Comparisons with Sri Lanka inaccurate, perhaps even harmful

THE comparison some have been making between the situation of Sri Lanka, which has been experiencing civil unrest, triggered by an economic crisis, and the Philippines has no basis in fact. Still, the incoming economic team of the next government should be wary of the poorly made contrasts and manage public opinion to keep it from distracting them from making the tough policy choices that the country needs.

Years ago, some brought up the supposedly disconcerting comparison. Back then, the fear was that the Philippines could get caught in a debt trap, experienced by some countries that accepted loans from China. One of them was Sri Lanka.

Meanwhile, the Duterte government was patching up ties with China, a relationship frayed by the foreign policy of its predecessor. While doing so, China offered the Philippines loans that the critics warned could compromise this country's economy and security through exposure to large debts. Obviously, that did not happen even as the Duterte government wraps up its term.

Recently, some so-called experts are again warning that the Philippines could be like that island state as Sri Lankans mount protests out of frustration over their deepening economic problems. And once again, the comparison is, as they say, apples and oranges. We hope that the concerns are merely misplaced and not a scheme to alarm the public and pressure policymakers into making wrong policy choices.

For one, Sri Lanka's debt is mostly to foreign creditors, which is not the case in the Philippines. Also, Sri Lanka has practically depleted its foreign currency reserves while the Philippines has gross international reserves to cover more than nine months of imports. A three-month cover is already considered good. In fact, the Philippines has enough reserves to pay out its debts, but retiring them may not be the best use of that resource.

Second, the Philippine economy is much larger than that of Sri Lanka. In terms of gross domestic product (GDP), the Philippines is about 12 times bigger, according to sources citing World Bank figures. Plus, the Philippines enjoys a steady flow of foreign currency injections thanks to remittances from overseas Filipino workers or OFWs. Regrettably, Sri Lanka has nothing similar.

Still, concerns are being raised in local media now because the Philippine debt has ballooned to about 60 percent of GDP. But those who are worried ignore the fact that massive public spending was essential in fighting off Covid-19. Besides, other metrics — per capita debt and even the nominal value of the country's loans — are not that bad relative to other countries.

Counter-intuitive

The problem is that the Philippines will likely have to spend its way out of the economic rut. It may seem counter-intuitive to spend more during a crisis, but it seems like the best antidote. Austerity measures, in fact, could be disastrous at this time.

As they say, money creates money. Specifically, the government should increase public spending or investments to create jobs, hasten economic recovery from the lingering health crisis and ensure sustainable development for generations to come. Not only will the next government have to ramp up spending, it may even have to continue borrowing to fund strategic projects and programs.

The important considerations in borrowing include paying them off when they come due, and the loans are invested in programs that generate healthy returns. Loans can weigh down the Philippines if they are spent on populist programs that do not create more capital and if they are lost to corruption or bureaucratic inefficiencies.

Granted, the Philippine economy draws its strength from private consumption, which accounts for about 70 percent of GDP. But consumers might not resume their pre-pandemic spending habits so soon. Some households may be inclined to save in anticipation of another wave of the health crisis. Also, rising inflation will likely dampen overall spending. Given these possibilities, public spending has to pick up to compensate.

Surely, the economic managers of the incoming Marcos government know this better than most people. But managing public opinion may be a different ballgame, as they say. Unpopular yet sound policy choices may be undermined by public anxieties created by false comparisons and sensational statements.

Source: TheManila Times