Asahan, Arlamae Mendoza, Aubrey Econ 121
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A study conducted by Gumata and Ndou (2021) demonstrates that GDP expansion and
employment growth rise in response to favorable shocks to the accumulating foreign
exchange reserves, while unemployment falls. On the other hand, a nation’s supply of
currency changes as a result of a rise in foreign reserves, which has an impact on inflation in
that nation. The two phases of this mechanism’s explanation are as follows: the first deals with
the effects of building up foreign reserves on the money supply. The second is how the amount
of money in circulation affects inflation. Although the growth of foreign resources has little
immediate effect on inflation, over time it raises prices (Nguyen et al., 2019).
The decline in foreign currency reserves can widely affect employment and inflation in
the country. As one of the factors that contributed to this decline is trade, the imbalance
between import and export or having more imported goods than exported goods can affect
employment. If the country chooses to import rather than export, workers will be greatly affected
due to the fact that the competition in the market will increase without even having a fair share
in the international market. In addition, trade includes international price commodity
fluctuations wherein if we import goods, especially crude oil, and coal, its changes in prices
affect prices of goods in our country, therefore affecting inflation as well. Crude oil and coal are
one of the most essential production materials for making goods, so changes in its international
price would affect the prices of these goods.
Another factor that has contributed to the decline of the Philippines’ foreign reserves is
its domestic economy, particularly the recent pandemic. The pandemic has affected
employment both negatively and positively. In its positive effect, it increased demand for goods
as people were stuck in their homes which had driven demand to rise which means employment
is expected to rise also to cater to this higher demand. In contrast, the pandemic has caused
restrictions on businesses and employment. Requirements such as “No vaccination, No work,”
isolation and social distancing, and work-from-home set-up made it difficult for businesses to
function properly. Moreover, because people are mostly not allowed outside, most business
operations could not go on normally, leaving them with no choice but to cut manpower to save
the business or worse, to close the business completely. These conditions trigger employment
to decline.
In a nutshell, when a country's foreign reserves decrease, it has less money available for
importing products and services. This may result in greater import costs, which would make it
harder for firms to function and maybe result in job losses. Furthermore, inflation might result
from declining foreign reserves since the country's ability has decreased to purchase foreign
currency, which could result in a decline in the purchasing power of the Philippine peso.
Imported items are priced higher when the peso is weak, which can raise prices for consumers
as well as companies.
Reaction Paper (The Philippines Foreign Debt Miracle, Explained)
The Philippines has had a long history of external debt from the government and the
private sector, amounting to $8.2 billion in 1975. Even though this was allocated to notable
investments, such as bridges, railways, and hospitals, the mismanagement of the said
infrastructures and continuous political corruption have made the Philippine economy
debt-driven and unsustainable. This clearly shows the huge impact of the political climate on
Philippine economic growth under the Marcos administration, denying the claim that there was a
“golden era” under his leadership.
Under Marcos’ rule, the country experienced an authoritarian leadership, which
suppressed opposition and created political instability. This instability contributed to the
existing mismanagement at the time, leading to negative consequences for the economy in the
long run. Throughout the years, the Philippines’ external debt grew exponentially, reaching over
70% of the GDP in 2003, which caused economic issues not only for the country but also for its
citizens. It is through proper management and transparency of initiatives that caused this
significantly large amount of debt be reduced.
In its history of external debt, the Philippines has a national external debt of $109B in
2022. The Bureau of Treasury reports a lower amount in January 2023 – $103.08 or Php 4.31
trillion. Even if the Philippine external debt is smaller than is presented, it still highlights the
inequality faced by Filipinos. A World Bank study in 2022 named the country as having one of
the highest income inequalities in East Asia. The top 1% of earners benefit from 17% of GDP,
while only 14% serves the bottom 50% (World Bank, 2022).
