Why is a $1bn deposit to the IMF such a big deal?

Over the last several days, I’ve been getting snippets of news and information lately about a USD 1 billion loan extended by the Philippines to the International Monetary Fund (IMF). The first I heard of it was in a “news” article that came across as a trumpeting of how the Philippines is now a “net creditor nation” which is kind of a badge of honour after having been a debtor nation for the most part of its 66-year history as an independent state.

Some people speculated that media mileage given to it is a prelude to the inclusion of the country’s “graduation” from a net debtor nation as an “achievement” in President Benigno Simeon “BS” Aquino’s coming 3rd Official State of the Nation Address (SONA) to be delivered to Congress July 22, 2012. Note, however, that the loans were reportedly fully paid on December 2006 under the administration of then President Gloria Arroyo.

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Following all that came the obvious questions from the usual quarters: How could a wretched country like the Philippines have $1bn to spare the IMF? Disapproval was expressed by some members of Congress

“Charity must begin at home. The government should prioritize the needs of the country rather than infuse funds to those struggling economically. We have more than enough problems needing those funds,” Senate President Pro Tempore Jinggoy Estrada yesterday said.

But aren’t some people confusing loaning that money with simply giving it away (as one would do when extending an aid package)? In my simplistic view of things, the IMF is just sort of a bank and that $1bn just a deposit in said bank. Even ordinary people loan money to banks. Depositing one’s savings in a bank is, in principle, a loan extended to that bank. Depositors are a bank’s creditors in essence. A bank pays said depositors interest on their cash deposits just like a borrower pays interest to her creditor.

In short, Filipinos were not really deprived of $1 billion in the way Senator Estrada implies. It is a deposit for which the Philippine government earns interest. The IMF owes the Philippines $1 billion plus interest as a result of that credit it was extended by the Philippine government.

To banks, loan portfolios are assets. So the thing to understand about being a creditor is that a loan made to another party is an asset — in the sense that assets yield income. In this case — interest income. This is the reason banks scramble over one another to issue credit cards to people and loan money to property buyers and why ordinary people with cash to spare voluntarily deprive themselves use of those funds for a certain period when they make time deposits — because the amount of money they safely lend ends up on the asset side of their balance sheets.

More pointedly, some leaders in the Philippine Left reminded how the IMF imposed what were often criticised (as what was the fashionable thing among activists at the time) as harsh and even crippling “austerity measures” on the Philippines as conditions of the loan packages it extended then.

Again, in my simplistic view of things, what person or institution in their right mind would lend money to a spendthrift? Of course you’d want to see the person — or country — you lend money to observe certain conditions to ensure that they are able to pay back the money you lent them. Recall the condition I mentioned earlier — money safely lent. If the IMF simply lent money without imposing conditions on their debtors, they wouldn’t be a safe institution to be lending $1bn to either, won’t they? And that is why all this is called a financial system. It is a system of elements that offer safety assurances to one another among other measures to ensure its internal integrity. It doesn’t always work in practice but that is the aspiration.

Back to the original point, people should be careful about making a big stink about something they hardly understand. I don’t pretend to understand it either. But I apply some really simple stock principles I learned as a 12-year-old making a fifty-peso deposit when I opened my very first bank account.

21 Replies to “Why is a $1bn deposit to the IMF such a big deal?”

  1. Hi benign0, according to this article ( http://mb.com.ph/articles/363131/senators-slam-1b-lending-to-imf ) – “…the Philippines does not profit from contributing to the IMF, saying that the interest paid by countries that borrow from the IMF would go to the IMF pool of fund”. That is why the impression I got was that we really aren’t getting anything out of this other than “pogi points” with the IMF. Am I missing something?

    1. Hi Hector, perhaps, though ironically I am taking the word issued by the BSP here at face value…

      “This is a loan to the IMF and we will get our money back with interest. In effect, by extending a loan to the IMF that will earn money for the Philippines we are also able to help other nations saddled with financial problems. Other nations have also committed to help IMF address the current financial crisis,” he added.

      The billion dollar question: Which media outlet is to be trusted? 😉

  2. Yeah, sure, the 1 billion dollar loan is not that bad considering, it will earn some interest and will earn us, the country some pogi points in the international community. However, what makes this rather absurd is the fact that we do have urgent public needs that need funding direly, why not lend some of our reserves to finance more classrooms. The construction of classroom is a dire need, the reason why we are lagging behind our neighbors is our under-investment in education and there is nothing more urgent in this area than the need for classrooms. We should really rectify the widening gap between the haves and the havenots in our society, by improving our public education program. The haves don’t mind this shortage of classrooms as their kids go to private schools with air-conditioned classrooms whereas the kids of the poor cram into a classroom than can hardly accommodate 100 kids, and they don’t even have adequate books. It has been said that Thailand invests close to a 1,000 dollars per kid a year, and the Philippines, not even 200 dollars, dunno the exact amount, but our government should really prioritize education and some of the reserves should be loaned to the government, instead of us, borrowing money from ODA offerings of Japan. Are losing our minds, we are so quick to lend money to the troubled economies when we are so slow at financing public spending that is sorely needed in the education sector. OMG!!!! This is what makes this loan through the IMF a little bit hard to take. . .

    1. “why not lend some of our reserves to finance more classrooms.”

      huh? why not lend some of our GIR to the goverment to finance more classrooms? Is that what you mean? BSP lending to our government FED style?

    2. Philippines has more money than most people think. The trouble is that the government (whoever is in charge) is not spending any of it wisely. CCT program, pork barrel, DepEd expenditures, you name it. All that spending in the Philippines is not for generation of revenue, but to buy votes. We’re frying in our own fat.

