19.9

per

SECTOR DEFICIT

borrowing per

expenditures.

89.2

Thus,

expenditure

57.0

capital

(i.e.

the

relied

expansionary

of

4).

the

savings

while

specifically

Net

sector

savings

sector

borrowing

GNP,

prevalent

enterprises

public

that

OF THE PUBLIC

the

of

carried

attributed

government

source

Net

in

sector

public

opposite

PSEs

investment

relative

of

sector

public its

sector

largely

total

cent

deficits

average,

were

per

lagged

3).

by

III. FINANCING

decade.

cent

sector,

principal

finance

of

public

for

the

cent

national

accounted

the

on

per

pattern

of

fiscal

Public

distribution

followed

large

investments

(Table

The

from

equal,

66.9

consistently 5.3

private

corporations.

30.9

bulk

the

contrast,

sector

contributed

The

In

savings

averaging

to

about

Public government

sector

investments,

period.

savings

only

public

in

31.3

the

per

the

fiscal

was

particularly

1978-1980. the

loans

fiscal

In

1978,

deficit

last

cent

deficit

to

of in high net

(Table


8 TABLE

:5 :

PERCENTAGE DISTRIBUTION OF CAPITAL EXPENDITURES OF THE PUBLIC SECTOR BY LEVEL OF GOVERNMENT, 1975-1984

I_blie S_or T6T_L

Natio_l _ meet

L._al 6weremet

Total

_,er

E_etoti_s

Social Sect-

NowFinancial

Fivtaneial F_s

Pity

P_s

5. TJb

f_8.11

_6.16

i_P5

IW.N

36,_

3._

f_o_

1977

IN.N

_IL_

8.65

76,k,8 3.86

_,,._

19,_'6

1978

IM.N

33. 18

_._,5

64. 17

_. I7

5_. 15

18._

i'"J'/9

IW,0B

_5,IY'_

_-,#6

7P.,85

k.,7_.

46.38

_1.74,

1983

100.N

38.18

8.67

_.35

1.61

36.L_

_1,7_

i_,t

i_. _l}

_5,17

_.07

_.76

I5. 6"_

,h_.7#

1_.52

30."J2

_. i8

66.9_

_._1

_4.8"_

17,3"J

gvee'_


9

TABLE 4 : PERCENTAGE DISTRIBUTION OF SAVINGS EXPENDITURES OF THE PUBLIC SECTOR BY LEVEL OF GOVERNMENT, 1975- 1984

laqbltc _ Hmlional TOTAL 6ovee_ ernst

Local 6overvr_t Total

Er_er'oe,Z_se,_

_z_ill ,_lec_-

5kz_Fir,imcial

Pity

P'aE5

Fi_'d_eial P_

l_r'3

lll, m

_,_6

-I_..71

P.3._d_ 14._d5

5.81

3. 15

I976

iM._

_.,16

-l*. 16

_.f_

81.6_

5.9_

3._)5

t_/7

IN.N

7fl.ld}

-10.53

3_._

_,'r-.05

6.6_

3.5e

1_/_

106,OO

_I, _

-7, _6

lfi. 56

16. i i

-_. a5

_, 73

l_t_J

IM, OD

_3,3T

-6,44}

13._

1_.99

-_, 12

,%_7

i_90

lOD.OO

9e._D

-fi._5

15.15

i&_

-l._

._._

i_l

l_B,ee

_

.-6.57

_.55

13.,_

_.3_

g.71

1963

lilLOD

96, I_}

-'%8_

_.3,7_

I_,,56

9,5k

_,51

I"M4,

IN, W

8,_.78

"_._O

7.3I

16,_1

"_. O_

8_,_1

-R._

7.17

_.38

19.85

17.16 15._


I0 5).

Approximately

borrowing

was

account

of

proportion to

the

national

were

rapid

increasing

turn,

deficit

as

up

on

on

of

the

debt

while

sector

the

foreign

remainder

foreign

obtained

piling

pressure

public

was

on

government.

of

In

budget

PSEs

dependence

which

of

by

lopsided

very

sector.

and

contributed

the

This

two-thirds

at

foreign

balance

servicing

a

commercial debt

ballooning

the

loans,

rates,

by

the

external

of

payments

led

public

debt and

requirements

large

grew

put

on in

the leaps

bounds.

Only

a small

monetized from In

in

1975

claims

of

the

cent

debt-induced

borrowing, deficit

from

non-Central

the

1976,

1981,

1980.

This

domestic (6) turn,

the

in

and

may

be

attributed

borrowing

by

the

years, may

from be

1977-1980, explained

a

in

the

by

the

sources but to

from

by

the

with

was

the

in

the

crisis.

financed

36._ ! Domesti_

significant

negative

in

1982-1984. burgeoning

in

1978

levels

corporate

and

1980-1983.

decade.

negative

government

downtrend

government

hand,

last

was

contractionary

exchange

other

1984

on

deficit

authorities

the

Bank

the

direction

foreign

on

borrowing years

pursued

of was

following

1983

the

its

monetary

policy

of

cent)

creation

reversed

fiscal

Domestic per

but

per

Money

contracted,

monetary/ of

1979

net

government

wake

(6.7

1975-1984.

to

1984,

portion

and

of

sector

in

This, level

net si_ in of


TABLE

5"

FINANCING

OF

PUBLIC

(in million

ltu

1_75

hfici_t(_plus)

_4_I._3

I_

12_e3._P3

Fof_zew Borcowi_

Nit 9eI_$ic

1976

1977

Z978

SECTOR

DEFICIT,

1975-1984

pesos)

1979

198_

161Y_.46

'Tc'_.92

6795. 44

9189. 53

7675.11

I8t!5. T_

67_,$7

7_o8.73

783Z.82

63_._

t137

67

-1416

tg_l

_7N._ T5_3.75

V'J6_

_3

L_8.5. 45

z58_5. 6_

|3731.4t

t673.48

V_'_

ZgTS-t984

2353'_.£

138618. 3

15124.84

P_78. 13

Bo_-m_g

Net I)<mm_tic Bank Ccedzts Nrmetar'y _tho_i$ z_ _m_$ic Nrmey Ba_k_ Net _0mesttc No_ fl=_ Ce_its

-1_.

