ASK an ordinary person about what the Bangko Sentral ng Pilipinas (BSP) does, and the usual reply is that it produces, issues, and regulates the country’s currency.
Those who know more may also mention that it supervises banks and other financial institutions with quasi-banking functions, and that it is the bank of banks and also the official depository of the national government.
Still others will say that the BSP maintains an efficient payment and settlement system so that transactions between financial institutions are recorded in real time.
The BSP actually does more as the Philippines’ monetary authority.
It also plays a role as the government’s financial advisor.
Just like individuals, governments may also need to borrow money at some point. The main source of income of the government comes from the people’s taxes. When the revenue collections are not enough, it may have to look elsewhere to get money to finance its operations, to fund economic activities, to spend at times of crisis or emergency, and also to pay for maturing obligations.
The national government can borrow domestically and/ or internationally. Government corporations can do likewise. However, local government units are limited to tapping the domestic market.
In any event, put together, these borrowings can be very substantial.
As of May 2013, total outstanding debt of the national government amounted to P5.3 Trillion. Of that, P3.45 trillion was sourced domestically while P1.9 Trillion was foreign-financed. Add to those loans, the several billions of debt owed by government corporations and local government units.
They can affect monetary aggregates and our balance of payments. They can affect monetary and price stability.
Since the Bangko Sentral is mandated by law to maintain monetary and price stability, (translation: to keep the inﬂation rate low and stable; to preserve the purchasing power of the peso) the national government and other government instrumentalities must seek at least the advice of the Bangko Sentral before borrowing.
In the case of foreign borrowings by the national government, the concurrence (not just the advice) of the Monetary Board must be obtained.
Just to be clear, the BSP’s opinion is limited to the monetary and balance of payment implications of any proposed loan.
The BSP does not rule on the intrinsic merit of the project or program to be financed. That is left to the sound judgment of the borrower concerned, be it the national government, the government corporation or the local government unit.
The BSP has advised the national government on the borrowing mix which should be adopted by the NG and the NG has heeded BSP advice.
For 2013, at least, the NG has decided to source its financial requirements mostly domestically, through the auction of treasury bills and treasury bonds.
According to National Treasurer Rosalia de Leon, foreign borrowing by the NG for this year will be limited only to tapping official development assistance (ODA) loans, which provide for very concessional terms to the government.
What happens, for instance, when a local government unit borrows without seeking BSP opinion on the proposed borrowing?
One of two things can happen: 1.) No financial institution will entertain such request to borrow by the local government unit. Or 2.) If a financial institution lends to the LGU, such institution will be facing strong sanctions from the BSP.
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