BSP worries on financial stability under federalism

A financial crisis and skyrocketing inflation are two impacts that Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. warned the country would struggle with if current discussions fail to address the crucial economic side of rebalancing state powers under a federal system.

The BSP is not even done yet with its study on how a shift to a federal form of government will affect not only the central bank, but the fiscal health and financial stability of the country, and dire consequences are already cropping up left and right.

“We have to make sure that our financial house is in order (before shifting to a new constitution),” Espenilla said. “I am not saying we shouldn’t do it but we have to study carefully how we will manage it and we have to answer those hard questions so that we will be able to look ahead to a future that is financially stable.”

Later, he told reporters that they have been pushing harder than before to get the decades-old BSP charter amendments approved before moves toward shifting to a new system of government get any more advanced.

“We really need that,” he said in Tagalog, referring to charter proposals to raise the central bank capitalization from 150 billion to 1200 billion. He said the capital increase will ensure a strong central banking in the country. Amendments to The New Central Bank Act (Republic Act No. 7653) of 1993 have been approved in Congress and now just awaiting the Senate version.

Espenilla echoed the pronouncements of the finance and socio-economic planning chiefs, Carlos G. Dominguez III and Ernesto M. Pernia, that the federalism shift proposals put forth by the Consultative Committee are half-baked and does not really answer critical economic questions as who will be paying the national outstanding debt which as of end-June, has reached 17 tril- lion, based on Bureau of the Treasury data.

The BSP reported that outstanding external debt as of end-March totaled $73.2 billion or 13.9 trillion, and this data includes both the public sector and private sector foreign debt, not just National Government debt.

Espenilla said the government has to study fed-

eralism more extensively and both public and private sectors should participate in discussions. “We need to study what it really contains (it) has many elements, political and economic matters,” he said in Filipino.

Espenilla pointed out the government should state clearly how both the central and regional systems will distribute national debt payments as well as revenues and the budgets. An inability to settle these issues will result in chaos, he said.

He noted that the ConCom draft is not clear on the sharing of national responsibilities.

There are issues that need the national view such as central bank actions, defense, foreign affairs, among other things, while those that can be handled on a regional level are construction of local roads, schools and hospitals.

Espenilla warned that as it is, a shift now would blow up the budget deficit and he fears the government will have to print banknotes higher than the limit – which will be the BSP’s problem – as this will be inflationary to the highest level.

“The BSP is apprehensive that with a larger budget deficit, and the Philippines getting denied access to foreign borrowing (no one will lend to us with a ballooning deficit), the government might think the easiest solution is to order the BSP to print more money to pay for our obligations. The consequence of that is a sky-rocketing inflation,” Espenilla said in Filipino.

Under a federal form of government, the BSP chief believes that a central monetary authority would have to keep its independence from the government for it to perform its function of ensuring financial and price stability, in support of economic growth.

The central bank charter declared the BSP as a “central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit” and with emphasis on the BSP that enjoys “fiscal and administrative autonomy.”

Based on the 1987 Constitution the BSP is mandated to provide policy direction in the areas of money, banking and credit and according to the BSP charter (Section 123) – the central bank “functions as financial advisor on official credit operations of the government, its political subdivisions and instrumentalities.” (LCC)