IMF: BSP needs more tools to contain risks
Amendments to the restrictive charter of the Bangko Sentral ng Pilipinas (BSP) may help give monetary authorities the flexibility they need to stabilize the economy and ensure that sustainable growth is achieved.
The International Monetary Fund (IMF) said the economy would benefit if the BSP were to be given more tools to deal with potential problems such as excessive credit growth, “shadow banking,” and an over-leveraged corporate sector.
“Providing the BSP with suitable instruments to undertake sterilization would improve the effectiveness of monetary policy,” the multilateral lender said in its annual staff report on the Philippines released over the weekend.
The statement comes as the proposal to amend the central bank’s two-decade-old charter languishes in Congress.
Among the highlights of the BSP’s proposed charter amendments are a hike in the central bank’s capitalization, powers for additional oversight of lending activities outside the banking system, and the ability to issue its own debt securities.
The IMF also endorsed the addition of “financial stability” as one of the BSP’s main mandates, allowing the central bank to expand its oversight over larger parts of the economy.
These additional powers will help the BSP contain financial risks to growth, mainly the “rapid credit growth or a disproportionate flow of resources to the property sector [which] could boost short-term growth but heighten volatility thereafter, impacting over-leveraged households and corporates,” the IMF said.
As global interest rates rise and advanced economies unwind ultra-cheap money policies, imbalances in the country’s recent credit boom may emerge as higher borrowing costs will make it harder for creditors to collect.
In recent weeks, the BSP tightened policy settings in response to excess liquidity, rapid credit growth, and the recent acceleration in consumer price increases. Banks were told to set aside more deposit reserves, while rates for the special deposit account (SDA) facility were raised to siphon off more liquidity from the economy.
Policy rates that previously stood at record lows since October 2012 were hiked last July by a quarter of a percent. Most analysts expect another hike in policy rates later this year.
“Continuing to proactively tighten monetary conditions would address both potential inflation and generalized financial stability risks,” the IMF said.
With the BSP focusing on stabilizing economic conditions, the IMF said administration officials should focus on building on reforms of the last four years to attract more investments, as well as give the state more resources to hike spending. These would lead to significant reductions in unemployment and poverty levels, it said.
The IMF called on the relaxation of foreign ownership restrictions, cutting red tape, and limiting tax holidays that tend to favor incumbents and distort the tax system. Officials should also fast-track the execution of public-private partnerships to “better position the Philippines to benefit from the growth and employment opportunities of deeper regional integration.”
The IMF expects growth this year to slow down to 6.2 percent from 7.2 percent in 2013. A recovery is expected in 2015, where the economy is expected to grow by 6.5 percent.
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