_

tl18

_ 173_

|_ -87

I2

13175.67

523 61_ I_.35

57 it} -3_._9

--637 -579 2773. 7!

1812

3672

7701

5136

_

2_557

121_ 6_8

33_3 3_9

33_3 4358

3375 176_

_ 5432

9357 15199

-t_9.

18

I5_o_.87

-13_6.%

J_3.8_

8_68. 36

3_a_83.IT

_latio'toDeficiil_pl_ Net Fo_eim_ _owv_i_

Met _m,_ic It_4m-y l)om_i© fi4

_ic

Bink Credits detkoPiti¢_ Nunay Baak,_ No. Bm_kO_dtts

31._

II._P

72.66

I_P_._2

9"J,.'='_

6.'3._

Z2.;Z7

.98

56.L_ _3.3_

7.48 -.5'_

5.64 6.63

._ .1_

-3_.61

81,8

15._

-5.#Z

85._2

-15.4Z JJ, 11 -6.3 3_.18

89.08

L'8.32

f_.36

73,58

_.L_5

,_7,_

_5.61

Z3,75

38.3_

32.36

1.47

Z6,gcJ

17._t_ 8,5_

l_._4 1.31

16._ 2.7

_z._7 zz._

-_t.61 23._

6. 75 Z_.L_

57.'_

-6.7t

-5.95

34._

L=5._6

-t_,_

__

Coerce=

Cintra!

.=.i _.t


12 arrearages sector

in

markets

in

extended

and

by

the

the

country.

by

underdeveloped

the

public

state

of

the

ECONOMIC IMPACT OF THE FISCAL DEFICIT The

by

credits/loans

enterprises,

financial

IV.

the

size

which

it

rest

of

out

private

of

is

the

in

fiscal

financed,

deficit,

has

economy.

inflationary result

the

For

widespread

one,

investments

while

situation.

For

balance

of

as

as

the

on

deficit-financing money

mannerl

repercussions

creation

another,

payments

well

may may

external

problems

in

lead

the

crowd to

financing

the

medium-

an may

and/or

long-run.

4.1

The

Fiscal

Deficit and

Our borrowings public

discussion

financed

the

tremendous

pace

1975-1985.

As

cent

debt in

21.5

External

of

(Table

debt

transfer

problem

generate

sufficient

the

public

per

from

External

shows

cent

a consequence,

expanded

1984

bulk

External of

the

Public

Debt

Servicing

earlier

sector.

foreign

Its

and

net

mounting

per

per

debt

annum

share

during

in

cent

external

deficits

sector

its 45.2

that

total

in

1975

of

grew

the

at

the

a

period

outstanding to

63.8

per

6).

presents (Goode, revenues

both

a budget

1984). to

The cover

problem

public

the

service

and

sector

a

must

payments.


13 TABLE 6:

OUTSTANDING EXTERNAL DEBT, 1975-1985 (in million U.S. dollor$)

9overe_,M

Year

Total Extee_tl Debt

Private Sector ExtereJl Debt

Total _lie Secto_ Extm'_l 9e_

_ 6_

_ 3 3_t_.6 _1_.. 3 _8 585_.3 8733._ "_odS,6 11_Si.e 99_). 1

_33, 7 3_3._ ___;___ 7 537_._ fi'_$7.7 8_18.8 113S4,_ 133"-J6. _ I_ST_.9

......................... l_ti_l Lo_l

_........ _zo_s

_netar), Inst it_t to.s

Level_ 1"3"/5 1_ 1977 i':J'_ l'JT_ l_jee 198I 19_2 _'_3

le69k 133_. iTLcw_ _ 8,k577 L_Sl6

731.! S14,6 1153,_ 1857.3 iS_h_ P.315.4 3378,1 3"t%.i) 44_6

S,3 _,3 0,3 _.3 e.3 _.S 1.9 _..9

37_._ [I=,T_. 7 15_J1.9 _i,57.3 _57_,6 36ii.6 43_.. 6 _3.,_ 5937.6

! i31. 4 I357.6 11i_tl, 3 i_55,3 1_.6 _1.5 3_k_.5 4576.6 _.8

lkrce_e_e Dist_ibot i_ 1_

IM.M

5_,77

_._'_

1_

J"J'/7

I_.M

51,83

_,S,68

14._'_

_.97

1_.9_

1_7'_

iW.e$

51,3#

_.fi6

13.'_

*

_1)._

14..73

l'J_ 19_3

itl_.N IM._

#5,71 _ih_16

_._'_ ,5_,9_

15.37 18,8_

_e _"

15,95 P.3.'_

18,95 17.97

l_5

IM.8_

41._6

_.3_

_._

r,_,55

15o58

7,5#

;_.8_


14 This

is

possible

only

endeavors

that

for

economic

good

external the

and

pay

resources

for

of

account

suffer

a

the

potential

crisis,

policies

to

correct

undertake

a

currency

The

pressure

imprudent is

national

servicing foreign

public

repayments

plus

increased

from

and

of

domestic

the

borrowing

other in

is

one

in

the

otherwise

subvert

this

deflationary and/or

in

5.1

per

to

to

debt.

accounted

to

these

the

bulk

large In

for

earlier

years

of

debt

the

total

service,

Accordingly,

cent

the

given

from

proportion

devoted

While

public

41.4

per

cent

figures

include

must

gone

have

share

1984,

70.5

the

per

of

to i

foreig_

for

instancei

cent

of

tota_

7).

hand,

financing of

the

resulting

financing

borrowings,

debt

(Table

this,

improve

imbalance

interest).