  3. The president is really brilliant. He uses the funds properly by lending it to ailing nations, helping their citizens and our OFWs as well, and expects an interest from it to have profit. This is the start of the Philippines’ rising again which the previous administration never ever did want.

    1. Maybe you got your facts wrong, the creditor status of the Philippines is through the genius of our previous economist-president. Are you blind??? or deaf???? or brain-dead???? It GMA who thought we should be debt-free from the IMF as this financial institution was strangling us with conditions every time we borrowed money. You should be thanking GMA, not the bald and empty head in Malacanang, grrrr. . .

  4. I am way too busy to make a full-time job out of deconstructing the constant stream of economic incomprehension coming out of this Administration (I doubt any of them could even balance a checkbook, judging from the b.s. they air), so I’m copying my comment to someone who asked me to explain it to them on Facebook:

    “The $1 billion is the amount in foreign currency deposits held by the BSP that the country makes available to the IMF. Those deposits, in turn, represent a proportion of the country’s banks’ reserve deposits that they make with the BSP. So, this article [n.b.: the report on the TV-5 website] is misleading on two key points: 1. The money is not State money — it belongs to the banks who put it there. Much as your bank uses your deposits as liquid assets to make loans to other people. 2. The Philippines is not “loaning” the IMF anything. It is a certain amount of funds that are available to the IMF if they need it, and if they do, they would be replaced by something else. Say, maybe the US or Canada would use some of their reserves to make it up. The way the IMF is set up — it is after all the *International *Monetary *Fund — even some debtor nations have reserves that can be drawn on, although of course that would not be the usual way of going about things.

    The only reasons there is this large amount available is because the banking system here hoards a lot of money and doesn’t lend it out to retail and commercial customers, and there are strict deposit requirements for banks, which you can thank the last administration for, because they’ve kept the banking system relatively sound while other parts of the world are in the weeds. It has very little to do with government activity, and nothing at all to do with the current government. So whatever N/A said about it, he should probably just close up his pie hole. :)”

    1. @BenK
      I dont think that it was the decision of the past administration , which you can thank the last administration for, regarding this portion “because they’ve kept the banking system relatively sound while other parts of the world are in the weeds.”
      because the bsp is an independent body hence the government has no control of its decision. I believe its the governor of BSP and his members deserve the credit.

  5. Perhaps the other question that people should be asking is: where exactly has the money that is allotted for national development gone to? Reserves are exactly just that. Isn’t the money to be used for national development a different allotment anyhow?

    If the debt to IMF was paid off during Gloria’s time, then PNoy has no business claiming it as his achievement. Then again, he always blames her for the economic woes but takes credit for her projects that came to fruition.

    1. Oops, I think I made an ambiguous statement up there:

      Reserves are exactly just that – reserves. They are not to be allotted for other uses such as national development, for example.

  6. Why should he deposit money which is not his? Puro pasikat itong Panot na ito. Wala pang nagagawa namimigay na ng Petra na Hindi naman kanya.

    I have just been to Greece. The country is way way ahead in development compared to the phil. The country has no natural resource but have been spending other people’s money until drowned in debt. And yet Panot wants Juan de la Cruz to help bail that country out? How revolting!

    This guy s not only arrogant , he stupid too!?#*+%#

  7. This should have been a positive news, but sadly, people would rather look at the glass as half-empty.

    The more important thing here is a paradigm shift, a change in the consciousness from being mendicant country to being a contributor.

    The issue of the money being spent more wisely if invested within is made out of ignorance of the nature of the reserves and the lending institution – the BSP, which has a degree of autonomy from the national government.

    Perhaps, the issue of some people here is that it was not in the time of GMA that this move was made when it was during her time that our IMF debts were paid-off, thus graduating from a debtor status, and allowing us now to lend. By all means, this should be pointed out and proper credit be given to the past administration. However, we should not begrudge ourselves from congratulating ourselves this “achievement” just because one does not like the carrier of the message.

    If at all, the issue thrown by some shows their propensity to compartmentalize and divide ourselves. Not that the PNoy administration is not guilty of the same thing, because they do, but why should we commit the same mistake or fault?

  8. I find funny that while people find pride in the RP loaning $1Bil to the IMF, they also take umbrage at the US Congress holding back some $13 million worth of military aid.

  9. mr. entong. the reason we have budgets allotted each year means that the money forecast for the fiscal year would be enough. and according to law, they(the gov’t) cannot spend more than what is alloted or APPROPRIATED. that is why any excess would be part of reserves. these reserves are supposed to be… reserves.
    no.2 greece, as you have mentioned, may not be entirely deserving of a loan. but RP did not loan the money to GREECE but to IMF. it is not a loan specifically designated to GREECE alone but to an int’l board whose main purpose is not just to help the dying economy of greece.
    no. 3 do not confuse politics with monetary or financial systems. i respect your view of looking at other ways of “spending” the $1B money. however, in the case of a reserve, there is no other and by no other means of “spending” it but through “INVESTING” it as a loan. i used the word invest. i assume you know why. RP did not loan the money merely for the badge or for the sake of charity. loan yields interest, that is a very layman knowledge everyone knows.

    -jee-noh, 19. i am not pro Pnoy. but i woun’t disagree with RP’s decision regarding this loan to imf. 🙂

  10. Well, that was a bad idea….the IMF is a terribly corrupt group…..they probably have no intention of paying that back at all.

  11. Let’s look at it this way:
    1. Philippines owes IMF $80B and we pay amortization+interest.
    2. Philippines has some money in the savings bank, $5B. Philippines want to keep some money in the pocket, don’t have to use that money to reduce IMF loan.
    3. Should Philippines lend money to anyone, moreso the IMF whom it owes $80B?

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