Economists to Bangko Sentral: Print money for coronavirus response

MANILA, Philippines – Faculty of the University of the Philippines School of Economics urged the Bangko Sentral ng Pilipinas (BSP) to study printing more money and do "whatever it takes" to combat the economic impact of the coronavirus pandemic. 

Economists Toby Monsod, Orville Jose Solon, Maria Socorro Gochoco Bautista, Emmanuel de Dios, Joseph Capuno, Maria Joy Abrenica, Cielo Magno, and Renato Reside Jr said in a paper that the BSP must take on the crucial role of being the "lender of last resort" during the crisis. (READ: What the Philippine economy could be like after coronavirus)

"It (the central bank) must stand ready to provide needed liquidity to banks to help borrowers who are unable to service their debts owing to the forced contraction, and prevent a crisis in the real sector from spilling over to the financial sector that would imperil financial stability," the economists said. (READ: What we know so far: Funding the fight vs coronavirus)

How it works

Here are 4 ways by which the government can raise money, and how the UP economists assessed them in relation to the pandemic:

1. Collecting more taxes - Economists outright nixed the imposition of new taxes to meet the needed amount of cash for the pandemic, as the economy is at a standstill and the public has nothing more to give.

"To accomplish this task, the government must set aside – for the moment, anyway – its old paradigm of spending to stimulate the economy, and then taxing to catch up with its deficit targets. Rather, the government must spend on a massive social protection scheme primarily to ensure the economy remains at a standstill. And it must do this without imposing taxes to compensate," they said.

2. Borrowing money from the public - In this case, the Bureau of the Treasury sells bonds to the public through their banks.

The economists noted that this may not work as people may want to hold on to cash due to the lockdown.

3. Borrowing money from the BSP - This has already been done, as the BSP bought P300 billion worth of government securities and injected cash into the government's war chest.

The BSP technically gave the government some form of "bridge loan," as the latter will have to pay the central bank the amount in 6 months. 

The economists noted that the 2nd and 3rd options pose a problem: The extra cash would not be coming from more revenues, therefore increasing the country's budget deficit. (READ: [ANALYSIS] How the budget deficit exploded under Duterte's watch)

A budget deficit simply means that the government spent more than what it collected from taxes or generated from investment activities.

In an interview with Rappler, Monsod said the Department of Finance (DOF) should not worry much about the breach in the deficit target affecting credit ratings.

Good credit ratings give the Philippines and banks lower interest rates.

"We breach the deficit, go to as high as 7%, then so what? We have to live with that deficit. What will count is how well you will spend the money you borrowed," Monsod said.

Finance Secretary Carlos Dominguez III said the economic team sees the deficit hitting 5.3%.

"If we show that this crisis was handled well and we made the right public investments, our credit rating may not be affected," Monsod said. (READ: Duterte gov't has no breakdown of P275B to be tapped for pandemic response)

4. BSP literally printing more money - Printing money "out of thin air" is the central bank's most important power.

In normal times, the BSP does not resort to printing money because it could raise inflation.

Recall that Venezuela registered hyperinflation of 10,000% in 2019 as it tried to cover for its sky-high budget deficit of 30% by printing more money.

However, the Filipino economists noted that this scenario is far from what the country is experiencing due to the virus. Philippine inflation year-to-date stands at 2.7%, well within target.

"These are not normal times. Inflation is not a pressing problem in a contracted economy," the economists said.

Banks have a "checking" account with the BSP. The BSP then credits these "checking accounts" with more reserves. 

With this mechanism, banks would have more money and could lend more cash to small businesses.

Likewise, the treasury also has a "checking account" with the central bank. When the BSP buys bonds from the treasury, it credits this account the same way as it does with commercial banks, and in turn, creates money for the government.

Role of banks

The economists noted that commercial banks will have a big role for the money printing scheme to work.

Banks will have to lend to small businesses. Before the pandemic, banks would rather pay penalties than give out loans to small companies, deeming them as risky borrowers. (READ: Agriculture department blames banks for poor growth)

Small businesses, however, may be intimidated to get loans. With a standstill on both ends, printing money would not result in anything.

The pandemic has aggravated and further exposed the financial inclusion problem in the country. (READ: 'Sariling diskarte': The heavy impact of lockdown on micro, small businesses)

Monsod said a guarantee from the DOF would help lessen the risks that banks need to take in and would encourage them to lend to small businesses.

The BSP previously lowered interest rates and the amount banks need to hold in their reserves this year to inject liquidity into the financial market. Paired with money printing and actual lending to small businesses, Monsod said this could spark the economy back to life post-lockdown.

Meanwhile, the economists cautioned against selling government assets to raise funds. Monsod said selling assets should be the "very last resort" as it shows "desperation" on the part of the government.

"What is obtained from selling assets now, most likely in a fire sale, may be far less than the present value of future income streams from these assets," the economists said. –

Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.