1984.

servicing,

public

to

of

or

pursue

budgets

expenditures

1975

both

transfer to

To

account

year

increase

debt

On

current

the

outstanding

external

decade

on

from

debt in

current

a

payments,

to

for

addition

pressure

needs

foreign

proportion

concern

crisis.

country

to

(principal

a

calls

devaluation.

government

between

of

productive

essentially

In

is

payments

the

is

in

requires

there

recourse

evident

debt

the

and

balance

of

This

debt

Thus,

balance

used

management.

foreign

of

were

themselves.

debt

abroad.

current

loans

management

domestic

servicing

if

the

the the

primary

excessive fiscal factors

reliance deficits that

led

on in to

external the

the

last

balance


TABLE

7:

OUTSTANDING

PUBLIC

( in million

Levels (in tallish

Nmtioeml 6oveemm_ LOCRI8m4M-mmwt Gmn'tnteedCmepor_iota EXTEfllW.E_r

15

pesos)

i_

I_

17"/_

_

_I

_

1141# 9_

13171 i5I

15_I _

17_@ 261

19e96 _J

22197 33_

878

17_4

_7

3074

3761

?_J5! 11_

_mct Nmtio_Bl 8ove_aewt l.oo_l 6mee_meet

164_6

2<Xa6

4_lOS

_I

73529

36_

3577_ 631

#IB_ 616

375

7']43

10355

9936

_

41478

_i31

6_T_I

_

17636_

_

_75

qml I

_7

lilA_ll

_

M_el IQ

_7

_4_16

_

_IO

_17

13376

_

_'7

_I_ i

851? _

i3378 @

_

_

?93_

73_I

I

3377_

_

4P_38

_ 0

g

I0

IS

lii*187 23

11_57

18_

_

415,16

,54_7

67768

_Jlle

le6733

11.61

11.74

le.3_

9.96

11.13

13.15

13.96

13.97

_._

10. 12

lO.i_

8._F_

8._

_,_

1@._

11.21

12._

9._7 ._1_

9,81 .II

9._ .13

9.91 .I_

8.76 .13

6,3_ .13

9._ .12

I@._:6 .13

ii.@# .16

I_.Sl .@7

.76

I._

I.#9

i._8

1.41

1._

l._e

Emetvt eed _i_s

3_i3

TOT_ W.EI.ICBEST

_0335

26855

36_'_

IL82

11.21

l@.OS

N_tioeml 6ove_emmt Local Emmmmm_ _e'enteedCorgor_t ions

7_1_

130310 _'_J_)l

of 6NP

INTEI_RLI)E_T _/wet

EXTEi_/. BT 9irec_ N_tioeml_ Lec_l_ _em(I

1975-1984

pesos}

ZNTEflN& _

• _.rcent_

DEBT,

COrlXW_ioe_

TOTAL_IBLIC _

_.36

2.73

1.8')

6.'_

8,81}

I8.74

1i.73

1_.72

10._

18.2_

1_,_7

L:_.46

33.51

4.3_

4.63

5.56

7.56

3.,5_

8.53

18.7_

11.93

I_.85

17.8_

_.31 ,N

_.63 .81_

,5._ ._

T,_,6 .N

"_.5_ .N

8._ ._

i_._ .N

11.93 .N

I_._ .0e

I'). 8_ .GO

_.63

_.I?

_.18

_.1_

5.16

7.1_

7.53

7.34

7.6_

_2.35

_,1.67

_-'5.e_

17.77

_.el

_.(_

_.35

_._2

3#._!

I3.71 47.6S


16 of

payments

servicing the

crisis

of

capacity

was

debt-service and

cent

to

1975

The

(ratio

of

per

cent

external

strained

in

principal

non-merchandise 28.1

country's

continously

ratio

merchandise in

1983.

plus

exports) in

1982,

the

period

as

interest

rose and

debt

to

to

from

15.5

per

46.9

per

cent

proportion

of

!/ in

1986

(Table

4.2

In the

The

8).

Fiscal

Section

fiscal

2,

deficit

borrowing.

Public

banks

from

and

sector

in

increased may

the

economies, crowded

in

the

use

noted

in

the

of

that last

a

decade

domestic

compete

financed

the

process

by

is

through

investment quantity

resources,

since (McKinnon,

of

may

which

higher

with

rationed

credit

through

interest 1973;

the

rates Fry,

1980

by

with

by

the

domestic more

Thus,

developed sector

rates.

through

In

cost

is less

economies, the

available

higher

and

private

borrowing

private

made

are

domestic

the

repressed out

domestic

from

In

financially crowded

funded

resources.

interest

be

than

was

financial

spending

and

borrowing

sources

domestic

Rates

significant

investments.

rather

fiat

we

private

investors,

by

Investment

non-bank

countries

private

Private

out

out

developed

Interest

sector

government

crowd

Deficit,

reduction to

of

generally Remolona,

private

financiall

kept

low

1985).

!/ The debt service ratios of the true debt burden declared by the Philippine

for 1983-1985 are not because of the debt government in 1983.

reflective moratorium

I I


17 TABLE 8 : EXTERNAL DEBT SERVICING RATIO (in million U.S. dollors)

YnP

ExportF.arnings _ Se_ici_ |_ledlm 3 $el_ices Pr'ineip_| lwCmmmt (1)

DebtServiTotal ci_ _io (2) 12/1)

r

1975

3_1

3_

,98

15.56

1976

_

f_5

_

856

_.91

1977

_

537

I_

726

17.I#

1971

4r=m9

73@

276

I_

_. 4_

1979

_

761

_

I_

_.Ik_

i900

M|@

799

6T3

I*7_

18.38

I961

!1616

_,

9Q3

17,T._

_.

1_

MI7

717

11_1_

13@9

_3.81

1985

_I?

