The government of a capitalist country has at its disposal a number of means for delivering economic growth in an environment of political 
and social stability. By far the most important of these means are monetary policy and fiscal policy. The monetary policy is made by the BangkoSentral ng Pilipinas and fiscal policy is controlled by the Department of Finance, which supervises the revenue-collecting agencies of the government.
One of the key lessons drummed into students in economics school is that the operations of the monetary authority and the operations of the fiscal authority are essentially antithetical to one another because the mandate of DoF is economic growth and that of the BSP is monetary stability. Excessive spending by a growth-obsessed government, by generating inflation and creating massive budget deficits, makes life difficult for the BSP, which then has to take measures intended to restore stability to the nation’s markets. These measures may take different forms, but they have a common objective, namely, to restore to a sound level the amount of money available to the economy.
Monetary policy and fiscal policy must, to the greatest extent possible, operate harmoniously and with close coordination. Given that fiscal policy is the domain of people with electoral mandates while BSP officials are unelected individuals, policy disagreements are sometimes resolved in favor of the government’s fiscal needs.
Coordination and accommodation between the DoF and the BSP clearly are the order of the day if the government’s growth objectives are to be attained without damage to the nation’s monetary environment. A government may try to pursue a program of very rapid growth, but such a program will grind to a halt the moment hyperinflation, huge budget deficits, massive loss of reserves and erosion of general business confidence begin to set in.
One of the best pre-World War II US Federal Reserve Board chairmen, Marriner Eccles, put the situation aptly when he said: “The principal task of a central bank is to lean against the prevailing winds.” He explained his statement by saying that monetary policy and fiscal policy—the Fed and the US Treasury—should not move in the same direction and that when the Treasury is in an expansionary or contractionary mode, it is the Fed’s job to deploy countervailing force so as to prevent the economy from going off the tracks.
Which brings me to a published report of a recent newspaper interview with the new Governor of the BSP, Nestor Espenilla Jr. The BSP’s CEO was quoted as saying that he was inclined to inject more cash into the economy at this time and, to achieve that expansion, he favored a lowering of the reserve that the BSP requires banks to maintain with the BSP against their deposit liabilities. The required reserve—arguably the most potent of the BSP’s monetary tools—currently stands at 20 percent. Mr. Espenilla indicated that he would like the reserve to be brought down to a single-digit figure. On the basis of BSP data, such a reduction would result in the injection of approximately P700 billion into the national monetary stream.
Considering that the Governor must be aware of the administration’s well-publicized intention to spend P8 trillion on infrastructure between now and the end of President Duterte’s term, I’m trying to figure out what was in the Governor’s mind when he made the reported statements. Does Mr. Espenilla think that the BSP operates in a vacuum? Does he think that his favored monetary expansion does not have to take into account the “Build, Build, Build” program’s likely impact on the economy? And has he assessed the economy’s capacity to absorb—in terms of consumer prices and resource availabilities—all the additional purchasing power unleashed into the economy by “Build, Build, Build” and his proposed monetary expansion?
No “leaning against the prevailing winds” for Governor Espenilla. Wherever he is, Chairman Eccless must be shaking his head.
E-mail: romero.business.class@yahoo.com