The Philippines is on the cusp of positive change, and policy reform will help the country to reach its full potential and fight poverty.

Benjamin Estoista Diokno

My appointment as governor of the Bangko Sentral ng Pilipinas (BSP) in March 2019 may have surprised many. In honesty, I too was not expecting the job offer. Almost half way into my term as budget secretary, I was preoccupied with the reforms meant to fulfil an expansionary fiscal policy that will catapult the Philippines to its next stage of economic development. Our reform-oriented work in the budget department was public knowledge.

Nevertheless, I am pleased and humbled by the opportunity to serve as BSP governor. It is another area where I can help make a difference for the Philippines.

With my two predecessors being home-grown central bankers, some thought appointing a person from outside the central bank – more of a ‘fiscal guy’ – to head the BSP was a risky move. But I think the opposite is true.

About seven months into my new job, my extensive experience in the fiscal sector (I was also budget secretary during the Estrada administration and budget undersecretary during the first Aquino administration), together with my background in academia and the private sector (I was an economics professor and director in a financial institution), is put to good use in my work in the BSP as I am able to view the Philippine economy and lead the conduct of monetary policy and financial sector regulation with a broad lens.

A record of service

The Philippine economy has come a long way since being tagged 'the sick man of Asia'. Now, the Philippines is among the fastest growing and most resilient economies, with even brighter prospects ahead. It enjoys investment-grade credit ratings, which are on their way to an A grade.

Of course, the transformation did not happen overnight, but gradually and supported by many structural reforms that began decades ago.

Having been a public servant and economics professor for decades, I have witnessed the positive transformation of the economy and even helped craft some game-changing reforms. Among these were the 1986 tax reform, which addressed the problematic fiscal situation following martial law, and the 1991 Local Government Code, which decentralised basic services to local governments, thereby improving the efficiency of resource allocation.

Other 1990s reforms instrumental in the country’s transformation were oil deregulation, accession to the World Trade Organisation, the privatisation of telecommunications and water services, and the creation of the BSP to replace the debt-ridden Central Bank of the Philippines, among others. There were also administrative reforms that strengthened the capacity and integrity of government institutions.

Since then, the reform momentum has never slackened. Over the past three years, the government has enacted a series of bold reforms, including a national ID system, tax reforms, an easing of the foreign investments negative list, universal healthcare, a revised corporation code and an 'ease of doing business' law.

These ‘soft’ reforms come in tandem with physical infrastructure reforms. The ‘Build, Build, Build’ programme – featuring mass transit systems, inter-island connector roads and world-class airports, among other projects – is ushering in the country’s golden age of infrastructure.

With its reform-packed history and infrastructure drive, together with a strong domestic demand that allows it to rely less on exports, the Philippines remains resilient to external headwinds and is poised for further growth.

In fact, the Philippines is now on the verge of becoming an upper-middle-income economy and on its way to becoming a high-income economy by 2040.

Challenges remain

This favourable setting does not mean there are no tasks left on the economic front, however. With one-fifth of the population still in poverty, a lot more needs to be done.

For the BSP, 2018 was challenging. With rising global oil prices, weather disturbances and food-supply bottlenecks, inflation hit 5.2%, breaching the BSP’s target of 2% to 4%. This challenged the poverty reduction drive, with the poor being hit the most when inflation accelerates.

Maturity of leadership cut the problem short.

A series of prompt monetary actions by the BSP – hikes in the key policy rate totalling 175 basis points (bps) – arrested brewing second-round effects and anchored inflation expectations. Also, non-monetary actions by other agencies, including the liberalisation of the rice sector and streamlining of processes for food importation, boosted food supply.

If not for the maturity of economic governance, arresting elevated inflation would have taken longer.

Now, inflation is back within target. Based on BSP estimates for 2019 until 2021, average inflation will remain within 2% to 4%. As such, we have started normalisation with a 50bps cut in the policy rate so far this year. We also resumed cutting the reserve requirement ratio by a total of 200bps.

Moving forward, the BSP will be even more proactive in conducting monetary policy, bearing in mind the effects of inflation on the poor.  

On a mission

Now that the period of elevated inflation is over, we can focus on exciting new reforms, which can contribute to poverty reduction.

My appointment as BSP governor came shortly after the amended BSP charter became law in February 2019. It resulted in the BSP’s enhanced ability to manage liquidity and supervise the financial sector, the authority to issue debt securities, and expanded supervision powers to include not just banks but also money service businesses, credit institutions and payment system operators.

On top of this, there is the Gold Law, which exempts from tax the sale of gold from small-scale mining to the BSP; the National Payment Systems Act, which officially designates the BSP as supervisor of the payments and settlements system; the Personal Property Security Act, which allows assets besides properties to serve as collateral for loans; and the Islamic Banking Law for regulation and development of Islamic banking. In fact, I consider the strict implementation of these laws my first mission at the BSP.

My second mission is to accelerate financial inclusion; that is, making financial products and services accessible to low-income households.

While my predecessors have accomplished a lot in this area, I want to step it up by promoting the use of fintech with proper regulatory safeguards to ensure consumer protection. Since most of the population own mobile phones, fintech can help make financial products and services accessible to Filipinos from all walks of life. 

We are also pursuing initiatives that will make it easier to open bank accounts for savings and investments, and to secure business loans. For example, the BSP has assumed the task of printing the national IDs under the new national ID system law. With it, the absence of formal IDs, which banks require for transactions, among the marginalised is addressed.

Promoting inclusion

On the payments front, the use of QR codes for payments will soon become extensive. Also, following the launch of interoperable systems – which allow electronic fund transfers from one financial institution to another – the share of e-payments will hit the target of 20% of financial transactions in the country by 2020. With this trend, we can imagine e-payments accounting for at least half of financial transactions within five years.

We also continue to partner with institutions to teach savings and investments among overseas Filipinos and their families, students, micro-entrepreneurs, recipients of government subsidies and civil servants. Together, financial innovations and education will do much in poverty reduction.  

My third mission is to improve the financial environment and make it conducive for banks to perform their intermediary role. In fact, we are conducting a review of old regulations. We will do away with the outdated and come up with new ones that will make the industry more relevant for ordinary Filipinos.

Finally, I’ve also taken it upon myself to push for other important financial sector reforms, including the easing of the Bank Secrecy Law, which will help efforts to combat money laundering and tax evasion, and the Financial Consumer Protection Bill.

As a former 'fiscal guy' now in charge of the monetary authority, I am making it a point to bring the BSP closer to the people. I want ordinary Filipinos to understand and appreciate our work, and to identify and feel its impact on their lives.

Together with a highly professional workforce, I intend to steer the BSP where it not only ensures price and financial stability, but also plants more seeds for financial inclusion and poverty reduction.

Given the history of reforms that has provided a solid macroeconomic environment – and with the reform momentum never ceasing – the Philippines can indeed become not only a high-income but also a truly inclusive economy by 2040.

Benjamin Dionko is the governor of the Bangko Sentral ng Pilipinas.

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