MANILA, Philippines - The Bureau of Treasury has urged the Bangko Sentral ng Pilipinas (BSP) to slash the interest it pays on special deposit accounts (SDAs) to release more liquidity into the financial system and fund productive projects under the public-private partnership (PPP) scheme of the Aquino administration.
Deputy Treasurer Eduardo Mendiola said in an interview with reporters that lowering the interest rate on SDAs would encourage banks to pull out funds parked in the vault of the BSP into the financial system, resulting to a lower borrowing cost for the National Government.
“Immediately we will have a lower borrowing cost,” he stressed.
Funds parked in the BSP’s vault of the BSP now amount to nearly to P1 trillion as banks and investors continue to scout for high-yielding investment instruments.
The SDA facility consists of fixed-term deposits by banks and by trust entities of banks and non-bank financial institutions with the BSP. It was introduced in November 1998 to enable the BSP to expand its tool kit in liquidity management.
In April 2007, the BSP expanded access to the SDA facility by allowing trust entities to deposit in the SDA facility in order to better manage liquidity in the face of strong foreign exchange inflows.
The BSP said investors continued to shift to high-yielding SDAs resulting in a shift of funds from reverse repurchase agreements (RRPs) that is also used to siphon off liquidity from the financial system.
RRP refers to the purchase of securities from the central bank with an agreement to sell them back at a fixed date. The BSP has withdrawn several liquidity enhancing measures introduced in November of 2008 to cushion the impact of the global financial crisis on the domestic economy.
For his part, First Metro Investments Corp. executive vice president Juanchito Dispo told reporters that there is a need to reduce the four percent interest rate on SDAs so that the funds presently frozen in BSP vaults may move into productivity-enhancing investments in infrastructure, power, utilities and other areas, and help accelerate the development of the capital market.
“If you want money to go to productive use, you should cut SDA rates,” Dispo added.
The central bank’s Monetary Board has kept its key interest rates unchanged for 11 consecutive policy meetings since July last year. It has slashed its policy rates by 200 basis points between December 2008 and July last year as part of its accommodative stance to cushion the impact of the global financial crisis on the domestic economy.
This brought the overnight borrowing rate to a record low of four percent and the overnight lending rate to six percent.