BSP, IMF buck proposal to fix foreign exchange rate

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) and the International Monetary Fund (IMF) are strongly opposing a proposal to fix the foreign exchange rate to boost the competitiveness of local exporters and at the same time benefit families of overseas Filipinos.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo told reporters that exporters should focus on improving their competitiveness to be able to survive in the global market instead of complaining about the strengthening of the peso against the dollar.

Guinigundo pointed out that the country’s merchandise exports have recovered strongly, growing more than 40 percent in the first two months of the year despite the strengthening of the peso against the greenback.

“Why is it that the peso has been able to sustain a level of 44 to 45 and at the same time exports continue to grow and in fact in the first two months exports went up by more than 40 percent,” he pointed out.

He explained that robust overseas Filipino workers’ remittances, strong tourist receipts, foreign direct investments, and steady earnings of the business process outsourcing (BPO) sector continued to fuel the appreciation of the peso against the dollar.

He stressed that letting the market determine the value of the peso has resulted to lower inflation rates over the past two years.

“I think one of the reasons is that we were able to achieve lower rates of inflation would also bring about a more competitive real exchange rate. So at the heart of that 44 to 45 versus $1 is an inflation rate that is much lower compared to what we have seen in the past and that is providing more competitiveness to our exporters,” the BSP official said.

Guinigundo made the clarification due to several proposals being raised, including a proposal from former Budget Secretary Benjamin Diokno, to peg the exchange rate at 55 to $1.

The BSP has proposed tweaking the foreign exchange assumptions to 45 to 47 per $1 instead of 46 to 49 due to the continued strengthening of the peso against the greenback.

For his part, International Monetary Fund country representative Dennis Botman said in a press conference that pegging the exchange rate would force monetary authorities to impose capital controls or to abandon its inflation targeting framework.

“There is no free lunch in economics. You cannot achieve low inflation, a depreciated peso, and have free capital inflows. You cannot have all three at the same time, you have to give something up,” Botman added.

According to him, the IMF would be open to the idea of the imposition of capital controls as a package of measures for countries confronted with a very large capital inflow and in order to contain a swelling budget deficit.

“But none of these things are happening right now in the Philippines so introducing capital controls will do more harm than good. The inflation targeting framework has also given a lot of credibility to monetary policy in the Philippines,” he said.

He also warned that a “very much” depreciated exchange rate would result to higher debt service costs for the National Government as well as private corporations resulting to rising inflation.

“In my view is that it would not be desirable there are many adverse effects of such a depreciated exchange rate it will push up debt service cost not only for the National Government but also for private companies. It will push up inflation rate and that by itself would undermine competitiveness,” Botman said.

The IMF official said higher interest rates would have implications on power rates and prices of oil undermining the competitiveness of local exporters.

The BSP has launched a series of conferences on “Gearing Up for External Competitiveness” in Manila last Friday. Similar forums would be held in Pampanga, Cebu and Davao.

These conferences aim to raise the awareness of exporters, importers, organizations of overseas Filipinos, BPOs and other entities with foreign exchange dealings and obligations, on the various ways to manage their foreign exchange risks, and highlight the factors that impact on the country’s external competitiveness.