Decline in interest rates results in P20.66-B savings for government

The Bureau of Treasury said declining interest rates have enabled the government to save P20.66 billion in interest payments during the first eight months of the year.

National treasurer Sergio Edeza said the government generated savings as domestic interest rates came down in reaction to the decision of the Bangko Sentral ng Pilipinas (BSP) to ease monetary policies early on in the year.

Policy moves by the BSP included the steep reduction in policy rates, deposit tiering system and the lowering of banks‚ reserve requirements.

These were intended to prod the banking system to increase its lending activity particularly to small and medium enterprises.

As a result, the yields for the benchmark 91-day treasury bills has declined to record lows, hitting a low of 4.299 percent, before recovering slightly above the five-percent level.

After successfully pre-funding its requirements, the BTr has been successful at keeping interest rates low despite the repeated attempts of the market to test the government’s cash position on the assumption that it’s budget deficit would force it to borrow from the domestic credit market even at exorbitant interest rates.

Edeza said the government had originally assumed an average 91-day T-bill rate of 10 to 11 percent for the 2002 national budget and the savings generated was a source of some relief for the budget.

Despite these savings, however, the Arroyo administration still spent more on debt servicing as interest expense increased by 11.3 percent in August alone. Over the eight-month period, interest expense amounted to P112.043 billion compared to only P111.431 billion last year.

This indicated that although domestic interest rates were low and generated savings for the government, the sheer volume of the country’s total indebtedness still resulted in increased debt service.

Nonetheless, Edeza said the savings would go a long way in supporting the government’s expenditures for the remainder of the year.

According to Edeza, the Arroyo administration need to watch its September spending with strict fiscal discipline since this historically determined the ending balance for the year.

"Usually during the final quarter, the increase in government spending is almost zero," Edeza said. "So the September is usually the final indication of what the year end deficit will be."

As of August, the national deficit rose to P144 billion, overshooting the full-year target of P130 billion despite the improvement in the August collections of the Bureau of Internal Revenue (BIR).

The Arroyo administration has been cutting its expenditures but government spending this year was still 9.4 percent higher at P508.658 billion compared to P465.091 billion spent over the same period in 2001. – Des Ferriols