Primary responsibility for recovery lies with fiscal policy

"A third Bayanihan Act is urgently needed."Primary responsibility for recovery lies with fiscal policy



The recent BSP (Bangko Sentral ng Pilipinas) statement on the Philippine banking system’s 2020 lending operations has provided fresh support for the belief that the primary responsibility for reviving an economy from a severe slowdown lies with fiscal policy, not monetary policy.

In this country’s economic policy, BSP makes monetary policy - essentially the DOF (Department of Finance) makes fiscal policy, which essentially involves the management of the government’s finances.

The current pandemic plunged the Philippine economy into a deep downturn last year, its worst since 1983. The GDP (Gross Domestic Product) contracted in every one of 2020’s quarters, with the second quarter GDP contracting by a horrendous 16.5 percent. The contraction for the entire year was 9.5 percent.

The ECQ (Enhanced Community Quarantine) that was put in place by the government on March 15, 2020 lost no time taking its toll on the Philippine economy. As consumption of goods and services shrank because of the stay-at-home rule, tens of thousands of businesses - mostly medium, small and micro enterprises (MSME) - closed shop, throwing millions of Filipinos out of work and causing the swelling of the ranks of the impoverished.

At the height of the crisis, DSWD (Department of Social Welfare and Development) placed at 18 million the number of Filipinos who badly needed financial assistance.

The governor of the BSP was quick to declare that the nation’s monetary authority would deploy all its policy tools at its disposal to ensure that the economy had all the liquidity that was needed to sustain the businesses that were continuing to operate and to prevent further closures. 

The Monetary Board then proceeded to measures designed to increase the availability and reduce the cost of credit.

Unfortunately, BSP’s credit-loosening stance appears to have been largely unsuccessful.

“Overall, lending remained tepid as (universal and commercial) banks continued to be risk-averse amid the ongoing pandemic,” BSP said in its recent statement. The banks’ lending apparently slowed continuously for eight months last year and, for the first time since September 2006, declined in December.

“(Consumer loans) to residents grew at a slower rate in December… due to the slowdown in credit card loans, motor vehicle loans and salary-based consumption loans,” the statement went on to say, consumption accounts for approximately two-thirds of GDP. 

In 2020, the first year of the pandemic, the central bank maintained a highly accommodative stance and brought its policy rates to their lowest levels since the Great Recession of 2008. 

It placed so much additional money in circulation that interest rates declined to recession-combatting levels. Yet, the banking system’s total outstanding loans steadily decreased and eventually contracted.

The reasons? A slowdown in consumer borrowing and risk-averseness on the part of the banks, according to BSP.

There is an old saying that you can take a horse to water but you may not be able to make it drink. The impact of monetary policy is akin to that.

Monetary policymakers may make it possible for bankers to make low-interest loans to borrowers but (1) the bankers may be unwilling to lend and (2) credit-needy people may be unwilling to borrow. How can there be demand growth sufficient for an economic revival when the majority of the citizenry is jobless and/or unwilling to borrow from banks?

The economy cannot depend on monetary policy to provide the demand surge that it needs for quick recovery. What can the economy depend on to do that? Fiscal policy, which has the capability to put funds quickly and direct in people’s hands.

Primary responsibility for bringing about the Philippine economy’s exit from the current recession lies with fiscal policy, not monetary policy. Thus fiscal policy has not been deployed with sufficient strength. A third Bayanihan Act is urgently needed. 

Topics: Bangko Sentral ng Pilipinas , lending operations , Department of Finance
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