MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has warned it may be forced to purchase gold abroad for its reserve requirements should local sales of the metal continue to drop due to taxes levied by the government, a central bank official said.
“If nothing happens, we might be forced to downsize our gold refinery. The effect is that the BSP will not be able to buy gold using pesos,” BSP Deputy Governor Diwa Guinigundo told The STAR in a text message late Monday.
“While gold can be bought from the international market, this will have to be done using (foreign exchange). Foreign exchange reserves will not be increased in the process,” he added.
When asked when the BSP can say that it needs to buy gold abroad, Guinigundo replied: “This is a question of timing policy and therefore not for public consumption.”
Gold is considered as a safe haven in times of foreign exchange volatility, meaning, investors flock to it when currencies around the world are plunging in value to protect their investment. BSP, by law, is supposed to be the sole purchaser of gold from local small-scale miners.
Gold purchased by the BSP become part of the country’s foreign reserves, which serve as buffer funds for external shocks. Once BSP decides to buy gold abroad, it will use foreign exchange reserves, causing it to remain at a certain level, or worse, decline.
Guinigundo said BSP purchases of the metal has been declining for the past months as miners move to the black market after the Bureau of Internal Revenue (BIR) charged two-percent excise tax and five-percent withholding tax against gold sales.
Government data showed gold sales to the BSP plunged 95 percent in the first semester to just 786 kilograms from 15,003 kilograms last year.
“We are not asking the BIR to reduce or remove the tax but to consider a smaller base. This is in recognition of the fact that the final seller to the BSP gold buying stations is not necessarily the gold miner but a trader or middleman who would have to pay for the gold produce to the initial seller,” Guinigundo explained.
With a lower tax base, taxes to be paid by the gold seller will also be lower and Guinigundo is hoping this would encourage miners to sell gold to BSP instead of to the black market as feared by many.
But BIR Commissioner Kim Jacinto-Henares said the law, which was only implemented late last year, will be implemented as it is. “The law does not allow us to assume the base, so how can we do that?” Henares said in a phone interview.
Bank of the Philippine Islands economist Jun Neri said gold is an important part of the country’s reserves as it gives BSP “flexibility” to sustain the value of over-all reserves which hit a new record of $79.3 billion as of July.
“It is a natural way to balance the portfolio of assets. Gold, being one of the options, is one way of protecting against inflationary pressures in the long term,” Neri said in a phone interview.
Guinigundo expressed hope the BIR would be consider its taxing proposal. “The traders and miners during our consultations with them support this approach,” he said.