60#

1111

1715

_1.66

1986

8IN

13@e

I_

_

_._

1_

9OU_-eS: _t_t of FCO_miC Research- I_lo_l_ Ce_tPal_ of 'thePhili_)oines. t_na_,_ntof ExteP_al_ebt& l_ves_um_ts _'¢,_t _e_aPteer_t, Ce_e_l _ of the _li_i_es.


18 In

the

resulted

in

allocation needs

Philippines, a

of

to

important

1981,

proportion

appropriated

by

was

large

in

ii,

the

share

1975,

in

private

was

occurred.

is

period

(Table

i0).

credit

markets

In

eight

years

sector

in

that

are

nominal

of

is

from

domestic

credit years

when

the

public

higher

between This

net

(8)

the

than

indicative

the

side

of

of

the

sector.

accruing (Table

share share

in

1978

growing public

that

out

may

in

real

in

the

and

1979

pressure

sector

to 9).

suggests

nominal

of

domestic

crowding

except

out

public

sector's

its

1975-1983,

net

credits

some

deficit

for

on the

years.

Since high

1985.

than

Moreover,

expansion

(7)

its

allocation

1985

a more

expansion

financing

on

and

pre-1981

in

significantly

1984

the still

be

credit

contracted

1975,

seven

would

sector

based

nine-year

domestic

private

has

but

the

movements

has

sector

for

the

evidence

credit

private

1984-1985,

Thus,

have

system

sector

and

larger

reform

out.

net

public

the

and

rate

crowding

1984

of

financial

particularly

of

the

expansion

However, the

of

financial

public

interest

indicator

The

credit

between

investigated,

After

1981

liberalized

credit

be

period.

more

the

1981,

rates

of

the

government

interest,

has

with

issued

Treasury

unprecedented

bills

high

at

yields

I offered

particularly

Businessmen

have

factors

has

that

in figured

led

to

low

1984 this levels

and

1985

development of

private

(Table as

one

ii).! of

investment

the asi

I


TABLE 9 :

SOURCES OF CHANGE IN NET DOMESTIC CREDIT IN NOMINAL TERMS,

f_r_

(Tot,al) N_C dq_est_._l __. MDC(Local _overmmnt) NIX:(_v%. COrlXX_io_m) (Plb]ic

Sector1

N_C (Priv_e)

875A

_

_5 --_1 17_

1977

1"_78

l_tT"_

1_

l_J6l

1_

1_

1_

7787

11611

l_

15653

_

eST_

L_uf_l(_

_

1_7 -147 --_7_

I_08 -18_ _58

-I37 --67 _

-IN --_3 68_

_

39d_

file

1137

6#

47?4

7312

665_

11547

I_

17 --_13 -IP.,_

_ -t_ -6_3

_ll -3_1_ --43_

733_ 3_ 3_9

-1416

181_

,._72

77_!

5135

138_1

16_J7_

1_4_1_

L_77_

17816

-le_=(D

412 _

1891 J'_ l,_.

346 4T'_

-1_19

Diz_ribek io_

_C (To_=Z)

IN.N

_C (N_timl C=_ee_e_) _I_ (Lo¢_! (]overeRet) (8_%, f_:

I976

in Le_,t,ls

At'twin! _

Ikccz_age

15_

1975-1985

(t_blic

C_t_t

im)

SL'CtO_)

• zn'¢_ of _si© _hrt_ C_¢_f,v't_l_

IN,_I_

I_I_,W

_5.8_ -.E'k

18._ -1.75

19,87

-3,_;

3,3t

_.3L

4_,_

13,_

14,_=_

,_5

of' th_ Philippine.

13.7_ -_..43

l_i_,N -1.18 -.56

I(_.N

I_I_N

IN.N

.le -I.38 ,z

15,35 -.fdi

_1.3_/ -I._

-7,_

-4,11

-£,fl

"6,53

11,5_

17.79

ltlL_ _.53 .13 I,_ L-_.%

I_.N -4._ -I.48 _.7_ 17. 17

-IN.N -_5,_ 9.38 _,_. 7.86

-IN.N |8,G3 -._ 15, _;_ -._4.r=_


I%1 O TABLE

Itmt

IO :

SOURCES

OF CHANGE

i"J'}'5

1"4"/6

3776.M_

_880.85

l'_J"/7

IN REAL

l'J'/_

NET

DOMESTIC

197".J

13eO

LM38.')6

1N5.'(_3

CREDIT,

1975

- 1985

1961

l"Je_

1"_9.._

lgek

3_8.97

tt61B.31

35e_.6e

-15,d_._

I985

Rct;_l Cher_Jei_ Le,wli N0C(Total}

3_13.35

--5e55.36

1_e6,3o_I _._ 15._'?. _,__.13 1012.07 -'_54.85

_,77.,_I-178.43 -(_.38 5.% 56.33 32.73

-t,_.67 7'_e.33 l_l_e.5:/t89_.8_ -83l._ -.L_.,'_J L_r.L_ -'5_,5e 48.66 "68.97 -6MJ.'_I -291.68 -155.07 <JE.P.._ 1"/_7._1

-1776.94 _1.55 -_7.4_

-181.3;3 _5.56 -18.35

MiC (Peb)_c _=:-_=_')

L_V_I.M!

k65.1_

-139.76

-'61_57

_6.N

1(leS.ee

_636.70

857._

-17_.8_

-t73.1z

NBC(Peiyate_

1_87,07

t7'¢Je. "J8

3353.|_.

36F-,_. =,_

_.4e3

¢_53.%

_-_73. 6I

¢qf_7.56

-137'_'¢J_

1tie._le

i(_.(l_

IN..N

100.00

100_N

100._

iN. (l_

63. I3 i_,51 -,_07

37,27 -I.57 -_.76

_l.i_ 1,06 _.,_

f_C (Nmctiom=| _) NgC (Local(k)vat'mm_ NgC (Govtt. Cof[x_itiors}

_mg_

L"_._.tO

,5_7_ _.1_

=_-.*3r___= _5

Distrit_io_ MBC(Total }

100.(10

J0O.N

3B.7'_ .$1 _6.7_

_8.<3_ . -1.86 -0.05

_l.l? -3.08 P_._

-5.55 .16 l.O_

-.5.L----_ -1.(_ -#_.56

14De(l_blic Sector)

65.%

18._1

_.rm?.

