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MANILA - Economists on Friday called on the Bangko Sentral ng Pilipinas to set aside worries over meeting its inflation target, and instead tackle the problem of the continued appreciation of the peso.
During a forum organized by the Philippine Exporters Confederation, economists from the private sector said the monetary authorities' efforts to stem the peso's rise are not enough, adding that more should be done to help exporters, business process outsourcing companies and the families of OFWs.
They said many instruments are at the disposal of the BSP if only it could temporarily abandon its mandate of inflation targeting, as other central banks in the world are doing.
University of Asia and the Pacific economics professor Victor Abola said the BSP's fears of expanding money supply accelerating inflation is unfounded.
Abola said money growth of above 20 percent in fast-growing countries did not result in high inflation, adding that there was no long-term relationship between the two.
"GDP growth in the Philippines is negative to inflation because you are able to supply the demand. So actually right now before they lowered the monetary policy rates, the monetary policy was tight because money growth was only at 7 percent then economic growth at 6.4 percent," Abola said.
With inflation no longer a concern, the BSP is free to move and put a clamp on the appreciating peso by cutting its key interest rates further, to as low as 3 percent for the overnight borrowing rate. This would keep foreign capital seeking higher yields from entering the country, Abola said.
Last month, the Monetary Board reduced its overnight borrowing and lending rates to 3.75 and 5.75 percent, respectively. Analysts said this surprise move by the BSP was not done to boost growth but rather to keep the peso from firming up against the US dollar.
Raul Fabella, University of the Philippines economist and national scientist, said the government must subsidize the BSP to the tune of P30 billion so it can absorb the losses when it buys dollars to defend the local currency.
"BSP loses when it purchases dollars using the pesos in the SDAs borrowed from local commercial banks, to sterilize inflow of dollars," Fabella said, referring to the special deposit accounts.
"Money lost by the central bank for sterilization is a good use of the money. It is towards a very healthy foreign exchange," he added.
Sterilization is done to temper the value of the local currency against its foreign counterpart and in the case of BSP, it is done by buying more dollars from the market to weaken the peso. Bankers had been saying the BSP was intervening in the market from time to time, to keep the local currency from rising too much.
HSBC earlier said the BSP may be prompted to cut interest rates rather than incur more losses with its purchase of dollars, if not for price pressures from food and oil.
Fabella said the reason the BSP would rather borrow from the SDAs than print more money is its fear of increasing money supply, which at a certain level is inflationary.
"So if BSP can't print money, then the [national government] subsidy is money well-spent," Fabella said.
Abandon inflation targeting
Exporters, however, had been asking monetary authorities to take the drastic measure of keeping the exchange rate fixed at a certain level, just like what the Swiss central bank did.
"If you want to keep exchange rate fixed, you are no longer inflation targeting, then you devalue the peso," Fabella said.
It would be easier for the BSP to let the currency stay at P42 for 10 years simply by buying huge volumes of dollars, higher than the amount monetary authorities are currently allocating for this.
This is where the P30 billion would come in, Fabella said.
But Ernest Leung, former finance secretary, said the BSP does not need the subsidy because when it buys all the dollars at P40 and the peso weakens to P45:$1, then it would have posted foreign exchange gains.
"The BSP has a range of tools it can use but a good question is why is it not employing these? They're too beholden to foreign fund managers around them, telling them what to do," Leung said.
De facto capital controls
Filomeno Sta. Ana, Action for Economic Reforms executive director, said that all the moves of the central bank are in the right direction so far, with it intervening in the market every now and then.
It also loosened its monetary policy last month, on top of the announcement that it would keep foreign funds from getting into the SDAs.
"That is de facto capital control. It is already a form of capital control. They just don't want to announce it as such for fear of receiving negative reactions from foreign investors," Sta. Ana said.
Capital controls are installed by monetary authorities around the world to keep foreign money from coming in, to keep their own currency from rising too much.
"If we want to be competitive and grow, we need to undervalue the peso. For me inflation targeting is already secondary. There is a lot of debate about inflation targeting and that is now discredited," Sta. Ana said.
"I think presently they have already abandoned inflation targeting. Even in the BSP charter, their real mandate is 'price stability' but now their definition of inflation targeting has become rigid, it's not really in black and white. But all over the world inflation targeting is no longer employed," he said.
To keep the peso undervalued, Sta. Ana said the BSP should print more money to buy the dollars. The BSP has enough room to do that since money supply growth is only at 7 percent, way below the inflationary threshold of 20 percent.
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