Thursday, October 2, 2008


For: Ms. Belinda Olivares-Cunanan
Members of media
Members of the academe
Members of the economics “profession”
BSP Governor and members of the BSP Monetary Board
Concerned Filipinos who care about what is happening
in our country and economy


The central bank is supposed to maintain interest rates at reasonable levels at all times, and it is clothed with awesome powers to sustain that mission. Without direct regulation, it should work for restrained interest rates at optimum level, as opposed to unbridled and superfluous high interest rates that prevailed in the economic crisis when high lending rates reached 35% in Mindanao, 37% in the Visayas, and 32% in Metro Manila. In Central Luzon, some borrowers had to contend with interest rates of up to 42%. However, can interest rates be controlled without direct regulation?

In its February 10, 1998 reply to my January 1998 letters, BSP explained that it has taken concrete steps meant to lower interest rates, as follows:

(1) “Liquidity reserve requirements have been lowered from a high of
8 percent in August 1997 to 4 percent by mid-November 1997.”

(2) “The BSP’s overnight borrowing rate now stands at 12.75 percent,
from 32.0 percent in mid-July 1997.”

(3) “The BSP has also opened its 30-day lending window to provide
additional liquidity to the market.”

BSP’s letter had a very innocent but startling incidental admission--that its overnight borrowing rate was intentionally raised to sky-high 32% upon outbreak of crisis in mid-July 1997 (p. 100), which explains today what to me then was the totally unprovoked, baffling, and shocking doubling of bank lending rates from 15% in June 1997 to 32% right the following month (pp. 75, 77).

In the same letter, written roughly half-year after it let loose the high-interest-rate monster, BSP lamented that “despite…(its concessionary) measures…the prime lending rates of banks have remained recalcitrantly high….” In other words, BSP instituted measures that would directly benefit banks, which measures would be for the indirect benefit of borrowers by way of expected reduction in interest rates—-but banks did not pass on the benefit to the borrowing public.

By its own admission, at that critical time when borrowers needed relief from loan-default-inducing high interest rates, utterly helpless and outsmarted by local banks was the country’s bank of banks—-Bangko Sentral ng Pilipinas, a powerful and independent constitutional body, one that could legally dispense or withhold favors to banks under its supervision—-and in fact had already instituted concessionary measures designed to ease high interest rates, yet unable to roll back to desired lower levels the high lending rates that it so easily induced upwards at the onset of crisis.

What was unfortunate was that the solution—-which might have escaped the best minds of BSP officials and experts—-has long existed in the age-old carrot and stick approach that has been in use since biblical times. In fact, from this solution lies the potential of greatly influencing interest rates up or down without direct regulation—-not through BSP’s empty moral suasion that did not prevent the upward climb of high interest rates to dizzying heights during the crisis.

What could be done to the potentially recurring BSP problem? My previously mentioned April 1, 1998 letter to BSP and others concerned (pp. 114, 202), received by BSP on April 17, 1998, suggested what should come out naturally as a solution to the foregoing BSP predicament:

“What BSP should do then is to make entitlement to its concessionary measures conditioned upon the actual lowering of interest rates by the banks. For example, BSP can set a guiding threshold interest rate, say 18% per annum, and banks charging lending rates above the threshold shall be subject to stringent measures like 16% statutory reserve requirement and shall not be qualified to borrow under any of BSP’s lending facilities, while those charging at the threshold or below will be subject to relaxed or concessionary measures like reduced statutory reserve requirement of say 8% and qualified to borrow from BSP at beneficial terms. If the differences between the stringent and concessionary measures…are significant enough, the scheme can be very effective as it will then become unattractive for banks to continue charging interest rates above the threshold….”

After about one month from the release of my letter to BSP, a newspaper with nationwide circulation carried the following news item:

“Bangko Sentral Governor Gabriel Singson has agreed to cut the reserve requirement on bank deposits by two percentage points to 8 percent from the existing 10 percent to enable banks to further bring down their lending rates…. Approval will be conditional on the BAP (Bankers Association of the Philippines) agreeing to lower the member-banks’ lending rates from the present (spread of) 2-7 (percent)…to 1.5 to 6 (percent)…. BAP had accepted Singson’s condition…. The governor made it very clear…that he would only consider reducing the intermediation cost if…banks would reduce the range of their lending rates. Otherwise, the move would only benefit the banks, not their borrowing customers.” (Doris C. Dumlao, “Bank reserves cut to 8%,” Philippine Daily Inquirer, May 21, 1998, p. B1).

So, we can see that within certain limitations, if BSP will set conditions that will affect the profitability of banks, or make things easier or harder for them, it can motivate them to act according to its wishes. In the reported actual case of influencing banks to reduce their lending rates, BSP used a soft or consensual approach. Fine. Whether by soft or hard approach, BSP can control ultra high local interest rates, which reached up to 38% or more during the crisis, by setting stiff punitive conditions that will really hurt the banks or make them less competitive if they stubbornly insist on charging very high interest rates. For example, BSP can set a limit of say 18% and any banks charging lending rates higher than this level will be subject to a different set of onerous measures, like much higher reserve requirements, much higher interest rate on BSP lending facilities or no lending facility at all, much lower cap on allowed dollar holdings,
and so on....

In the end, will the following monetary authorities go down in history as unable to tame the shameful “recalcitrantly high” interest rates in their time despite BSP’s awesome powers: BSP Governor Gabriel Singson and Monetary Board members Guillermo Carague, Vicente Valdepenas, Jr., DTI Secretary Cesar Bautista--who was replaced in mid-1998 by next DTI Secretary Jose Pardo--Cayetano Paderanga, Teodoro Montecillo, and Andre Navato?


San Miguel, Bulacan
October 2, 2008

Note: Excerpt from the book Puzzlers/Economic Sting,
pages 155-156.

Cc through separate emails:
Selected executive & legislative government officials,
Selected BSP officials,
Selected members of media and academe,
professional & think-tank organizations,
civil society groups, concerned citizens, etc.

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