--_.35

-28.07

_.77

30.84

N_ (Pc'-ivm)

3_.e6

81.7'_

7_.38

11_07

55.23

6_J.16

(No4;i_! 6,o,wtreieyJt) (Local 6mmwamnt) NIX: (_P_'k. Coe.m'_io_}

free Table_

lO,_._

-iN.N

-iN,0_

_ -1 .'_Y/r _,i,_

-11,_7 1.56 -t.34,

-3.10 .4,5 -,31

_,18

_r_._

-11.25

-,?.%

_;l_

"_

".(l&7_'

-'37.e6


21 TABLE II :

INTEREST RATES AND PUBLIC SECTOR DEFICIT, 1975- 1985 ( in percent)

[_flatiow Ymr

recital l_tere_t Rate

_I

[_ecest Rate

i_blicSeetoP l_efi_it as a

i_/5

8.31

1_,_

_. t7

?.15

1976

9.19

10._1

i,_

15.36

1977

7.3"_

11.16

&Tt

3.kl

IF/8

9. 81

1e._

1.7k

8. 3_

197_

15.P.3

I_, i8

-3. _

18.W

igM

15,L_

i_._.

-3.E7

8._'1

i_I

1_._

l_,_l

1,%

i_. _

5. 99

I_E

8. _2

I_B_

#9. ¢/

36,98

t_85

17.55

_7,_

-1_. _R 9.5

1_._ 9. 8I

8. 19 9.68

at Bmmdon _P i_mlici_ iz-ic,e iwler_ Na'tio_el fiL'CCSmts _aff. gei_ted _ _o_ri_el interesl wareon allmt_i¢ies of T_sm"y _ills_Centralt_.. ftmi_tal i_tm'_t_te ¢ims inflat_o_ rate. ¢ffBasic_8-"

Cewt_l _

of the f_iliom_ms


22 well

as

to

increased

Furthermore, real on

an

interest

Treasury

fiscal

examination

rates,

bills

sector

(i.e.

(as

in

1981, points

On

hand,

to

other

1981,

deficit (2)

such and

the

(i.e.

by

sector

indicate

that

indeed

taken

4.3

1980)

validate

our

The

in

the

crowding place

Fiscal

last of

fiscal

Deficit,

deficit

government/public to

cover

increase Other

its in things

sector deficit. net held

variables

1985)

under

the

out

of

of

a

in of

four

(4)

six

(6)

the

regime.

period

between

in

fiscal

only

has

crowded

decade.

The

private

sector

Money

Creation

two

years.

These

expectations

sector

prior

the

observed (5)

total

positive

liberalized

five

the

the

repressed

was

rate

on

the

out

the

evidence

also

investments

has

1985.

Price

The

is

a priori

out

in

there

rate

public

size

that

and

out

the of

correlation

interest

the

and

of

interest

ratio

(2)

years.

movements

the

financially

and

which

private

the

direct

real

1978

developments manner

a

by

1984

these

nominal

rate)

two

available in

by

show

these

1983,

observation the

GNP)

in

relative

measured

inflation

to

between

costs the

measured

deficit

relationship

of

(as

minus

deficit,

public

production

is

credits

of

constant,

the

Level

said

borrows Money

and

to

be

from

creation the

CB

to

because

monetized the

Central

takes the of

the

the

when

the

Bank

(CB)

form

public CB's

of

an

sector. balance i


28 sheet in

identity, an

CB

increase

An

in

increase

creation

leads

turn,

the

of

exports.

Because

the

to

increased

the

availability

should

impact

of

is

not money

us,

creation

on

at

the

reserve

money,

we

observe

deficit

accounts

and

1985

reserve

(see

Government may result money banks provides rediscounting

for

a

money,

Table

is

rise

the

other

sources

of

into

that

puts

to

be

the

of a

1975-1984. that

variables in

is

the also

high-powered

proportion in

time,

covered

in

monetization

particularly

same

believing

change

significant

response

financing

creation

economic of

the

to

creation.

deficit

however,

a

relative

tends

sources

sector

and

effectively

money

money

In prices,

output

At

inflation

the

money

present)

imports

with

that

public

Looking

in

of

indicate

mislead

higher

reserves

Thus,

by

spending.

limited.

associated

the

financed

bottlenecks,

international

results

money.

induces

as

discussion

sector

aggregate

account

small.

change

in

usually

problem

of

spending

capacity

supply

public

high-powered

over

expansion.

portion

This

of

the

demand (if

deficit

of

increase

current

earlier

fiscal

small

an

of

import

Our

stock

to

government

demand

important

the

in to

worsening

more

the

output,

on

lending

increased

additional

a cap

net

1976,

or

of

the

fiscal

of

the

total

1980-1982,

12).

borrowing from the commercial banking system in net addition to the money supply if deposit have excess reserves, or if the Central Bank them or

with supplemental the provision of loans

reserves and advances.

through


25 The supply sions

impact

and

prices

based

log

of

on

Mt

may

6.12

=

.82

=

3.36

creation

be

national

=

R2

money

on

summarized

by

government

+

.45 log (6.47)

reserve the

money,

money

following

regres-

data:

HNG

(i) t

and

e log

P t

- 1.34 (-2.40)

+ .80 (2.20)

R2

=

Estimation where:

log

t

Y

+ .03z (2.81)t

t

(M/P)

+ 1.39 %-I(8.50)

(2)

log

Mt

.98 Period:

M

log

=

1975

money

-

supply

circulation

HNG

1985 defined plus

of

CB

as

currency

demand

deposit;

on

government;

net

claims

=

the

CPI

=

real

=

expected

inflation

estimated

by

the

in

t

Y

index;

and

GNP

t ze

losses

from

rate

minimizing

forecast

errors.

which the

was

expected

!/

Equation 2 is one of the equations in the Aghevli-Khan model of inflation and government deficits. For a more detailed discussion of this model as applied to Philippine data, refer to Appendix A. Due to data constraints, we were unable to estimate the model for the consolidated public sector.


