Continuity plus plus

Continuity plus plus” is how Governor Nestor A. Espenilla Jr. described his intentions for the Bangko Sentral ng Pilipinas (BSP) in his speech “Building on built foundations: continuity and change” before the Foundation for Economic Freedom last week.

To me, the plus plus, like proposals for new legislation like a Payments System Act (to formalize BSP oversight of national payments), an Islamic Banking Law, and a Collective Investment Schemes Law, is the gravy. The continuity, which I trust means keeping inflation benign, is the meat.

The very low inflation rates of only 1.4 percent in 2015 and only 1.8 percent in 2016 (averages of monthly rates) are unprecedented in the 21st century. The percentage was 2+ in December 2014-April 2015, 1+ or less in May 2015-August 2016, 2+ in September 2016-January 2017, and back up to 3+
only by February 2017. The mildness of inflation, rather than growth in Gross National Product, is the real reason for the drops in poverty and hunger in the last few years.

The recent progress in the economic wellbeing of the Filipino people also includes reductions in joblessness, widespread optimism about personal quality of life in the future, and—what is very unusual and most welcome—a steady dominance of those whose quality of life has improved from the past. These are as measured, of course, by the quarterly nationwide Social Weather Surveys, up to June 2017; watch for more on www.sws.org.ph. The government has hardly any counterpart, up-to-date, indicators.

The key role of inflation is what makes the BSP, now headed by Governor Espenilla, the most important promoter, or at least guardian, of the people’s economic welfare.

In the time of BSP Governor Amando Tetangco Jr., the average inflation rates (percent per year) were: July-December 2005 6.1; 2006 5.5; 2007 2.9; 2008 8.3; 2009 4.2; 2010 3.8; 2011 4.6; 2012 3.2; 2013 3.0; 2014 4.1; 2015 1.4; 2016 1.8; and January-June 2017 3.1.

Inflation was much higher in Tetangco’s first term, appointed by President Gloria Arroyo, than in his second, reappointed by President Benigno Aquino III. His second term was more successful in terms of doing good for the people.

The BSP has econometric capacity. The challenge of how to promote inclusive economic growth is essentially the question of how to have growth and price stability at the same time.

Thoroughly answering the question is best done by an econometric model that forecasts growth in GNP, the rate of inflation, and many other (so-called endogenous) variables, on the basis of expected changes in the money supply, the fiscal deficit, private investments, the balance of payments, and many other (so-called exogenous) variables. A model will have several equations that connect the variables by numerical parameters.

Anyone who does economic forecasting has some model, whether crude or sophisticated. The BSP has its own confidential econometric model. Congress and executive agencies like the National Economic and Development Authority and the Department of Budget and Management should have their own, and show us comparative estimates of the inflationary impact of alternative fiscal proposals.

The BSP has social survey capacity. The BSP’s quarterly Consumer Expectations Survey (CES) has a very adequate national sample size of 5,000 households. Its findings with respect to the people’s optimism are quite consistent with those of the Social Weather Surveys.

The CES is capable of measuring poverty, hunger and other wellbeing indicators on a quarterly basis, and of independently validating the SWS indicators. This will enable the BSP to see for itself how critical is inflation to the people’s welfare.

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