Philippine economy

[ANALYSIS] Are monetary, fiscal policies effective vs PH recession?

JC Punongbayan
[ANALYSIS] Are monetary, fiscal policies effective vs PH recession?
In the end, our economy’s speedy rebound rests not so much on monetary or fiscal policies, but on sound public health measures

With total output declining for five consecutive quarters, we’re officially in the middle of the Philippines’ longest recession or sustained economic downturn since Martial Law. (READ: PH economy ‘on the mend’? It’s actually stalling)

This being a health crisis first and foremost, there’s no surer, more sustainable way of bringing back our economy to life than implementing better pandemic management as well as mass vaccination. To the extent possible, government ought to aim for the elimination of COVID-19.

Naturally, economic policymakers must often give way to the health experts these days. But this is not to say that economists are totally powerless. They still have in their arsenal a set of policy tools to fight recessions such as this one.

But are these economic tools working at all to help mitigate the recession and bring us closer to recovery? Not as much as we want them to.

Monetary policy

Let’s start with monetary policy, which involves the actions of the Bangko Sentral ng Pilipinas (BSP).

Most people think of the BSP as merely the printer of bills and the minter of coins, or as the regulator of banks. But, in fact, one of the BSP’s chief purposes is macroeconomic: to ensure that prices are stable enough and “conducive to a balanced and sustainable economic growth.”

Right now, amid the recession, the BSP has tried its best to prop up the economy by injecting more money or liquidity into the economy.

It has done so primarily by lowering its policy interest rate – which orchestrates the interest rates prevailing across the economy – to a historic low of 2% (Figure 1). In so doing, the BSP aims to encourage people to take out new loans for, say, businesses, condo units, or cars – all of which will boost spending, and thus, growth.

Figure 1.

Apart from this, the BSP has also reduced its so-called “reserve requirement ratio” by a full 2% in 2020. This just means that banks don’t have to keep too much of their deposits as reserves in the BSP, freeing up funds they can lend to clients.

“Expansionary” monetary policies such as these ordinarily promote bank lending. But they’re not so effective this time. In fact, bank lending has been shrinking since December 2020, with its growth rate reaching a 14-year low (Figure 2).

This is largely because of the dense fog of uncertainty still hanging over the economy. Banks, fearing that many borrowers might not be able to repay, are imposing more stringent requirements than before. Borrowers, too, are hesitating to take out loans – at least until they’re sure their jobs or businesses will survive in the short run.

It’s a classic case of leading the horse to water but failing to make it drink.

Figure 2.

The apparent ineffectiveness of monetary policy is by no means unique to the Philippines. Many central banks around the world are similarly trying and failing to promote economic activity substantially – especially in places where interest rates are too low to begin with, so that any further drop in interest rates will have little to no impact on growth.

Said Gita Gopinath, the chief economist of the International Monetary Fund, “the world is in a global liquidity trap, where monetary policy has limited effect.” Therefore, “fiscal policy must play a leading role in the recovery.”

Fiscal policy

With BSP doing its part, it’s up to the rest of the Philippine government – mainly the executive and legislative branches – to pursue expansionary fiscal policy.

First, government must pump up its spending tremendously.

The idea that massive government spending can save an ailing economy is an old one, harking back to the ideas of economist John Maynard Keynes during the Great Depression in the 1930s. Spending of this sort – say, on infrastructure projects – is expected to cause a ripple effect in the economy, so that a peso of public spending might generate more than a peso in extra economic output. This is also called the “multiplier effect.”

However, the rise in government spending has been anything but tremendous.

To begin with, the 2021 budget (at P4.5 trillion) is only about 10% larger than the 2020 budget. While most of its budget increases did go to Build, Build, Build projects, government is having a hard time boosting infrastructure spending.

In the latest GDP report for the 1st quarter of 2021, there was a 26.2% jump in public construction from 2020 (Figure 3). That looks sizable, but in truth that amounted to just an additional P31.3 billion – puny compared to the trillions of pesos originally promised by Build, Build, Build. Public construction also failed to offset the huge decline in private construction.

Figure 3.

At the same time, President Rodrigo Duterte and his economic managers are refusing to pour substantial sums on economic aid, even if that in itself also promises to create multiplier effects.

In the US, the federal government’s stimulus checks (amounting to as much as $1,400 per person in the most recent round) are said to have spurred consumer spending and put the US economy well on the path to recovery.

Another way to conduct expansionary fiscal policy is to cut taxes. This tends to raise the disposable income of consumers or the earnings of corporations. This, in turn, allows them to spend more on the economy.

In the middle of the pandemic, Duterte did sign the Create Law, which lowered the income tax rate paid by corporations. But it’s doubtful whether corporations will spend their windfalls to expand operations or hire new workers, what with demand for goods and services in the economy still rather anemic. Create might just end up being a gift to the rich. (READ: Amid record hunger, Duterte aids the rich)

Worse, Create’s tax cuts will almost certainly drain the public coffers, deplete much-needed funds for the pandemic response, blow up the budget deficit in coming months, and compel government to borrow even more – on top of the record borrowings it already incurred during the pandemic. (READ: Debt is rising fast, but worry more about Duterte’s spending)

It’s plain as day that the Duterte government is not implementing the right fiscal policies. Apart from refusing to spend aggressively – constantly and misguidedly citing the need for “fiscal prudence” – its corporate tax cuts are threatening to drain the public coffers at the worst possible time.

Health is wealth

In a forum last April 26, Duterte’s economic managers boasted that the government’s total pandemic response amounted to 15.4% of the country’s GDP or total output.

But BSP Governor Ben Diokno later claimed that the government’s monetary response alone was 11% of GDP or about P2 trillion. This implies that the government’s fiscal response was just about 4.4% of GDP – quite low in ASEAN, given the depth of our economic slump (Figure 4).

Figure 4.

Aside from injecting liquidity into the economy, I should mention here that the BSP also went out of its way to lend billions of pesos to the cash-strapped national government in 2020.

Clearly, then, the BSP seems to be doing the heavy lifting when it comes to saving our economy. But it can only do so much, and Duterte must redouble his efforts. The quick passage of Bayanihan 3, an economic relief package worth more than P405.6 billion, is low-hanging fruit. (READ: Why Congress needs to pass Bayanihan 3)

In the end, however, our economy’s speedy rebound rests not so much on monetary or fiscal policies, but on sound public health measures – better pandemic management, mass vaccination – which will allow Filipinos to get back to their normal lives and resume business as usual.

In short, the best economic policy now is good health policy. –

JC Punongbayan is a PhD candidate and teaching fellow at the UP School of Economics. His views are independent of the views of his affiliations. Follow JC on Twitter (@jcpunongbayan) and Usapang Econ (

JC Punongbayan

JC Punongbayan, PhD is a senior lecturer at the UP School of Economics. His views are independent of the views of his affiliations.