26 Equation CB

credits

per

cent

(i) to

that

turn

result

the

CPI

index.

and

1983,

by

48.7

creation

may

the

1976,

years

It assets of

is of

the

have

CB

(1986)

currency

reserves in

base

the base CB

money

entire

in

to

of and

creation

had

credit

but

not of

the

burden

to nearly national

of

money

supply

cent

increase

that

between

and

a

indicate

(2) would in 1975

increased

that

tO

4.5

However,

then

change

1985

is

negative,

and

money

inflation

shift

public As

far

This

meant

suffer.

in

of

Remolona

away

holding

from

from

of

that

holding

was

CB

holdings

to

other

sources

of

such

As placed

of

increments

other did

accomodate

government.

and reforms

banks,

to

the

financial

and

One

foreign

indicative

aftermath

short

commercial

accomodation

net

a consequence,

fell

enough

in

1983.

the

"a

the

the

of

that

banks.

to

net

equation

the

in

of

in

annually.

1984,

crisis out

1982

result

that

debt

resulted

in

1985.

and

part

growth

significantly

explosion

part

cent

These

and

government...

liquidity

requirements

cent

the

the

1981

national

somewhat

the

the

money

per

1979

1981

on

on

per

1985.

per note

38.6

pointed

in

we

noting

from

in

(1.39)

by

in

worth

build-up,

implemented

increase

contributed

balance-of-payments

of

= 4.5

1980-1982

also

the

Lamberte

6.2

percent

cent

Meanwhile,

cent

32.6

per

supply.

per

expanded

i0

will

Furthermore,

H

by

a

a

government

money

4.5 to

NG t declined

has

again

in

a

in

that

national

increase

indicates

it

suggests

source declinq

the

credil

it

turned

on

CB

out

holdings

i


27 of

international

the

demand

of

willingness find

reserves". the

of

for

and

the

rid of of

reached

such

devaluation followed,

wreaked

on

recent

history.

4.4

recognize money

that

supply

While

the

which

changes

point

out money

fiscal factor

that

of

hypothesized

the

way in

the

this

situation a

a

drastic policies

the

havoc

it

part

of

become

Fiscal

Deficit

economic

two-way

the

and

and

the

of

literature

relationship

between

inflation.

money

The and

studies

emphasized

supply

causes

in

price

the

between

inflation

is

the

inflation, level

intereaction

inflation

interface that

a

in

demand

balance

that

have

on

they

deflationary

economy

Inflation

is

changes

deficit

the

developments

supply.

in

recession,

than

increased

1983,

resulting

earlier

in

In

firms

reflected

account

"the

and

Either

be

The

there

and

will

current

and

an

assets...

inevitable.

Impact

recent

to

proportion

industry

The

More

pesos

currency

way

because

exceeded

household

local its

goes,

creation

alarming

the

story

it,

reserves".

an

became

money

foreign

recorded

the

absorb

find

excess

exchange

as

more

and/or

of

depletion

to

somehow

goods

worsening

that

public

on

holding

this

foreign

getting

in

government

themselves

desire,

Thus,

may

between seen

these results

as

two in

process later

induce the

the

by works

changes

government most

vital

variables.

It

a

fiscal

growing

is


28 deficit, faster

to

financed supply

government

inflation

than

by that

Aghevli

and

Using ships

(because

money

income,

is

log

and

money

Gt

a

were

=

9.37

R

=

3.47

+

data,

level,

which

increases

prices

the R,

P,

residual

in

if money

(Dutton

1971;

following

expenditures,

money

item,

relation-

E

supply, = H

- G +

G, M, R,

real money

where

estimated:

+

1.34 log (3.70)

+ .80 log (15.62)

log

to

in

revenues,

price

m,

reserve

government

government the

multiplier,

revenues)

rise

increases

respond

1977).

national

Y,

gives

further

Khan

between

government

creation,

causes

expenditures

+

Y

+

.03 log (.ii)

(G/P)t_ 1

(3)

P t

+ .78 (2.86)

.05 log (.14)

Yt

(log

log

t

P ) t

(4)

R t-1

and

logM

= 133 +(1.08) 87 logGo02 logRt _(-.002) +

Estimation

.21 log (1.39)

Period:

_

+ .88 (2.41)

1975-1985

4/ Refer

to

Appendix

A

for

details.

log

mt

(5)

H


2g Our

estimates

are

0.97

Khan

of

and

0.95,

that

than

coefficients implying

are

includes

Thus,

behind

expenditures

have

for

resulted

in in

our

revenues

evidence adjusting

of

these

from

unity

revenues

revenue

to

inflation,

the

deficit

data

of

to

that

price

of

estimate

tends

suggests

a widening

our

be

and

the biased

revenues

as

R,

Aghevli-

and

since

and

to

both

expenditures

effects,

the

the

different

But

G

faster

However,

inflation.

coefficient

upwards.

adjust

government

to

for

confirms

significantly

discretionary

adjustment

which

do.

not

both

promptly

coefficients

expenditures

revenues

that

adjust

adjustment

respectively,

proposition

changes

the

do this

lag may

a result

of

inflation.

V.

