THE FINANCIAL EXECUTIVE
Business World
Should government fund and run credit programs targeted at underdeveloped sectors that have difficulty accessing credit? In 1999, after decades of failed experiments with various types and modes of directing subsidized credit to individuals or groups in the agricultural and microenterprise sectors, government, through Executive Order No. 138, finally said no and stopped its nonfinancial agencies from continuing to grant loans to target sectors.
Instead, under EO 138, government was to focus on putting in place a policy environment conducive to private sector participation through the adoption of market-oriented financial policies. Even government financial institutions were supposed to concentrate more on wholesale lending, leaving retail lending to private financial institutions.
The lessons - huge and hidden fiscal costs from subsidized interest rates, poor repayment rates given beneficiaries' dole-out mentality, high administrative costs, unsatisfactory outreach with the poor continuing to lack access to credit despite the proliferation of government credit programs, distortive impact on financial markets given subsidized interest rates offered under the programs - had finally hit home.
Or so everybody thought.
Two days before the seventh anniversary of EO 138, President Arroyo signed EO 558 repealing EO 138. The move caught everyone, including officials in the Department of Finance, by surprise. The timing was ominous. With just nine months to go before the 2007 local elections, EO 558 gave government back an off-budget, high visibility tool that can easily be used to win votes. It demonstrated once again this administration's readiness to sacrifice long-term development goals to secure its hold on power.
Indeed, there is no rationale for repealing EO 138. EO 558 certainly does not provide one and the Palace's defense - to enable government agencies to supply credit in poor areas not reached by financial institutions - has been shown time and again to be ineffective in combating poverty (better for government to focus on support and capability building services to help the poor become bankable). Thus, in one stroke of a pen, the President simply undid all the work that successive administrations since the time of President Aquino had put into the effort - the Aquino administration made it a policy to abolish direct lending by government nonfinancial agencies; the Ramos administration created the National Credit Council to rationalize all directed credit programs; the Estrada administration articulated in EO 138 government's policy on directed credit programs.
In fact, EO 138 was part of a package of measures that included the Social Reform and Poverty Alleviation Act, Agriculture and Fisheries Modernization Act, the General Banking Law of 2000 and the Barangay Micro Business Enterprise Act, to help improve the policy environment for microfinance.
And EO 138 was working, too. More and more, private financial institutions were extending credit to microentrepreneurs. In recent speeches, BSP Gov. Say Tetangco noted that from about 55 banks claiming to do microfinance before 2000, there are 193 private financial institutions, with a portfolio of P3.3 billion and an outreach of over 600,000 beneficiaries, engaged in microfinance operations today.
Thus, by repealing EO 138 and paving the way for government to reenter the financial market as direct subsidized credit providers, the President is not only risking its hard-won fiscal battle, it is telling private financial institutions to get out of the microfinance business, since after all, they are constrained by market realities and will not be able to compete with the subsidized interest rates that government charges.
However, government does not have that much money to meet the huge demand for micro-credit. Moreover, with its limited funding and poor track record in microfinance, it will likely take only a few loan cycles for its funds to dry up. Sadly, without the clear policy rules provided under EO 138, private sector players cannot be expected to jump right back in knowing that government can anytime render their business models unviable. In the end, small entrepreneurs' lack of access to credit will come back to haunt the economy.
President Arroyo needs to do what is right and withdraw EO 558.
