TWO CHANGES
The objective basically involves two changes — a financial restructuring of the CB to allow it to operate without a recurring cash deficit; and a return to positive levels of net foreign assets to reduce the incentive for the CB to overvalue the currency.
These measures would take time and would involve a series of steps. The first step has, however, been taken with the filing in Congress of the bill on the Central Monetary Authority to address the CB’s financial problems.
Lastly, to address the trade misalignment, Mr. Lamberte proposes the acceleration of the reduction in tariffs under Executive Order 470 to one year from five years. In this manner, zero tariffs on imports translate to higher export production since the economy is still basically import-dependent.
If exports are higher, then this would generate investments in the industry itself and this would, in turn, spillover to the domestic sector.
Studies have shown that lowering aggregate tariffs to 15% from 40% could reduce peso overvaluation by about 10%. But with the graduated reduction of tariffs, the corresponding decrease in peso overvaluation was only above 3%.
REGIONAL THRUST
An accelerated trade liberalization is also the right move given the ASEAN’s thrust towards lower tariffs and freer trade. The countries which have gone the farthest in opening up their economies and in creating an internationally competitive climate will best capture the gains from trade within the region.
Economists believe industries in the ASEAN region will expand at the expense of thirdparty competitors outside the free trade area. However, the bulk of the losses from trade diversion will fall on those countries with significant tariff protection.
No doubt, the challenges posed by forex liberalization are immense. The country’s transition to an open economy has been rough, resulting in some disruptions in the corporate and financial sectors. The key is to coordinate liberalization more closely with macroeconomic stability and develop the capacity for prudent financial regulation.