Former member of the Monetary Board, economist Eduardo García Michel, writes in an op-ed feature in Diario Libre that “the government has opted to transfer to the future belt-tightening of bellies inflated by additional borrowing.” “Their heads use this instrument for a comfortable time in power, by delaying changes that are needed,” he writes.
“Debt has a delayed, but real political cost,” he writes. “By the time the public perceives the debt, it’s too late. And when this occurs, future generations will be strapped with having to navigate a problematic and painful macroeconomic adjustment program. The political cost is transferred to the subsequent administrations, with the social cost fully absorbed by the population”, he writes. He explains borrowing is a kind of escape valve for governments and is frequently used as a means to finance lavish public service program that dupe the population into believing that the government is performing well and thus should remain in power.
He says there are few leaders who have been able to generate domestic savings to carry out public investments. García Michel recalls the days of President Joaquín Balaguer, a strong believer in balancing the budget. He knew it could lead to a loss of sovereignty. He also recalls President Antonio Guzmán, accustomed from his days as a private businessman to more or less balance accounts. And in less measure, he says President Salvador Jorge Blanco was tied to the demands of the agreements signed with the IMF. He said these three administrations were able to have savings that would be used for capital investments.
But the federal governments that have followed have instead increased current spending, essentially ended savings and used debt to cover the bloated current spending and diminishing capital investment. He said the turnaround was when as of 2001, instead of obtaining financing from bilateral sources and multilateral organizations, the governors discovered the mechanism of borrowing sovereign bonds with their reduced checks and without having to make a counterpart payment.
“The idea was not to improve the economy, but to inject it with steroids with an eye toward reelection,” he explains. “There were resources to invest in visible projects that would catapult the constitutional reform. The contrition argument was to add the “never ever” tagline, after the second period.”
García Michel adds: “Thus the total debt of the Non-Financial Public Debt went from US$4.14 billion in 2000 to US$7.37 billion in 2004, a 78% expansion.” This was during the Hipólito Mejía administration.
The administrations that followed would do more of the same. García Michel explains. “Successive governments took this new trail and turned it into a four lane highway, reforming the Constitution to facilitate this reckless monetary policy,” he writes.
As a result, the country saw how in the two consecutive periods of the Leonel Fernández government that would follow, the national debt rose to US$19.46 billion.
But Garcia Michel highlights that the biggest fiscal imbalance would occur in 2012, with a historical deficit that would herald the arrival of ruling party candidate, Danilo Medina. From 2012 to 2016, during the Medina government, the debt would increase from US$19.46 billion to US$29.54 billion in 2016, a 51.8% increase.
“And it has continued to grow,” writes García Michel. As of July 2018, it is at US$31.4 billion.
He observes that the quasi-fiscal debt of the Central Bank began with the local banking crisis, was reduced when the assets were cashed in. But what started at US$414 million in 2000 became US$1.3 billion in 2004; US$5.47 billion in 2008; US$6.67 billion in 2012; US$8.21 billion in 2016 and US$9.34 billion by July 2018.
He concludes:
In short, sooner rather than later we will have to stop this crazy federal debt race to the bottom and return to the basic principles of macroeconomic management, which are not different from those used to manage a company or personal finances: sobriety, balance of accounts, rationalization of the spending. And a large, very large dose of responsibility.”
Read the feature in Spanish:
Diario Libre
3 October 2018