CONCLUSION It

is

apparent

mix

of

financing

the

most

part

financing

as

later get be have the

of

the

public

by out

On

the of

government

in

sync

with to

devaluation has

relied

in too

For

instance,

proved

hand, the

the

BOP the much

same on

the

for lure by

be

out

of

proportion

rate

of

money

in

eighties

1983

year.

of net

unsustainable

factors.

crisis

right

government

program

early

economic

the

to

ballooned

in

the

the

expenditure

other

other

that

eluded

decade.

deficit

the

discussion

has

1977-1982

government

contributed massive

last

sector

years.

above

expansionary

borrowings

the

the

instruments

its

foreign

from

creation proved

These that

to

events triggered

Similarly,

deficit-financing

in

in

the 1984-


I

3O 1985,

resulting

and

the

jacking

need

to

the

government

exercise

exchange

and

of

deficit,

movements

this,

policy. deficit

is

financing

economic

economic

to

low

spawn

proved

the resource

in

and

implementing performance

for

manageable of

a

given

constrains

usually

abrupt

results

expenditures

the

a

whatever

standards,

of

mobilization

fiscal,

requires

Government

unsustainable.

finance

need

more

that

that

be

importance

the

oftentimes

resources

to

is

mix

the

required.

magnitude

international

government

to

consistent

one,

variables

by

suggests

financing

The

growth.

investment

means

definitely

a

adopt

while

of

are

The

to

go

This

however,

large

1977-1982,

the

policies

a

key

private

Specifically,

particularly

and

stress

choice

the

one.

in

relative

in

larger

policymakers

a

of

rates.

than

a small of

out

interest

monetary

fiscal

that

they

of

important

fashion

stop

up

crowding

deficit.

conservative

than

the

prudence

rate,

More

in

in

were

deficit

in

high

figures

This

leads

measures

to

improve

public

sector;

of

the

us

to

!

namely:

(i)

structure;

and

generation is that

even

of more

is

near

future

some

debt

government essential.

improvement (2)

in

tax

improvement

in

government critical

certain unless

to the

relief. operations

administration efficiency

corporations. considering form

part

the of

government Needless to

cut

The

is to down

/internal latter

gargantuan

government able say, on

to

and

cas measure

debt

burde,

budgets avail

in

the

itself

oJ

streamlining

unnecessary

ta_

cost

oJ is


A pp en dix An Application Government Deficits

Aghevli between

and

money that

money

supply

and

gives

rise

to

growing

further

increases

The

fiscal

the

for

of

real

rate

inflation:

log

in

(M/p)Dt

=

They

price

(because

more

inflation.

as

money

the

a0

al

=

stock

of

P

=

price

level

Y

=

level

of

=

expected

is

the

=

demand

lag which

creation)

of

log

money,

Yt

a

function

opportunity i.e.

- a2_

nominal

money

real

income

rate

of

balances

e D

revenues

money

where: M

inflation

follows:

and

+

the

between

changes)

of

balances

form

with

that

(because

supply,

model

start

hypothesize

to

relationship

causality

deficits,

income

assets

the

two-way

adjusting

real

holding of

a They

induces

demand

level

exists

in

formulate

examined

inflation.

money

consequently,

They

(1978)

inflation.

expenditures

(i)

Khan

there

behind

and

of the Aghevli-Khan Model of and Inflation to the Philippines

supplyand

proposition

31

inflation

the

of

the

cost

of

expected

(i)


i I

32 The to

actual

adjust

demand

real

money

to

balances

(M/P t)

I denotes

The generated

where

real

money

balances

the

difference

and

the

is

assumed

between

actual

stock

the

in

the

period,

Alog

where

of

proportionally

for

previous

stock

=

the

l[log

(M/P) D=

coefficient

expected

rate

of

of

adaptive

log

(M/P__

1 3.

(2)

adjustment.

inflation

by

an

expectation

e A_t

=

[_t __e ] t- 1

=

denotes

the

=

denotes

the

current

=

log

log

Pt-i

is

assumed

mechanism

such

to

be

that

(3)

: 8

coefficient

of

expectations

and

t _t

Subst<tuting level,

we

_

(i)

%

= -I_

Desired the

into

(2)

and

of

solving

inflation

for

the

i.e.

price

get log

(ii)

-

rate

level

(I -I

real of

- la I

log

)

log

government real

Yt

+ la 2 e t

(M/P)t_ 1

expenditures

+

(4)

log is

a

M tfunction

of

income:

D log

(G/P)t

=

%

+

gl

log

Yt

(5)


33 It

is

to

the

and

assumed

that

difference

actual

actual

real

between

real

expenditures

desired

expenditures

in

real

the

adjust

expenditures

previous

period,

i.e.

aog

where

(G/P)

_ is

=

the

_ [log

(GlP)t

coefficient

of

(G/P) t-1

-log

adjustment

of

]

(6)

government

expenditures.

Substituting expenditures

(5) we

logGt

Desired

of

log

the

â&#x20AC;˘ is

Rt

P

level

t

solving

for

nominal

,

(7)

of

of

the

nominal

+ t I (log

are

between

previous

Alog

where

the

revenues

difference in

log

revenues

RD = t o t

Actual

and

= _g0 + _gllogYt + (i - 2) log (alP__ I

nominal

function

(6)

obtain:

+

(iii)

into

Y

t

+

R,

is

log

P

t

)

to

revenue

and

(8)

adjust actual

to

the

revenue

period:

= _[log

the

RD t

coefficient

-

log

of

a

income:

assumed

desired

government,

R t-I ]

adjustment

(9)

of

revenues.


34 Substituting revenues

(8)

into

(9)

and

solving

for

nominal

:

log

R t = Tt0

+ Tt

(log

Yt

+

log

Pt )

(lo) +

(iv)

The

supply

to

the

of

stock

multiplier,

money, of

= mt

is

multiplicatively

high-powered

money,

H,

related

via

the

money

(ll) t

Changes

in

net

claims

changes

in net

sectors,

M,

Rt_ 1 .

