PHILIPPINE MONETARY POLICY

Monetary Policy – measures or actions taken by the central bank to influence the general
price level and the level of liquidity in the economy. Monetary policy actions of the
BSP are aimed at influencing the timing, cost and availability of money and credit,
as well as other financial factors, for the main objective of stabilizing the price level.

o Expansionary Monetary Policy – monetary policy setting that intends to

increase the level of liquidity/money supply in the economy and which could also
result in a relatively higher inflation path for the economy. Examples are the
lowering of policy interest rates and the reduction in reserve requirements.
Expansionary monetary policy tends to encourage economic activity as more
funds are made available for lending by banks. This, in turn, increases aggregate
demand which could eventually fuel inflation pressures in the domestic economy.

o Contractionary Monetary Policy - monetary policy setting that intends to

decrease the level of liquidity/money supply in the economy and which could also
result in a relatively lower inflation path for the economy. Examples of this are
increases in policy interest rates and reserve requirements. Contractionary
monetary policy tends to limit economic activity as less funds are made available
for lending by banks. This, in turn, lowers aggregate demand which could
eventually temper inflation pressures in the domestic economy.

In accordance with Republic Act No. 265,The Bangko Sentral ng Pilipinas or BSP
is the central monetary authority of the Republic of the Philippines. It provides policy
directions in the areas of money, banking and credit and exists to supervise
operations of banks and exercises regulatory powers over non-bank financial
institutions. It keeps aggregate demand from growing rapidly with resulting high
inflation, or from growing too slowly, resulting in high unemployment.

The primary objective of BSP's monetary policy is to promote price stability

because it has the sole ability to influence the amount of money circulating in the
economy. In doing so, other economic goals, such as promoting financial stability and
achieving broad- based, sustainable economic growth, are given consideration
in policy decision-making.

List of Advantages of Monetary Policy

1. Expansionary monetary policy makes it possible for more investments
come in and consumers spend more. With the banks lowering the interest
rates on mortgages and loans, more business owners will be encouraged to
expand their businesses since they are more available funds to borrow with
interest rates that they can afford. On the other hand, prices of commodities
will be lowered and the buying public will have more reason to buy more
consumer goods. In the end, companies will profit while their customers are
able to afford what they need like basic commodities, property and services.
 2. Lowered interest rates also lower mortgage payment rates. Another
advantage of monetary policy in relation to lowered rates is that it also affects
the payments home owners need to meet for the mortgage of their homes.
Reduced mortgage fees will leave home owners more money to spend. Also,
they will be able to settle their monthly payments regularly. This is a win-win
situation for merchandisers, creditors and property investors as well.
3. It allows the Central Bank to apply quantitative easing. The central bank
can make use of this policy to print or create more money which enables it to
purchase government bonds from banks. The end result is increased cash
reserves in banks and also monetary base. This also leads to reduced interest
rates and more money for the bank to lend its borrowers.
4. It promotes predictability and transparency. Supporters say that
policymakers are obliged to make announcements that are believable to
business owners and the consumers when it comes to the type of monetary
policy to be expected in the coming months for it to be a success.

List of Disadvantages of Monetary Policy

1. Despite expansionary monetary policy, there is still no guaranteed
economy recovery. Some economists who criticize the central bank on the
policy say that in times of recession, not all consumers will have confidence to
spend and take advantage of low interest rates. If this is the case, then it is a
disadvantage.
2. Cutting interest rates is not a guarantee. Others also claim that even if the
banks are given lower interest rates by the Central Bank when they borrow
money, some banks might have the funds. If this happens, there will be
insufficient funds people can borrow from them.
3. It will not be useful during global recession. Proponents of expansionary
monetary policy say that even if banks will lower interest rates and more
consumers will spend money, during a global crisis, the export industry might
suffer. They say that if this is the current situation, the losses of exporters are
more than what businesses can earn from sales.
4. Contractionary monetary policy can discourage businesses from
expansion. Opponents claim that if the Central Bank will impose this policy,
interest rates will increase and businesses will not be interested to expand their
operations. This can lead to less production of manufacturers and higher prices.
Consumers might not be able to afford goods and services. Worse, it might
take a long time for these businesses to recover and eventually force them to
close shop. If this continues, workers might lose their jobs.
Philippine Banking System

The Philippine banking system is composed of universal and commercial banks,

thrift banks, rural and cooperative banks.

Universal and commercial banks represent the largest single group, resource-
wise, of financial institutions in the country. They offer the widest variety of banking
services among financial institutions. In addition to the function of an ordinary
commercial bank, universal banks are also authorized to engage in underwriting and
other functions of investment houses, and to invest in equities of non-allied undertakings.

The thrift banking system is composed of savings and mortgage banks, private
development banks, stock savings and loan associations and microfinance thrift banks.
Thrift banks are engaged in accumulating savings of depositors and investing them. They
also provide short-term working capital and medium- and long-term financing to
businesses engaged in agriculture, services, industry and housing, and diversified
financial and allied services, and to their chosen markets and constituencies, especially
small- and medium- enterprises and individuals.

Rural and cooperative banks are the more popular type of banks in the rural
communities. Their role is to promote and expand the rural economy in an orderly and
effective manner by providing the people in the rural communities with basic financial
services. Rural and cooperative banks help farmers through the stages of production,
from buying seedlings to marketing of their produce. Rural banks and cooperative banks
are differentiated from each other by ownership. While rural banks are privately owned
and managed, cooperative banks are organized/owned by cooperatives or federation of
cooperatives.

