Sabal: Our lender of last resort

THE Economics department of Xavier University-Ateneo de Cagayan has been asked to assist in drafting an economic recovery plan for Northern Mindanao in response to the sheer effects of Covid-19. Businessmen are wary about the potential effects of this community-wide lockdown to our economy. Is a recession inevitable in the immediate-term?

This experience is unprecedented in recent memory. Commerce has been paralyzed to avoid the congregation of people. Obviously, the negative impacts have been hardly felt on service-oriented industries like restaurants, travel, leisure, hospitality, and retail.

Secretary Ernesto Pernia, our country’s chief economist, said that our economic growth is likely to shrink between 0.3 and one percent for this year. He did not rule out the possibility of a recession if this lockdown will continue in the coming months. Recession, for the information of our readers, is an economic contraction felt in two consecutive quarters.

The economy of Northern Mindanao (even the entire country) has been very dependent on the service sector; as it is the top contributor to our gross domestic product. This is followed by manufacturing, while the agriculture sector has been consistently lagging behind (a one percent growth rate is already a surprise blessing). One can then clearly imagine the consequences to our economy if the manufacturing and service sectors are placed in hibernation.

Fortunately, this is not yet the end-game. The 6.5 to 7.5 percent growth target for this year may still be possible through a massive government spending. In fact, a P200 billion worth of recovery package is already in place through the Bayanihan to Heal as One Act. Boosting our capacity to combat the effects of this pandemic, the Asian Development Bank (ADB) and the World Bank Group (WB) have granted the country generous loans amounting to $3M and $500M, respectively.

Despite these developments, government officials and some businessmen are still deeply concerned that public funds will run-out, without totally arresting the impacts of Covid-19. As we already know, the government has extended direct tax payments whilst the implementation of the community quarantine. Tax revenue is highly needed on a period where an enormous government spending is warranted.

Least that we realize is the salient role of our central bank in this battle. The primary task of the Bangko Sentral ng Pilipinas (BSP), as stipulated on their charter, is “to promote and maintain price stability, a strong financial system, and a safe and efficient payments and settlements system conducive to a sustainable and inclusive growth of the economy.”

BSP can’t literally print more money as it will have inflationary effects. However, University of the Philippines (UP) economists, have suggested other ways to “print money” without increasing general prices. Being known as the lender of last resort, the central bank can increase market confidence through various policy instruments, especially on a period of market stagnation.

Alfredo Paloyo, and his fellow economists in UP, suggested that the BSP should release commercial paper funding facility, and bail-out banks in case of a massive borrower defaults on loans. As a result of this lock-down, firms have lost potential revenues. In return, they won’t be able to pay for their costs, including compensation for their workers who are encouraged to do work-from-home arrangements. To avoid massive lay-offs, the government should assist firms in paying for these costs through various modalities -- one is to provide them easy access to financial sources.

Paloyo, emphasized that the BSP can “buy up the commercial paper of firms in order to ease their liquidity constraints and help maintain the employment of their workers”. The central bank also has to make sure that there is enough money in the banks (and other financial intermediaries) that firms, especially the small and medium-scale enterprises (SMSEs), can access to cover their costs.

Another notable policy recommendation from the UP School of Economics (UPSE), is for the BSP to absorb the debts of the government in sustaining its social protection and recovery package. Aside from acquiring loans from supranational agencies like ADB and WB, our government can release bonds to finance its deficits. These bonds are like loans by the government to its people. People avail these bonds, with assurance of return investment determined by an agreed interest range, from the government. These bonds are considered to be debts of the government to its people.

Those who have excess money can invest their savings to government bonds. In effect, government collects additional funding to assist those who are most vulnerable. Our BSP has all the resources to repay these government bonds until its maturity date.

Economists have agreed that in this unconventional period, the BSP should perform unconventional policies to fulfill its tasks. When private production is halted, where there is a decreasing supply with the demand remaining high, an increase of general prices is not impossible. When this public health crisis is over, with the firms facing difficulties in recovering the loss of revenue (due to the lockdown), restoration of the pre-pandemic production level will take a longer period of time.

The BSP should do “whatever it takes” as its equally important contribution to ending this pandemic, to secure price stability and make sure that the financial system is readily available to support SMSEs, without the threat of a financial system collapse.

It should do “whatever it takes” to fund massive government spending to keep the economy in sane condition and still achieve our growth targets, without putting the country at risk to inflationary effects.

Our central bank is not just tasked to print money bills, but has various capacities to save our economy from financial or public-health shocks like what we are experiencing for the past weeks. As of this writing, the BSP has already implemented a few policy adjustments, such as lowering the policy interest rates, expanding its lending facilities, and reducing the reserve-requirement for banks by 200 basis points –releasing approximately P180 to P200B into the economy.

In this period of a potential economic slowdown, as a result of this unprecedented public health crisis, our knight-in-shining-armor is our central bank!


Jhon Louie B. Sabal is a faculty of the Department of Economics and the Research Coordinator of the Social Sciences of Xavier University-Ateneo de Cagayan. Mr Sabal is a graduate of MA in Economics at Ateneo de Manila University.


No stories found.

Just in

No stories found.

Branded Content

No stories found.
SunStar Publishing Inc.