BSP Governor Rafael Buenventura said with the huge gap in the budget seen to persist until next year, the government cannot afford anymore to rely heavily on domestic borrowings to fund the deficit, noting its impact on inflation.
This year, the BSP – whose main task is to control the rate of inflation – has been fairly successful in this aspect since the rate of increase in the prices of basic goods and services has been tamed at single digit-levels, peaking to six percent in November.
Buenaventura noted that with the controlled inflation figures, the BSP was able to relax its grip on liquidity, even allowing it to borrow significantly from domestic sources to plug in the ballooning budget deficit.
He said based on the International Monetary Fund’s (IMF) projection that next year’s inflation could peak at eight percent and the fiscal problem continues to get out of control early, the BSP would be forced to resort to its monetary tools, one of which is an increase in interest rates based on overnight borrowings and lendings.
The BSP uses several measures to mop up inflation-inducing excess liquidity in the financial system: the mandatory bank reserve requirement, overnight rates and open market operations (OMO).
Although they tend to favor OMO more, Buenaventura said the BSP has been constrained in using these due to the loss of the tax-exempt status, making OMO more costly for the BSP to undertake.
There is now a pending bill in Congress that seeks to exempt the BSP from paying taxes in the form of documentary stamp taxes for its OMO. – Marianne V. Go