An overvalued Philippine peso has been found to have triggered off the boom and bust cycle that has afflicted the economy for decades, caused balance of payment crises, chronic unemployment and served as an incentive for smuggling.
This was stressed by Action on Economic Reforms chairman Filomeno Sta. Ana II in his recently launched book titled: Philippine Institutions: Growth and Prosperity for All.
Sta. Ana argued that an overvalued currency, meaning a strong peso, hurts the Philippine economy. Using the data of the Bangko Sentral ng Pilipinas (BSP) on the real exchange rate but rebasing this to the exchange rates in 1986 and 2001, instead of 1980.
He found that the peso was overvalued by 15.7 percent in middle of last year compared to 2001 and 11.3 percent overvalued using the 1986 baseline.
“The popular perception is that exporters and the families of overseas Filipino workers are the most hurt by the appreciating peso. That is only partially true. The whole real sector of the economy (the tradable sector particularly) hurts from an overvalued peso.”
“Those that produce mainly for the domestic market are negatively affected too. They have to compete with cheap imports as well as the rampant smuggling of goods,” Sta. Ana pointed out.
He noted that in recent years, the main driver of an appreciating peso was OFW remittances, the second highest dollar earner next to exports, which have far outstripped foreign direct investments.
“It takes a radical change in policy regime for the government to opt for a strategy of an undervalued currency,” the economist further argued. He had reviewed the rich literature on what he called the Sustained Growth (SG) countries in Asia including China, India, South Korea and Taiwan whose most common driver for growth is an undervalued local currency.
The studies have pointed out that growth was sustained for long periods of at least eight years in their bid for progress regardless of what was happening in the rest of the global economy.
He, however, suggested that it should be the national government that must initiate a calibrated depreciation of the peso as a development strategy.
With its fixation on inflation targeting and proven bias in favor of less dollars in exchange for the peso, the BSP is not expected to initiate a creeping depreciation as a strategy for sustained economic growth.
After all, the economic reformist further argued, the BSP’s mandate is not simply controlling run-away inflation. It is to promote price stability conducive to a balanced and sustainable growth in the economy.