Budget gap pressures RP to print money: IMF
Budget gap pressures RP to print money: IMF
MANILA (Dow Jones): International Monetary Fund (IMF) has warned that the Philippines' burgeoning budget deficit raises the risk of the central bank printing new money to finance the national debt and providing bailout loans to the government.
The IMF raised the specter of monetization to service the heavy financing requirements of the budget in a "working paper" on the preparations being made by the central bank to switch to inflation targeting as its main policy plank later this year.
The IMF warned that the fiscal slippages over the past two years could hamper efforts to achieve inflation targeting.
When a U.K. investment bank recently raised similar fears to the IMF's, the central bank was livid, and vigorously denied it would monetize the national debt under any circumstances.
Even so, the question of whether the Philippines will be able to deflate its ballooning budget deficit is regarded by many in the market as the most daunting challenge faced by President Gloria Macapagal Arroyo's economic managers.
Poor tax collection and weak privatization proceeds caused the budget deficit to balloon to 136 billion pesos (US$2.65 billion) in 2000, more than double its original target.
The failure to run a tight fiscal ship pressured the peso and sporadically caused interest rates to spike last year.
So far, the monthly ceiling targets for 2001's planned deficit of 145 billion pesos haven't overshot. But some analysts believe the government isn't out of the woods yet.
"Fiscal slippages over the past two years have raised the domestic financing requirement of the budget, and unless contained, may create pressure for monetization...and increasing the risk it (central bank) might have to provide direct credit to the government," the IMF said.
The IMF is also concerned that a fiscal jam could result in the central bank providing direct credit to the government.
Monetization most commonly refers to a central bank printing new money to buy debt, a step that floods the markets with cash and generally brings interest rates lower.
The Philippines is confronted by a different set of economic problems. For one thing, prices are rising not falling, with the government forecasting inflation averaging 6 percent to 7 percent in 2001, compared to 4.4 percent last year.