Monetary Policies

Having seen what the previous reporters have discussed regarding the country’s economic
situation, I would now like to present the first half of the policies we will be proposing to combat
the economic crisis, beginning with the monetary policies

Objective:
We now know that the current recession in the Philippine economy has brought about a
significant decline in output, affecting the purchasing decisions of consumers. Spending is at an
all time low, and has deflated money supply due to forward-thinking consumers who prefer to
safekeep their money for uncertainties rather than spending them on goods and services. We
believe that the central bank should seek to restore economic growth by replenishing the
economy’s money supply, firstly.

So with the intention of catering to the consumption component of national income, the
expansionary monetary policies we bring forward today can be described as ALERT

Aimed towards restoring national

Liquidity and
Enhancing consumption within
Recession during
The pandemic

The first of the policies is maintaining low interest rates NEXT

1. Maintain low interest rates - The primary benefit of low interest rates is its stimulative
effect on economic activity. By reducing interest rates, consumers will spend more and
businesses will enjoy the ability to finance operation at a cheaper rate, thereby
increasing their future earnings potential and reviving GDP. NEXT

Our decision to keep interest rates low is also backed up by the BSP’s support of the
COVID-stricken economy, even if their inflationary expectations were higher than the mean
inflation rate of 3.1 that was initially targeted. The solution was to keep the overnight borrowing
rate at 2%, and maintain lending rate at 2.5%. NEXT
However, we are extremely wary of the fact that by implementing lower interest rates, it may
lead to a rise in inflation if money supply rises faster than domestic growth. In fact, BSP
Governor Diokno noted, that inflation pressures are coming from the supply side due to forces
like the ASF outbreak in Luzon. That being said, we will consider a possible rate hike should
inflation remain stubbornly high.
Though lower interest rates may attract more loans from the public, the dwindling credit activity
among borrowers is another matter we considered. NEXT

As BSP Deputy Governor Dakila said in March of this year: "Because of the prevailing
uncertainty in the economy, there has been a much longer lag in the transmission of [monetary
policy on] credit activity. Banks are still reluctant to lend and business and the public are
reluctant to borrow," NEXT
This results in a shrinking lending rate due to banks imposing more stringent requirements, and
businesses hesitating to take out loans without having full confidence in their short-run
operations.

The stringent requirements and negative figures in bank lending should serve as enough of an
indication that borrowers should be given more incentives to take out loans. So, an equally
significant monetary policy to implement would be our second monetary policy which is to lower
reserve requirement ratios. NEXT

2. Lower reserve requirement ratio When the central bank decreases the reserve ratio, it
lowers the amount of cash that banks are required to hold in reserves, allowing them to
make more loans to consumers and businesses. This increases the nation's money
supply and expands the economy. NEXT

In 2020,the BSP has already reduced its “reserve requirement ratio” by 2% as you can see in
this table.

Reserve 2018 2019 2020 2021 (Apr)

Requirement
Ratio 3.625 4.408 2.733 2.000
Source: bsp.gov
As with lowering interest rates, although this policy attracts borrowers and potentially boosts
liquidity into the economy, we have been cautioned on its tendency to cause higher inflation
rates when money supply grows out of proportion. As inflation rates have already risen beyond
the BSP’s expectations, lowering reserve requirement ratios must be analyzed carefully to
accommodate more borrowing while limiting the risk of higher inflation. NEXT
Evaluation
Evaluating the ends of the proposed expansionary monetary policies to boost spending and
borrowing against the realities of output in the economy, it is clear to us that monetary policy will
be rendered ineffective if spending plans are continuously hampered by financial and
health-related uncertainties. The Philippines does not share this concern alone. In fact, most
central banks around the world are also attempting to promote economic activity by lowering
interest rates.

Considering that BSP has been implementing viable policies to alleviate the recession, and only
affect the economy in small amounts, fiscal policy is expected to step up in areas where
monetary policy is unable to perform. So with that, we present the second half of the proposals
with the fiscal policies.

Conclusion
To wrap up this discussion, I would like to reiterate that our proposed recovery program is
focused mainly on reviving the dwindling output. On the monetary side, we hope to achieve that
by encouraging more consumer spending to increase money supply, and on the fiscal side, we
advocate for lower taxes, increased government spending, and less regulations.

Having laid out our proposed monetary and fiscal policies, we must emphasize that at this point
in the economy, where too many exogenous factors are affecting the efficiency of our policies,
stability and security during the health crisis should be the first step to recovery. We therefore
come to the conclusion that while expansionary monetary and fiscal policies allow policymakers
to reach their goals for growth, they can only do so much when there is a bigger issue at hand.
If the root of financial uncertainty comes from the lack of health security, the economy cannot
revive itself unless its citizens feel safer under the present conditions. That being said, we firmly
believe that in order for these policies to reach their fullest potential, they must be accompanied
by effective health measures and better pandemic response initiated by the government to
achieve economic recovery.

And with that, we conclude our presentation. Thank you very much for listening.