|
Philippines Monetary Policy
The Central Bank of the Philippines was established in June
1948 and began operation the following January. It was charged
with maintaining monetary stability; preserving the value and
covertibility of the peso; and fostering monetary, credit, and
exchange conditions conducive to the economic growth of the
country. In 1991 the policy-making body of the Central Bank was
the Monetary Board, composed of the governor of the Central Bank
as chairman, the secretary of finance, the director general of
the National Economic and Development Authority, the chairman of
the Board of Investment, and three members from the private
sector. In carrying out its functions, the Central Bank
supervised the commercial banking system and managed the
country's foreign currency system.
From 1975 to 1982, domestic saving (including capital
consumption allowance) averaged 25 percent of GNP, about 5
percentage points less than annual gross domestic capital
formation. This resource gap was filled with foreign capital.
Between 1983 and 1989, domestic saving as a proportion of GNP
declined on the average by a third, initially because of the
impact of the economic crisis on personal savings and later more
because of negative government saving. Investment also declined,
so that for three of these years, domestic savings actually
exceeded gross investment.
From the time it began operations until the early 1980s, the
Central Bank intervened extensively in the country's financial
life. It set interest rates on both bank deposits and loans,
often at rates that were, when adjusted for inflation, negative.
Central Bank credit was extended to commercial banks through an
extensive system of rediscounting. In the 1970s, the banking
system resorted, with the Central Bank's assistance, to foreign
credit on terms that generally ignored foreign-exchange risk. The
combination of these factors mitigated against the development of
financial intermediation in the economy, particularly the growth
of long-term saving. The dependence of the banking system on
funds from the Central Bank at low interest rates, in conjunction
with the discretionary authority of the bank, has been cited as a
contributing factor to the financial chaos that occurred in the
1980s. For example, the proportion of Central Bank loans and
advances to government-owned financial institutions increased
from about 25 percent of the total in 1970 to 45 percent in
1981-82. Borrowings of the government-owned Development Bank of
the Philippines from the Central Bank increased almost 100-fold
during this period. Access to resources of this sort, in
conjunction with subsidized interest rates, enabled Marcos
cronies to obtain loans and the later bailouts that contributed
to the financial chaos.
At the start of the 1980s, the government introduced a number
of monetary measures built on 1972 reforms to enhance the banking
industry's ability to provide adequate amounts of long-term
finance. Efforts were made to broaden the capital base of banks
through encouraging mergers and consolidations. A new class of
banks, referred to as "expanded commercial banks" or "unibanks,"
was created to enhance competition and the efficiency of the
banking industry and to increase the flow of long-term saving.
Qualifying banks--those with a capital base in excess of P500
million--were allowed to expand their operations into a range of
new activities, combining commercial banking with activities of
investment houses. The functional division among other categories
of banks was reduced, and that between rural banks and thrift
banks eliminated.
Interest rates were deregulated during the same period, so
that by January 1983 all interest rate ceilings had been
abolished. Rediscounting privileges were reduced, and rediscount
rates were set in relation to the cost of competing funds.
Although the short-term response seemed favorable, there was
little long-term change. The ratio of the country's money supply,
broadly defined to include savings and time deposits, to GNP,
around 0.2 in the 1970s, rose to 0.3 in 1983, but then fell again
to just above 0.2 in the late 1980s. This ratio was among the
lowest in Southeast Asia.
Monetary and fiscal policies that were set by the government
in the early 1980s, contributed to large intermediation margins,
the difference between lending and borrowing rates. In 1988, for
example, loan rates averaged 16.8 percent, whereas rates on
savings deposits were only slightly more than 4 percent. The
Central Bank traditionally maintained relatively high reserve
requirements (the proportion of deposits that must remain in
reserve), in excess of 20 percent. In 1990 the reserve
requirement was revised upward twice, going from 21 percent to 25
percent. In addition, the government levied both a 5 percent
gross tax on bank receipts and a 20 percent tax on deposit
earnings, and borrowed extensively to cover budget deficits and
to absorb excess growth in the money supply.
In addition to large intermediation margins, Philippine banks
offered significantly different rates for deposits of different
amounts. For instance, in 1988 interest rates on six-month time
deposits of large depositors averaged almost 13 percent, whereas
small savers earned only 4 percent on their savings. Rates
offered on six-month and twelve-month time deposits differed by
only 1 percentage point, and the rate differential for foreign
currency deposits of all available maturities was within a single
percentage point range. Because savings deposits accounted for
approximately 60 percent of total bank deposits and alternatives
for small savers were few, the probability of interest rate
discrimination by the commercial banking industry between small,
less-informed depositors and more affluent savers, was quite
high. Interest rates of time deposits also were bid up to reduce
capital flight. This discrimination coupled with the large
intermediation margins, gave rise to charges by Philippine
economists and the World Bank that the Philippine commercial
banking industry was highly oligopolistic.
Money supply growth has been highly variable, expanding
during economic and political turmoil and then contracting when
the Philippines tried to meet IMF requirements (see
table 7,
Appendix). Before the 1969, 1984, and 1986 elections, the money
supply grew rapidly. The flooding of the economy with money prior
to the 1986 elections was one reason why the newly installed
Aquino administration chose to scrap the existing standby
arrangement with the IMF in early 1986 and negotiate a new
agreement. The Central Bank released funds to stabilize the
financial situation following a financial scandal in early 1981,
after the onset of an economic crisis in late 1983, and after a
coup attempt in 1989. The money was then repurchased by the
Treasury and the Central Bank--the so-called Jobo bills, named
after then Central Bank Governor Jose Fernandez--at high interest
rates, rates that peaked in October 1984 at 43 percent and were
approaching 35 percent in late 1990. The interest paid on this
debt necessitated even greater borrowing. By contrast, in 1984
and 1985, in order to regain access to external capital, the
growth rate of the money supply was very tight. IMF dictates were
met, very high inflation abated, and the
current account (see Glossary)
was in surplus. Success, however, was obtained at the
expense of a steep fall in output and high unemployment.
Data as of June 1991
|
