Banko Sentral could/should do more
FROM FAR AND NEAR - Ruben Almendras (The Freeman) - March 17, 2020 - 12:00am

The medical and health effects of the COVID-19 pandemic are well disseminated and explained, and even the socio-political consequences of the quarantine, lockdown, state of medical emergency declarations of the government are well discussed. The economic effects have been projected and are starting to be felt, like job losses and business closures in the tourism, supply chain, and service sectors. These, in turn have significant socio-political effects which could be more and worse, unless the government and the Banko Sentral ng Pilipinas (BSP), can mitigate the situation.

All the governments in the world that are affected by the COVID-19 pandemic are pump priming their economies by injecting money/liquidity into their financial systems. China has been pumping unlimited amounts of liquidity via the fiscal and monetary route, they don’t even disclose the amount anymore. The US will be injecting $ 50 billion for the pandemic mitigation and aid to businesses and employees, and the Federal Reserve reduced their rates by ½%. Australia, Great Britain, Italy, Singapore, and many other countries, are pouring billions of dollars into their financial system, not just to fund the fight against the pandemic, but also to maintain aggregate demand (both consumer and investment demand), to keep their economies growing or stop it from falling into a recession.

The Philippine government last week, announced that it will keep the public expenditure program intact and add P2 billion more to the Department of Health budget. The SSS will also provide unemployment benefits which will amount to another P1 billion for laid-off employees. The infrastructure projects will be accelerated to frontload the expenditures and to provide alternative employment opportunities. Secretary of Finance Dominguez also ordered the GSIS and SSS to invest hundreds of millions in the Philippine stock market, as the stock market has already lost over P900 billion in valuation. The BSP also announce that their prime rate will be reduced by ¼ of 1% in March and another ¼ of 1% by May. All these may not be enough and may be too little and too late.

The absorptive or spending capacity of government agencies have been proven to be limited because of their limited technical capability, that it had to revert to Public Private Partnership in many of the “Build, build, build” projects. There are also leakages due to corruption in both infrastructure and operational expenses that the cash infusions will be diminished. Even the Conditional Cash Transfer (4P’s) program needs to be streamlined to increase absorptive capacity. Then, there is the issue of limiting the government’s deficit spending in relation to the GDP to 3.4% to keep the Good Credit Rating of the Philippines.

In the above situation, it is only the BSP that can provide the liquidity/cash infusion into the Philippine financial system. Unlike other countries where interest rates are already down to 2% or less, we still have lending rates in the 5% to 9%. A significant reduction in interest rates will still mean interest expense savings to businesses, and will still spur borrowings. This will even reduce the borrowing costs of the government and containing the budget deficit. The best way for the BSP to do this is by reducing the Required Reserve Requirement of the Banks to 11% from the current 14%. Since every 1% reduction will free up P110 billion to the financial system, then it adds P330 billion to loanable funds. With money velocity at two times, this will mean P660 billion to the GDP. And this can be done while keeping inflation in the 3% to 4% because oil and prime commodities prices are down. These will surely help many businesses affected by the COVID-19 pandemic, ease the pressure of businesses to lay off workers, and fund or continue funding long-term investments. It gives employers and employees a breathing spell, and buys time for the economy to recover.

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