H

t

CB's

_ T ) log

m:

M

in

(i

of

the

CB

on

, such

=

money on

international claims

H

AH

high-powered

the

the

sum

of

government,

reserves commercial

plus banks

changes H

and

changes and

in

private

that:

AH

t

is

+

AH

(12)

NG

0A t

t

or

+ AH

oA t

t If

it

then

is

assumed

that

AH NG

=

+ H

(13)

t-1 G

t

-

R

t

,

equation(13)becomes: Ht

=

Gt

E

=

AH

Rt

+

Et

(14

where:

t

+ H 0A

. t-i

t


35 It

is

assumed

here

results

automatically

reserve

money.

the

deficit

then

If

this

Khan

out in

assumption

is

LDCs

Mt =

mt

Equation

(15)

linear

in

may

such St =

this

whatever both

log

faster

to

deficit

will

rise

and

Thus, induced inflation

we

and

E

open

market

the

former

that

countries.

by

make

(12)

we

a

get

relationship

estimation

T <

price

more

the

price

deficit

level

result

i.e.

if

in

log

Rt

will

will

an

up

money

in

adjust the

some

(for

increase

then cause

go

increases

expenditures

revenues,

This

the

- _

(16)

than

level

Gt

t

2,

a widening

log

will

increase.

fiscal

and

(15)

(to

if

inflation

obtain

money

Et)

this If

the

CB,

financing,

equation

approximated

log

3

system,

R.

that

Aghevli

for

these

in

m t + KO + _

reason,

G and

valid.

of

that :

+ K

In

be

in

stock

the

deficit

so

(14)

(G t - R t +

extent

the

scope

valid

equation

to

by

limited

logarithms

convenient) log

is

deficit

in

from

longer

the

the

change

borrowing

no

generally

Substituting

only

funded

that

in

equal

true

by

is

increase

an

were

assumption

operations

is

financed

deficits

points

an in

This

is

creation.

that

fiscal

supply more,

to etc.

situation

where

an

inflation-

gives

rise

to

sustained

deficit.


36 Equations by

using

three-stage

estimated

by

criterion errors

(4),

of using

estimates

(7),

(10)

least

squares

using

the

expected

Philippine

data.

from

this

(16) and

Nugent

minimizing

obtained

and

were

estimated

equation

and

Glezakos

losses

from

The

(3)

(1979) forecasts

structural

exercise

are

was

equation

as

followsz

e

1 log_ --336- 134logY + 03_ (-2.401

+

.80

log

(2.81)

(M

/P)t-i

+

(2.20)

2.

log

Gt

=

9.37

+

.80

Mt

log

(8.50)

1.34

log

Yt

+

(3.70) +

1.39

log

.03

log

(G/P) t - 1

(.11)

P t

(15.62)

3"

log

Rt

=

3.47

+

.78

(log

Yt

+

Pt ) +

log

(2.86) 4.

log

M

=

1.33

t +

5.

A_e t

=

+ .87 (i.08)

.21 log (1.39)

.4

.05 (.14)

log

Et

[ _ - e t t-i

G t

+ .88 (2.41) ]

- .002 (-.002) log

m

log

R t

t

log

R t-i


37 The in

effect

the

short-run

adjustment are

0.97

and

is

0.95,

for

upwards.

adjust

expenditures

from almost

Consequently, implying in

adjusting

and

and

significant. and

and

unity.

both

This

automatically revenue

our

expenditures

expenditures

Since

effects,

Philippines,

revenues

respectively,

inflation.

discretionary

on

positive

different

variables

with

income

coefficient

significantly both

of

estimate

it

is

that to

likely

revenues inflation.

are

not that

to

pace

keep

includes

T may that

revenues

implies

data of

The

be

biased

T < _ for lag

the

behind


38 BIBLIOGRAPHY

Aghevli, Bijan B. and Mohsin S. Khan, "Government Deficits and the Inflationary Process in Developing Countries", International Monetary Fund Staff Papers , Vol. 25, September, 1978. Blejer, Mario and Mohsin Private Investment International Monetary June, 1984. Dutton,

Dean,

"A

Model

Argentine Case", Vol. 3, May, 1971. Dornbush, McGraw Fry,

M.

Rudiger Hill, J.,

and 1981.

Khan, in Fund

of

Self-Generating

Journal

Fisher,

"Saving,

Richard. Washington,

of

Money

Government D.C.: The

Policy and Countries", , Vol. 31,

Inflation: Credit

and

Macroeconomics,

Investment,

Financial Repression", April, 1980. Goode,

"Government Developing Staff Papers

Growth

World

Finance Brookings

in

New

and

The

Banking,

York:

Cost

of

Development,

Vol.

8,

Developing Institution,

Countries, 1984.

Heller, Peter S. "Impact of Inflation on Fiscal Planning in Developing Countries", International Monet@ry Fund Staff Papers, Vol. 27, December, 1980. Lamberte, et.al., "Review and Monetary and Fiscal Policy. Balance of Payment Crisis". Development Studies Monograph and Balance of Philippines." Studies Staff Nugent, J. and Expectations Protection John Hopkins Remolona, Eli M. Philippines", Studies Staff

Appraisal of the Government Response to the 1983-1984 Philippine Institute for Series No. 8, 1985.

Remolona E., "Financial Reforms and Payments Crisis: The Case of the Philippine Institute for Development Paper No. 86-02, 1985. C. Glezakos, "A Model in Latin America," in Developing Countries, Press, 1971. "Financing Philippine Paper Series

the Budget Institute No. 85-02,

of Inflation The Structure Baltimore:

and of The I

Deficit in th_ for Developmen_ 1985. 1

The Size, Financing and Impact of the Public Sector Deficit, 1975-198  

PUBLIC SECTOR DEFICIT_ 1975-1984 Rosor/o G.Monoson PhilippineInstitute forDevelopmentStudies April 1988 V. Conclusion .........................

Read more
Read more
Similar to
Popular now
Just for you