The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, said Friday it approved the request of the government for a fresh provisional advance of P540 billion to be used for deficit financing amid the coronavirus pandemic.
“The Monetary Board approved today the national government’s request for a new tranche of provisional advances in the amount of P540 billion [$11.1 billion], pursuant to Section 89 of Republic Act 7653, as amended,” BSP Governor Benjamin Diokno said in a message to reporters.
Diokno said the approval came following the Bureau of the Treasury’s full settlement on Sept. 29, 2020 of the previous repurchase agreement with the BSP wherein the Treasury borrowed P300 billion from the BSP at zero interest rate.
The BSP governor earlier said the purpose of the fresh provisional advance would be for “budget support,” especially “deficit financing as a result of the pandemic.”
He said the provisional advance of P540 billion would be settled on or before Dec. 29, 2020 also at zero interest.
An economist earlier warned that the BSP might be putting at risk its hard-earned credibility and its independence would be questioned under a debt monetization scheme, especially if it allowed the rollovers of upsized repurchase agreements to help in debt financing of the government.
The BSP’s charter allows it to advance to the national government through a repurchase agreement. ING Bank Manila senior economist Nicholas Mapa said although it is not technically debt monetization, rolling over the repurchase agreement upon end could constitute a de facto debt monetization.
The Bayanihan 2 Act, a fiscal COVID-19 rescue plan, contains a provision that allows the BSP to buy up to P850 billion (from P540 billion) worth of bonds from the primary market to help in debt financing.
Mapa said the BSP continued to “single handedly provide the much-needed stimulus to the economy while fiscal authorities stock pile funds and yet roll out modest stimulus packages.”
He warned the BSP about the case of Indonesia where the Finance Ministry early this year announced a “burden sharing” arrangement where Bank Indonesia would buy up bonds in the primary market to help finance the deficit in the fight against COVID-19.
Mapa said authorities pledged the move would be a one-off incident given the extreme circumstances. He said Bank Indonesia then faced a firestorm when a panel of experts from Indonesia proposed ceding more control of Bank Indonesia’s monetary board to the finance ministry, opening the door for successive rounds of debt monetization, once perceived as taboo in central bank circles.