By Melissa Luz T. Lopez, February 18 2019; Business World

Image Credit to Business World

TWO NEWLY ENACTED LAWS are seen to strengthen operations of the Bangko Sentral ng Pilipinas (BSP), with monetary officials noting they will now have a better handle on inflation as well as on the financial system.

BSP Deputy Governor Diwa C. Guinigundo welcomed the enactment of the rice tariffication law as well as changes to the BSP Charter, saying these should increase the potency of central bank steps to keep prices stable.

The rice measure replaces import caps and allows the private sector to bring in cheap rice from abroad subject to tariffs.

Among others, private importers will pay a 35% tariff on rice bought from within Southeast Asia, raising revenue for the government and also funding a rice industry competitiveness fund that will support local farmers.

“The BSP expects the law to result in at least 0.6 percentage point (ppt) reduction in inflation in 2019 and around 0.3-0.4 ppt reduction in 2020. It’s split because implementation is already close to the end of the first quarter,” Mr. Guinigundo said in a text message when sought for comment.

President Rodrigo R. Duterte signed the rice tariffication measure into law on Friday, hours before it would have otherwise lapsed into law sans a veto.

Last year’s inflation rate of 5.2%, which was past the BSP’s 2-4% target band, was due largely to food supply constraints. In fact, food prices went up by an average of 6.6% in 2018, faster than the headline print.

From a peak of 9.7% food inflation in September 2018 — which also led to a nine-year peak of 6.7% for the headline figure — food prices have since slowed for four consecutive months to 5.1% in January. The BSP now expects 2019 inflation at 3.1%, well within target and far slower than last year’s pace.

Pending the signing of the rice tariffication law, the National Food Authority had approved the importation of 1.186 million metric tons of the staple under an out-of-quota scheme in a bid to ensure sufficient stocks ahead of an expected El Niño episode this year.

Another key reform enacted last Friday strengthens the central bank itself.

Key features of Republic Act No. 11211 include raising BSP’s paid-up capital to P200 billion from P50 billion and restoring the central bank’s authority to issue debt papers.

The law also widens the scope of BSP supervision to cover money service businesses, credit granting businesses and payment system operators.

In a statement, BSP Governor Nestor A. Espenilla, Jr. described the updated central bank charter as “timely and attuned to a fast-evolving market landscape.”

“The new BSP Charter embodies a package of reforms that will further align its operations with global best practices, improve the BSP’s corporate viability, and enhance its capacity for crafting proactive policies amid rising interlinkages in the financial markets and the broader economy,” the central bank said on Saturday.

The law also removes money supply and credit levels as bases for setting monetary policy, with the focus put on price stability.

Mr. Guinigundo said separately that the expanded powers and additional capital will “empower the BSP to conduct more effective market-based open market operations to preserve appropriate levels of liquidity and ensure stable prices.”

One provision authorizes the BSP to set aside reserves which it can tap to prevent losses from its foreign exchange operations. The BSP conducts “tactical intervention” during the daily peso-dollar trading, in line with its mandate of price and financial stability. A weaker peso usually means gains for the BSP, given that a chunk of its assets and investments are expressed in dollars. — Melissa Luz T. Lopez