BSP as beast of burden

Lately, I’ve pictured the Bangko Sentral ng Pilipinas (BSP) in my mind as the mythical Atlas forced to carry the world. In his recent public statements, including in his speech at last month’s general membership meeting of the Management Association of the Philippines, BSP Governor Eli Remolona has increasingly telegraphed a strong message to the government. He has, in effect, been calling on the latter for resolute action to overcome its many faults, which for years, the BSP has been forced to offset with the limited monetary policy tools it has control over. It is forced to act like a damage control unit that must fix the mess the government keeps making.

As our central bank, the BSP, by law, is independent from and not part of the government (contrary to what many think, I suspect). Central banks worldwide are given such independence for a crucial reason: Monetary policy and the banking system must be kept out of the hands of politicians. Once appointed by the President, the BSP governor holds office for a six-year fixed term. United States President Donald Trump could not fire Remolona’s American counterpart, Federal Reserve Bank Chair Jerome Powell, even as he has made no secret of his disdain for the Fed’s prudent monetary policies. Powell and Remolona can do what is right and speak freely without fearing for their jobs. The latter has nonetheless chosen diplomacy and politeness, but signals in no uncertain terms that the government must get its act together, warning that the BSP simply can’t keep carrying the economy when what’s weighing it down is something monetary policy cannot fix.

As mandated by law, BSP’s foremost mission, as in most central banks worldwide, is price stability, or keeping inflation low. It pursues this through monetary policy, which boils down to managing the supply of money going around. When prices rise too fast, BSP dampens it by slowing down the money supply. Interest rates are a key tool to manage this; the higher the rates, the harder it is for banks to lend out money that will circulate in the system, hence the tighter the money supply, and vice versa. The less money going around, the less there is to buy (demand) goods and services with. But higher interest rates also dampen economic activity by making investible funds costlier to borrow, while also making it harder for consumers to buy on credit, especially durables like vehicles and appliances. All told, BSP’s direct influence is on the demand side: It can influence how much investors and consumers spend, and therefore the demand for goods and services.

Our problem is that the economy’s woes have mostly come from the supply side: things that make the cost of production higher–infrastructure, including for power, transport and logistics, telecommunications, water supply and irrigation; and governance, as it affects the cost of doing business. I need not elaborate on the infrastructure problem; we’ve been crying ourselves hoarse about it for decades, while our neighbors simply left us far behind (after having been known for the best infrastructure in our part of the world some six decades ago). It’s governance that has been killing us softly, and it is about many things: regulatory burden, corruption, incompetence, misplaced priorities, bad policies, slow processes, or plain inaction.

On regulatory burden, I’ve constantly written how our government is such an expert in throwing obstacles in our way, often deliberately to extort bribes, although I’ve come to believe that some honest bureaucrats actually think it’s a sign they’re doing their jobs well. Corruption’s cost to the economy has never been clearer than now. Incompetence is what you get when the government is seen as the employer of last resort, yet is the largest minimum wage violator. Misplaced priorities happen when government departments fail to recognize who properly comprise their constituency. Consumers are consistently forgotten when departments focus only on the welfare of producers in their sector, rather than seeking a proper balance with their wider constituency and thereby uphold the greatest good of the greatest number. This leads to outright bad policies that keep getting repeated, as if expecting different results—what Einstein famously described as ”the definition of insanity.” Finally, slow processes and plain inaction are something the Anti-Red Tape Authority is now able to change, thanks to its crusader leader, Secretary Ernesto Perez.

Remolona sees the inevitable law of diminishing returns kicking in on the matter of lowering interest rates; there’s little more it can do now to draw out greater production supply. As someone recently posted online, the BSP is now telling everyone: “We can manage inflation and liquidity. But we cannot manufacture trust, productivity, or institutional quality.” The BSP simply can’t keep assuming the burden of propping up the Philippine economy.

—————-

cielito.habito@gmail.com