BSP open to investing huge dollar reserves

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is open to investing its huge dollar reserves in strategic local infrastructure projects like baseload power plants, instead of incurring virtual losses for keeping over $75 billion in its vaults while the peso keeps on gaining value against the US dollar.

This stance was advanced by Francisco Dakila Jr., director of the BSP’s center for monetary policy and financial policy, during a recent roundtable discussion on how competitive is the peso-dollar exchange rate.

This was in response to a presentation made by former University of the Philippines’ College of Economics dean Raul Fabella advocating a calibrated depreciation of the peso as a weapon to protect domestic industries from cheap imports, increase the peso earnings of OFWs and spur higher export growth.

The BSP is known to park its foreign reserves in ‘safe’ investments, mostly by buying US debt papers that command minimal interests and help the US government bridge its yearly budget deficit.

The BSP official, however, insisted the central bank will continue to pursue the control of inflation, often called inflation targeting, as its primary task, and allow other arms of government take care of the

growth targets for the economy.

Dakila admitted that tightening money supply to control inflation does not work when high prices of a basket of consumer goods like fuel oil, rice and vegetables are driven by scarcity. This happened in the case of rice in 2009 and vegetables after Luzon was directly hit by a succession of typhoons earlier this year.

Fabella presented recent studies by foreign economists that came to one conclusion: that an undervalued or inexpensive local currency is good to poor nations whose citizens have per capita incomes of $6,000 or less.

The Philippines, he said, with per capita income of less than $3,000 perfectly qualifies to keep its peso cheaper.

He suggested that in the present uncertain situation of exchange rate volatility, the government could adopt calibrated moves to allow the value of the peso to go down to 45 to the dollar and keep it there.

“If the BSP does that this holiday season, OFW remittances can infuse an additional P40 billion to the domestic economy which is a sure-hit stimulus package, “Fabella argued.

The economist suggested that part of the calibrated moves is for the national government to stop borrowing from abroad, the BSP to buy more dollars that come in and invest the money on big-ticket infrastructure projects like power plants and international airports and regulating the quick inflow and outflow of hot money.

This is doing things softly without inducing shock waves. It is rather subdued in comparison to his proposed quick devaluation strategy advanced in 1994.

That strategy was used by the Central Bank of Switzerland two months ago when it devalued the Swiss franc.