Business World, 7 April 2014


The New Central Bank Act of 1993 which circumscribes the monetary policy of the Bangko Sentral ng Pilipinas (BSP) is in the process of being recast. It is long overdue. That the BSP of the recent years is a far cry from the BSP of the previous decades is however due largely to the changed outlook and openness of the recent BSP leadership rather than to, and even despite, the Act itself. For R.A. 7653 tended largely to be backward-looking and defensive in character. That is understandable. Every institution at its inception embodies the lessons distilled from recent past. For example, the EPIRA (Electric Power Industry Reform Act) of 2001 proscribed “take-or-pay” contracting and government direct procurement of power generation (without an emergency declaration), suspected to be carriers of abuses of the decade past. R.A. 7653 was no exception. The pertinent recent history was of debacles emanating from the 1980s economy characterized by chronic Balance of Payment (BOP) crises and dependence on foreign borrowing (the so-called Boom-and-Bust economy). R.A. 7653 was to be a firewall against the excesses of the old economy. It may, however, hamper future growth in the new economy.

The overarching principle that underpinned R.A. 7653 is “monetary policy independence.” Its principal driving force was however historical: the rape by the Marcos regime of the old central bank (CB), which resulted in the collapse of government banking institutions supposedly under the supervision of the CB. The result was the trillion-peso tab to absorb the losses of the CB and government banks imposed on the wobbly Cory economy. Thus Section 28 of the Law proscribed the development banking role for the CB:

Section 128: Prohibitions: “The Bangko Sentral shall not acquire shares of any kind or accept them as collateral, and shall not participate in the ownership or management of any enterprise, either directly or indirectly… The Bangko Sentral shall not engage in development banking or financing…”

Thus, also, the exclusion of goals other than price stability:

“Section 3: The primary objective of the Bangko Sentral is to maintain price stability conducive to a balanced and sustainable growth of the economy. It shall also promote and maintain monetary stability and the convertibility of the peso.”

 The phrase “balanced and sustainable growth of the economy” allows many interpretations. An economy can be balanced and sustainable at 1% GDP growth. Likewise, the open-market operation of the BSP has an exclusive goal — price stability:

“Section 90: Principles of Open Market Operations — The open market purchases and sales of securities by the Bangko Sentral shall be made exclusively in accordance with its primary objective of achieving price stability.”

 The emerging awareness of the importance of the composition of output and employment as important objectives is exorcised. The wherewithal of the open market operations of the BSP is limited to borrowing from the private sector:

“Section 92: In order to provide the Bangko Sentral with effective instruments of open market operations, the Bangko Sentral may… issue, place, buy and sell freely negotiable evidences of indebtedness of the Bangko Sentral: Provided, that issuance of such certificates of indebtedness shall be made only in cases of extraordinary movements of in price levels.”

 This underpins the BSP’s use of the high interest rate (since then lowered) SDA facility to pursue the goal of price stability. More pertinently, the latter seems to proscribe the use of increasingly popular monetary instrument, “quantitative easing” (QE), which involves the printing of money.

The BSP Law of 1993 was cast to serve a Philippine economy whose time has passed. Since 2002, the Philippine economy has become a BOP surplus economy. This new phenomenon is accounted for by, on the positive side, a massive OFW remittance ($25 billion annually) helped along by the growing contribution of Services exports (business process outsourcing or BPO; $12 billion); on the negative side, the very low investment rate (20% of GDP) puts a lid on imports. The familiar pressure to a (forced) devaluation of the peso is a thing of the past; the pressure in the foreseeable future is for chronic appreciation of the peso. But sustained rapid growth requires massive infrastructure investment which can, but is not, financed from the BSP’s ample gross international reserves by virtue of, among others, Section 128. The monetary authorities have bravely fought the appreciation despite the limitations but at the cost of a big hole in its balance sheet. “Tapering” has temporarily eased the losses.

Like the formidably defensive Maginot Line built by the French on the Franco-German border (and rendered completely nonsensical by the German blitzkrieg through Belgium), the BSP Law of 1993 is fighting the last war. Like the Maginot Line, it has become a straitjacket. This view is echoed by Rodrik (2011, “The Future of Economic Convergence”):

 “Developing countries have opened up to the world economy, placed greater emphasis on macroeconomic stability, and are for the most part better governed… My reading of the evidence is that these are improvements that serve mainly to enhance these economies’ resilience to shocks and help avert crises, which often interrupted economic progress in the past. They do not necessarily stimulate ongoing economic dynamism and growth… Another way of putting the same result… :avoiding truly awful policies can prevent a country from turning into an economic basket case, but … (they) do not reliably generate high growth” (Italics added).

 The BSP Law should be recast now to fight today’s and not yesterday’s war.