BSP should still shore up banks’ liquidity after lockdown–UPSE

ECONOMISTS from the University of the Philippines said the Bangko Sentral ng Pilipinas (BSP) should “do whatever it takes” to shore up liquidity for banks after the lifting of the lockdown.

In a paper, eight UP School of Economics (UPSE) experts led by Toby Melissa C. Monsod said consumption will likely remain weak even months after the lifting of the lockdown, and the BSP should be ready to pump liquidity into banks to prevent the country from becoming financially unstable.

The economists said the BSP’s “monopoly power to print money is its most important power.” This will allow the BSP to play its crucial role of being the lender of last resort.

“These are not normal times and the Central Bank’s ability to print money enables it to take on a crucial role and act as a ‘lender of last resort’ during a crisis,” economists said.

In order to meet the financial requirements these entail, the economists said the government should abandon its deficit targets.

This, they said, is part of the “old paradigm of spending to stimulate the economy, and then taxing to catch up with its deficit targets.”

The economists also said taxation as a source of government funds is “inferior to seigniorage revenue from the issuance of money when the economy is stopped dead in its tracks.”

“While the economy is on lockdown and in the immediate aftermath of its lifting, when demand will likely remain muted, the Central Bank should do ‘whatever it takes’ to ensure that the program of expenditures laid out by government is provided the necessary financial resources,” the economists said.

“In this way, government can hold up its end of the social contract, at a time also when there is expected to be large tax revenue shortfalls,” they added.

Development gaps

The economists—among them Orville Jose C. Solon, Ma. Socorro Gochoco-Bautista, Emmanuel S. de Dios, Joseph G. Capuno, Ma. Joy C. Abrenica, Cielo Magno and Renato E. Reside Jr.—believe the coronavirus 2019 (Covid-19) pandemic is an opportunity to address the country’s development  gaps.

These development gaps include not only problems in the health system but also logistics, research and development, social safety nets, financial system, and the overall capacity for foresight.

The economists also said the current crisis highlighted the lack of understanding in the moving parts of supply chains as well as the micro-, small-, and medium-sized enterprises (MSMEs) who are part of these chains.

“The point is, if equity, resilience and sustainable development are to remain at the core of the country’s vision for itself, observations of how these systems performed, must be taken into account in the design of economic policy and spending programs moving forward,” the economists said.

Opportunity to reset

“To ignore these and assume that the economy can simply start where it left off, would be to squander a unique opportunity to reset the country on a potentially better development path,” they added.

The economists said hunger and hardships brought about by the pandemic will still be there even at the end of the lockdown.

They said consumption will remain low at least in the “next few months” due to low confidence.

Globally, the economists said foreign demand and investment demand will also “remain muted,” making it necessary for the government to carry the weight of the economy on its shoulders in the near term.

At this time, the economists said government should reevaluate pre-pandemic development policies and priorities. The local governments would also have to play an important role particularly in upgrading supply chains.

“The weaknesses revealed by the crisis offer elements of a resilience expenditure program that can begin immediately, even as development policies are being re-assessed,” the economists said.

The government should ramp up spending to modernize national and local health facilities and establish a Philippine Center for Disease Control, they added.

The funds should also be used to upgrade and update the Bureau of Quarantine; fast-track the implementation of a single electronic medical record system nationwide; fabricate/stockpile lifesaving equipment and supplies; offer incentive packages for all hospitals to establish separate infection control units, among others.

The government should also increase spending to boost the resilience of food and other supply chains, including investments to augment production/fabrication capacities; upgrade warehousing, transport and distribution; support research and technology development; and incentivize technology adoption by MSMEs and upskilling of workers, moving both up the value chain, and others.

Image Credits: Bernard Testa