Proem

Ordinary logic tells you that when the value of the peso decreases the prices of commodities increase. Therefore if the value of the peso will rise, the prices of commodities should decrease. However, in our present experience, the peso has already strengthened but the price of commodities did not fall, it is still rising. Why? What causes this illogical situation?

OFW Remittances

Our Overseas Foreign Workers (OFW) remitted to the Philippines approximately $8 billion. The Philippines Government hails our OFW as heroes. They provided the Philippines with the much needed dollars to pay our foreign debts.

The OFW dollars saved the Philippines Government but the same OFW dollars is the cause of the illogical situation of the economy.

We Use Pesos, Not Dollars

The medium of exchange in the Philippines is the peso. Therefore the Philippines Government must somehow produce the pesos to exchange for the $8 billion.

Where will the government get the pesos to exchange for the dollars when all the government's money is already budgeted? There is no budgeted money that could be used to exchange for the $8 billion.

The solution is to order the Bangko Sentral Ng Pilipinas (BSP) to print new money to exchange for the dollars. If we use the exchange rate of $1 = P40, then the BSP will print P320 billion new money in pesos.

At the end of December 2007, the money supply in pesos increased by 9% because of this new printed money. (Business Sect., Phil. Daily Inquirer, Feb. 1, 2008, p. B5).

In the same issue of the Phil. Daily Inquirer (p.1), it announces that the economy grew by 7.3% based on Gross Domestic Product (GDP) computations. (Note: What about the Gross National Product [GNP]? It is not used because the result is grim.)

Theoretically the increase in money supply of 9% is the gage of inflation. This is greater than the growth of 7.3% of the economy. However, there are tricks available to lessen the actual inflation.

Mopping Up Operation

When the OFW dollars eventually arrives at a bank, it is either deposited as a dollar account or exchanged into pesos. If the local bank bought/exchanged pesos for the dollar, the banks will in turn sell it to the BSP who buys it using the newly printed money.

To prevent inflation, the BSP will immediately mop up the excess pesos. How will the BSP do it? The BSP tells the banks that they can only use 50% of deposited money for business. The BSP also induces the banks to deposit their money in the BSP by buying Treasury Bills (T-Bills) at very high rate of return. Naturally the bankers will "deposit" their money at the BSP. So the excess money will not actually circulate but stay in the BSP. The problem is not actually solved but only postponed because BSP will have the problem how to pay when the T-Bills are due.

Businessman's Problem

The banks will have a problem. How will they pay the interests of money deposits when they are allowed only 50% of the money for business? To solve the problem, the banks offer only very low interest rates for deposits and very high interest rates for borrowers. How else could the banks pay the interest on the huge deposits if they will not do it? Of course the banks will not worry if there will be no borrowers because their income from T-Bills is already very good.

Most businessmen rely on bank borrowings for capital. How else could they raise capital at quick notice? Since the businessmen borrow money at high interest rates, the products and commodities they sell must also be at high prices. How else could they recoup?

So the consumers must suffer the consequences of high prices.

Comment

This is the reason why our economy seems to be illogical. The OFW dollars are both a boon and bane. Boon or beneficial to the government because they can have the dollars without exerting effort. Bane or burden to the people because whether the value of the peso will rise or fall the prices of commodities will continue to increase.