EDITORIAL - Risking financial resilience

The creative movement of public funds by the government has drawn the attention even of the International Monetary Fund. In a country report released during the Christmas holidays, the IMF said it is “important” to quickly restore the capital of the Land Bank of the Philippines and Development Bank of the Philippines. The IMF said both the Landbank and the DBP must exit regulatory relief “as soon as possible.”

The Landbank is mandated to provide financing for agricultural production while the DBP supports rural development efforts. The two banks, however, were required to contribute a combined P75 billion or 65 percent of the P125-billion seed capital for the country’s first sovereign wealth fund administered by the Maharlika Investment Corp.

The MIC had to source the bulk of its seed capital from the DBP and Landbank after a public uproar forced the government to retreat from its original plan of tapping people’s pensions in the Social Security System and Government Service Insurance System for Maharlika capitalization. Also included in the MIC seed capital were dividends from the Bangko Sentral ng Pilipinas as well as earnings of the Philippine Amusement and Gaming Corp., royalties and proceeds from privatization.

But the Landbank and DBP also have their specific mandates, and their contributions to the Maharlika reduced their liquidity. The Bangko Sentral expressed concern that the contributions to the MIC could make the two banks noncompliant with minimum capital requirements. The Landbank and DBP were then given regulatory relief of two to three years. The IMF said the two banks are now pursuing strategies that would strengthen their capital position, including possible nonpayment of dividends to the national government.

“While the establishment of the MIC can help address the country’s investment needs, it should not come at the cost of a resilient financial system, sound regulatory framework, and level-playing field,” the IMF said.

The government has said the IMF is not suggesting the return of the P75 billion to the Landbank and the DBP. How the government intends to “replenish” the capitalization of the two state-run lenders is unclear. What’s clear is that there could be adverse consequences if concerns such as those raised by the IMF go unheeded.