Eco priming scheme won't work

'Eco priming scheme won't work'

By Artemio F. Cusi III
Reporter

 

THE government's pump-priming efforts will most likely hurt the economy rather than help it recover, according to Cielito Habito, former director-general of the National Economic and Development Authority (Neda).

 

During Monday's economic and political briefing at the Ateneo de Manila University, Habito said the government's intent to enliven an economy burdened by an "alarming" ratio of the deficit to gross domestic product (GDP) will further isolate investors from their sources of funding. "Pump-priming will choke investors competing for loanable funds that the private sector needs. It is not the time to do pump-priming."

 

He also warned that the intended government spending will not stimulate the economy if the government fails to regain its credibility among investors.

 

The deficit-to-GDP ratio stood at 2.7 percent in 2005. A ratio of more than 1.5 percent was among the criteria used by the government in driving to increase the rate of the value-added tax (VAT) to 12 percent from 10 percent.

 

The other is for the ratio of VAT collections to GDP to exceed 2.8 percent. This was surpassed with the government reporting a 2.9 percent ratio.

 

"But the deficit to GDP ratio is only that of the national government. This does not include the GOCCs (government-owned and controlled corporations)," said Habito. He estimated the combined ratio to GDP of the national government and the GOCCs to be near 5 percent. "During the Ramos administration, we were already alarmed with 3 percent."

 

Habito, now a professor at the Ateneo, said the attempt of the government to boost infrastructure spending from revenue collections of P21 billion might lead to higher inflation. For January, inflation reached 6.7 percent. This is higher than the recorded 6.6 percent in December 2005.

The rise in prices of commodities, in turn, will trigger an increase in interest rates. Higher interests on loans reduce the profits of businessmen and discourage them from borrowing money from financial institutions to start an enterprise or to expand.

 

Instead of channeling public funds to the so-called big-ticket infrastructure projects, Habito advised the Arroyo administration to focus on the basics, such as providing decent housing for the public. He said this would have a longer impact on the people. Aside from shelter, the economist noted the even more progressive decline of education and health since 1997.

 

Earlier, House appropriations committee chairman Jose Salceda said the government will concentrate 80 percent of its discretionary funds on the infrastructure buildup in Subic, Clark , Metro Manila and Calabarzon (Cavite-Laguna-Batangas-Rizal-Quezon).

 

On the strong peso, Habito said this could be explained by factors outside government control, among them are the slowdown in imports that lead to lower demand for dollars, the weakening of the dollar, excess global liquidity that resulted in investors searching for areas to dump their dollars, and the peso being on a catch-up mode.

 

"There is nothing special [in] what we did in the Philippines ," Habito said, referring to the state of the peso today.

 

Citing foreign exchange data in other Southeast Asian countries, he also dismissed the government's boasting that the peso is the best-performing currency in the region.

 

He said that to be on a par with the Thai baht, the peso should move between P48.50 to P49.25 to a dollar.

 

He also sees a negative aspect. With the exports sector not performing well, a strong peso will also cut the profit margins of manufacturers not inclined to diversify their products. "We are not geared to new developments."

 

Although the government's reason for sluggish exports was weak global demand, Habito said Malaysia disproved this by showing higher earnings from outward shipments of electronic products last year.

 

Aside from narrow product lines, the limited markets where the Philippines sells have not helped in increasing dollar earnings. He described the US and Japanese markets as "too skewed."