Maharlika funding provisions questioned

TRUST in the Bangko Sentral ng Pilipinas (BSP) and its effectiveness as a regulator will be put at risk if the government pushes through with its plan to establish a sovereign wealth fund, economists and businessmen said.

In a January 26 private statement that was released on Wednesday during Senate deliberations, the Foundation for Economic Freedom, Management Association of the Philippines and the UP School of Economics Alumni Association said the proposed Maharlika Investment Fund (MIF) was “highly questionable as a strategy to achieve the government’s stated objectives” of promoting infrastructure development and economic growth.

“This is due to the fundamental flaw that funding of the MIF will not come from significant surpluses from commodity earnings or government operating results,” they said.

With regard to the BSP, it said the central bank would be weakened as House Bill (HB) 6608 particularly states that 100 percent of its declared dividends should go to the MIF during the first two years of the law’s implementation.

This would be lowered to 50 percent in succeeding years with the remainder to be used to fund the BSP’s capitalization but then revert to 100 percent once the capitalization goal is achieved.

“This not only amends the BSP’s mandate to promote monetary stability by adding an earnings factor for the MIF in its key performance indicators, but also effectively deprives the BSP of its ability to strengthen itself from its earnings to manage liquidity and inflation, as well as help distressed financial institutions,” the economists and businessmen said.

“It compromises the BSP’s autonomy, independence and ability to deliver on its price and financial stability mandates,” they added.

A provision mandating government guarantees for debt instruments issued by the MIF to government financial institutions (GFIs), meanwhile, would add “contingent liabilities for the national government at a time when there are serious concerns about the size of the government’s outstanding debt, contingent liabilities in infrastructure projects and pension funds, and burgeoning unfunded liabilities in the retirement program for the armed forces.”

“Weakening the BSP will reduce its ability to fulfill its primary purposes, and relying on the BSP’s dividends will engender systemic risks,” they continued.

“Giving the GFIs a statutory guarantee for its lendings to the MIF will open the sizable liquidity of the LBP (Land Bank of the Philippines) and the DBP (Development Bank of the Philippines). However, it creates no incentive for diligence, since the risk is passed as a contingent liability entirely to the NG (national government).”

In addition to HB 6608, the Senate is also deliberating Senate Bill 1670 that BSP Governor Felipe Medalla expressed support for on Wednesday.

With regard to concerns over the use of the central bank’s dividends, he noted that using these to fund the MIF would delay the full capitalization of the BSP.

“At this point, our balance sheet is quite good and we could easily take the postponement,” Medalla said.

The BSP will also support the provisions that say that the central bank may extend regulatory relief to LBP and the DBP, he added.