"Placing funds—purchasing power—in the hands of businesses and individuals is the answer."
"Placing funds—purchasing power—in the hands of businesses and individuals is the answer."
The governor of the Bangko Sentral ng Pilipinas was absolutely right when he said recently, in connection with the disease-caused rise in pork prices, that supply-side inflation issues should be addressed with supply-side solutions. But his pronouncement on economic policy making was incomplete. He should have gone on to say that fiscal problems generated by pandemics should be solved with fiscal solutions. In other words, Benjamin Diokno should have said that monetary solutions should not be applied to pandemic-generated fiscal problems.
In so saying, Governor Diokno would find support in the Philippine commercial banking system during the first two months of 2021. Data released last month by BSP indicate a 2.7-percent year-on-year drop in lending by the universal and commercial banks in February and a 2.5 percent YOY drop in January. Outstanding loans to the major industries continued to decline, BSP reported. This was particularly true of trade —both wholesale and retail—manufacturing generally (-5.7 percent), finance and insurance (-7.5 percent) and repair of motor vehicles and motorcycles (-6.5 percent).
The BSP certainly cannot be blamed for the unsatisfactory bank-lending outcome of 2021’s first two months. The central bank has deployed most of the tools in its arsenal in its declared effort to maintain a benign monetary environment. The rates at which it lends money to the banks have for some time been at historically low levels. And BSP has introduced one or two vehicles for increasing the level of the banking system’s loanable funds. Still, credit-needing businesses and individuals have been behaving like proverbial horses that have been brought to the water but have refused to drink.
The explanation for the widespread unwillingness of businesses and individuals to avail themselves of bank loans at historically low rates is not hard to find. It consists of a combination of uncertainty and confidence. Businesses and individuals, who in normal times would be crowding the banks for loans at invitingly low rates, are not overly certain of the economy’s near-term prospects. They are not confident that, given the current level of aggregate demand, they will be able to generate enough repayment funds. In the current environment, businesses and individuals have little appetite for increasing their debt burden.
Monetary policy is not the answer to a national economic situation like the present. Fiscal policy is. More specifically, placing funds—purchasing power—in the hands of businesses and individuals is the answer. Hopefully, the third Bayanihan measure, which calls for P404 billion worth of additional government ayuda payments, will be ready for President Duterte’s signature very shortly.
To repeat, and to stress: Fiscal problems are not solved by monetary policy measures. Especially not when the fiscal problems are generated by a pandemic.