An enabling law to solve the problem of the budget deficit

( Second of Two Parts )

The specific government agency responsible for the management of both money supply and credit of a country is its central bank. The central bank is tasked with the monetary management of long-term financing in the local currency.

Under the charter of the Central Bank (R.A. 7653) the Bangko Sentral Ng Pilipinas is mandated to provide policy directions in the areas of money, banking and credit. Its primary objective is to maintain price stability conductive to a balanced and sustainable growth of the economy (section 3). The Bangko Sentral likewise functions as the financial advisor of the government (Chapter V, Article III).

We propose the passage of a bill that seeks to provide and empower the BSP to be more effective in its mandated role to maintain price stability conducive to a balanced and sustainable growth of the economy as well as to adequately promote and maintain monetary stability and the convertibility of the peso, thereby positioning the country more strongly to achieve growth and industrialization.

The BSP is meant to be a pro-active force in ensuring that the monetary needs for the development of the country is amply met. Yet, it is ironic that the New Central Bank law itself contains provisions that clip the BSP of its powers to so fulfill this mandate.

Section 117 of the New Central Bank Law provides: "The issue of securities representing obligations of the government, its political subdivisions or instrumentalities, may be made through the Bangko Sentral, which may act as agent of, and for the account of, the Government or its respective subdivisions or instrumentalities, as the case may be: Provided, however, that the Bangko Sentral shall not guarantee the placement of said securities, and shall not subscribe to their issue except to replace its maturing holding of securities with the same type as the maturing securities."

This section is highly restrictive as it prohibits the Bangko Sentral from guaranteeing the placement of government securities and from subscribing to government issuances of securities. This section absolutely decapitates the power of the central bank to assist government in raising funds on a long-term, low-interest basis in local currency to finance the needed investments of government in infrastructure and utilities. For said section bars the central bank from buying government issued securities such as government bonds.

The above-cited provision effectively renders impotent the power of the BSP to assist and help the government finance the construction of all the infrastructure and utilities urgently needed to develop the country now. This has created a very peculiarly abnormal, if not irregular, situation where our own government instead of running to the BSP for loans for public investment projects, has to seek funding through continued foreign borrowings.

It is no wonder, then, that our total foreign debt has reached the whopping amount of $58 billion to $60 billion, although some peg the sum to be at $53 billion. The service of this foreign debt at 40 percent of the national budget deprives the government of scarce funds to support not only its operating expenses but its investments for infrastructure and utilities as well.

The question, therefore, begs asking: Why should the government not be able to borrow from the central bank–a government agency and its very own financial agent and repository of national funds? Why can’t the government borrow long-term, low-interest funds from the central bank that is secured against future taxes? Without the government being able to borrow local currency securitized against future taxes, how can we have the wherewithal to build our infrastructure and utilities knowing that the current budget alone is grossly insufficient to defray the cost of development?

Without government being able to raise funds now securitized against future taxes, how can we put-up the needed roads, highways, ports, airports, schools, markets, hospitals and government buildings all over the country? How can government then establish the needed power, water and telecommunications facilities? How can we ever develop now?

There is, therefore, an urgent need to amend the New Central Bank Act to give it the power, authority and mandate to lend out to the government local currency by buying long-term, low-interest government bonds and thereby create the corresponding new money. This way, the central bank, by directly and not through the open market, buying with local currency the 30 year, four percent interest with 10 year grace period bonds issued by the government, can be at the forefront of national development by making available to the government the necessary funds to be invested in the economic mainstream for the development of the infrastructure and utilities all over the archipelago that we so badly need now.

The immediate passage of this bill is most urgently recommended.

(You may write your comments / suggestion at 15/F Equitable Bank Tower Paseo de Roxas, Makati City or through e-mail at [email protected])

(Editor’s note: Atty. Roxas is writing a limited series of articles dealing with financial matters and other important business topics.)