The regressive tax system places more burden on the poor in paying public debt,
despite it being less than what is reported. The Tax Reform for Inclusion and Acceleration Law
(TRAIN Law) decreased personal income tax exempting those with an annual income lower
than Php 250,000, and levying 15%-30% tax rates on amounts Php 250,000 to Php 8 million
(Cordero, 2022). Over that is subject to 35% obligations (Philippine Information Agency, 2022).
The mentioned percentages are from the 2023 tax table. Disposable income is higher for
citizens earning above the minimum annual salary, but the lowest earners of the country bear
the burden of higher commodity prices as the law redirects tax collection to the basket of goods.
Another point in the video is that external debt only takes up 27% of GDP compared to
previous years, reaching a peak of 70% in 2003. Philippine GDP is marked to have grown faster
than its rate of debt, but it begs the question of where GDP growth even comes from. Is it
inflation-driven or productivity-driven? The GDP deflator, used to determine how much of
GDP growth relies on inflation, is at 6.3% in December 2022, higher than the average rate from
1982 to 2022 is 5.4% (CEIC, 2022). Meanwhile, labor productivity is only at 1.23% YoY in 2021,
lower than the average of 2.47% from 1992 to 2021 (CEIC, 2021). There is still no available
data on labor productivity in 2022.
Philippine GDP growth, then, is mainly caused by rising prices rather than rising
productivity. It still stands that the poorest populations bear the most weight in paying the
external debt.
The Philippines have a long history of external debt, which has been exacerbated by
political corruption and poor management. As a result, the economy of the nation is currently
unsustainable and debt-driven. Inequality is maintained since the costs of repayment are still
placed on the poorest people. To address these problems, encourage sustainable growth and
reduce inequality, transparent management, and inclusive economic policies are crucial.
References
Cordero, T. (2022, July 20). Ibon: Each Filipino owes P112,000 due to Philippines’ P12.5-trillion
debt. GMA News Online.
https://www.gmanetwork.com/news/money/economy/838833/each-filipino-owes-p112-00
0-due-to-philippines-p12-5-trillion-debt/story.
Individual taxpayers to have lower income tax rates in 2023. Philippine Information Agency.
(2022, December 28).
https://pia.gov.ph/press-releases/2022/12/28/individual-taxpayers-to-have-lower-income-
tax-rates-in-2023.
National Government debt recorded at p13.70 trillion as of end-January 2023. Bureau of
Treasury. (2023, March 7). https://www.treasury.gov.ph/?p=53105.
Nguyen, Phung & Thuy, Nguyen & Hoang, T.. (2019). The Impact of Foreign Reserves
Accumulation on Inflation in Vietnam: An ARDL Bounds Testing Approach.
10.1007/978-3-030-04200-4_54.
Nombulelo Gumata & Eliphas Ndou, 2021. "Foreign Currency Reserves: Do They Contribute to
GDP Growth and Employment Growth?," Springer Books, in: Achieving Price, Financial
and Macro-Economic Stability in South Africa, chapter 0, pages 189-210, Springer.
Philippine economy to post robust growth in 2023, 2024 despite inflation pressures. Asian
Development Bank. (2023, April 4).
https://www.adb.org/news/philippine-economy-post-robust-growth-2023-2024-despite-infl
ation-pressures-adb.
Philippines GDP deflator growth. CEIC. (2022).
https://www.ceicdata.com/en/indicator/philippines/gdp-deflator-growth.
Philippines labour productivity growth. CEIC. (2021).
https://www.ceicdata.com/en/indicator/philippines/labour-productivity-growth.
Philippines: Reducing inequality key to becoming a middle-class society free of poverty. World
Bank. (2022, November 24).
https://www.worldbank.org/en/news/press-release/2022/11/24/ph-reducing-inequality-key
-to-becoming-a-middle-class-society-free-of-poverty.
Venzon, C. (2023, May 11). Philippines’ economic growth slows to 6.4% in Q1 as inflation bites.
Nikkei Asia.
https://asia.nikkei.com/Economy/Philippines-economic-growth-slows-to-6.4-in-Q1-as-infl
ation-bites.