The BSP likewise releases selected statistics on non-banks with quasi-banking

functions. This group consists of institutions engaged in the borrowing of funds from 20
or more lenders for the borrower's own account through issuances, endorsement or
assignment with recourse or acceptance of deposit substitutes for purposes of relending or
purchasing receivables and other obligations.

Fiscal Policy in the Philippines

In economics and political science, fiscal policy is the use of government revenue
collection (taxes or tax cuts) and expenditure (spending) to influence a country's
economy. Fiscal policy refers to the "measures employed by governments to stabilize the
economy, specifically by manipulating the levels and allocations of taxes and government
expenditures. Fiscal measures are frequently used in tandem with monetary policy to
achieve certain goals. In the Philippines, this is characterized by continuous and
increasing levels of debt and budget deficits, though there have been improvements in the
last few years.

The Philippine government's main sources of revenue are taxes, with some non-
tax revenue also being collected. To finance fiscal deficit and debt, the Philippines rely
on both domestic and external sources.

Fiscal policy during the Marcos administration was primarily focused on indirect
tax collection and on government spending on economic services and infrastructure
development. The first Aquino administration inherited a large fiscal deficit from the
previous administration, but managed to reduce fiscal imbalance and improve tax
collection through the introduction of the 1986 Tax Reform Program and the value added
tax. The Ramos administration experienced budget surpluses due to substantial gains
from the massive sale of government assets and strong foreign investment years and
administrations. The Estrada administration faced a large fiscal deficit due to the decrease
in tax effort and the repayment of the Ramos administration's debt to contractors and
suppliers. During the Arroyo administration, the Expanded Value Added Tax Law was
enacted, national debt-to-GDP ratio peaked, and underspending on public infrastructure
and other capital expenditures was observed.

Revenues and Funding

The Philippine government generates revenues mainly through personal and
income tax collection, but a small portion of non-tax revenue is also collected through
fees and licenses, privatization proceeds and income from other government operations
and state-owned enterprises.

 Tax Revenue. Tax collections comprise the biggest percentage of revenue

collected. Its biggest contributor is the Bureau of Internal Revenue (BIR),
followed by the Bureau of Customs (BOC).
 Income Taxes. Income tax is a tax on a person's income, wages, profits arising
from property, practice of profession, conduct of trade or business or any
stipulated in the National Internal Revenue Code of 1997 (NIRC), less any
deductions granted. Income tax in the Philippines is a progressive tax, as people
with higher incomes pay more than people with lower incomes.
 E-VAT. The Expanded Value Added Tax (E-VAT), is a form of sales tax that is
imposed on the sale of goods and services and on the import of goods into the
Philippines. It is a consumption tax (those who consume more are taxed more)
and an indirect tax, which can be passed on to the buyer. The current E-VAT rate
is 12% of transactions. Some items which are subject to E-VAT include
petroleum, natural gases, indigenous fuels, coals, medical services, legal services,
electricity, non-basic commodities, clothing, non-food agricultural products,
domestic travel by air and sea.
 Tariffs and Duties. Second to the BIR in terms of revenue collection, the Bureau
of Customs (BOC) imposes tariffs and duties on all items imported into the
Philippines. According to Executive Order 206, returning residents, Overseas
Filipino Workers (OFW's) and former Filipino citizens are exempted from paying
duties and tariffs.
 Non-Tax Revenue. Makes up a small percentage of total government revenue
(roughly less than 20%), and consists of collections of fees and licenses,
privatization proceeds and income from other state enterprises.
 The Bureau of Treasury. The Bureau of Treasury (BTr) manages the finances of
the government, by attempting to maximize revenue collected and minimize
spending. The bulk of non-tax revenues comes from the BTr's income. Under
Executive Order No.449, the BTr collects revenue by issuing, servicing and
redeeming government securities, and by controlling the Securities Stabilization
Fund (which increases the liquidity and stabilizes the value of government
securities through the purchase and sale of government bills and bonds.
 Privatization. Privatization in the Philippines occurred in three waves: The first
wave in 1986–1987, the second during 1990 and the third stage, which is
presently taking place. The government's Privatization Program is handled by the
inter-agency Privatization Council and the Privatization and Management Office,
a sub-branch of the Department of Finance.
 PAGCOR. The Philippine Amusement and Gaming Corporation (PAGCOR) is a
government-owned corporation established in 1977 to stop illegal casino
operations. PAGCOR is mandated to regulate and license gambling (particularly
in casinos), generate revenues for the Philippine government through its own
casinos and promote tourism in the country.

Coordinating Fiscal & Monetary Policy

Fiscal policy and monetary policy are the two tools used by the state to
achieve its macroeconomic objectives. While for many countries the main
objective of fiscal policy is to increase the aggregate output of the economy, the
main objective of the monetary policies is to control the interest and inflation
rates. The IS/LM model is one of the models used to depict the effect of policy
interactions on aggregate output and interest rates. The fiscal policies have a
direct impact on the goods market and the monetary policies have a direct impact
on the asset markets; since the two markets are connected to each other via the
two macro variables output and interest rates, the policies interact while
influencing output and interest rates.