OBSTACLE TO ECONOMIC GROWTH -- BSP'S EXCHANGE RATE POLICY

Indeed, government policies can make or unmake business.

In the face of significant and steady dollar inflows from OFWs, BPOs, exports, and hot foreign funds that increase dollar supply, BSP's P1.8-TRILLION Special Deposit account (SDA) facility constricts and reduces peso supply, thereby strengthening and appreciating the local currency vs. the dollar--making imported goods more affordable to importers owing to less pesos needed in paying the dollar importation costs, with consequent more patronage of cheap imports than costly locally-manufactured and produced products. 

Thus, while Bangko Sentral ng Pilipinas (BSP) professes to adhere to free market foreign exchange rate, it actually vitiates free market through hampering the free operation of peso and dollar supply and demand in the foreign exchange market--by way of drastically curtailed peso supply frozen and immobilized in its SDA facility.     

What BSP failed to do was to similarly manage the dollar-supply side of the peso-dollar exchange rate equation--the exchange rate determinant--such as through reducing dollar supply through promoting OFW families' high-yielding dollar deposits in BSP-conduit banks, which can partly discourage their consumption spending. BSP will shoulder the OFW-deposit interest cost in exchange for its interest expense wasted on the SDA facility, which should have been abolished or at least substantially reduced since years ago. BSP rejected my suggestion for fallacious reason....  BSP did not also institute any measure that would discourage the inflow of hot foreign funds, flocking to the Philippines simply because the economic turmoil in other parts of the world (like Europe) has not fully eased. Except in rare cases of initial stock offering, the bullish local stock market fueled by volatile foreign funds does not necessarily benefit local industries and corporations. There is no cash inflow to them that they can use in capacity expansion--because the numerous stock market transactions merely involve change in owners or corporate stockholders.       

The result:  cheap imported goods forconsumers, many of whom do not have purchasing power because members of their families lost jobs in local production and businesses that could not survive from the onslaught of cheap foreign competition.  

Not all is well, however, with globalization. FREE-MARKET PRICING at WHAT THE MARKET CAN BEAR has in some products counteracted the beneficial effects of liberalization. It took the Cheap Medicines Act to reduce by half the ultra expensive prices of medicines.  In the case of agrochemicals used by our farmers, nothing is done to mitigate high prices of as much as four times those prevailing in competitor neighboring countries, making local farmers uncompetitive.  

Worse, interest expense on the SDA facility was the largest contributor to BSP's annual net loss, which balooned to a whopping P95-billion (yes, BILLION) for 2012, prompting it to run to the national government for assistance, otherwise my prediction in an earlier email that the central bank will go bankrupt again will materialize--just like the way its predecessor, the now defunct Central Bank of the Philippines, went bankrupt from high-interest-incurring central bank "Jobo" bills in the 1980s.

M. L. Tecson