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
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