IMF rejects exporters' calls for exchange rate cap

The International Monetary Fund (IMF) rejected calls by Filipino exporters for the government to limit the strength of the peso against the US dollar. Such a ceiling on the foreign exchange rate would help Philippine exports maintain a competitive edge in the world market as the global economy continues to recover from recession, the exporters argued. But Dennis Botman, the Manila-based IMF representative, said supporting the US dollar would require policymakers to do a number of things, none of which is desirable. Limiting the strength of the peso would cast doubt on the credibility of the Bangko Sentral ng Pilipinas (BSP), whose inflation-targeting framework helped insulate the Philippines from the global recession, Botman said. “First of all, it is very difficult to engineer such an exchange rate. Second of all, it becomes a question of if we can do it, is it desirable. In my view it will not be desirable," Botman said of the idea raised by economist and former Budget Secretary Benjamin Diokno. Diokno wants the BSP to let the peso fall to P55 per dollar, a rate weaker than average P45.31 per dollar set the Friday just before the local currency market went on a long weekend for the May 10 polls. Botman said the level of public debt service, totaling P339.34 billion in the first three months, is a factor having an impact on the exchange rate. Keeping the peso deliberately weak would only stoke inflation “and that by itself would undermine exporter competitiveness." Also, an artificial peg has implications on interest rates and on the ability of businesses to finance operations, Botman added. Such a peg will require the BSP to put up capital controls or abandon the inflation-targeting framework first adopted in 2002, according to Botman. “There are no free lunches in economics. You cannot achieve a low inflation rate, a depreciated peso, and free capital flows at the same time." The IMF was not dogmatic about capital controls, because countries with very large foreign capital flows, such as Brazil and China, have adopted some control measures, he said. He said policymakers could think of macro prudential measures in case large capital flows lead to bubbles in the property market. “But none of these are happening now in the Philippines. Introducing capital controls would do more harm than good. Also, the inflation-targeting framework has given a lot of credibility to monetary policy crafting in the Philippines," Botman explained. “You must not forget we just came out of a deep global recession, and because of the credibility of the monetary policy framework the Philippines was able to reduce interest rates and support the economy at a time when it needed it most. So that is a framework you should be proud of and not be afraid of," Botman said. The central bank made a series of interest rate cuts totaling 200 basis points as of July 2009, bringing the policy rates to a 17-year low. The rates remain at 4 percent for borrowing and 6 percent for lending, which helped the gross domestic product grow by 0.9 percent in 2009 when the global recession was in full swing, the IMF said. —VS, GMANews.TV